Biden would make the tax code more progressive, meaning more affluent households would pay taxes at a higher rate than low-income taxpayers. By 2030, Biden’s tax increases would reduce after-tax income by 7.7% for the top 1% of taxpayers. The net effect of the biggest changes is to increase federal revenue by $3.3 trillion over 10 years. Like any tax increase, the plan would also reduce economic growth—in this case, by 1.62% over 10 years—which would lower the number of full-time jobs by 542,000. Here’s how Biden’s tax plan would affect individual taxpayers and corporations, if it gets passed by Congress.
Tax Changes for Individual Taxpayers
Biden promised to provide tax relief for working families while increasing taxes on those who make more than $400,000 a year. For 2021, he would restore the top tax rate to the level it was in 2017, tax capital gains as income, and eliminate loopholes in inherited-wealth taxes.
Higher Tax Rates for High-Income Earners
Biden would increase taxes on those making more than $400,000 per year as follows:
Impose a 12.4% Social Security payroll tax, evenly split between employers and employees. Limit the tax benefit of itemized deductions at 28% of value. Restore the Pease limitation on itemized deductions. Phase out qualified business income (QBI) deductions (also known as Section 199A pass-through deductions).
Under Biden’s plan, the top income tax rate for high-income filers would be restored to 39.6%, reversing the TCJA’s decrease to 37%. Long-term capital gains and dividends would be taxed at the 39.6% tax rate on income above $1 million a year. Long-term capital gains (held more than one year) are usually taxed between zero and 20% (as of 2020). The Obamacare tax added an additional 3.8% tax on net investment income for individuals earning more than $200,000 ($250,000 for married couples). Combined with the new highest bracket, that increases the top rate on long-term capital gains to 43.4%. The Biden tax plan would eliminate the “step-up in basis” loophole that allows families to pass capital gains tax-free to their heirs. It’s done by “stepping up” the value of the asset, whether it’s jewelry, stocks, bonds, or real estate, to its value when it’s inherited or, later, sold by the heir.
Tax Breaks for Families
Biden would expand credits for families caring for children and elderly relatives, first-time homebuyers, and people who purchase electric vehicles. The president would expand the Child Tax Credit for 2021 (and longer, if needed), amounting to up to $3,000 per child ages 6 to 17 and up to $3,600 for children under 6. He would also raise the Child and Dependent Care Tax Credit from a maximum of $3,000 to up to $16,000 per family with multiple dependents. Biden’s tax plan would reestablish the First-Time Homebuyers’ Tax Credit to provide up to $15,000 for taxpayers purchasing their first house. Biden also would provide tax credits for those caring for the elderly, and he would increase tax credits for long-term care insurance. Families, along with others, could also take advantage of the restored electric vehicle tax credit. These changes would lower federal revenue by about $350 billion over the next decade, thus adding to the deficit.
Tax Breaks for Lower- and Middle-Income Taxpayers
As one example, Biden would equalize the tax benefits of retirement plans for everyone by providing a refundable tax credit instead of a deduction. The tax credit would automatically be deposited into the taxpayer’s retirement account as a 26% matching contribution for each $1 contributed. This would encourage low- and middle-income earners to save more for retirement. Compared with current law, the flat credit would boost the benefit of retirement savings for those in the lower tax brackets, while reducing it for higher-income earners. This would be paired with other changes for retirement savings, such as establishing workplace “auto-401(k)s or IRAs” for lower-income Americans who don’t currently have access to an employer-sponsored retirement plan. Beyond retirement, Biden has recognized the burden of housing costs on lower-income Americans by proposing a new renter’s tax credit to reduce rent and utilities to 30% of income for individuals and families who may make too much to qualify for a Section 8 voucher but still struggle to pay their rent. He has also pledged to expand the Low-Income Housing Tax Credit to encourage rehabilitation and construction of affordable housing around the country.
Changes for Business Taxes
Biden’s tax plan would increase some important business taxes, reversing many changes made by the TCJA.
Corporate Tax Rates
Biden’s plan would raise the corporate tax rate to 28% from 21%, reversing the TCJA’s decrease from 35% to 21% in 2018. Biden would also impose a 10% tax penalty on corporations that ship jobs overseas when those jobs could be filled by American workers. Biden’s tax plan would create a 15% minimum tax on all corporations with book profits (not taxable income) of $100 million or higher. His goal is to make sure all corporations pay some tax. It adds complexity by reinstating a business alternative minimum tax, which would require corporations to pay the greater of their regular corporate income tax or a new 15% minimum tax on worldwide book income. The Tax Foundation, an independent nonprofit that analyzes U.S. tax policy, estimated that applying these efforts to corporate taxes would increase revenue by about $1 trillion over 10 years.
GILTI Rate
Global intangible low-taxed income (GILTI) is income earned by foreign affiliates of U.S. companies from assets such as patents, trademarks, and copyrights. Biden’s tax plan doubles the rate for this income that has been paid under the TCJA, pushing it to 21% from the current 10.5%. This increase would add $290 billion to federal revenue.
Business Tax Credits
Biden would create a 10% tax credit for companies that create jobs for Americans. Specifically, this credit would apply to businesses that:
Revitalize closed manufacturing plantsRetool plants important to American competitivenessReturn overseas jobs to the United StatesExpand U.S. productionIncrease their manufacturing payroll
Will Biden Raise Your Taxes?
Biden has been adamant that he won’t raise taxes on households making less than $400,000 a year. However, costs will rise for all families as corporate taxes increase. To stay in business, companies must maintain a certain profit margin. So higher corporate taxes mean firms will either raise prices or cut costs, possibly by lowering wages or even laying off workers. Shareholders could also be hurt by lower corporate investment returns. In the long run, families who make less than $400,000 a year could be affected indirectly by Biden’s tax plan.
Where Biden Might Have to Compromise
According to the U.S. Constitution, only Congress has the power to tax and spend. As a result, Biden’s tax plan will require congressional approval before it becomes law. Republicans may not want to reverse any of the TCJA, which they endorsed just a few years ago. Its provisions could continue for individuals until 2025, when they are due to expire. The TCJA provisions for corporations are permanent unless changed by Congress.
