Both presidential candidates plan to make changes to the tax code, but largely in opposite directions. While President Donald Trump plans further tax reductions, his Democratic opponent, former Vice President Joe Biden, plans to raise taxes on the rich and businesses.
Both candidates are also proposing a number of tax incentives for particular behaviors.
Biden would give tax breaks to those who buy electric cars, install solar panels, or make their homes more energy-efficient. Further credits would go to babysitters, the elderly, and those who pay more than 30 percent of their incomes toward rent.
Trump would expand the Opportunity Zones in depressed areas, give tax breaks to companies that bring manufacturing back to America, and place tariffs on imports of offshored goods.
Biden, too, proposes tax incentives for companies investing in U.S. manufacturing, but according to Tax Foundation, a tax policy think tank, the incentive isn’t large enough to offset his proposed tax increases and so it’s unclear if it would actually convince businesses to invest.
Biden’s plans to boost taxes mostly focus on businesses and people earning more than $400,000. The corporate tax rate would rise to 28 percent from 21 percent, and he wants to impose a 15 percent minimum tax on large businesses as well as doubling the tax on companies’ international profits to 21 percent from 10.5 percent.
On the personal side, those earning more than $400,000 a year would see the top income tax bracket increase to 39.6 percent from 37 percent. Meanwhile, income above $400,000 would be subject to an additional 12.4 percent tax, half of which would be paid directly by employers.
People in this income bracket would also face curtailed tax deductions, and capital gains above $1 million would be taxed at 43.4 percent, instead of the current 23.8 percent.
The nonprofit says its modeling shows that while Biden’s tax policies would raise about $3.8 trillion over 10 years, they would pare long-term economic growth by 1.5 percent and eliminate nearly 600,000 jobs.
While the measures aren’t directly aimed at people with lower incomes, the increases would still affect them “by reducing the incentive to work and invest in the United States,” Tax Foundation estimates. The bottom quintile would lose about 0.7 percent of income, while the top 1 percent would lose nearly 8 percent.
Trump said he’d like to further cut income taxes for the middle class; he’s also mentioned wanting to cut the capital gains tax to 15 percent. He would also allow pharmaceutical and robotics companies to write off their assets all at once if they move manufacturing to the United States.
Trump also needs to ensure his previous tax cuts to stay in place, as they are slated to expire by 2026.
Trump’s second-term proposals couldn’t be modeled, the Tax Foundation said, as he hasn’t yet spelled out his plans in detail.
It’s likely that both candidates would favor economic stimulus measures to counter the damage caused by lockdowns amid the COVID-19 pandemic.
Trump proposed a payroll tax holiday for the lockdown period until the end of the year. That would cost the federal government some $950 billion in lost revenue, the Tax Foundation said, while giving a break both to employers as well as all workers, particularly those in low- and mid-wage jobs.
For employers, the tax break would help assuage liquidity problems and help put or keep people on the payroll. For employees, it would give them more money to spend or save. The advantage is that the money would stay where it’s earned without the need for the government to distribute it, preventing potential misspending and fraud, not to mention administrative costs.
Biden is likely to postpone his tax increases in light of the stunned economy, the Tax Foundation estimates. He’s also likely to back Democrats’ stimulus bills, which can be expected to include tangential items, such as spending to limit carbon emissions and make abortion more available.
Regardless of what the candidates promise, it’s up to Congress to change the tax code. Currently, the Democratic-led House is unlikely to back Trump’s proposals while the GOP-led Senate is unlikely to back Biden’s. Both parties face tough battles to keep a hold of the chambers they control.
If either party ends up controlling at least one piece of the trifecta—House, Senate, or the presidency—the other party will have an exceptionally hard time advancing its agenda, given that the politicians are currently having trouble reaching agreement on even issues both sides generally support, such as relief bills during the lockdowns or long-anticipated infrastructure funding.
Tax Plan Comparison
- Middle-class income tax cut.
- Capital gains tax cut (20 percent to 15 percent)
- Tax breaks for those returning manufacturing to the United States
- 100 percent expensing for pharmaceutical and robotics manufacturing returned to the United States
- Tariffs on goods made by offshored labor
- Payroll tax break for pandemic period
- Restore the top marginal income tax rate to 39.6 percent from today’s 37 percent
- Phase out Section 199A deduction for those earning more than $400,000
- Tax capital gains at 43.4 percent, up from the current top rate of 23.8 percent, for those earning more than $1 million
- Eliminate step-up in basis for inherited assets with capital gains
- Cap the value of itemized deductions at 28 percent for those in higher tax brackets
- Restore the Pease limitation on itemized deductions for those with income above $400,000
- Raise the corporate income tax to 28 percent from 21 percent
- New 15 percent minimum tax on corporations with $100 million income or more
- Double the tax rate on foreign subsidiary income to 21 percent from 10.5 percent
- New 12.4 percent Social Security payroll tax on income above $400,000
- Restore the electric vehicle tax credit
- Tax credits for residential energy efficiency
- Making permanent the New Markets Tax Credit for investment in distressed communities
- Establishing a Manufacturing Communities Tax Credit
- A credit to reduce rent and utilities to 30 percent of income
- Expand Earned Income Tax Credit (EITC) for those older than 65
- A $5,000 tax credit for informal caregivers
- Expand the Low-Income Housing Tax Credit (LIHTC)
- Reinstate Solar Investment Tax Credit (ITC)
- A tax credit for child care facilities built by businesses
- New 26 percent tax credit to match traditional retirement contributions as a replacement for deductibility of those contributions
- Establish a First Down Payment Tax Credit of up to $15,000
Source: Tax Foundation