Details and Analysis of Democratic Presidential Nominee Joe Biden’s Tax Plan

Key Findings

  • Democratic presidential nominee Joe Biden would enact a number of policies that would raise taxes on individuals with income above $400,000, including raising individual income, capital gains, and payroll taxes. Biden would also raise taxes on corporations by raising the corporate income tax rate and imposing a corporate minimum book tax.

  • Biden’s plan would raise tax revenue by $3.3 trillion over the next decade on a conventional basis. When accounting for macroeconomic feedback effects, the plan would collect about $2.8 trillion the next decade. This is lower than we originally estimated due to the revenue effects of the coronavirus pandemic and economic downturn and new tax credit proposals introduced by the Biden campaign.

  • According to the Tax Foundation’s General Equilibrium Model, the Biden tax plan would reduce GDP by 1.62 percent over the long term.

  • On a conventional basis, the Biden tax plan by 2030 would lead to about 7.7 percent less after-tax income for the top 1 percent of taxpayers and about a 1.9 percent decline in after-tax income for all taxpayers on average.


Details of Biden Tax Plan


Biden’s plan includes the following payroll tax, individual income tax, and estate and gift tax changes:

  • Imposes a 12.4 percent Old-Age, Survivors, and Disability Insurance (Social Security) payroll tax on income earned above $400,000, evenly split between employers and employees. This would create a “donut hole” in the current Social Security payroll tax, where wages between $137,700, the current wage cap, and $400,000 are not taxed.[1]

  • Reverts the top individual income tax rate for taxable incomes above $400,000 from 37 percent under current law to the pre-Tax Cuts and Jobs Act level of 39.6 percent.

  • Taxes long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6 percent on income above $1 million and eliminates step-up in basis for capital gains taxation.[2]

  • Caps the tax benefit of itemized deductions to 28 percent of value for those earning more than $400,000, which means that taxpayers earning above that income threshold with tax rates higher than 28 percent would face limited itemized deductions.

  • Restores the Pease limitation on itemized deductions for taxable incomes above $400,000.

  • Phases out the qualified business income deduction (Section 199A) for filers with taxable income above $400,000.

  • Expands the Earned Income Tax Credit (EITC) for childless workers aged 65+; provides renewable-energy-related tax credits to individuals.

  • Expands the Child and Dependent Care Tax Credit (CDCTC) from a maximum of $3,000 in qualified expenses to $8,000 ($16,000 for multiple dependents) and increases the maximum reimbursement rate from 35 percent to 50 percent.

  • For 2021 and as long as economic conditions require, increases the Child Tax Credit (CTC) from a maximum value of $2,000 to $3,000 for children 17 or younger, while providing a $600 bonus credit for children under 6. The CTC would also be made fully refundable, removing the $2,500 reimbursement threshold and 15 percent phase-in rate.[3]

  • Reestablishes the First-Time Homebuyers’ Tax Credit, which was originally created during the Great Recession to help the housing market. Biden’s homebuyers’ credit would provide up to $15,000 for first-time homebuyers.[4]

  • Expands the estate and gift tax by restoring the rate and exemption to 2009 levels.

Biden’s plan also includes the following proposed business tax changes:

  • Increases the corporate income tax rate from 21 percent to 28 percent.[5]

  • Creates a minimum tax on corporations with book profits of $100 million or higher. The minimum tax is structured as an alternative minimum tax—corporations will pay the greater of their regular corporate income tax or the 15 percent minimum tax while still allowing for net operating loss (NOL) and foreign tax credits.[6]

  • Doubles the tax rate on Global Intangible Low Tax Income (GILTI) earned by foreign subsidiaries of US firms from 10.5 percent to 21 percent.

  • In addition to doubling the tax rate assessed on GILTI, Biden proposes to assess GILTI on a country-by-country basis and eliminate GILTI’s exemption for deemed returns under 10 percent of qualified business asset investment (QBAI).[7]

  • Establishes a Manufacturing Communities Tax Credit to reduce the tax liability of businesses that experience workforce layoffs or a major government institution closure

  • Expands the New Markets Tax Credit and makes it permanent.

  • Offers tax credits to small business for adopting workplace retirement savings plans.

  • Expands several renewable-energy-related tax credits, including tax credits for carbon capture, use, and storage as well as credits for residential energy efficiency, and a restoration of the Energy Investment Tax Credit (ITC) and the Electric Vehicle Tax Credit. The Biden plan would also end tax subsidies for fossil fuels.

Other proposals not modeled due to a lack of detailed information include:

  • Imposing a new 10 percent 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.”[8] This surtax would raise the effective corporate tax rate on this activity up to 30.8 percent.

  • Establishing an advanceable 10 percent “Made in America” tax credit for activities that restore production, revitalize existing closed or closing facilities, retool facilities to advance manufacturing employment, or expand manufacturing payroll.[9]

  • Equalizing the tax benefits of traditional retirement accounts (such as 401(k)s and individual retirement accounts) by providing a refundable tax credit in place of traditional deductibility.[10]

  • Eliminating certain real estate industry tax provisions.

  • Expanding the Affordable Care Act’s premium tax credit.

  • Creating a refundable renter’s tax credit capped at $5 billion per year, aimed at holding rent and utility payments at 30 percent of monthly income.

  • Increasing the generosity of the Low-Income Housing Tax Credit.


Updates from our September 2020 Analysis


Since our September analysis of the Biden plan, we have included the Biden campaign proposal to expand 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,[11] which has impacted our economic, revenue, and distributional estimates.


We have also added a discussion of the effects of Biden’s plan on Gross National Product (GNP), which allows us to examine how it would reduce American incomes.


Updates from our April 2020 Analysis


Since we released our first analysis of Biden’s tax proposals, the campaign has proposed several new tax policies that have impacted our revenue and distributional estimates.

That includes proposals to expand several credits, including the CTC and the CDCTC. The proposed expansion to the CTC would be a major increase in the generosity of the credit by increasing the maximum credit amount up to $3,600 for children under 6 and by making the credit fully refundable without regard to a taxpayer’s income level. The CDCTC would be expanded to a maximum value of $8,000, with a higher maximum refundable percentage of 50 percent.


The Biden campaign has proposed that the CTC expansion remain for 2021 and “as long as economic conditions require,” based on an original proposal in the House-passed HEROES Act.[12] For this proposal, we assume that the expansion lasts for one year, as estimated by the Joint Committee on Taxation (JCT) for the HEROES Act proposal.[13]


In addition to proposed changes to the CTC and CDCTC, Biden has released a proposed plan to reduce offshoring of production and jobs from the United States by modifying the way GILTI is taxed and through other tax incentives. In addition to doubling the GILTI rate to 21 percent, Biden would eliminate the 10 percent deemed return exemption based on qualified business asset investment (QBAI) and would assess the tax on a country-by-country basis.


Biden has also newly proposed a 10 percent surtax on imports from offshored business activity and a 10 percent “Made in America” tax credit to incentivize onshoring; we have not included these two proposals in our estimates due to a lack of detail on their design.

We have also refined our estimate for the Biden minimum book tax on corporations to project the revenue effects of the tax more accurately. In this update, we have included an estimate of Biden’s First-Time Homebuyer’s Tax Credit worth up to $15,000. Additionally, we have included stacked long-term economic effects for each proposal to provide more granularity on each proposal’s economic impact.


Since our original analysis, the Biden campaign has clarified that it will hold harmless taxpayers making under $400,000 from tax increases associated with the proposed 28 percent cap on itemized deductions. We have modified our modeling of this proposal so that filers with less than $400,000 can take the full value of their itemized deductions but those above that threshold have the value of itemized deductions capped at 28 percent.[14]

Finally, the coronavirus pandemic and related economic downturn have impacted the federal government’s budget outlook over the next 10 years, including federal revenue projections. The large economic shock will also affect how much revenue the Biden tax plan would be expected to raise due to a lower baseline level of economic activity, especially in the first few years in the budget window. To account for this effect, we have used the Congressional Budget Office’s (CBO) September 2020 update to the budget outlook to adjust our revenue estimates for each proposal.[15]


Economic Effect


According to the Tax Foundation General Equilibrium Model, Biden’s tax plan would reduce the economy’s size by 1.62 percent in the long run. The plan would shrink the capital stock by about 3.75 percent and reduce the overall wage rate by a little over 1 percent, leading to about 542,000 fewer full-time equivalent jobs.


Read more of this article at the source:


https://taxfoundation.org/joe-biden-tax-plan-2020/


Source:


Garrett Watson - Huaqun Li - Taylor LaJoie at Taxfoundation.org


4 views0 comments