A quick overview of President-elect Joe Biden's tax policy
President-elect Joe Biden's tax policy was initially released in Spring 2020 and has been modified several times since that date. This article is a two-part series that summarizes the details of the updated Biden-Harris tax plan and analyzes the political feasibility of Biden getting such policies approved by Congress.
The first part of the series focuses on the key proposals in Biden’s tax policy. These proposals can be summarized as (1) raising taxes on high-income households, (2) imposing higher taxes on corporations, and (3) offering expanded tax breaks to low-income households, certain companies, and green energy initiatives.
Summary of the Joe Biden income tax policy
Individual provisions that raise taxes on high-income households
- Raises the top individual income tax rate from 37% to 39.6% for taxable income above $400,000. The 39.6% rate was in effect prior to the enactment of the Tax Cuts and Jobs Act.
- Imposes a 12.4% Social Security payroll tax on income earned above $400,000, which is split 50-50 between employers and employees. The current cap of $137,700 would be retained, meaning wages between $137,700 and $400,000 would be free of tax.
- Increases long-term capital gains rate and qualified dividends rate to 39.6% on income above $1 million. The current long-term capital gains rate is 20%, which means the rate would nearly double under these circumstances.
- Limits itemized deductions for taxable incomes above $400,000. This includes a cap of 28% and reinstating the Pease phaseout limitations that were in effect prior to the enactment of the Tax Cuts and Jobs Act.
- Erodes the Section 199A deduction for taxable incomes above 400,000. The phase-out of the qualified business income deduction could have a significant impact on entities that restructured operations to take advantage of this new provision after December 2017.
- Expands estate and gift taxation by applying 2009 rates, lowering the exemption amounts from $11.58 million to $3.5 million for transfers at death and $1 million on lifetime gifts, and eliminating the step-up in basis when assets are transferred to beneficiaries, such that unrealized capital gains are subject to tax.
Business provisions that impose higher taxes on corporations
- Raises the corporate tax rate from 21% to 28%. Prior to the Tax Cuts and Jobs Act, the corporate tax rate was 35%.
- Imposes a minimum tax on corporations with profits of $100 million or more. The plan proposes a 15% minimum tax on corporate book income to prevent corporations from paying no taxes in a given taxable year.
- Doubles the tax rate on Global Intangible Low-Tax Income earned by foreign subsidiaries controlled by U.S. businesses. The current rate is 10.5% but would increase to 21% under the proposal and be applied on a country-by-country basis.
- Eliminates the exemption that currently exists for routine returns on qualified business assets under the Global Intangible Low-Tax Income provisions.
- Imposes a 10% surtax on corporations that produce goods offshore and sell items back into the U.S. market, which could result in a nearly 31% tax on applicable profits.
- Ends tax subsidies for fossil fuels.
Individual provisions that offer expanded tax breaks to low-income households
- Increases Child Tax Credit from $2,000 to $3,000 and creates a $600 bonus credit for children younger than 6-years-old. The proposal would make the credit fully refundable and allow taxpayers to receive the credit in monthly installments.
- Expands the Child and Dependent Care Tax Credit by allowing maximum qualified expenses of $8,000 (instead of $3,000) and raising the reimbursement rate from 35% to 50%. This means a 50% credit of up to $8,000 in childcare costs per child under the age of 13. The benefit is fully phased out at $400,000.
- Broadens the scope of the Earned Income Tax Credit (EITC) to childless workers over age 65. This would be the first time the EITC was made available to individuals over the age of 65.
- Provides up to $15,000 to first-time home buyers through a tax credit. This credit would be modeled after the first-time homebuyer credit enacted under the Obama administration, but is much more generous.
- Grows the benefit of the low-income housing credit.
- Creates a refundable renter’s credit. The credit would be capped at $5 billion per year and would reduce rent and utilities to 30% of income for low-income individuals and families that earn too much to qualify for regular housing assistance.
- Establishes a $5,000 credit for informal caregivers.
Business provisions that offer expanded tax breaks to certain companies
- Creates a Manufacturing Communities Tax Credit to decrease the tax liability of businesses that experience hardships tied to layoffs and closures.
- Expands the New Markets Tax Credit and makes it permanent.
- Provides small businesses a tax credit for establishing retirement savings plans for workers.
- Establishes a “Made in America” tax credit for activities focused on restoring production, revitalizing closed facilities, and expanding manufacturing payroll. This is referred to as a 10% onshoring credit available to companies that make investments in increased manufacturing operations within U.S. borders.
Provisions that offer expanded tax breaks for green initiatives
- Enlarges renewable-energy-related tax credits. This includes tax incentives for carbon capture, use and storage. It also includes credits for upgrading to energy efficient equipment and processes.
- Adopts a “scaled up” credit for renewable energy projects that meet certain labor standards.
- Restores the Energy Investment Tax Credit and the Electrical Vehicle Credit.
- Reinstates the “Cash for Clunkers” program. This is aimed at getting taxpayers to trade older vehicles for newer, more full-efficient vehicles.
- Creates direct cash rebates for individuals who upgrade appliances, install more efficient windows, and cut energy bills.
The proposals outlined in Biden’s tax policies have been reviewed by several tax policy groups. According to the Tax Foundation’s general economic model, the Joe Biden income tax policy will reduce GDP by 1.62 percent over the long-term and raise $3.3 trillion in tax revenue over the next 10 years.
A Tax Policy Center model conducted in Spring 2020, before Biden added several new provisions, found that three-quarters of all Biden’s tax increases would be borne by the top one percent of highest-income households. The Tax Policy Center study also found that low and moderate-income households would see a decline in their after-tax incomes, not from individual taxes, but from the tax increases on the corporate side.
Many economists believe people pay corporate income taxes, not businesses. They argue taxes remitted by corporations are ultimately borne by owners in the form of lower returns on their investment, or workers in the form of lower wages. This is an important consideration when evaluating changes to corporate tax provisions, and the impact of such proposals, which we will discuss further in Part 2, addressing the political feasibility of Joe Biden’s tax policy.
The content contained in this article is for informational purposes only and is not tax advice. You should consult a tax advisor for advice applicable to your situation.
Tara Fisher has been practicing international tax for over 20 years. Her professional background includes working for the U.S. Congress Joint Committee on Taxation, the national tax practice of PricewaterhouseCoopers, the University of Pittsburgh, and American University in Washington D.C. She is a licensed CPA and holds both an undergraduate and graduate degree in accounting from the University of Virginia.