The upcoming presidential election will be pivotal for the future of tax policy, as major swaths of the Tax Cuts and Jobs Act (TCJA) inch closer to expiration and the economic recovery from COVID-19 becomes one of the defining issues of the next term.
President Donald Trump is running on his economic record and has pitched himself as the only candidate who can usher in another economic surge. He largely credits the strong, pre-COVID economy to the TCJA, his signature legislative achievement, and his administration has teased a “Tax Cuts 2.0” package to continue what he started.
Presumptive Democratic nominee Joe Biden has used the pandemic to springboard his own economic plan, one that includes a robust tax platform. He’s hoping to convince voters that the pandemic has exposed flaws and inequities in the Trump economy and that his tax plan, perhaps the most progressive of any Democratic nominee to date, provides a much-needed course correction. Who wins in November could spell the difference between cementing the TCJA as a permanent shift in U.S. tax policy or reversing major portions of the three-year-old law.
Trump eyeing more tax cuts
A Trump victory would be touted as an endorsement of his handling of the economy and, by extension, his tax policies. It would give Republicans significant political capital to push legislation entrenching the TCJA. This includes permanently extending the law’s temporary provisions, such as 100% bonus depreciation, which runs until 2023, and all of the law’s individual tax provisions, currently set to sunset by 2026. It may even encompass postponing or outright repealing the “sunrise” tax increase provisions from the TCJA scheduled to take effect in the coming years, including the amortization of research expenses under Section 174, rate increases for the base erosion anti-abuse tax and global intangible low-taxed income (GILTI) and a reduction to the foreign derived intangible income deduction.
Republicans may also be able to push for additional reforms. The Trump administration isn’t expected to formally unveil its Tax Cuts 2.0 package until this fall, but tax priorities floated by administration officials include a further reduction of the corporate rate, a payroll tax cut, immediate expensing for businesses that bring operations and jobs back to the United States, a middle-class tax cut, indexing capital gains to inflation and introducing new tax-free savings and investment accounts.
Importantly, the Republican tax agenda will still face major challenges even with a Trump victory. Democrats appear to have favorable odds to retain the House and a chance at taking the Senate. Even if Republicans achieve a surprise victory and take control of both chambers, they are unlikely to reach the 60-vote threshold in the Senate needed to avoid procedural hurdles. Republicans used budget reconciliation to prevent a Democratic filibuster when passing the TCJA, but that process has its limitations, which is why they saddled the TCJA with so many temporary provisions. It appears likely that, even in a second Trump term, Democrats will retain some measure of power in Congress, forcing Republicans to the negotiating table. loans.
Biden proposing course reversal
A Biden victory would dramatically alter the outlook for tax policy. Biden would enter office with a mandate for change, and a central tenet of his platform will be reversing major parts of the TCJA. While he never endorsed some of his primary opponents’ most liberal tax proposals, such as a wealth tax, he did shift left and his tax platform remains very progressive.
On the business side, Biden has proposed raising the corporate tax rate to 28%, well short of a return to the full 35% rate proposed by many other Democrats. However, he does propose imposing a 15% corporate minimum tax on book profits and phasing out the Section 199A pass-through deduction for qualified business income in excess of $400,000. He has called for ending tax breaks for fossil fuels and is instead pledging to reform and extend tax incentives that promote investment in renewable energy production, technology and jobs.
Biden also has a plan centered on boosting American industry that calls for a new 10% advanceable tax credit to encourage the reopening and revitalization of closed plants and expanding U.S. production, tax incentives for manufacturing drugs and other “critical products” in the United States, and a clawback of public investment and tax incentives when companies move jobs overseas. Biden recently expanded on this plan with new proposals targeting offshoring. It includes an offshoring penalty on profits of U.S. companies from overseas production for sale back in the United States. The penalty is imposed as a 10% surtax on the amount of a company’s corporate tax, resulting in a 30.8% tax against applicable profits. Other proposals in Biden’s offshoring plan include restructuring GILTI as a 21% global minimum tax on all earnings that applies separately to each country, implementing “strong anti-inversion regulations and penalties” and denying deductions for “moving jobs and production overseas.”
For individuals, Biden proposes restoring the 39.6% top rate and capping the value of itemized deductions at 28%, something former President Barack Obama also championed. Biden’s most significant change would be taxing capital gains as ordinary income, nearly doubling the current top rate of 20% (not including net investment income tax). This change had broad support from many of the candidates for the Democratic nomination but would likely run into fierce opposition in Congress and more modest increases in the capital gains rate could be considered. He has also proposed expanding the Child Tax Credit and Earned Income Tax Credit, creating an “automatic 401(k)” for workers without a similar employer-sponsored retirement plan or pension plan and establishing new credits for first-time home buyers and low-income renters. groups.
Like Trump, Biden would face major challenges actually enacting his tax platform if elected. Democrats are viewed as favorites to retain the House and appear to have a real shot and taking the Senate but are not expected to get near the 60 votes to avoid procedural hurdles. Democrats could consider changing Senate rules to abolish the filibuster for some types of legislation, something Republicans also discussed, but such a change could have major political fallout that is difficult to predict. Like with a Trump victory, a Biden victory would likely require him to engage the opposition in bipartisan negotiation.
Still, a Biden presidency should be expected to result in significant tax changes on both the regulatory and legislative arenas. Although bipartisan negotiation will be required, the approaching expiration of major parts of the TCJA appears to give Democrats significant leverage. Obama parlayed the expiration of the 2001 and 2003 tax cuts into significant revisions that extended only parts of the bill Democrats found most palatable. No matter what the outcome on Election Day, it is likely to impact tax policy for several years to come. Trump and Biden have both committed to reforming the tax code, and although it might not be the top campaign issue on many voters’ minds, tax proposals are a major talking point of both campaigns. Taxpayers should examine the candidates’ proposals and understand how they may be affected, keeping in mind many hurdles remain between now and the enactment of any proposals.
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