Fixing a Trumped-Up Code

Update 479: Fixing a Trumped-Up Code:
Biden’s Fiscally Fair, Re-Balanced Budget

Vice President Pence and Senator Kamala Harris face off tonight in the one and only Vice Presidential Debate of the cycle. We cover that critical encounter on Friday.

Today, as prospects for a next coronavirus package waffle via twitter, we examine the tax plans (or lack thereof) of the presidential candidates facing off in November. Trump intends to continue on his path of revenue destruction, proposing cuts that go even further than his 2017 ones. Biden, on the other hand, has put forth a well-thought-out plan to make the code more equitable and also more fruitful.

Best,

Dana

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With the recent news of President Trump’s meager tax payments in 2016 and 2017, the presidential race has had a renewed focus on the candidates’ tax plans. Trump’s signature accomplishment has been the 2017 tax bill (commonly referred to as the “Tax Cuts and Jobs Act,” or TCJA), which made the US tax code drastically more regressive. Trump’s plans for a second term are vague, but Vice President Biden has a thorough plan to ensure tax justice and fairness in the code. The top one percent of households would bear three-quarters of the burden of Biden’s tax increases. 

Below, we examine Biden’s changes to the code, focusing on the TCJA, taxes on individuals and corporations, and tax expenditures. 

TCJA Tax Cuts 

In 2017, the Republican-controlled Congress passed the TCJA, a regressive tax bill that cut taxes substantially for businesses and individuals from 2018 through 2025. Biden has taken aim at these Trump tax cuts, proposing a plan that will restore tax rates for incomes over $400,000 to pre-TCJA levels. Biden’s plan will raise the top marginal tax rate from 37 percent back to 39.6 percent. But Biden has vowed not to raise taxes on those under the $400,000 threshold. 

Trump’s tax cuts overwhelmingly favored the top one percent of earners, leaving the rest of Americans to foot the bill, as the richest five percent of taxpayers received 50 percent of the TCJA’s benefits or $145 billion in 2020. This payday for the wealthy will add up to $2 trillion to the federal debt. Biden’s plan will partially recover these losses by repealing some of the cuts for top earners, raising between $100 to $150 billion through 2026. 

Distributional Effects of the Biden Tax Plan

Source: Committee for a Responsible Federal Budget’s analysis of TPC, PWBM, TF and AEI

The Biden proposal is highly progressive. The $400,000 threshold excludes all but 1.8 percent of American households, a group projected to earn almost 25 percent of adjusted gross income in 2021. His tax plan will increase the effective tax rate for this group by 13 to 18 percentage points, without any significant impact on the economy or other income groups’ tax rates. 

Other Individual Tax Reforms

In addition to his partial repeal of the TCJA, Biden has proposed the following individual tax increases on the top one percent of earners, including: 

  • A “Doughnut Hole” in the Payroll Tax: The Biden tax plan includes a 12.4 percent Social Security payroll tax on wages above $400,000. This would create a “doughnut hole” where wages between $137,700 and $400,000 avoid Social Security tax. Over time, the current $137,700 cap would rise with inflation, closing the gap. The change would raise an estimated $800 billion to $1 trillion over 10 years, replenishing Social Security. 
  • Taxing Capital Gains as Ordinary Income: The top rate for long-term capital gains is currently 23.8 percent; Biden aims to raise this to 39.6 percent for individuals making above $1 million. The plan also proposes eliminating step-up basis for inherited assets. This loophole allows heirs to avoid capital gains taxes on the appreciation of inherited assets during the decedent’s lifetime. These proposals would bring a combined $379 to $502 billion in revenue over the next decade. 
  • Limiting Itemized Deductions: While only ten percent of taxpayers itemize their deductions, more than half of taxpayers in the top-income bracket claim this deduction. Biden proposes capping the overall value of itemized deductions at 28 percent. Under Biden’s plan, the Pease Limitation would reduce the amount one can deduct for every dollar over $400,000 by three cents. These provisions would raise between $260 to $380 billion over a decade. 

Corporate Tax

Trump’s tax cuts drastically lowered the corporate tax rate from 35 percent to 21 percent, substantially lower than the OECD average. Before the cuts, corporations had already decimated their effective tax rate through tax shelters and havens. Following a long period of decline, the effective corporate tax rate rose under President Obama to just under 20 percent before plummeting to 9.7 percent following the 2017 tax cuts. 

Statutory and Effective Tax Rates for U.S. Corporations (1947 – 2017)

Biden proposes raising the federal corporate income tax rate to 28 percent, aligning it with the OECD average as a share of GDP, ensuring US competitiveness, and eliminating the Trump corporate tax giveaway. His plan would raise between $1.1 and $1.3 trillion over 10 years and would be highly progressive, as the incidence would fall primarily on the very wealthy — the primary owners of stock. 

Yet a high corporate tax rate can’t prevent companies from eliminating their tax liability completely by utilizing loopholes and shifting profits offshore. To address this, Biden would reinstate a corporate alternative minimum tax at 15 percent of book income. The tax would apply to corporations with at least $100 million in annual income and would raise between $160 to $320 billion over 10 years. 

Biden’s plans also mention other ways to close corporate tax giveaways like the Opportunity Zones program and prevent tax avoidance and evasion through the use of international tax havens.

Tax Expenditures 

The Biden tax plan also makes the tax code more progressive by expanding tax credits that primarily benefit lower-income workers and families. 

  • Child Tax Credit (CTC): Biden would increase the CTC from a maximum of $2,000 per child under 16 to $3,000 for children ages 6 to 17 and $3,600 for children under the age of 6. The plan would also make the credit fully refundable and accessible in monthly installments rather than as a lump sum after filing a return. The Biden proposal would increase benefits by $2,260 on average for CTC-eligible families. Biden’s changes to CTC are to last only through the recession. 
  • Child and Dependent Care Tax Credit (CDCTC): Biden would expand the CDCTC for families earning up to $125,000 and make it refundable. The plan would provide funds for half of child care costs for children under the age of 13 up to $8,000 per child — a $5,000 increase from the current maximum allowed expenses. 
  • Housing tax credits: Biden would reinstate and expand the First Time Homebuyer’s Tax Credit, created in 2008 by the Housing and Economic Recovery Act but ended in 2010. Biden’s version of the credit would provide $15,000 for first-time homebuyers and would not expire. He would also create a new, refundable Renters’ Credit, which would provide funds to ensure renters do not pay more than 30 percent of their household income on rent. 
  • Earned Income Tax Credit (EITC): Biden’s plan broadens eligibility for the EITC to workers without dependent children over the age of 65. The expansion would greatly benefit low-income seniors, who are currently unable to access the credit and thus at a disadvantage compared to younger workers with the same income level. 

The need for a simplified, more progressive tax code is clear, and Biden’s tax plan will do much to reverse the damage of the last four years. But Biden could go further. Policies like a wealth tax would guarantee that wealthy Americans with a low rate of earned income, like Trump, pay their fair share. Progressives should take the opportunity to promote structural tax proposals to ensure an equitable code for years to come. 

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