Taxes, no matter where one starts, carry three pains.
Taxes, no matter where one starts, carry three pains. Their details make boring reading. Writing about the is tedious. And however much one believes in the programs they finance, the actual paying is far from pleasant. But we all owe it to ourselves and those who depend on us to go through the pains involved, to understand, to communicate, and ultimately to open our wallets. Now that Joe Biden is nearing the White House, this month’s piece takes up his stated tax plans, imposing the first two of these three pains. If his plans pass into law, the IRS will see to the third.
Of course, the passage of Biden’s proposals into law is hardly assured. Even if both Georgia runoff elections go to the Democrats, there are many of that party who could side with Republicans on several of the new president’s initiatives. And if, as is likely, at least one of those Georgia seats goes Republican, then that majority in the Senate will ensure that all the Biden plans will not become reality. Compromise might pass some parts of those tax plans, and for that reason alone, it behooves all to know what the new White House will propose.
Biden and his running mate, Kamala Harris, have already given up on one promise they made repeatedly during the campaign: a repeal of Trump’s 2017 tax reform.
It does not appear in the transition tax plans. That is understandable.
Such an action would contradict another Biden promise not to raise taxes on any who earn less than $400,000 a year. Although the Trump reform has been characterized as favoring only the wealthy, it did in fact cut tax burdens much lower in the income distribution than the Biden cutoff. Also, the wide budget gaps facing federal finances make it hard for the new administration to reinstitute, as has been suggested, the ability for taxpayers to write off all state and local taxes from their federal tax obligation. On this so-called SALT provision, all Biden has promised is to “discuss the matter with Congress.” For the time being, this is a dead issue.
On corporate taxes, Biden would impose three increases. His plans call for a rise in the statutory rate from 21 percent at present to 28 percent. He would add a 15 percent minimum tax for corporations that have over $100 million in profits, if, because of deductions, they would otherwise pay less. It would work much like the alternative minimum tax in the individual code. He would also double from 10.5 percent at present to 21 percent the tax charged on foreign income from licensing and fees on intellectual properties. He would write the law so that the government could impose the tax selectively on a country-by-country basis.
Republicans would fight all three measures but likely show more resistance on the second two.
The reason has to do with the original purpose of the 2017 corporate tax reductions. They were not meant as a give a gift to business but rather to bring this country’s corporate taxes into line with international norms. Prior to the 2017 reform, U.S. rates were so much higher than elsewhere in the world that U.S.-based multinationals were keeping profits abroad to avoid paying the high rates on repatriated funds. Some firms, to avoid relatively high tax rates, were actually incorporating abroad. The proposed increase in the statutory rate would indeed tend to undermine this intended effect but is not so great that Republicans could not compromise. Because capital spending is the main source of deductions, however, the minimum tax would face Republican and some Democratic opposition as anti-growth, job destroying, and harmful to the competitive abilities of American industry. And because licensing and fees on intellectual property are a major factor in overseas sales, it too would face considerable opposition, not the least because big technology would lead in the lobbying. Additional objections would arise because the selective application of the law would resemble centralized industrial planning.
On individual income taxes, Biden would raise the maximum rate – on income over $400,000 a year – from 37 percent presently to 39.6 percent.
He would cap itemized deductions at 28 percent of income for those earning more than $400,000 a year, impose a 12.4 percent Social Security payroll tax on those in the highest bracket and also repeal the break on pass-through income for this class of taxpayers. These changes would increase the tax burden on this income group some 16 percent. All Americans would also face the reimposition of the individual mandate to buy health insurance. Lower-income Americans would see increased tax breaks: a jump in the earned income tax credit for older taxpayers, a rise in the Child and Dependent Care Tax Credit from a maximum of $3,000 presently to a fully refundable $8,000 ($16,000 for multiple dependents), and, just for 2021, an increase in the Child Tax Credit from today’s $2,000 maximum to $3,000 with a $600 bonus for children under six. That, too, would be fully refundable.
Republicans would resist the changes, most especially the tax hikes, but are likely to yield in compromises, particularly if doing so helps them protect the existing provisions in the corporate tax code. The net economic effect of these proposed changes would not be that great. The tax breaks for dependent care and children might increase spending marginally among those eligible, but not enough to affect overall growth rates appreciably. No doubt the increased burden on the wealthy would prompt these people seek ways to shelter income from taxes and so create a small boom in the tax preparation industry. By making tax exemptions that much more attractive these changes would also bring a slight rise in municipal bond prices. To the extent that the tax hikes bite, they are more likely to slow the flow of savings than spending, as most in these high-income brackets live well within their means.
A greater impact on savings and investment would emerge from Biden’s plans on capital gains and inheritance taxes.
He would raise the present rate of 23.8 percent to 39.6 percent for households with annual incomes above $1.0 million. He would change current arrangements on inheritance. Today, those willed appreciated assets pay taxes only when they realize the gains and then only on the gains since they received the assets. The Biden plan would insist that heirs pay income taxes on the unrealized gains. These plans are silent on other aspects of inheritance taxing, such as the $100,000 exclusion per person or accommodations for inflation or special provisions for the transfer of a principal residence or a small family business or farm. Presumably, these would stand.
We’re such provisions to pass into law or even just look likely, they would cause an immediate sell off in financial markets as asset holders sought to realize gains under the present lower tax rate. Such monies would likely go back into the market quickly. The inheritance changes would have a more lasting depressive effect on market prices in that each transfer would force sales to enable the heirs to pay the tax on the willed assets. In general, the provisions would discourage savings by significantly reducing the returns to them, putting further downward pressure on asset prices and otherwise reducing the funds available for capital investments.
A strict accounting of these the entire package shows that it would raise federal revenues some $3.3 trillion over ten years. Accounting for the slight growth impediment in these tax changes, a consensus of economists suggests that the actual revenue gain would amount to something closer to $2.7 trillion over this time. Either way, the annual figure of between $270 and $330 billion would reduce projected federal deficits by about a third, leaving considerable flows of red ink. Of course, the ultimate budget effect would also depend on Biden plans for spending, which are far from inconsiderable, especially his version of the Green New Deal. How much of that passes into law will also be a matter of substantial resistance in Congress and will form the subject of a separate discussion.