Movers and SHAKERS
A Deep Dive into Candidate Biden’s Tax Proposals
Democrat Presidential nominee Joe Biden has proposed a number of changes to the tax code, including substantial reversals of reductions under the Tax Cuts and Jobs Act of 2017. Among the key proposals, Biden has included increasing the top marginal income tax rate to 39.6% from a current 37%, taxing capital gains at ordinary income tax rates, up from a top rate of 23.8% today, for those earning over $1 million, elimination of stepped-up basis for inherited assets with capital gains, applying the 12.4% Social Security tax on wages above $400,000 (currently the limit is $137,700, although the wage limit increases annually), and raising the corporate income tax to 28% from 21%. We would note that under the 2017 Act, nearly all the individual and estate tax rollbacks were to expire after 2025, although most of the corporate tax reductions were to be permanent.
On a historical basis, Biden’s tax proposals would be the fifth-largest tax increase, as a percent of GDP, since 1940, based on figures from the Treasury Department. Notably, the four larger tax hikes-during 1942, 1941, 1968, and 1951-all occurred during periods when the country was financing wars. Biden’s proposals would increase federal revenue as a percentage of GDP to a peak of 19.3% in 2027 and 18.9% in 2030 versus 17.8% under current law. This would bring the U.S. back up to the high point of revenue collection levels seen from 1998 to 2000 when the level peaked at 20% in 2000.
While Biden promises not to increase taxes on those earning less than $400,000, his tax proposals fall far short of his announced spending plan. Various organizations estimate Biden’s tax proposals would raise between $3.4 trillion to $3.7 trillion over the 2021-2030 time frame. But Biden’s announced spending plans are in excess of $6 trillion over the same period. As usual, the deficit would have to be financed either through additional tax increases, reductions in other federal spending, or increased government debt.
Ultimately, however, how do tax changes actually impact tax-paying individuals? Since 1980, there have been 60 major tax reforms enacted at the federal level, according to the Tax Policy Center. Over that time frame, Republicans controlled the White House for 24 years and Democrats for 16. If we look at data from 1980-2017 (the most recent data released by the IRS), we can see some interesting trends. Just looking at the top 1% of earners (and note due to changes in IRS definitions and methodologies, the historical numbers are not strictly comparable), the percent of Adjusted Gross Income (AGI) earned by the top 1% went from a low of 8.3% in 1981 to as high as 22.9% in 2007 to 21.0% in 2017. The percent of income tax paid by the top 1% rose from a low of 17.58% in 1981 to a high of 39.81% in 2007 to 38.47% in 2017. The average tax rate of the top 1% was 34.47% in 1980, hit a low of 22.46% in 2007, and was 26.76% in 2017. If we expand the analysis to the top 5% of income earners, AGI share was a low of 20.78% in 1981, hit a high of 37.39% in 2007, and was 36.53% in 2017. The group’s percent of federal taxes paid rose from a low of 35.06% in 1981 to a high of 59.9% in 2007 and was 59.14% in 2017. The average tax rate rose from 26.86% in 1980 to a low of 20.46% in 1990 to 23.7% in 2017. It will be interesting to see how these percentages changed as a result of the 2017 Act.
Of more importance may be Biden’s proposal to raise corporate income tax rates. Currently, the U.S. has the 84th highest combined statutory corporate income tax rate at 25.9%. Raising the corporate tax rate to 28% would result in a combined rate of 32.9%, raising the U.S. to the 20th highest corporate tax rate worldwide and well above the G7 average of 28% and the OCED average of 26.4%. The substantially higher corporate tax rate may put U.S. corporations at a competitive disadvantage. While increased corporate tax rates are not a direct tax increase on individuals, most economists agree the corporate tax burden is shared in some combination by shareholders, owners of capital, and workers, according to the Committee for a Responsible Budget, so individuals would see some type of indirect tax increase, although the size of the increase is debatable.
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