Understandably lost in the wake of Wednesday’s shocking events was the fact that, with two election wins in Georgia, Democrats took control of the Senate to go with control over the House and presidency. Though tax policy may have taken a backseat in these Georgia elections, the results raised the chances of significant tax hikes, and the undoing of progress made in the 2017 Tax Cuts and Jobs Act (TCJA), substantially.
The most likely tax hikes that President Biden will push for with a Democratic Congress are increases to income tax rates. During the campaign, Biden proposed to raise the top individual income tax rate from 37 percent to 39.6 percent. Biden’s tax plan also included a provision that would subject annual income above $400,000 to Social Security taxes (currently only annual income up to $142,800 is subject to these taxes).
Biden will also likely push to increase taxes on capital gains. Capital gains and dividends are currently taxed at a lower maximum rate of 23.8 percent, in recognition of the fact that this same income has already been taxed once. Biden’s campaign called for taxing capital gains and dividends as ordinary income, which would push the maximum tax rate up to 39.6 percent when paired with his proposed hike to the top individual income tax rate, increasing the double-taxation penalty on investment income.
But even as capital gains and dividends tax hikes are proposed, so too may Biden seek to increase corporate taxes. His tax plan would raise corporate income tax rate from 21 percent to 28 percent, while also reverting to a global tax system.
The TCJA improved America’s corporate tax competitiveness substantially not only by lowering the corporate tax rate from 35 percent to 21 percent, but by shifting to a so-called territorial tax system. Prior to this change, U.S.-based multinational corporations had to pay U.S. income taxes on income earned by foreign subsidiaries when repatriated back to the American parent company.
This policy had the effect of simply encouraging corporate inversions, or the shifting of operations to a country that did not have this requirement (such as 29 of 35 member countries of the Organization for Economic Cooperation and Development). Eliminating this outdated global tax encouraged companies to come back to the United States and to bring cash back into the country — resulting in the repatriation ofmore than $1 trillion in assets. Biden’s proposal to undo this change would likely send many multinational companies and their assets back overseas.
Another questionable change Biden is likely to pursue is the removal of the cap on the state and local tax (SALT) deduction. Prior to the TCJA, taxpayers who itemized deductions could deduct their state and local taxes against their federal income tax liability. This effectively blunted the impact of high state tax rates — part of the reason that blue states have proved so eager to remove the $10,000 cap the TCJA placed on the deduction.
Yet the SALT deduction is a handout to the wealthy, and removing the cap would do very little to benefit most taxpayers. A staggering 96 percent of the benefit of removing the SALT cap would go to the top 20 percent of taxpayers, while also using federal tax policy to effectively encourage higher state tax rates.
And this is just a selection of some of the most significant tax changes a Biden presidency could oversee with control of Congress. Changes to the estate tax, refundable tax credits, and other deductions could very likely be coming down the pipe as a direct result of the Georgia election results. Taxpayers can only hope that Congress shows restraint and avoids sweeping changes that harm an economy that needs all the help it can get in the middle of a pandemic.