Tomorrow, voters will choose either the incumbent, Republican Donald Trump, or his Democratic challenger, former Vice President Joe Biden, as the next President of the United States.
The two men find little common ground in their respective policies, and this holds true for their tax proposals. As the ensuing discussion will illustrate, President Trump is looking to add additional tax cuts to the $1.5 trillion he provided with the 2017 Tax Cuts and Jobs Act (TCJA), while Joe Biden would significantly raise taxes on the country’s highest earners in order to pay for social programs.
Trump’s Tax Plan
The TCJA remains President Trump’s signature legislation from his first term. While the TCJA represented the most comprehensive overhaul of the tax law in 31 years, the overwhelming majority of individual tax cuts in the bill will expire on Dec. 31, 2025. As a result, the president has made it a second term priority to make those temporary provisions permanent.
In his bid for reelection, however, the president has released little in the way of new tax proposals for a second term.
In recent weeks, he has expressed a desire to completely eliminate the payroll tax, though administration officials say that such a move is not under serious consideration. It is much more likely that he would instead focus on eliminating the payroll tax deferred by employees as part of the president’s late-summer executive order.
In addition, the president has proposed further reducing the top rate on capital gains from 20% to 15%, a move that stands in stark contrast to a key proposal from former Vice President Biden.
President Trump’s website also indicates that the following proposals would become a core part of his tax policy, though details remain elusive:
- “Made in America” Tax Credits
- Expanded Opportunity Zones
- Tax Credits for Companies that Bring Back Jobs from China
- 100% Expensing Deductions for Essential Industries such as Pharmaceuticals and Robotics that Bring Back their Manufacturing to the U.S.
- Cut Taxes to Boost Take-Home Pay and Keep Jobs in America
Joe Biden’s Tax Plan
Former Vice President Biden has made no secret of his desire to raise nearly $4 trillion in additional tax revenue, though he has repeatedly assured voters that those earning less than $400,000 annually will not experience an increase in their tax bills. The following discussion includes selected pieces of Biden’s individual and corporate tax proposed changes:
Return the Top Ordinary Individual Income Tax Rate (39.6%):
- Prior to the passage of the TCJA, the top individual rate on ordinary income—items such as wages, interest, and business income—was 39.6%. The TCJA reduced the rate to 37%, but Biden would return it to 39.6%.
Additional 12.4% Social Security tax on employees earning more than $400,000:
- Under current law, employees and self-employed individuals pay a 12.4% Social Security tax on the first $137,700 of wages or self-employment income, split evenly between the employer and employee (a self-employed taxpayer pays the full 12.4%). Biden’s plan calls for adding an additional 12.4% tax on wages or self-employment income in excess of $400,000, to again be split between employer and employee.
39.6% Capital Gains & Dividends Rate on Incomes Greater than $1M:
- For those with income in excess of $1 million, Biden would tax long-term capital gains and dividends at the same rate that is applied to ordinary income, or 39.6%.
Changes to Itemized Deductions:
- Taxpayers deduct the greater of the standard deduction and the sum of their itemized deductions. After the TCJA doubled the standard deduction while limiting or eliminating many itemized deductions, the number of itemizers dropped from near 30% to under 10%. Biden’s plan would further limit itemized deductions in two ways. First, Biden would reinstate the “Pease limitation,” which would reduce a taxpayer’s overall itemized deductions when income exceeds $400,000. In addition, Biden would cap the total benefit of itemized deductions at a rate of 28%. Thus, for a high-earning taxpayer, the final dollar of income would be taxed at 39.6%, while the final dollar of expense would give rise to only a 28% deduction.
Elimination of the 20% Qualified Business Income (QBI) deduction for incomes over $400,000:
- The TCJA allows taxpayers who operate businesses as an S corporation, partnership, or sole proprietorship to claim a deduction equal to 20% of the qualified income earned in the business. Biden would eliminate the deduction for those taxpayers with taxable income in excess of $400,000.
Increase the Corporate Income Tax Rate to 28%:
- The hallmark of the TCJA was the reduction in the corporate rate from 35% to 21%. Biden would increase the rate to 28%.
Corporate Minimum Tax on Book Income:
- In the most unconventional proposal in the Biden plan, the former Vice President would create a new “minimum tax” for corporations, requiring businesses with financial statement income in excess of $100 million to pay the greater of their regular corporate income tax or a 15% tax on their financial statement income.
Changes to the Estate Tax:
- Biden would eliminate the tax-free step-up in basis that occurs upon death under current law. In addition, Biden would reduce the estate tax exemption to $3.5 million and increase the estate tax rate from 40% to 45%.
- Among a host of other credits, Biden would increase the tax credit for childcare, expand the Earned Income Tax Credit for childless workers over age 65, and create a $15,000 tax credit for first-time homebuyers.
President Trump and Joe Biden offer diametrically opposed tax plans. While the proverbial tax tail should not always wag the dog, voters should take into consideration each candidate’s proposals to see how aligned each are for their vision for America.
This column doesn’t necessarily reflect the opinion of The Bureau of National Affairs Inc. or its owners.
Tony Nitti, CPA, MST is Partner-in-Charge of National Tax at RubinBrown and Charlie Forsyth is a Tax Accountant in RubinBrown’s Denver office.