Summary of Biden Tax Plan
With the conclusion of the 2020 U.S. Presidential Election, the United States will enter a transitionary period. During this time, one of the main issues on policymakers’ minds will be what new tax plans President-elect Biden will propose to pay for his social policies. These social policies include new spending on education, COVID-19, and affordable healthcare. According to the Committee for a Responsible Federal Budget, an independent, bipartisan, and non-profit organization that examines federal budget issues, Biden’s proposed tax plan would raise between $3.35 trillion and $3.67 trillion in revenue over a decade if enacted in full. This would account for approximately 1.30 to 1.40 percent of total gross domestic product.
From individual income to corporate taxes, this article will outline the several ways that the Biden campaign has proposed raising revenue. This article will focus on corporate and business level taxes, while briefly mentioning several individual level tax consequences. This article does not attempt to summarize every Biden tax proposal. Rather, it focuses on what will hopefully be primary points of debate moving forward.
Individual Income Taxes
According to President-elect Joe Biden, his plan would enact several policies raising income taxes for individuals earning more than $400,000 in income, including raising individual income, payroll, and capital gains taxes. Specifically, his plan would restore the pre-Tax Cuts and Jobs Act rate of 39.6 percent top marginal tax rate, up from 37.0 percent. Further, the Biden tax plan would cap the tax benefit of itemized deductions at 28 percent of value for those earning more than $400,000, meaning that those earning above that level would face limited itemized deductions. Finally, Biden’s proposal taxes capital gains as ordinary income for those earning over $1 million, limiting itemized deductions to 28 percent of value for higher earners, and repealing step-up in basis.
Some additional tax proposals by the Biden administration include expanding the estate and gift tax by reducing the exemption amount to $3.5 million and increasing the top rate for the estate tax to 45 percent.
The most consequential proposition at a business tax level is the Biden campaign’s proposal to increase the corporate income tax. Over the last three decades, countries around the world have lowered their corporate income tax rates and, in 2017, the United States followed suit. Biden’s tax proposal would increase the corporate income tax to 28 percent and create a 15 percent minimum tax on book income. This would include a 10 percent “offshoring penalty surtax,” on corporations that “offshore manufacturing and service jobs to foreign nations in order to sell goods or provide services back to the American market.” In parallel, the Biden administration would create a 10 percent “Made in America” tax credit for activities that revitalize existing or closed facilities and expand manufacturing payroll.
Over the course of a decade, this increase, would raise approximately $1.6 to $1.9 trillion in revenue from businesses. At the same time, the Biden plan would phase out the qualified business income deduction (Section 199A) for filers with taxable income above $400,000. Critics of this increase would argue that corporate income tax hinders capital formation by increasing the cost of capital and reducing wages, economic output, and productivity.
According to the Tax Foundation, there would be several consequences to raising the corporate income tax. Raising the tax rate to 28 percent would reduce the long-run level of economic output by 1.0 percent, wages by 0.8 percent, and capital stock by 2.3 percent. Further, the Tax Foundation estimates that a 28 percent corporate tax rate would decrease the number of jobs by 187,000. Lastly, the Tax Foundation estimates that despite its progressive intent, “increases in the corporate tax rate…[would burden] taxpayers across the income spectrum.”
One other major business proposal of the Biden administration is the creation of a 15 percent minimum tax on corporations with book profits of $100 million or higher. The Biden administration estimates that this tax would raise approximately $400 billion in revenue over a decade. Some have criticized this plan given that the internal revenue code is based on taxable income, not book income. For example, unlike with book income, companies may deduct the cost of an investment from their gross income when determining taxable income, thus reducing a company’s tax liability. Similarly, when calculating taxable income, net operating losses may be carried forward to future years if firms post losses each year beyond their tax liability.
One additional note: for foreign subsidiaries of U.S. firms, the Biden tax proposal would double the tax rate on Global Intangible Low Tax Income (GILTI) from 10.5 percent to 21 percent. GILTI is a newly-defined type of foreign income added to corporate taxable income. Essentially, it is a tax on earnings that exceed a 10 percent return on a company’s foreign invested assets. In addition to the doubled rate, the Biden plan proposes assessing GILTI on a country-by-country basis and eliminates GILTI’s exemption for deemed returns under 10 percent of qualified business asset investment (QBAI).
Clean Energy Tax Credits
One of the additional proposals in the Biden tax plan is to reform and extend current tax incentives to favor renewable-energy-related tax credits and deductions. These renewable-energy related incentives would include tax credits for “carbon capture, use and storage” as well as additional credits for residential energy efficiency. At the same time, the Biden campaign has proposed ending subsidies for fossil fuels.
Distributional Effects of the Biden Tax Plan
Overall, President-elect Biden’s plan would make the U.S. tax code more progressive. In the top 1 percent, taxpayers would see their after-tax incomes reduced by 11.3 percent due to higher taxes on incomes above $400,000. For the top 5 percent, taxpayers would see a reduction in after-tax incomes of approximately 1.3 percent. Finally, filers in the 90th to 95th percentile would only see a slight reduction of approximately 0.2 percent. For all taxpayers on average, these tax increases will lead to about a 1.9 percent decline in after-tax income.
Thomas L. Bourneuf serves as a Graduate Editor of the NYU Journal of Law & Business. He is an LLM candidate at NYU School of Law where he focuses on taxation. Thomas also serves as an editor on the Tax Law Review. Prior to attending NYU, he worked as an attorney at law at Paul Hastings LLP. Before that, he was a research assistant at several universities.