Although quantitative analysis is necessarily subject to considerable uncertainty, many commentators estimate that Biden's tax plan would raise federal revenues by $2 trillion to $2.5 trillion over the next decade. Approximately two-thirds of this would be from tax increases on businesses and one-third from tax increases on high-income households.
Whether the Biden tax plan will be enacted is a function of the circumstances when Biden takes office. The appetite for tax reform will, in part, depend on the economic recovery from COVID-19 and the composition of the Senate. While the Senate typically requires 60 of 100 votes to pass legislation, simple majorities have previously been used to pass significant legislation on largely partisan lines, such as the ACA under Obama and the TCJA under Trump.
Business Tax Provisions
- Increase the top corporate tax rate to 28%. The current rate is 21%. Before the Tax Cuts and Jobs Act of 2017 (the TCJA), the highest marginal federal corporate rate was 35%.
- Impose a new alternative minimum tax on corporations with book profits of $100 million or higher. A U.S. corporation would pay the greater of (1) its regular corporate income tax and (2) 15% of its net book income. Net operating loss carryforwards and foreign tax credits may be available to offset the 15% alternative minimum tax.
- Phase-out qualified business income deduction for high-income taxpayers. Under current law, taxpayers other than corporations are allowed to deduct 20% of their qualified business income (QBI), which includes income from certain partnerships and REITs, subject to several limitations. The QBI deduction is scheduled to expire after 2025. The Biden plan would retain the QBI deduction, but phase it out for filers with more than $400,000 in taxable income.
- Double the minimum tax on GILTI. The Biden plan would double the tax rate on global intangible low tax income (GILTI) earned by foreign subsidiaries of U.S. corporations from 10.5% to 21%. In addition, Biden would assess GILTI on a country-by-country basis, which likely would further raise the effective tax rate on GILTI.
- Effectively end preferential treatment of carried interest. Currently, carried interest income is taxed at preferential long-term capital gains rates, subject to the satisfaction of a three-year holding period. The Biden plan would effectively eliminate this benefit by taxing long-term capital gains recognized by individuals with incomes above $1 million as ordinary income.
- Establish financial risk fee on certain liabilities of large financial institutions. The annual fee would apply to financial institutions with over $50 billion in assets. Few details are available regarding this fee, but it is expected to be similar to fees proposed by the Obama administration, which would have imposed an annual fee of 0.07% to 0.15% on covered liabilities of U.S. financial firms (including banks, broker-dealers, insurance companies, and financial captives) and their foreign subsidiaries.
- Establish a "Made in America" manufacturing tax credit. The 10% tax credit would be available to businesses with expenses related to domestic manufacturing activities such as restoring domestic production and adding manufacturing jobs. The credit would be "advanceable," meaning a taxpayer can realize the benefit of the tax credit before filing its annual tax return.
Individual Tax Provisions
- Expand and create tax credits for middle- and lower-income taxpayers. The Biden plan would reduce the tax burden on taxpayers with incomes below $400,000 by (1) temporarily increasing and making fully refundable the child tax credit, (2) expanding the child and dependent care tax credit and increasing the maximum reimbursement rate from 35% to at least 50%, (3) providing new tax credits for first-time homebuyers, family caregivers, and low-income renters, and (4) creating additional incentives for retirement savings.
- Increase income and payroll taxes for high-income taxpayers. Although Biden has pledged not to increase taxes on households with incomes less than $400,000 per year, his plan would substantially increase taxes on higher-income households. In particular, the Biden plan would repeal the TCJA's individual income tax cuts for high-income taxpayers, increasing the tax rate on income above $400,000 from 37% to 39.6%. (Under current law, the lower rate would have expired in 2026.) In addition, the Biden plan would impose the 12.4% Social Security payroll tax on wages earned above $400,000. (Under current law, the Social Security payroll tax applies only to a taxpayer's first $137,700 of income in 2020.)
- Modify itemized deduction limitations. The TCJA nearly doubled the standard deduction, making it unnecessary for many noncorporate taxpayers to itemize their deductions, and eliminated a taxpayer's ability to take miscellaneous itemized deductions (which include deductions for management fees) before 2026. For households with incomes greater than $400,000, Biden's plan would reduce the value of itemized deductions to 28% and would restore the Pease limitation, under which itemized deductions are deductible only to the extent that they exceed the lesser of (1) 80% of the amount of otherwise allowable itemized deductions and (2) 3% of the excess of the taxpayer's adjusted gross income over an inflation adjusted amount. It is unclear whether Biden's plan would repeal the TCJA's $10,000 cap on itemized deductions for state and local taxes but, even if it does, the top effective income tax rates for New York and California households could be between approximately 58% and 63% (inclusive of state income tax).
- Effectively double the tax rate on capital gains for high-income taxpayers. The Biden plan would tax capital gains and dividends at the same rate as ordinary income (39.6%) for individuals with incomes above $1 million.
- Expand the estate and gift tax. The Biden plan would reduce the estate and gift tax exemption from $11.5 million ($23 million for married couples) to $3.5 million ($7 million for married couples) and increase the highest estate and gift tax rate from 40% to 45%.
- End basis step-up at death. The Biden plan would end the tax-free step-up in basis of assets held at death and may tax unrealized capital gains at death.
- No wealth tax, no mark-to-market regime for unrealized capital gains. The Biden plan does not endorse a wealth tax, as proposed by Sen. Warren (D-MA), or a mark-to-market regime for unrealized capital gains for high-income taxpayers, as proposed by Sen. Wyden (D-OR).
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