“Read my lips: No new taxes” vs. “It’s the economy, stupid.”
Those defining catchphrases from campaigns past pretty much sum up where Donald Trump and Joe Biden stand today when it comes taxes, the key planks of their economic platforms.
After making good on a promise to slash taxes in his first term, the president is offering up mostly modest tweaks this time around, such as making permanent the temporary rate reductions for individual taxpayers passed in 2017 and reducing payroll taxes. “No new taxes,” is no surprise, of course, but Trump hasn’t laid out a coordinated strategy to fortify an economy threatened by a resurgent coronavirus and climate change.
Biden has vowed to rip up Trump tax cuts for businesses and anyone making over $400,000 a year. And he’d plow trillions of dollars into emergency pandemic relief and longer-term investments in everything from clean energy to child care and affordable housing.
With many voters focused on the pandemic and the possibility of a contested election, a tax-and-spend pledge isn’t quite the same hurdle for a Democrat to overcome as it has been in past elections. That may be one reason Biden is leading Trump by 10 percentage points or more in many national polls.
Even on Wall Street, where the threat of higher taxes usually rattles investors, things are different this year. A fair number of investors and economists are saying a Biden victory wouldn’t necessarily be a disaster for businesses and the markets. In fact, it could be a plus, with the lift from aggressive spending to support the recovery offsetting the drag of new taxes — increases that, in any event, would likely be put on hold until the economy is in better shape.
“The stock market has generally improved and moved higher at the same time that the polls have widened in Biden’s favor,” said Luke Tilley, chief economist at Wilmington Trust.
That had more to do with prospects for fiscal stimulus coming from Congress, Tilley said, but “it’s clear to me that there is a sentiment in the market trying to get more comfortable with a Biden presidency and his tax and spending policies.”
“Trying to get more comfortable.” That’s the key phrase.
Business leaders and millionaires don’t welcome the higher taxes a Biden administration may bring. Rather, they are looking past taxes to assess potential positive outcomes from the “blue wave” — a Biden win combined with the Democrats retaking the Senate.
So what’s on the line for individual and corporate taxpayers on Nov. 3? A lot.
The Tax Cuts and Jobs Act, or TCJA, passed by a Republican-controlled Congress in December 2017, is arguably Trump’s biggest legislative achievement, praised even by some who didn’t support him during the campaign against Hillary Clinton. The $1.6 trillion package lowered rates for corporations, small business owners, and individual taxpayers up and down the income ladder. For 2020, Trump’s tax initiative — there isn’t even a formal plan on his website — is a defense of the status quo:
- A maximum rate on corporations of 21 percent. That’s down from 35 percent under Barack Obama, a decline that pumped up corporate profits and drove the stock market higher.
- Elimination of the corporate alternative minimum tax, which was intended to get companies to pay at least something to the IRS every year.
- A top rate of 29.6 percent for pass-through businesses — whose profits flow through to their owners' personal tax returns — down from 37 percent.
- Substantially rewritten tax rules on profits earned overseas, with an eye toward making it more palatable for chief executives to bring those earnings back to the United States.
Biden says he would gut the TCJA’s business tax breaks. His plan — detailed on his website — would:
- Set the highest corporate tax rate at 28 percent.
- Impose a 15 percent minimum tax on so-called book income reported to shareholders, which is often higher than the income that a company reports to the IRS.
- Establish a 21 percent minimum tax on overseas income of American companies.
- Slap a 10 percent surtax on proceeds from an American company’s domestic sales of products made overseas.
For individuals and couples, Trump reduced tax rates for everyone except those in the lowest (10 percent) bracket. The top rate fell to 37 percent from 39.6 percent. The Tax Policy Center estimated that about two thirds of taxpayers got a break, 6 percent paid more, and the rest saw no change in their bills.
The 2017 law set more generous exemptions for estate and gift taxes, increased the standard lump-sum deduction (but limited popular individual write-offs such as the one for state and local taxes), and reduced the number of taxpayers hit by the much-hated alternative minimum tax.
As he runs for reelection, Trump is essentially tinkering around the edges of TCJA. He wants to make permanent the individual rate cuts and estate/gift exemptions that are set to expire in 2025. And the president has said he would:
- Reduce payroll taxes for employers and employees.
- Allow 100 percent deduction of health care premiums.
- Expand the tax credit for child care and create new credits for employers who add jobs domestically or bring work back from China.
Biden, meanwhile, has said he would raise taxes only on the richest Americans. He has a long list of changes for them, including:
- Returning the top rate for individuals and joint filers to 39.6 percent.
- Repealing all other TCJA reductions for those making $400,000 a year or more.
- Taxing profits on investments and other so-called capital gains at regular income rates for people making more than $1 million.
- Capping all deductions at 28 percent of income for those above the $400,000 cutoff.
- Increasing the amount of wages eligible for the Social Security tax.
- Reverting to the less generous exemptions on estates and gifts that were in effect in 2009.
Like Trump, Biden would offer tax credits to employers who add jobs in the United States, and for child care, renters, and first-time home buyers, among many others.
If some of the former vice president’s agenda looks similar to proposals pushed by Senators Elizabeth Warren and Bernie Sanders during the primary campaign, that’s because he has moved to the left in an effort to hold the progressive wing of his party.
All told, Biden’s plan would raise $2.4 trillion in new tax revenue over the next decade, according to an analysis released Thursday by the Tax Policy Center. Trump’s proposals are so bare-bones that the center hasn’t been able to estimate their impact on government revenues.
To undo the core of the Republican income tax cuts, a President Biden would need Democrats to retake the Senate, extending the blue wave that gave them the House in the 2018 midterms. A divided Congress would make passing any substantial legislation nearly impossible.
Once considered a long shot, the odds of Democrats winning the Senate are now about 80 percent, according to the latest forecast by FiveThirtyEight, while Biden’s average margin of victory in national polls is 52 percent to 42 percent.
If Biden and Senate Democrats come out on top, the spending floodgates will likely open, even if tax hikes don’t kick in until the economy is strong enough to absorb them.
Among Biden’s big initiatives are $2 trillion for climate and clean energy initiatives, $775 billion for child care, and $700 billion for infrastructure projects. Such plans may be unrealistic in light of the news last week that the federal budget deficit tripled to $3.1 trillion in the fiscal year ended Sept. 30.
As Goldman Sachs chief economist Jan Hatzius put it in a note this month to clients: A Democratic sweep “would likely result in substantially easier US fiscal policy, a reduced risk of renewed trade escalation, and a firmer global growth outlook.”
In other words, the blue wave wouldn’t be a disaster.