- Tax Proposals of President-Elect Biden and Other Prominent Democrats
- Increased Individual Tax Rate
- Increased Capital Gains Tax Rate
- Repeal the ,000 Cap on the State and Local Tax Deduction
- Death as Realization Event
- Limitations on Itemized Deductions
- Phase Passthrough Deduction
- Payroll Tax
- Increased Corporate Tax Rate
- Corporate Minimum Tax
- Changes to GILTI
- Offshoring Tax Penalty and Made in America Tax Credit
- Repeal of -Kind Exchanges
- Estate and Gift Tax
- Other Proposals
- Wyden’s Proposal
- Ocasio-Cortez’s and Schakowsky’s Proposal
- Financial Transaction Taxes
- Democratic plans for raising taxes on the rich: A guide for the middle class
- Individual income taxes
- Investment income
- Corporate income tax
- A wealth tax
- Carbon tax
- Turning the page
- Tax the rich: Will Biden make good on his campaign promise?
- ‘Major Reform’
- Republican Warning
Tax Proposals of President-Elect Biden and Other Prominent Democrats
Wednesday, January 13, 2021
This blog summarizes some of the tax proposals of President-elect Joe Biden and other prominent Democrats.
Increased Individual Tax Rate
Biden would increase the top marginal income tax rate for individual taxpayers with income above $400,000 from 37% to 39.6% (the top marginal income tax rate in effect prior to the enactment of the Tax Cuts and Jobs Act (the “TCJA”)). For income subject to the additional 3.8% tax on net investment income, the rate would be 43.4%.
Increased Capital Gains Tax Rate
Biden would increase the long-term capital gains and qualified dividend rate for individual taxpayers with income in excess of $1 million from 20% to the proposed ordinary income tax rate of 39.6%. It is unclear whether the 39.6% rate would include the additional 3.8% tax on net investment income; if it did not, the marginal rate for capital gains could be as high as 43.4%.
Repeal the $10,000 Cap on the State and Local Tax Deduction
Biden would repeal the $10,000 cap on the state and local tax deduction. However, for taxpayers with income of more than $400,000, the 28% cap on the benefit of deductions and the restoration of the Pease limitation (both described below) will reduce the benefit of the repeal.
Death as Realization Event
Under current law, the death of a taxpayer is not a taxable event. The basis of property acquired from a decedent is stepped-up to the fair market value at death, with the result that appreciation in the property during the life of the decedent is not subject to income tax. Biden would treat death as a realization event. As a result, the decedent would be treated as if he or she sold all of his or her assets for fair market value at death and would be taxed on any unrealized appreciation at the rate applicable to long-term capital gains (which, in the case of taxpayers with income above $1 million, would be the ordinary income tax rate of 39.6%).
Limitations on Itemized Deductions
Biden would cap the tax benefit of itemized deductions at 28% of value for taxpayers with income above $400,000.
Biden would also restore the “Pease” limitation on itemized deductions. The Pease limitation would reduce the value of certain itemized deductions by 3% for every dollar of a taxpayer’s taxable income above $400,000, with a maximum reduction equal to 80% of the total value of the taxpayer’s itemized deductions.
For a taxpayer with itemized deductions, the 28% cap on the tax benefit of itemized deductions and the Pease limitation reduce the value of a taxpayer’s deductions – and increases his or her taxes – by 12.44% of the amount of the deductions.
Phase Passthrough Deduction
Section 199A provides individuals (and certain trusts and estates) with a “passthrough deduction” of up to 20% that reduces the income tax rate from 37% to 29.6% for ordinary income items from certain passthrough entities, such as partnerships, S corporations, REITs, trusts and estates. Biden would phase out this deduction for taxpayers with taxable income above $400,000.
Biden would impose the 12.4% social security payroll tax on taxpayers with earnings above $400,000. Under current law, wages above $142,800 (for 2021) are not subject to the 12.4% social security tax. Biden would keep the existing threshold, so that wages between $142,800 and $400,000 would not be subject to the payroll tax.
However, because the existing cap of $142,800 is adjusted over time for wage growth and the $400,000 threshold is fixed, the gap would gradually close so that all wages would eventually be subject to the 12.4% social security tax. For an employee, the payroll tax is split evenly between the employer and the employee.
Self-employed taxpayers with earnings above $400,000 would be required to pay the full 12.4% social security payroll tax.
Increased Corporate Tax Rate
Biden would increase the corporate income tax rate from 21% to 28%.
Corporate Minimum Tax
Biden would introduce a new 15% minimum tax on book income of companies that report net income of more than $100 million. Corporations would pay the higher of the regular corporate income tax or the 15% minimum tax. The minimum tax would still permit corporate taxpayers to use foreign tax credits and any net operating loss carryovers.
Changes to GILTI
Biden would double the current effective tax rate on “global intangible low-taxed income” (“GILTI”) from 10.5% to 21% (and from 13.125% to 26.250% starting in 2026).
In addition, Biden would calculate GILTI tax liability on a country-by-country basis, rather than a global basis, and thereby deny taxpayers the ability to blend high-taxed foreign income with low-taxed foreign income. Under current law, the GILTI tax exempts earnings up to a 10% deemed return on “qualified business asset investment.” Biden would eliminate the exemption.
Offshoring Tax Penalty and Made in America Tax Credit
Biden would establish a 10% penalty surtax on companies that offshore manufacturing and service jobs to foreign countries to sell goods or provide services back to the U.S. market. Companies would also be denied deductions for expenses related to moving jobs and production overseas if these could be performed in the United States.
Biden would also offer a “Made in America” tax credit, which would be a 10% advanceable tax credit for companies making investments that create jobs for U.S.
workers and accelerate economic recovery by revitalizing existing closed or closing facilities, retooling or expanding facilities to advance manufacturing employment, or expand manufacturing payroll.
Repeal of -Kind Exchanges
Biden would repeal section 1031, which allows taxpayers to exchange “-kind” real estate tax-free.
Estate and Gift Tax
Under current law, the estate and lifetime gift exemptions for 2021 are both $11.7 million (increased from $11.58 million in 2020) and the maximum estate and gift tax rates are both 40% (applicable to taxable amounts above $1 million).
Biden would reduce the exemptions to $3.5 million for the estate tax exemption and $1 million for the lifetime gift tax exemption and would increase the maximum estate and gift tax rates to 45%.
This would restore the exemptions and rates to 2009 levels.
Biden also proposes to expand the new markets tax credit and several renewable-energy-related tax credits, and establish new credits for businesses that experience workforce layoffs or major government institution closure. He has also proposed replacing the deduction for contributions to retirement savings plans with a 26% credit.
Biden also has proposed expanding the earned income tax credit, the child and dependent care tax credit, and the child tax credit and reintroducing the first-time homebuyers’ tax credit.
Ron Wyden (D-OR) has proposed a “mark-to-market” tax on wealthy and high-income individuals that would tax unrealized gains in publicly-traded property and would impose an additional tax in the nature of an interest charge upon the sale of nontraded property. The proposal would also increase the capital gains tax rate so that it is equal to the ordinary income tax rate for these taxpayers.
Wyden’s mark-to-market proposal would apply to individuals, estates or trusts with income in excess of $1 million or assets exceeding $10 million in each of the three prior tax years. For purposes of determining whether the $10 million asset test is satisfied, the first $2 million of combined value of a taxpayer’s primary and secondary personal residences would be excluded, the value of a taxpayer’s operating family farm would be included only to the extent it exceeds $5 million, and the first $3 million of a taxpayer’s retirement savings would excluded.
These taxpayers would be required to “mark-to-market” their publicly-traded assets on an annual basis and pay a tax on any appreciation (or take a loss on any depreciation) at the end of the tax year as if they had been sold.
In addition, a “look-back charge” in the nature of an interest charge would be imposed on gains from non-publicly traded assets closely-held businesses, investment real estate, and art and collectibles, upon a realization event, which would generally include any transfers of these types of property or the death of the owner.
Proceeds from the primary and secondary residences of a taxpayer only in excess of $2 million, and proceeds from a family farm only in excess of $5 million, would be subject to the look-back charge rule.
Wyden’s proposal would not apply to assets held in tax-preferred savings accounts, which would continue to be taxed in the same manner as under current law.
Wyden’s proposal would also include transition rules that would require taxpayers to pay tax on pre-proposal built-in gains over an unspecified period.
Publicly-traded corporations would generally not be subject to Wyden’s proposal, but there would be anti-abuse rules that would prevent taxpayers from using a corporation to avoid application of the mark-to-market rules. The Wyden proposal would apply the regime at the partner or S corporation shareholder level, and an interest in a partnership or S corporation would generally be treated as a nontraded asset.
Ocasio-Cortez’s and Schakowsky’s Proposal
Rep. Alexandria Ocasio-Cortez (D-NY) and Rep.
Jan Schakowsky (D-IL) previously indicated that they plan to introduce a bill that would implement a mark-to-market system and increase the capital gains tax rate to match ordinary income tax rates. Ocasio-Cortez’s and Schakowsky’s bill would also increase the top marginal individual income tax rate to 59%. The details of the proposal have not yet been released.
Financial Transaction Taxes
There have been several proposals to impose a financial transactions tax on trades of stocks, bonds, and derivatives. The Wall Street Tax Act of 2019, sponsored by Sen. Brian Schatz (D-HI) and Rep. Peter DeFazio (D-OR), would to impose a 0.1% a tax on securities transactions. Sen.
Bernie Sanders (I-VT) and Sen. Kirsten Gillibrand (D-NY) previously introduced a bill that would apply tax of 0.5% for stocks, 0.1% for bonds and 0.
005% for derivatives and would provide an income tax credit to offset the financial transaction tax for taxpayers with income of less than $50,000 (or $75,000 for couples).  See Biden, “A Tale of Two Tax Policies: Trump Rewards Wealth, Biden Rewards Work,” Biden Harris. See id.; Biden, “Healthcare,” Biden Harris.  This proposal does not appear on the Biden website but has been widely reported. See e.g., Richard Rubin, “How Joe Biden’s Tax Plan Could Affect You,” The Wall Street Journal.  See Biden, “Healthcare.” While his website only states that his capital gains proposals “will close the loopholes that allow the super wealthy to avoid taxes on capital gains altogether,” Biden has confirmed during campaign events that this means treating death as a realization event. See Rubin, “How Joe Biden’s Tax Plan Could Affect You.”  These proposals do not appear on the Biden website but have been widely reported. See e.g., Tony Nitti & Charlie Forsyth, “U.S. Taxation in 2020: Tax Policy & the Presidential Election,” Bloomberg Tax (Nov. 2, 2020)  39.6% – 28% + (3% * 28%).  This proposal does not appear on the Biden website but has been widely reported. See e.g., Rubin, “How Joe Biden’s Tax Plan Could Affect You.”  This proposal does not appear on the Biden website but has been widely reported. See e.g., id.  The proposals in this section appear in Biden, “The Biden-Harris Plan to Fight for Workers by Delivering on Buy America and Make It in America,” Biden Harris.  See Biden, “Caregiving,” Biden Harris.
 See Biden, “Highlights of Joe Biden’s Plans to Support Women During the COVID-19 Crisis,” Biden Harris; Biden-Sanders Unity Task Force, “Combating the Climate Crisis and Pursuing Environmental Justice,” Biden Harris.  These proposals appear in Biden, “The Biden-Harris Plan to Fight for Workers by Delivering on Buy America and Make It in America.”  Biden, “Older Americans,” Biden Harris.https://joebiden.com/older-americans/  See Biden, “A Tale of Two Tax Policies: Trump Rewards Wealth, Biden Rewards Work,” Joe Biden, “Housing,” Biden Harris The expansion of the earned income tax credit does not appear on the Biden website but has been widely reported. See e.g., Kaustuv Basu, “Biden Tax Credit Proposals Could Gain Traction in Split Congress,” Bloomberg Tax, (Nov. 12, 2020).  See Ron Wyden (R-OR), Senate Fin. Comm., Treat Wealth Wages (Sept. 2019).  These thresholds would apply to both single and joint filers and would be indexed for inflation. A taxpayer with income or assets that exceed either of the thresholds would be subject to the regime until the taxpayer fails to meet both income and asset requirements for three consecutive tax years, at which point the taxpayer could elect anti-deferral accounting.  Laura Davison, “Alexandria Ocasio-Cortez Plans Bill to Boost Top Individual Tax Rate to 59%,” Bloomberg, (Nov. 15, 2019).  Wall Street Tax Act of 2019, H.R. 1516, 116th Cong. (2019).  See Inclusive Prosperity Act of 2019, S. 1587, 116th Cong. (2019).
Although the plan does not specifically mention -kind exchanges under section 1031, according to Bloomberg News, a Biden campaign official has said that “a Biden administration would take aim at so-called -kind exchanges, which allow investors to defer paying taxes on the sale of real estate if the capital gains are reinvested in another property. The official also said they would prevent investors from using real-estate losses to lower their income tax bills.” Tyler Pager, “Biden’s $775 Billion ‘Caring Economy’ Plan Paid for with Real Estate Taxes,” Bloomberg (July 21, 2020).
© 2020 Proskauer Rose LLP. National Law Review, Volume XI, Number 13
Democratic plans for raising taxes on the rich: A guide for the middle class
It’s hardly surprising that if a Democrat wins the White House, taxes on wealthy Americans and corporations will probably go up. How they’ll go up is the more interesting question.
The 2020 Democratic presidential candidates generally agree the U.S. economy faces a variety of challenges: record-high income inequality, decaying infrastructure, failing public schools, climate change that is already leading to fires and floods and a lack of health insurance for millions of Americans, to name a few.
To remedy these problems, every candidate has proposed raising government revenue by increasing taxes on the rich in one way or another, whether through higher income tax rates, a wealth tax or changing how investment income is treated.
Here is a brief look at the tax plans of the top eight candidates in the polls and what economists me think about them.
Bloomberg proposed creating a new 5% surcharge on incomes over $5 million. AP Photo/David Goldman
Individual income taxes
President Donald Trump’s 2017 tax reform law reduced the top individual income tax rate from 39.6% to 37%. Every Democratic candidate running to replace Trump agrees that it should be raised. Most suggest returning it to 39.6%; a few think it should go higher.
Bloomberg proposes an additional 5% surcharge on income above US$5 million, yielding a 44.6% rate, while Vermont Sen. Bernie Sanders wants a top rate of 52%.
For taxes on lower- and middle-income Americans, the candidates generally say they plan to leave the current rates in place or lower them.
The candidates focus on taxing the wealthy because they say the richest Americans have benefited greatly from U.S. tax policy in the recent past and are no longer paying their fair share.
The question that economists ask when assessing such policies is when do high tax rates have negative economic consequences, such as by discouraging productive work because Uncle Sam takes such a big chunk of each extra dollar they earn.
The standard economic argument for lower marginal tax rates is that it provides incentives for people to work hard and be productive. But it’s not clear at what rate that happens, and 37% does not seem to be the tipping point.
For perspective, every year from 1940 to 1980, the top marginal tax rate was at least 70%. Yet productivity growth and economic growth were both robust over this period.
A related issue is should investment income, such as dividends, capital gains and carried interest, be taxed at a lower rate than labor income.
Currently, investment income is taxed at a top rate of 20% – as opposed to the 37% tax on labor income – with other rate differentials at lower incomes. The Democratic candidates all want to end the practice of taxing investment income at a lower rate than labor income.
I believe there are good reasons to do so, as do many other economists.
Primarily, a lower tax rate incentivizes the wealthy to find ways to convert earnings from labor into capital income to reduce their tax bill. And believe it or not, private equity managers who typically earn hundreds of millions of dollars a year have all their earnings classified as capital income, cutting their tax bill in half.
Buttigieg and Klobuchar both favor raising the corporate tax rate. AP Photo/Patrick Semansky
Corporate income tax
The 2017 Trump tax bill also cut corporate taxes, from 35% to 21%, with proponents arguing it would spur business investment and economic growth.
Several studies, however, found little or no evidence of this impact.
And the 2017 tax bill reduced corporate tax revenues as a share of GDP to 1.1% from the 50-year average of 1.9%, putting a larger proportion of the tax burden on individuals.
This is why all the Democratic candidates propose raising corporate tax rates. Some, such as former Vice President Joe Biden and Minnesota Sen. Amy Klobuchar, want to raise the rate some, while others, such as Mayor Pete Buttigieg and Massachusetts Sen. Elizabeth Warren, would restore the pre-Trump 35% rate.
Similar to the individual tax, finding the optimal corporate tax rate can be tricky.
Generally speaking, changes to corporate taxes have little impact on the U.S. economy, so raising them shouldn’t slow growth.
Higher corporate taxes do, however, reduce stock prices, since corporations will pay more money to the government and less to shareholders as dividends, thereby reducing incentives to own stock shares. This can hurt less wealthy Americans with investments in retirement plans and mutual funds.
A wealth tax
Sens. Sanders and Warren argue the super wealthy should pay even higher taxes to reduce inequality – and to cover their bigger spending plans. Most Americans agree.
Warren wants to slap a 2% tax on net worth in excess of $50 million, and a 3% tax on fortunes in excess of $1 billion.
Sanders would go further. He suggests a tax of 1% on net worth over $32 million that would get progressively higher, rising to 8% on wealth over $10 billion.
Economists are not huge wealth tax fans. They think it would spark tax evasion and, for this reason, not ly lead to much additional revenue.
More than that, a wealth tax may be unconstitutional. Even if Congress were to pass such a tax, it would immediately be challenged in the courts. The Supreme Court would ly hold it unconstitutional, as was the case with the individual income tax, which required the 16th Amendment to the U.S. Constitution be passed before it could be implemented.
Carbon taxes are taxes on polluting activities, such as the use of gasoline or electricity.
Economists across the political spectrum tend to support taxing carbon because it creates incentives for consumers and businesses to spend money in ways that reduce carbon emissions and slow climate change.
It would, however, increase the cost of driving, flying and heating one’s home. It would also increase the price of all goods transported long distances and whose production requires a good deal of energy. This regressive side to the tax is why Sanders doesn’t support carbon taxes – though most of the other candidates do.
As an example, Yang’s $40 per ton tax would cost the average American family $2,000 a year. Besides helping the environment, the entrepreneur says a carbon tax would help finance his basic income guarantee.
Yang supports a $40 per ton carbon tax. AP Photo/Mary Altaffer
Turning the page
With few exceptions, the Democrats running for president seem to be on the same basic tax policy page.
They all want to raise more revenue by taxing capital income at the same rate as labor income and increasing rates on the wealthy and on corporations. They differ over the extra taxes, on carbon, wealth and financial transactions.
Whatever combination of these tax changes might be enacted, if a Democrat wins the White House in 2020 and Congress is controlled by the Democrats, the rich will almost certainly lose their large gains under Trump.[You’re smart and curious about the world. So are The Conversation’s authors and editors. You can get our highlights each weekend.]
Tax the rich: Will Biden make good on his campaign promise?
President Joe Biden’s economic team at the White House is determined to make good on his campaign pledge to raise taxes on the rich, emboldened by mounting data showing how well America’s wealthy did financially during the pandemic.
With Republican and business-lobby opposition to the administration’s tax plans stiffening, Democrats need to decide how ambitious to be in trying to revamp the tax code in what’s almost-certain to be a go-it-alone bill. Interviews with senior officials show there’s rising confidence at the White House that evidence of widening inequality will translate into broad popular support for a tax-the-wealthy strategy.
Biden himself has become convinced of the need, saying last week that those earning over $400,000 can expect to pay more in tax.
“2020 really did show him that there were so many of the fragilities across society” that need addressing, Heather Boushey, a member of the White House Council of Economic Advisers, said in an interview.
Funding spending priorities given a shortfall in revenues from the 2017 Republican tax cuts “has really demanded the president sit down and think about both the enormous needs, and these questions we’re talking about as to how we tax,” she said.
Behind the scenes, aides have been working on a proposal to pay for some of the longer-term Biden agenda. Boosting income and capital-gains tax rates on top earners, along with levies on companies and an expansion of the estate tax, would help fund priorities such as infrastructure, climate change, and assistance for child care and home health care.
Lawmakers and the administration are stepping up discussions about what measures could pass later in the year. The Senate Finance Committee on Thursday will hold a hearing on the impact on employment and investment of the current U.S. international tax structure.
Senior members of the administration, including David Kamin, deputy director of the National Economic Council, and Lily Batchelder, who’s been tapped to become assistant Treasury secretary for tax policy, have been working for years on options to raise revenue from the best-off Americans.
Kamin, who with Batchelder mapped out potential reforms in a 2019 paper called “Taxing the Rich: Issues and Options,” signaled in an interview that the following options are among those under discussion:
- Removing “step up in basis” for estates, which revalues assets such as stocks and real estate at market prices, rather than their original purchase cost — reducing tax liabilities
- Taxing capital gains for wealthy Americans at income-tax rates, which are higher
- A minimum tax for large companies
“The idea of finally eliminating what is a massive loophole, in that the highest income Americans escape tax on their wealth by addressing step up in basis and then taxing capital gains as ordinary income, is a major reform of our system, which I think is needed,” Kamin said in the interview.
“These would be major accomplishments, which would pretty fundamentally shift how our tax system treats the richest Americans and the largest corporations so they can’t escape tax in the ways they now can,” he said.
The administration is also looking at rolling back a portion of former President Donald Trump’s income-tax cuts, aides say.
“Anybody making more than $400,000 will see a small-to-a-significant tax increase,” Biden said in an interview with ABC earlier this month. For those under that level, there won’t be “one single penny in additional federal tax,” he said.
Major aspects of the plan have yet to be detailed, including the specifics of the threshold for higher taxes. The White House clarified last week that the $400,000 figure applies to families.
But when asked in a Bloomberg TV interview Monday what the figure is for families versus individuals, Boushey said “all the details are still to be worked out.
This is an ongoing conversation so I can’t speak to specifics at this point.”
“We are looking at folks just at the very, very top of the spectrum,” Boushey said.
The so-called K-shaped recovery, in which wealthier Americans thrived even as low-income and many middle-class workers suffered from job losses, evictions, food insecurity and health risks associated with working in-person jobs during Covid-19, has reinforced the administration’s intentions.
The richest 1% of U.S. households added more than $4 trillion in wealth last year as stocks hit record highs and property values swelled, fueled in part by record-low interest rates. The bottom 50% saw their net worth gain by a much-smaller $470 billion — and that was bolstered by the extraordinary income support provided in the March 2020 Cares Act.
A new paper from the left-leaning Economic Policy Institute showed that 80% of job losses in 2020 were concentrated among the lowest 25% of wage earners, while the workers in the top half of the distribution saw gains in employment.
“It is always true that recessions hit low- and middle-income people harder, but I have never seen anything this,” said Heidi Shierholz, the institute’s policy director and a former chief Labor Department economist.
Republicans warn that higher taxes will hold back the recovery. The U.S. Chamber of Commerce says boosting levies on companies will “make the United States a less attractive place to invest profits and locate corporate headquarters.”
“Whatever the new normal is we return to after Covid-19, I think it is important for the government to stay as far the way as possible to allow the economy to find its footing,” said Chris Campbell, a former Senate Republican aide who served in the Treasury during the Trump administration.
Senate Minority Leader Mitch McConnell said last week there wouldn’t be bipartisan support for higher taxes, and predicted Democrats will use the reconciliation process — which allows bills to pass the Senate with a simple majority — for their proposals.
One tax issue on which lawmakers from both parties agree is the potential for toughening IRS enforcement. A Treasury Department watchdog report showed last week that the Internal Revenue Service has failed to collect more than $2.4 billion from wealthy individuals who owe the federal government back taxes.
A National Bureau of Economic Research working paper this month separately indicated that random IRS audits are missing most tax evasion through offshore centers and pass-through businesses such as partnerships and limited-liability firms.
Biden’s current determination marks a shift in a decades-long political career with few episodes of pushing for higher taxes. On the presidential campaign trail he drew a distinction with liberal competitors’ plans for a wealth tax, and as vice president he cut a deal with Republicans in late 2012 to make permanent 82% of the tax cuts originally passed by President George W. Bush.
But liberals are fully behind his efforts now.
“We have seen him propose, fight for, sign, and sell one of the most progressive pieces of legislation in three generations,” said Senator Elizabeth Warren in an interview, referring to the pandemic-relief plan. “There is momentum now for real change, and tax policy is a critical part of that change.”