The 2020 presidential campaign between President Trump and former Vice President Joe Biden has mostly been sidelined as the country continues to grapple with the COVID-19 (coronavirus) pandemic. With November fast approaching, attention will soon shift toward the presidential race, where both candidates seek to distinguish their policies and initiatives. One place where the candidates stand far apart is on taxes.
Key Differences between the Candidates’ Tax Plans
Biden’s tax plan generally calls for tax increases on wealthy individuals and on businesses. President Trump has not yet released a tax plan for 2021 but has made statements about extending tax cuts under the 2017 tax reform law commonly known as the Tax Cuts and Jobs Act (TCJA), and about enacting further middle class tax cuts. A more detailed plan from President Trump is scheduled for a September release. But even without significant details from President Trump’s campaign, it is possible to make broad comparisons.
The first point of comparison — tax rates — highlights the federal deficit in a way that neither candidate likely anticipated. Thus far, coronavirus relief legislation is budgeted to add roughly $3 trillion to the federal deficit, with debate now commencing on another aid package that could cost another trillion dollars or more. Congressional concern over the growing federal deficit could affect each candidate’s tax plans in a unique way.
President Trump’s administration has maintained that tax cuts pay for themselves, because of a ripple effect they have on other economic forces. A recent study from the Congressional Research Service on the initial effects of the TCJA does not support that view. The weight of such evidence together with Congressional concern over the deficit could stand in the way of further tax cuts under a second-term Trump administration.
This difficulty does not necessarily benefit presumptive Democratic nominee Biden, who faces a different set of problems. In Biden’s case, the proposed tax increases are designed to pay for expanded healthcare and social programs. However, the expanding federal deficit could make Congress reluctant to endorse additional spending and more prone to divert tax increases to stem that rise. One analysis of the revenue generated by Biden’s tax plan anticipates it will raise an additional $3.8 trillion over 10 years, which may be notable to those sharing recent concerns over spending in that it roughly equals the anticipated spending for coronavirus relief.
With these challenges in mind here are the specific tax rate differences proposed by the two candidates:
Individual Tax Changes
Increase the top individual tax rate to 39.6% from 37% for those earning more than $400,000
Decrease the rate for an unspecified group of middle class taxpayers by 10%
Corporate Tax Rate
Increase to 28%
No change to the current 21% rate
Global Intangible Low-Taxed Income (GILTI)
Double the tax rate
No change to the current 13.125% rate
Capital Gains & Qualified Dividends
39.6% on income over $1 million
Possible capital gains tax holiday that would reduce rate to 0% for short period of time; possible change to index basis for measuring capital gains to inflation
But tax rates are not the only differentiating factor between the candidates.
Other Proposals under the Biden Tax Plan
Biden would also limit deductions and impose new types of taxes, along with making changes to payroll taxes in ways that would broaden the tax base. Essentially, these changes would act to further raise taxes on wealthy individuals and businesses.
The specific measures that Biden would enact to effectively broaden the tax base are:
- Reactivating the limitation on itemized deductions for incomes above $400,000;
- Limit the tax benefits of itemized deductions to 28%, which based on 2020 tax brackets, would mean that individuals with income over $326,600 (married filing jointly) or $163,300 (single) will have the benefits of itemized deductions reduced;
- Repeal the step-up in basis for items transferred at death;
- Phase out the qualified business income (QBI) deduction for income above $400,000;
- Impose a new corporate minimum tax on corporations with book income over $100 million, which would primarily target companies that report little to no taxable income but report significant income for financial accounting purposes; and
- Apply the Social Security payroll tax of 12.4% to earnings above $400,000, which would mean wages between $137,700 (the current wage cap) and $400,000 would not be subject to the tax.
These comparisons reveal that the two candidates have significant ideological differences on tax rates and on federal revenue in general. As the election approaches, we will explore other related topics such as the effects of tax rates on overall government revenue, planning opportunities and challenges arising from tax law changes, and others.
For more information on the 2021 candidates’ tax plans and their potential effect on you or your business, please contact your local CBIZ tax professional.
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