WASHINGTON—There is an enormous gulf between the presidential candidates on tax policy—with trillions of dollars at stake over the next decade.
President Trump is campaigning to continue his administration’s biggest legislative achievement, the 2017 tax law, which lowered taxes on businesses and individuals while increasing budget deficits. He credits the law with helping spur economic growth in 2018 and 2019, a period when the unemployment rate fell to 3.5% from 4.1%, and is pushing for even more tax cuts in a second term.
Democrats, meanwhile, say the tax law did little to boost the economy, which had been growing since 2009, and they contend that it offered too much help to rich people who didn’t need it. Candidate Joe Biden would keep the cuts for what he describes as middle-income households but raise taxes sharply on corporations and households making more than $400,000 a year. The goal: to raise $3 trillion to $4 trillion over a decade for education, health care and other social programs. Estimates vary on the total size of the Biden proposals. Mr. Biden’s spending plans exceed his proposed tax revenue, in part because of his support of short-term expansion of budget deficits to stimulate the economy.
Because tax policy is so polarizing, neither candidate is likely to accomplish much without full control of Congress. A Republican sweep would mean more tax cuts, while a Democratic sweep would bring increases. Anything in between results in a stalemate. That would leave lawmakers addressing expiring provisions or—as they have during the pandemic—using tax policy to respond to a crisis.
Four years ago, Mr. Trump ran on a corporate tax cut, and he and Congress, controlled at the time by Republicans, delivered in 2017. They reduced the corporate tax rate to 21% from 35% and made it easier for companies to deduct capital-investment costs and bring home their foreign profits. The law passed without a single Democratic vote.
Mr. Biden says that law cut taxes too steeply. He would raise the corporate tax rate to 28%, impose a new minimum tax on U.S. companies and raise taxes on the foreign income of many U.S.-based multinationals. Both candidates say they back tax incentives that could encourage domestic manufacturing.
The bulk of the tax breaks for individuals enacted in 2017 lapse after 2025, and Mr. Trump wants to extend them. Beyond that, his aims are less clear. In the short term, he wants Congress to forgive any payroll taxes that are deferred this year under an executive action he took in August to allow for smaller paycheck withholding. But that may not amount to much because few employers have opted to defer those taxes.
Mr. Biden would keep the tax cuts that Mr. Trump signed in 2017 for households making less than $400,000, including the larger standard deduction and child tax credit. But there is one exception: He has proposed reinstating the individual mandate to purchase health insurance, which the Supreme Court said was a tax but which the campaign describes as more of a fee.
Beyond that, Mr. Biden has proposed a suite of tax increases on high-income households, and that top sliver of the income scale would pay a lot more under a Biden administration—if Democrats also get control of the Senate and can enact their agenda.
Mr. Biden’s proposals include a top individual tax rate of 39.6%, up from 37%. He would also expand the 12.4% Social Security payroll tax. Currently, wages above $137,700 are exempt; Mr. Biden would keep that cap but then start the tax again at wages above $400,000. He would also repeal a 20% deduction for income from pass-through businesses as it applies to high-income households and impose new limits on itemized deductions.
At the same time, Mr. Biden has tax cuts, too. He would repeal the $10,000 cap on the state and local tax deduction, a change from 2017 that raised taxes on high-income households, particularly in states such as New York, New Jersey and California. And he would offer targeted tax credits for middle-income households, including proposals aimed at boosting retirement savings, child care and first-time home purchases.
Republicans have long championed cuts in capital-gains taxes as a boon for the economy, but they didn’t change those rules at all in the 2017 tax law. Now Mr. Trump proposes to cut capital-gains taxes, driving the top rate down to 15% or 18.8%, from 23.8%.
The president also wants an unspecified expansion of Opportunity Zones, the 2017 program that offers capital-gains tax breaks for investments in low-income areas; Mr. Biden would limit the program, aiming to ensure that low-income residents benefit.
The top capital-gains rate would nearly double under Mr. Biden, to 39.6%. That rate would apply only to households with income exceeding $1 million, which account for the bulk of capital-gains income.
Mr. Biden would also make an important structural change. Currently, when people die with unrealized capital gains, their heirs pay income taxes only on gains in value after the original owner’s death and only when they sell. Under Mr. Biden’s proposal, those unrealized gains would be taxed as capital gains at death. That would raise money and discourage people from holding on to assets for tax reasons.
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