By Robert Duquette, CPA

A few weeks remain before the 2020 presidential election. If you are still weighing which candidate to vote for, this blog provides a comparison of President Donald Trump’s tax plan vision for 2021 and what former Vice President Joseph Biden has proposed. Links to my sources have been provided, and all positions are current as the date of this blog. To start, I begin with the incumbent.

Donald Trump’s Tax Vision

As of late September, the Trump team had not yet unveiled specific funding or legislative plans to support his proposals highlighted in an August campaign press release.¹ If reelected, Trump says he will do the following:

• Create 10 million new jobs in 10 months
• Create 1 million new small businesses
• Cut taxes to boost take-home pay and keep jobs in America
• Create “Made in America” tax credits
• Expand Opportunity Zones
• Bring back 1 million manufacturing jobs from China
• Provide tax credits for companies that bring back jobs from China
• Allow 100% expensing deductions for essential industries, such as pharmaceuticals and robotics, that bring back manufacturing to the United States
• Protect Social Security and Medicare

As stated above, there are no further details about these intentions, nor are their definitions about which manufacturing jobs are the focus of his vision, amounts of tax credits, and how take home pay would be increased or for how long. The president maintains that only he can make sure the tax reforms of the Tax Cuts and Jobs Act (TCJA) he enacted three years ago can continue without repeal. You may recall that many of the provisions are scheduled to phase out beginning in 2022, including a built-in repeal of the individual rate cuts after 2025. Trump suggests he wants to see more middle class tax cuts to expand on his prior tax reform measures (presumably this means making at least the middle class cuts permanent), and a cut in the capital gains tax from 23.8%, which includes the net investment income tax (NIT) of 3.8%, to 15% (presumably without the NIT), and possibly have capital gains indexed for inflation.² Notably, not much has been said yet regarding any specifics of the expiring provisions of the TCJA starting in 2022,³ or what he wants to see regarding immediate pandemic relief beyond an unemployment insurance extension (currently at an impasse in Congress).

I had already written about the potential impact of the TCJA last December on this site. In summary, that analysis cited the Tax Foundation and the Tax Policy Center as concluding that substantially all TCJA benefits went to the top 5% of taxpayers, and that corporations did not share their tax savings with workers.

With regard to the president’s new proposal to cut capital gains taxes, the Tax Policy Center concluded earlier this year that it would primarily benefit the top 5% only since that group reports 85% of the capital gains. With respect to the president’s proposal to index capital gains to inflation, the Tax Foundation estimates that provision would increase the national debt by another $180 billion over the next 10 years.

Around the same time as the August press release, Trump ordered the Department of the Treasury to authorize a deferral of payroll tax withholdings from worker pay effective Sept. 1, 2020, for any worker whose pretax compensation in a biweekly pay period is under $4,000 until the end of 2020. Much has been written about this plan, including that this is, in effect, only a “loan” that has to be repaid between Jan. 1, 2021, through April 15, 2021, and that many employers have elected out of it. It is possible that Congress and whomever wins the election could make the reduction permanent, but such an action would likely accelerate the insolvency of the Social Security and Medicare Trust Funds.⁴ (See AICPA’s recent article on this topic as well as IRS Notice 2020-65.)

Joseph Biden’s Tax Vision

During the Democrats’ primary season, I provided a summary of the candidates’ tax plans in a CPA Now blog. Here, I have updated Biden’s entry based on his Build Back Better: Joe Biden’s Jobs and Economic Recovery Plan for Working Families from his campaign website as well as on a position paper released Sept. 17, titled A Tale of Two Tax Policies: Trump Rewards Wealth, Biden Rewards Work, and public comments he has recently made.

In a nutshell, Biden envisions raising new taxes on high earners and businesses to help fund about $5 trillion in new spending over the next 10 years (including an immediate $1 trillion stimulus down payment in January), to support economic recovery, narrow income and wealth disparities, improve infrastructure, and fight climate change.

Below is what I have been able to pull together from the above sources, including the estimated economic impact, with the help of the Tax Foundation, EY, and the Penn Wharton Budget Model released earlier in September.

Proposals Affecting Individuals:

Probably the most discussed position is Biden’s support for a repeal the TCJA with respect to those earning more than $400,000 and reinstating the prior top rate of 39.6% from the TCJA’s 37%. In addition, he would phase out the 20% Section 199A qualified business income deduction for those same high earners, which would effectively increase the marginal tax rate on such income about 8 points.

For taxpayers earning over $1 million, the current maximum preferential rate of 23.8% on capital gains (20% preferential plus 3.8% NIT) would be increased to the taxpayer’s ordinary marginal income tax rate, which would be as high as 39.6% under the Biden plans. He also proposes to eliminate the tax-free step-up in basis that occurs at death related to inherited assets going to the beneficiaries; instead he would allow the step-up in basis only as a result of taxing those gains at death. He would place a limit on the value of itemized deductions allowed to only 28% for taxpayers in higher marginal ordinary tax rates. He would also cap total itemized deductions at to 80% of adjusted gross income (i.e., the former “Pease limitation”) for those with taxable income above $400,000. For high earners (those with income above $400,000), he proposes a new 12.4% Social Security payroll tax on wage and self-employment income. Currently, there is no Social Security tax on earned income above $137,700 in 2020.

To provide immediate tax relief during the pandemic, Biden proposes to expand the current child tax credit from $2,000 per qualifying child to $3,000 (and $3,600 for children under 6). He also proposes health insurance premium tax credits so that no family spends more than 8.5% of their income on health insurance.

The former vice president additionally proposes several long-term provisions and an extension of existing and expired energy tax incentives designed to encourage activities to combat climate change. He also wants to pursue the following:

• An increase in the family tax credit for childcare of up to $8,000
• A $5,000 tax credit for “informal” caregivers
• A “First Down Payment” tax credit of up to $15,000
• A new renter’s credit to reduce rent and utility costs to no more than 30% of income
• Expansion of the low-income housing tax credit
• An enhanced earned income tax credit for those older than 65
• Make permanent the new markets tax credit
• Create a manufacturing communities tax credit
• Replace the deductibility of contributions to traditional IRAs with a 26% credit

Biden has defended the proposed tax hikes during a recessionary economy⁵ by citing a Tax Policy Center study that concluded that 83% of the tax benefits of President Trump’s TCJA will benefit the top 1% by 2027 as well as by citing the current significant racial wealth gap in income.

Notably, many Democratic candidates had proposed a “wealth tax” during the primaries, but Biden is currently against this proposal.

Proposals Affecting Businesses:

Currently, the former vice president is proposing an increase in the corporate income tax to 28% from 21% and a new 15% minimum tax on corporations with GAAP income of $100 million or greater.

To address the current incentives to move jobs overseas – which arguably has been exacerbated by the TCJA and its exemption of most foreign earnings from U.S. corporate taxation – Biden proposes a doubling of the current 10.5% tax to 21% on Global Intangible Low Tax Income (GILTI) generated by foreign subsidiaries of U.S. businesses. He would also apply that rate on a country-by-country basis compared with the current aggregate basis of the calculation of such income. In addition, he is looking at a new 10% surtax on a U.S. companies’ overseas production profits from sales back to the United States and a new 10% advanceable “Made in America” tax credit for investments such as revitalizing facilities.

To these corporate tax plans, Biden has also proposed a repeal of like-kind exchanges of real estate, additional limits on the ability to deduct real estate losses, and a new business tax credit for childcare facilities.

The former vice president has defended corporate tax hikes during a slowed economy⁶ by citing that, since passage of the TCJA, corporate entities have not been passing on their tax savings from the TCJA to workers (a selling point of the legislation). Instead, he says, TCJA beneficiaries have continued to cut jobs, move operations overseas, and fund trillion-dollar share buybacks, including throughout the pandemic this year. In the A Tale of Two Tax Policies position paper, the Biden team cites an Institute on Taxation and Economic Policy study from December 2019: “In 2018, in the wake of the Trump tax giveaway, 91 companies in the Fortune 500 paid no federal taxes on their income and another 56 paid less than 5%.”

Impact of the Biden Plans:

What follows is a summary, in comparative form, of two independent models that have analyzed the macroeconomic and behavioral impact of former Vice President Biden’s spending and tax proposals, as presumably compared to Congressional Budget Office’s current forecasts under present tax law and normal federal budget spending prepandemic. The Tax Foundation’s analysis was issued in April and the Penn Wharton Budget Model was released in mid-September.

For readers who want a detailed static projection of the above tax proposals and all proposed new spending plans of both candidates for the next 10 years, as well as the probability of different elections scenarios as to who wins the presidency and the Senate, Moody's Analytics released its model. Moody's concluded that the president’s plans would cut tax revenue by about $2 trillion, cut spending by about $ 1 trillion, and cause a net additional deficit above CBO current projections of another $ 1 trillion, and result in about a 2% to 3% average annual real GDP growth. With regard to Biden’s plans, Moody’s forecasts that there would be an increase in tax revenue of about $4 trillion, an increase in spending of about $ 7 trillion, and a net additional deficit above CBO current projections of another $3 trillion. The plans would result in about a 3% to 4% average annual real GDP growth if it all gets enacted.

Whoever wins the presidency owes the public many more specifics about their long-term tax plans. Most importantly, though, I believe the country continues to need short-term, immediate relief to jump start the country into a post-pandemic recovery that will help the middle class and poor, the unemployed, and the millions of struggling small businesses. Should more permanent damage occur in the meantime, it will make the candidates’ longer-term proposals less effective and more costly than the models currently show.

¹ www.donaldjtrump.com/media/trump-campaign-announces-president-trumps-2nd-term-agenda-fighting-for-you 
² www.marketwatch.com/story/trump-seriously-considers-capital-gains-tax-cut-heres-how-he-could-do-it-2020-08-11 
³ https://taxfoundation.org/president-trump-tax-plan-2020 
⁴ www.cms.gov/files/document/2020-medicare-trustees-report.pdf 
⁵ https://joebiden.com/a-tale-of-two-tax-policies-trump-rewards-wealth-biden-rewards-work 
⁶ https://joebiden.com/a-tale-of-two-tax-policies-trump-rewards-wealth-biden-rewards-work 

Robert Duquette, CPA, is Professor of Practice in the College of Business at Lehigh University, and a retired EY senior tax partner. He has served on PICPA’s Federal Taxation Committee for over 25 years, focusing on federal tax reform and the national debt.

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