Joe Biden wasn’t shy about proposing tax hikes as a presidential candidate in 2020. He told voters and campaign contributors he planned to undo some of the 2017 Trump tax cuts, even though “a lot of you may not like that.” His website detailed various taxes he would raise to pay for new programs.
Washington forgot about that while President Biden and his fellow Democrats were rolling out the $1.9 trillion American Relief Plan. But with that out of the way, Biden’s proposed tax hikes are getting attention again, and they’ll be a key focus of investors for the next several months.
Biden told ABC’s George Stephanopoulos on March 16 that anybody making more than $400,000 will see a “small to significant tax increase.” The White House later clarified that: the income threshold for tax hikes is $400,000 per household, not per individual. So if two spouses each earn $400,000, for household income of $800,000, their taxes are going up. If they each earn $200,000, for a household income of $400,000, they’d be safe from Biden’s tax hikes, in theory.
None of this is new, but we’re moving from what Biden said as a candidate to what he might actually do as president. And that’s likely to be a big difference. Congress is beginning to draft infrastructure and green-energy legislation, which will include tax hikes to pay for some of the new spending. Here are the major tax hikes on the table, with some handicapping on whether Democrats with very narrow margins in both houses of Congress could actually vote them in.
Raising the top individual income tax rate. The Trump tax cuts of 2017 dropped the top rate from 39.6% to 37%. Biden wants to put it back to 39.6%, which seems plausible. The top marginal rate kicks in at incomes of around $518,000, and wealthy Americans didn’t really need the tax cut in the first place. They’ve benefited the most from soaring stock and real-estate values, and there’s solid support for raising taxes on “the rich.”
Senate Majority Leader Chuck Schumer, D-N.Y., speaks during a news conference at the Capitol in Washington, Tuesday, March 16, 2021. (Kevin Dietsch/Pool via AP) ·ASSOCIATED PRESS
Raising capital-gains taxes for those earning more than $1 million. Biden would tax income from capital gains at the same rate as labor income for high earners, which would essentially boost this tax from 23.8% to 37%, or 39.6% if Biden raises the top rate. There could be political support for this, too, with one caveat: Senate Majority Leader Chuck Schumer of New York is a stealthy friend of Big Finance, a dominant industry in his hometown and his top source of campaign funding. If higher capital-gains rates would harm Wall Street, Schumer could block this move.
Higher estate taxes. Biden would lower the taxable threshold from $7 million to $3.5 million. Doable.
A higher business tax. Trump cut the corporate rate from 35% to 21%. Biden wants to raise it to 28%. Republicans will fulminate, but Congress could probably pass a compromise of 24% or 26%. Roaring stock prices of the last year make it hard to argue against tapping businesses for more of a contribution toward funding infrastructure that would benefit them anyway. A higher tax on corporate income could also be offset by new tax breaks for investments in domestic manufacturing or green energy.
A minimum business tax of 15%. This would apply to large companies that report positive net income but use various tax breaks to lower their taxable income, in some cases avoiding taxes altogether. It’s a populist idea, but not necessarily a good one, since it would basically block companies from using legal tax incentives already on the books. Better to repeal those incentives than to lard up the tax code with complex provisions that cancel each other out.
UNITED STATES - MARCH 01: From left, Rep. Brendan Boyle, D-Pa., Sen. Elizabeth Warren, D-Mass., and Rep. Pramila Jayapal, D-Wash., conduct a news conference in the Capitol to introduce the Ultra-Millionaire Tax Act which would tax high net worth households on Monday, March 1, 2021. (Photo By Tom Williams/CQ-Roll Call, Inc via Getty Images) ·Tom Williams via Getty Images
A wealth tax. This isn’t Biden’s idea. Senators Elizabeth Warren, Bernie Sanders and others want an annual “ultra-millionaire tax" on wealth of more than $50 million, so there could be some pressure to put this in Democratic legislation. But a wealth tax would be hard to enforce and it might be unconstitutional. And some Democrats oppose it, which means it has little to no chance of becoming law.
A financial transaction tax. Also not Biden’s idea, though it may have more Democratic support than a wealth tax. Some Democrats want to impose a 0.1% tax on sales of stocks, bonds and other financial assets. It doesn’t sound like a lot, but the securities industry is profoundly opposed, arguing that an FTT would depress the value of retirement accounts, impede liquidity and disadvantage the U.S. financial sector. That gets back to Schumer, unlikely to let this happen on his watch.
If Biden’s tax plan were fully enacted, it would raise around $210 billion per year, according to the Tax Policy Center. But Congress only seems likely to pass fragments of Biden’s plan, and even that will be a fight. Taxes get people riled up, but there may not be much of a change by the time the dust settles later this year.
