Reviewing Joe Biden’s Tax Vision

August 20, 2020

Tonight, former Vice President Joe Biden formally accepts the Democratic nomination for President, ending a long primary season that saw competing policy visions from the many candidates, including in tax policy. However, questions about Biden’s tax proposals, such as when and how fast he would push for tax hikes, remain to be clarified headed into the fall campaign.

Biden has not released a single formal tax plan, but he has proposed many tax changes and increases connected to spending proposals related to issues like climate change, infrastructure, health care, education, and research & development. Most of these proposals center around raising income taxes on high earners as well as on businesses. Selected highlights of Biden’s tax increases include:

  • Repealing the Tax Cuts and Jobs Act (TCJA) individual income tax reductions for those earning over $400,000 and restoring the top marginal income tax rate to 39.6 percent from today’s 37 percent. The Section 199A deduction would also be phased out for those earning over $400,000.
  • Taxing capital gains at ordinary income tax rates—up from a top rate of 23.8 percent today—for those earning over $1 million. Biden would also eliminate step-up in basis for inherited assets with capital gains, instead taxing those gains at death.
  • Capping the value of itemized deductions to 28 percent for those in higher marginal tax brackets and restoring the Pease limitation on itemized deductions for those with taxable income above $400,000.
  • Raising the corporate income tax from 21 percent to 28 percent.
  • Imposing a 15 percent minimum book tax on corporations with $100 million or greater in income.
  • Doubling the tax rate on Global Intangible Low Tax Income (GILTI) earned by foreign subsidiaries of U.S. firms, from 10.5 percent to 21 percent.
  • Imposing the 12.4 percent Social Security payroll tax on wage and self-employment income earned above $400,000.

Using the Tax Foundation General Equilibrium Model, we estimate that Biden’s tax proposals would raise about $3.8 trillion over 10 years. The plan would also reduce long-run economic growth by 1.51 percent and eliminate about 585,000 full-time equivalent jobs.

While Biden’s tax plan would make the tax code more progressive, it would reduce after-tax incomes for filers across the income spectrum by reducing the incentive to work and invest in the United States. On average, taxpayers would see a 1.7 percent reduction in after-tax income on a conventional basis by 2030, ranging from a 0.7 percent decline for those in the bottom quintile of the income distribution to a 7.8 percent decline for earners in the top 1 percent.

A prospective Biden administration will have to consider how fast and how far to enact the variety of tax increases that the candidate has proposed so far, as the American economy is still struggling with the coronavirus pandemic and economic hardship. If enacted too fast, tax hikes may undercut a nascent economic recovery next year. Tentatively, it seems Biden may be open to delaying some of his tax proposals until economic conditions improve. However, additional details about what a Biden administration would want to see before entertaining tax hikes would increase policy certainty moving forward if he won the election.

In addition to tax increases, Biden proposes a variety of tax incentives that are meant to encourage specific kinds of activity, ranging from carbon capture and storage to an $8,000 tax credit for childcare. In addition to those tax credits, he proposes:

  • A restoration of the electric vehicle tax credit
  • Tax credits for residential energy efficiency
  • Making permanent the New Markets Tax Credit
  • Establishing a Manufacturing Communities Tax Credit
  • A renter’s credit to reduce rent and utilities to 30 percent of income
  • An expanded Earned Income Tax Credit (EITC) for those older than 65
  • A $5,000 tax credit for informal caregivers
  • Expanding the Low-Income Housing Tax Credit (LIHTC)
  • A reinstated Solar Investment Tax Credit (ITC)
  • A tax credit for childcare facilities built by businesses
  • Providing a 26 percent tax credit to match traditional retirement contributions as a replacement to deductibility of those contributions (Roth treatment remains unchanged)
  • Establishing a First Down Payment Tax Credit of up to $15,000

Despite these tax credit proposals, Biden has not gone as far as his running mate, Sen. Kamala Harris (CA), when it comes to expanding the generosity and eligibility of major tax credits such as the Child Tax Credit (CTC) and the EITC. Harris has endorsed a plan that would cost over $2.7 trillion over 10 years, nearly matching the revenue raised from all of Biden’s tax increases. House Democrats have also endorsed more generous tax credits to help vulnerable households, which may be an alternative starting point for Biden.

Biden’s tax vision is twofold: higher taxes on high-income earners and businesses paired with more generous provisions for specific activities and households. Given the current economic landscape, as households and businesses are still reckoning with the economic fallout of the coronavirus pandemic, the former part of the Democratic nominee’s tax vision may have to be put on hold if he wins the election.

 

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A tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat.

An itemized deduction allows individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most high-income taxpayers. 

A payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 23.05 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue.

The Tax Cuts and Jobs Act in 2017 overhauled the federal tax code by reforming individual and business taxes. It was pro-growth reform, significantly lowering marginal tax rates and cost of capital. We estimated it reduced federal revenue by $1.47 trillion over 10 years before accounting for economic growth.

An individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. Individual income taxes are the largest source of tax revenue in the U.S.

A corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.

The federal child tax credit (CTC) is a partially refundable credit that allows low- and moderate-income families to reduce their tax liability dollar-for-dollar by up to $2,000 for each qualifying child. The credit phases out depending on the modified adjusted gross income amounts for single filers or joint filers.

After-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize after-tax income.

A tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.

Taxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income.

The Earned Income Tax Credit (EITC) is a refundable tax credit targeted at low-income working families. The credit offsets tax liability, and can even generate a refund, with EITC amounts calculated on the basis of income and number of children.