US President-elect Joe Biden (Photo by Alex Edelman / AFP) (Photo by ALEX EDELMAN / AFP via Getty … [+]
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Like any other candidate, Biden made many promises during the campaign, including what he would do about taxes. Now his transition team has made plans. They don’t quite keep promises, but they are in the same spirit. His team wants to collect taxes on businesses and the rich and give low-income Americans slight extra breaks.
Of course, plans, especially at this early stage in the process, are far from the law. If Republicans are likely to retain a majority in the Senate, they will block much of the law a Biden team would need to carry out their plans. Even if Republicans fail to get a Senate majority for some reason, many Democratic senators and officials will object to some provisions of these plans. But even if US tax law doesn’t necessarily have to follow the example of the Biden team, various aspects could become law in the wake of the inevitable compromises in Washington. Whatever the outcome, the plans on the table now will determine future debate and for that reason alone deserve review.
The transitional tax team has already failed to keep a promise made by candidate Biden: to repeal Trump’s 2017 tax reform. No such measure is included in the specified transition plans. That is understandable. Such an action would contradict Biden’s other promise not to impose taxes on anyone earning less than $ 400,000 a year. Although the Trump reform has been characterized as affecting only the rich, it has actually lowered the tax burden in income distribution much less than the Biden limit. The Biden plans, as proposed during the campaign, also do not include efforts to restore taxpayers’ ability to write off all state and local taxes from their federal tax liability. With regard to this so-called SALT provision, Biden now only promises to “discuss the matter with Congress”. Undoubtedly, the huge budget gaps in Washington have something to do with the team’s reluctance on this point.
With regard to corporate taxes, Biden would make three changes. First, it would increase the statutory rate from the current 21% to 28%. Second, it would add a minimum tax of 15 percent for companies with profits over $ 100 million if they otherwise paid less due to deductions. It would work similarly to the alternative minimum tax in each code. Third, it would double the tax on foreign income from intellectual property licenses and fees from the current 10.5% to 21%. He plans to write the law so that the government can levy the tax on a country-by-country basis.
Republicans would oppose all three measures but would likely show more resistance to the second two. Part of the reason has to do with the impetus behind the corporate tax cut in the 2017 bill. It was less intended as a corporate gift than to bring this country’s corporate taxes in line with international standards. Before the 2017 reform, U.S. corporate tax rates were so much higher than anywhere else in the world that U.S. multinationals withhold profits overseas to avoid paying high tax rates on repatriated funds. Some, in order to avoid relatively high tax rates, were actually admitted abroad. The proposed increase in the statutory rate would tend to undermine this intended effect, but it is not so great that Republicans cannot compromise. In contrast, the minimum tax would face stiff opposition. Since investment is the primary source of deduction, the minimum would be viewed as particularly hostile to growth and detrimental to the global competitiveness of American industry. And since intellectual property licenses and fees are a major factor in overseas sales, the proposal to increase those taxes would also meet with significant opposition, not least because big technologies would lead the way in lobbying. Additional objections would arise because the selective application of the law could become arbitrary and resemble centralized industrial planning.
On individual income taxes, Biden would burden high-income taxpayers by increasing the maximum rate for incomes over $ 400,000 per year from 37% today to 39.6%. It would also limit individual deductions to 28% of income for those earning more than $ 400,000 a year and a 12.4% wage tax for those in the top tier. The plans also include lifting the 2017 pass-through income interruption for this class of taxpayers. These changes would increase the tax burden on this income group by around 16 percent. All Americans would also face the reintroduction of the individual mandate to take out health insurance. Biden’s plans include increased tax breaks for lower-income Americans. They would increase the earned income tax credit for senior taxpayers and increase the child and care tax credit from the current maximum of $ 3,000 to a fully refundable $ 8,000 ($ 16,000 for multiple dependents). In 2021, the child tax credit will increase from a maximum of $ 2,000 today to $ 3,000 with a bonus of $ 600 for children under the age of six. That too would be fully refundable.
Republicans would oppose the changes, particularly tax hikes, but are likely to compromise, especially if they can protect the existing provisions of corporate tax law. The net economic effect of these proposed changes would not be that great. The tax breaks for people in need of care and children could slightly increase the expenses of those entitled, but are not enough to have a noticeable effect on overall growth rates. Undoubtedly, the increasing burden on the rich would spark a small boom in the tax preparation industry as these people look for ways to protect income from taxes. With a much more attractive tax exemption, these changes would also lead to a slight increase in prices for municipal bonds. As tax hikes bite, they tend to slow the flow of savings rather than spending, as most people in these income brackets live well within their means.
A greater impact on savings and investments would come from Biden’s plans for capital gains and inheritance taxes. It would increase the current rate of 23.8% for capital gains to 39.6% for households with an annual income of over $ 1.0 million. The plans would change the current inheritance rules. Today, these valued assets only pay taxes when they realize the gains, and then only on those gains since they received assets. The proposed legislative changes would insist that heirs pay income tax on the unrealized gains. They are silent on other aspects of inheritance taxation, such as excluding US $ 100,000 per person or housing for inflation or special provisions for transferring a primary residence or small family business or farm. Presumably this means they would stand.
If such provisions were to come into effect, or even appear likely, they would cause an immediate sell-off in the financial markets as the asset owners sought to make a profit under the current lower tax rate. Such funds would likely come back to market quickly. The changes in the inheritance would have a more lasting effect on market prices, as any transfer would force the sale so that the heirs can pay the tax on the wanted property. In general, the provisions would discourage savings by significantly reducing what they can earn after tax. Such a reduced inflow would put further pressure on asset prices and otherwise reduce the resources available for capital investment.
Rigorous accounting shows that this package of tax regulations would add $ 3.3 trillion to federal revenues over a decade. Given the slight barriers to growth they would place on the economy, a consensus among economists suggests that actual sales growth would be a little closer to $ 2.7 trillion. In any case, the annual figure of between $ 270 billion and $ 330 billion would cut the forecast federal deficits by about a third and leave a sizable stream of red ink. Of course, the final budget effect would also depend on Biden’s spending plans, which are anything but negligible, especially his version of the Green New Deal. How much of this will go into law will also meet with considerable resistance in Congress and will be the subject of separate discussion.
At this point in time, conclusions count as speculation only. What is certain is that Mr. Biden will not get everything he wants. While he will almost certainly impose changes, they will be significantly watered down in any final piece of legislation. Now at least the readers know which topics the sales debate will revolve around.