Election 2020 / Election Coverage / Opinion / Politics

Details and Analysis of Democratic Presidential Nominee Joe Biden’s Tax Proposals

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Photo Taken by Gage Skidmore

Key Findings

  • Democratic presidential nominee Joe Biden would enact a number of policies that would raise taxes on individuals with income above $400,000, including raising individual income, capital gains, and payroll taxes. Biden would also raise taxes on corporations by raising the corporate income tax rate and imposing a corporate minimum book tax.
  • Biden’s plan would raise tax revenue by $3.05 trillion over the next decade on a conventional basis. When accounting for macroeconomic feedback effects, the plan would collect about $2.65 trillion the next decade. This is lower than we originally estimated due to the revenue effects of the coronavirus pandemic and economic downturn and new tax credit proposals introduced by the Biden campaign.
  • According to the Tax Foundation’s General Equilibrium Model, the Biden tax plan would reduce GDP by 1.47 percent over the long term.
  • On a conventional basis, the Biden tax plan by 2030 would lead to about 6.5 percent less after-tax income for the top 1 percent of taxpayers and about a 1.7 percent decline in after-tax income for all taxpayers on average.
Summary of Joe Biden’s Tax Plan Estimates
Plan Details Repeal the TCJA components for high-income filers
Impose 12.4% Social Security payroll tax for wages above $400k
Increase the corporate income tax to 28%
Establish a corporate minimum tax on book income
Double the tax rate on GILTI and impose it country-by-country
Temporarily increase the generosity of the Child Tax Credit and Dependent Credit

Conventional Revenue, 2021-2030 (Billions of Dollars)

$3,052

Dynamic Revenue, 2021-2030 (Billions of Dollars)

$2,650

Gross Domestic Product (GDP)

-1.47%

Capital Stock

-2.54%

Full-time Equivalent Jobs

-517,800

Source: Tax Foundation General Equilibrium Model, January 2020.

Details of Joe Biden’s Tax Plan

Biden’s tax plan includes the following payroll tax and individual income tax changes:

  • Imposes a 12.4 percent Old-Age, Survivors, and Disability Insurance (Social Security) payroll tax on income earned above $400,000, evenly split between employers and employees. This would create a “donut hole” in the current Social Security payroll tax, where wages between $137,700, the current wage cap, and $400,000 are not taxed.[1]
  • Reverts the top individual income tax rate for taxable incomes above $400,000 from 37 percent under current law to the pre-Tax Cuts and Jobs Act level of 39.6 percent.
  • Taxes long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6 percent on income above $1 million and eliminates step-up in basis for capital gains taxation.[2]
  • Caps the tax benefit of itemized deductions to 28 percent of value for those earning more than $400,000, which means that taxpayers earning above that income threshold with tax rates higher than 28 percent would face limited itemized deductions.
  • Restores the Pease limitation on itemized deductions for taxable incomes above $400,000.
  • Phases out the qualified business income deduction (Section 199A) for filers with taxable income above $400,000.
  • Expands the Earned Income Tax Credit (EITC) for childless workers aged 65+; provides renewable-energy-related tax credits to individuals.
  • Expands the Child and Dependent Care Tax Credit (CDCTC) from a maximum of $3,000 in qualified expenses to $8,000 ($16,000 for multiple dependents), and increases the maximum reimbursement rate from 35 percent to 50 percent.
  • For 2021 and as long as economic conditions require, increases the Child Tax Credit (CTC) from a maximum value of $2,000 to $3,000 for children 17 or younger, while providing a $600 bonus credit for children under 6. The CTC would also be made fully refundable, removing the $2,500 reimbursement threshold and 15 percent phase-in rate.[3]
  • Reestablishes the First-Time Homebuyers’ Tax Credit, which was originally created during the Great Recession to help the housing market. Biden’s homebuyers’ credit would provide up to $15,000 for first-time homebuyers.[4]

Biden’s tax plan also includes the following proposed business tax changes:

  • Increases the corporate income tax rate from 21 percent to 28 percent.[5]
  • Creates a minimum tax on corporations with book profits of $100 million or higher. The minimum tax is structured as an alternative minimum tax—corporations will pay the greater of their regular corporate income tax or the 15 percent minimum tax while still allowing for net operating loss (NOL) and foreign tax credits.[6]
  • Doubles the tax rate on Global Intangible Low Tax Income (GILTI) earned by foreign subsidiaries of US firms from 10.5 percent to 21 percent.
  • In addition to doubling the tax rate assessed on GILTI, Biden proposes to assess GILTI on a country-by-country basis and eliminate GILTI’s exemption for deemed returns under 10 percent of qualified business asset investment (QBAI).[7]
  • Establishes a Manufacturing Communities Tax Credit to reduce the tax liability of businesses that experience workforce layoffs or a major government institution closure
  • Expands the New Markets Tax Credit and makes it permanent.
  • Offers tax credits to small business for adopting workplace retirement savings plans.
  • Expands several renewable-energy-related tax credits, including tax credits for carbon capture, use, and storage as well as credits for residential energy efficiency, and a restoration of the Energy Investment Tax Credit (ITC) and the Electric Vehicle Tax Credit. The Biden plan would also end tax subsidies for fossil fuels.

Other proposals not modeled due to a lack of detailed information include:

  • Imposing a new 10 percent surtax on corporations that “offshore manufacturing and service jobs to foreign nations in order to sell goods or provide services back to the American market.”[8] This surtax would raise the effective corporate tax rate on this activity up to 30.8 percent.
  • Establishing an advanceable 10 percent “Made in America” tax credit for activities that restore production, revitalize existing closed or closing facilities, retool facilities to advance manufacturing employment, or expand manufacturing payroll.[9]
  • Equalizing the tax benefits of traditional retirement accounts (such as 401(k)s and individual retirement accounts) by providing a refundable tax credit in place of traditional deductibility.[10]
  • Eliminating certain real estate industry tax provisions.
  • Expanding the Affordable Care Act’s premium tax credit.
  • Creating a refundable renter’s tax credit capped at $5 billion per year, aimed at holding rent and utility payments at 30 percent of monthly income.
  • Increasing the generosity of the Low-Income Housing Tax Credit.

Updates from our April 2020 Analysis

Since we released our first analysis of Biden’s tax proposals, the campaign has proposed several new tax policies that have impacted our revenue and distributional estimates.

That includes proposals to expand several credits, including the CTC and the CDCTC. The proposed expansion to the CTC would be a major increase in the generosity of the credit by increasing the maximum credit amount up to $3,600 for children under 6 and by making the credit fully refundable without regard to a taxpayer’s income level. The CDCTC would be expanded to a maximum value of $8,000, with a higher maximum refundable percentage of 50 percent.

The Biden campaign has proposed that the CTC expansion remain for 2021 and “as long as economic conditions require,” based on an original proposal in the House-passed HEROES Act.[11] For this proposal, we assume that the expansion lasts for one year, as estimated by the Joint Committee on Taxation (JCT) for the HEROES Act proposal.[12]

In addition to proposed changes to the CTC and CDCTC, Biden has released a proposed plan to reduce offshoring of production and jobs from the United States by modifying the way GILTI is taxed and through other tax incentives. In addition to doubling the GILTI rate to 21 percent, Biden would eliminate the 10 percent deemed return exemption based on qualified business asset investment (QBAI) and would assess the tax on a country-by-country basis.

Biden has also newly proposed a 10 percent surtax on imports from offshored business activity and a 10 percent “Made in America” tax credit to incentivize onshoring; we have not included these two proposals in our estimates due to a lack of detail on their design.

We have also refined our estimate for the Biden minimum book tax on corporations to project the revenue effects of the tax more accurately. In this update, we have included an estimate of Biden’s First-Time Homebuyer’s Tax Credit worth up to $15,000. Additionally, we have included stacked long-term economic effects for each proposal to provide more granularity on each proposal’s economic impact.

Since our original analysis, the Biden campaign has clarified that it will hold harmless taxpayers making under $400,000 from tax increases associated with the proposed 28 percent cap on itemized deductions. We have modified our modeling of this proposal so that filers with less than $400,000 can take the full value of their itemized deductions but those above that threshold have the value of itemized deductions capped at 28 percent.[13]

Finally, the coronavirus pandemic and related economic downturn have impacted the federal government’s budget outlook over the next 10 years, including federal revenue projections. The large economic shock will also affect how much revenue the Biden tax plan would be expected to raise due to a lower baseline level of economic activity, especially in the first few years in the budget window. To account for this effect, we have used the Congressional Budget Office’s (CBO) September 2020 update to the budget outlook to adjust our revenue estimates for each proposal.[14]

Economic Effect of Joe Biden’s Tax Plan

According to the Tax Foundation General Equilibrium Model, Biden’s tax plan would reduce the economy’s size by 1.47 percent in the long run. The plan would shrink the capital stock by just over 2.5 percent and reduce the overall wage rate by a little over 1 percent, leading to about 518,000 fewer full-time equivalent jobs.

Gross Domestic Product (GDP)-1.47%
Capital stock-2.54%
Wage rate-1.04%
Full-time Equivalent Jobs-517,800
Source: Tax Foundation General Equilibrium Model, January 2020.

The economic effect of Biden’s tax proposals can be separated to show the specific impact of each proposal on long-run economic output (see Table 2).

ProvisionLong-Run Change in Economic Output
Apply a Social Security payroll tax of 12.4% to earnings above $400,000-0.18%
Tax capital gains and dividends at 39.6% on income above $1 million and repeal step-up in basis-0.02%
Limit the tax benefit of itemized deductions at 28% of value for those earning over $400,000-0.09%
Raise the corporate income tax to 28%-0.97%
15% corporate minimum book tax-0.21%
Total-1.47%
Source: Tax Foundation General Equilibrium Model, January 2020.

The increase in the corporate income tax from 21 percent to 28 percent and the 15 percent minimum book tax on corporations make up a majority of the economic impact of Biden’s tax proposals. Applying the Social Security payroll tax on earnings over $400,000 also reduces long-run output by about 0.18 percent. Taxing capital gains as ordinary income for those earning over $1 million, repealing step-up in basis, and limiting itemized deductions to 28 percent of value for higher earners also contribute to lower economic output for a combined reduction of 0.11 percent.

Biden’s proposed increase to the top individual income tax rate from 37 percent to 39.6 percent does not reduce long-run growth, as the top individual income tax rate is already scheduled to increase under current law in 2026. This is because of the temporary nature of the tax reduction under the Tax Cuts and Jobs Act (TCJA) from 2018 to 2025.[15] Similarly, the phaseout of the Section 199A pass-through reduction for those earning over $400,000 does not reduce long-run growth because it is scheduled to expire in 2026.

Revenue Effect of Joe Biden’s Tax Plan

Based on the Tax Foundation General Equilibrium Model, we estimate that, on a conventional basis, Biden’s plan would increase federal tax revenue by $3.05 trillion between 2021 and 2030 relative to current law. Increasing the corporate tax rate to 28 percent would account for the largest revenue gain (about $1 trillion over 10 years) in the plan. Adding other changes on the business side, such as the 15 percent corporate minimum tax and tax increases on international profits, Biden’s taxes on businesses account for about 51 percent of the revenue gains.

Higher taxes levied on taxpayers earning more than $400,000, including higher tax rates on ordinary income as well as capital gains and dividends, would raise another $1 trillion over 10 years. The payroll tax increase for high-income households would generate around $820 billion in additional revenue over 10 years.

Table 3 presents the conventional revenue score for each individual provision of the plan. We estimate the integrated revenue effects by stacking one provision after the other. The presented revenue effect for each provision is the difference between the newly stacked simulation and the simulation that includes all provisions listed above it. Note that some of Biden’s proposals, such as the higher marginal income tax rate on income above $400,000, raise revenue in the beginning of the 10-year window, but not at the end. This is because under current law, the lower 37 percent rate is already scheduled to revert to 39.6 beginning in 2026, meaning Biden’s proposal does not result in increased revenue in those years.

Our original analysis projected that the Biden tax plan would raise about $3.8 trillion conventionally over 10 years. The reduction in estimated revenue is due to two factors. First, the economic downturn driven by the coronavirus pandemic reduced expected revenue over the budget window, including revenue expected from tax increases. Second, the Biden campaign included new tax credit proposals, including a $105.5 billion expansion in the CTC, that reduced net revenue collections over the budget window.

On a dynamic basis, we estimate that Biden’s tax plan would raise about $400 billion less revenue than on a conventional basis over the next decade. Dynamic revenue gains would total approximately $2.65 trillion between 2021 and 2030. That is because the relatively smaller economy would shrink the tax base for payroll, individual income, and business income taxes.

Proposal20212022202320242025202620272028202920302021-2030
1. Apply a Social Security payroll tax of 12.4% to earnings above $400,000$73.2$78.5$81.3$80.7$79.5$80.8$83.9$87.1$88.1$86.8$819.9
2. Raise the top ordinary income tax rate from 37% to 39.6%$25.1$29.0$30.4$31.1$32.5$0.0$0.0$0.0$0.0$0.0$148.1
3. Reactivate the Pease limitation for income above $400,000$16.2$18.8$19.7$20.4$21.4$0.0$0.0$0.0$0.0$0.0$96.6
4. Tax capital gains and dividends at 39.6 percent on income over $1 million and repeal step-up in basis$14.2$27.1$39.5$42.1$45.8$49.5$56.9$61.8$64.8$67.6$469.4
5. Limit the tax benefit of itemized deduction at 28% of value for those earning over $400,000$23.7$27.7$28.9$29.7$31.2$25.3$27.7$28.7$29.7$31.0$283.5
6. Phase out qualified business income deduction for income over $400,000$29.9$34.4$35.8$37.3$39.6$0.0$0.0$0.0$0.0$0.0$177.1
7. Expand the Child Tax Credit to $3,000 maximum value, $600 bonus for children under 6, and make the CTC fully refundable with no phase-in thresholds-$105.5$0.0$0.0$0.0$0.0$0.0$0.0$0.0$0.0$0.0-$105.5
8. Expand the Child and Dependent Care Tax Credit (CDCTC) to a maximum value of $8,000 and increase the refundability percentage to a maximum of 50 percent-$6.0-$7.0-$7.2-$7.5-$7.9-$8.3-$8.7-$9.0-$9.4-$9.7-$80.7
9. Provide a First Time Homebuyer Credit up to $15,000 in value-$12.0-$14.0-$14.5-$15.0-$15.9-$16.9-$17.8-$18.8-$19.4-$20.2-$164.6
10. Raise the corporate income tax rate to 28%$40.9$78.0$96.0$106.3$115.8$117.4$118.5$122.7$125.8$128.9$1,050.8
11. Impose a 15 percent corporate minimum tax on book income$7.9$15.1$18.6$20.5$22.3$22.7$22.9$23.7$24.3$24.9$202.7
12.  Double the tax rate on GILTI, eliminate the exemption for deemed returns to QBAI, and impose GILTI on a country-by-country basis$16.0$29.5$34.7$39.2$43.1$28.5$26.9$26.3$24.3$21.2$289.7
13. Miscellaneous credits-$6.6-$9.1-$11.0-$11.8-$12.9-$14.7-$15.7-$16.6-$17.5-$18.4-$134.3
Total Conventional Revenue$117$308$352$373$395$284$295$306$311$312$3,052
Total Dynamic Revenue*$110$271$301$330$345$287$256$250$252$249$2,650
*Note: Dynamic 10-year revenue is a preliminary estimate that we will be updating in subsequent analysis.Source: Tax Foundation General Equilibrium Model, January 2020. Items may not sum due to rounding.

Distributional Effect of Joe Biden’s Tax Plan

On a conventional basis, Biden’s tax plan would make the tax code more progressive. The proposed changes to individual income taxes affect the distribution of the tax burden differently after 2025, as the individual income tax provisions in the TCJA expire and Biden’s CTC proposal is no longer in effect. To show this difference, we present the distributional effect for both 2021 and 2030.

In 2021, on a conventional basis, taxpayers in the top 1 percent would see their after-tax incomes reduced by around 9.9 percent due to higher taxes on income above $400,000. The top 5 percent would see a reduction in after-tax incomes of about 1.3 percent. Filers in the 90th to 95th percentiles would see a slight reduction in after-tax incomes of about 0.2 percent.

Taxpayers in lower income quintiles would see an increase in their after-tax income in 2021. This increase is driven by the large expansion of the CTC in 2021, which boosts the bottom 20 percent’s after-tax incomes the most due to the CTC’s increased refundability and size. Taxpayers higher up the income distribution would see smaller increases in after-tax incomes, facing the indirect effects of higher business taxes while receiving a CTC benefit that is a lower share of their after-tax incomes compared to the bottom 20 percent.

The conventional distribution table for 2030 contrasts with the conventional distribution in 2021. This is because the proposed CTC expansion would have ended, and households across the income spectrum would experience lower after-tax incomes. The bottom 20 percent of filers, for example, would experience a 0.16 percent decrease in their after-tax incomes in 2030. 

Households across the income spectrum in 2030 would face an increased tax burden on labor from higher corporate income taxes. The Tax Foundation’s General Equilibrium Model assumes that the corporate tax is borne by both capital and labor and evenly split between the two in the long run. However, the labor share of the corporate income tax change is gradually phased in over five years.[16]

Another notable difference is that the change in after-tax income for the top 1 percent would be smaller in 2030 than in 2021. This is because several individual income tax provisions, such as the 37 percent top marginal income tax rate, expire starting in 2026. Accordingly, some of Biden’s tax increases on high-income households would not increase their tax burden in 2030 compared to current law in that year. Biden’s plan would reduce after-tax incomes for the top 1 percent by about 6.5 percent in 2030, compared to 9.9 percent in 2021. On average, after-tax income for all taxpayers would shrink by 1.7 percent, lower than the 1.0 percent decline in 2021.

On a dynamic basis, the Tax Foundation’s General Equilibrium Model estimates that the plan would reduce after-tax incomes by about 2.5 percent across all income groups over the long run. The lower four income quintiles would see a decrease in after-tax incomes of at least 1.1 percent. Taxpayers in between the 95th and 99th percentiles would see their after-tax income drop by 2 percent, while taxpayers in the 99th percentile and up would have a more significant reduction in their after-tax income of about 7.6 percent.

Income GroupConventional, 2021Conventional, 2030Dynamic, long run
0% to 20%+10.8%-0.2%-1.1%
20% to 40%+3.6%-0.2%-1.1%
40% to 60%+1.4%-0.3%-1.2%
60% to 80%+0.6%-0.5%-1.3%
80% to 100%-3.5%-2.6%-3.4%
80% to 90%+0.1%-0.6%-1.4%
90% to 95%-0.2%-0.7%-1.5%
95% to 99%-1.3%-1.1%-2.0%
99% to 100%-9.9%-6.5%-7.6%
 TOTAL-1.0%-1.7%-2.5%
Source: Tax Foundation General Equilibrium Model, January 2020.

Conclusion

Democratic presidential nominee Joe Biden’s tax plan raises taxes on the labor income, investment income, and business income of those earning over $400,00. Among other changes, the plan imposes a “donut hole” payroll tax on earnings over $400,000, repealing the TCJA’s income tax cuts for taxpayers with taxable income above $400,000, and increasing the corporate income tax rate to 28 percent.

Additionally, Biden has proposed a variety of new tax credits or expansions to existing credits to help increase after-tax incomes for low-earners. Biden’s onshoring plan increases the taxation of foreign profits while providing credits to incentivize economic activity that is onshored. Biden’s plan would shrink the long-run size of the economy by 1.47 percent due to higher marginal tax rates on labor and capital.

Biden’s tax plan would raise about $3.05 trillion over the next decade on a conventional basis, and $2.65 trillion after accounting for the reduction in the size of the U.S. economy. While taxpayers in the bottom four quintiles would see an increase in after-tax incomes in 2021 primarily due to the temporary CTC expansion, by 2030 the plan would lead to lower after-tax income for all income levels.

Reprinted with Permission from - Tax Foundation by - Garret Watson, Huanqun Li, Taylor LaJoie

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