Presidents Joe Biden and Donald Trump were far apart on many issues — tax policy among them.
The Biden administration is seeking to dismantle or reverse many aspects of his predecessor’s signature tax law. The law cut taxes for businesses and a broad swath of Americans, with benefits accruing mostly to the wealthy.
Biden wants to raise taxes on the well-to-do, specifically those who make more than $400,000 a year. He would subject more of their earnings to Social Security taxes, repeal cuts to top income-tax rates, reduce the value of tax deductions and increase taxes on inherited wealth and capital gains.
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The president also campaigned on a promise not to raise taxes on middle and low earners. Some policies, like expanded tax credits, would likely reduce their taxes.
In aggregate, the Biden administration aims to make the tax system more progressive, said Richard Winchester, a tax law professor at Seton Hall University.
“The richest people in America now pay a smaller portion in tax than the poorest people,” he said.
Of course, it’s unclear whether Biden can push his tax agenda through a divided Senate.
It appears Senate Democrats can pass most of the measures with a simple majority (rather than the typical 60-vote threshold) using a special budget rule, according to tax experts. Republicans used the same tool to pass the 2017 tax law.
“It frees up the Dems to enact legislation with the thinnest of majorities,” said Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center.
Trump tax law
The Tax Cuts and Jobs Act cut taxes in many ways.
The corporate tax rate fell to 21% from 35%, perhaps the law’s signature feature.
But it also cut income taxes for many. The top tax rate, for example, fell to 37% from 39.6%. (It kicks in for income above $524,000 this year.) The law doubled the standard deduction and gave a 20% tax deduction to some business owners, like sole proprietors and partnerships. It exposed fewer families to estate taxes.
The law did limit some deductions for wealthy taxpayers, like one for state and local taxes. The tax break, previously unlimited, is now capped at $10,000 and doesn’t rise with inflation.
In aggregate, the tax law put more money in Americans’ pockets across the board, said Garrett Watson, a senior policy analyst at the Tax Foundation.
After-tax income rose 2.3% for the average person in 2018, the Tax Foundation estimated. The bottom fifth of earners saw a 0.8% increase, while the top 1% got a 3.8% boost, according to the projections.
It’s projected to increase the federal budget deficit by just shy of $2 trillion over a decade.
Many of the cuts for individuals were temporary, however. They’re scheduled to end after 2025, thereby raising tax rates.
Biden tax plan
Biden’s plan would have the opposite effect. Taxes would rise for the richest and fall most for the poorest.
On average, the top 1% would pay $260,000 more in taxes next year, according to an Urban-Brookings Tax Policy Center analysis. That represents almost 16% of their after-tax income.
Middle earners would get a $680 tax cut — 1.1% of their after-tax income. The lowest earners, making less than $25,000, would get a $760 cut — or 5.2% of their income.
“Our tax system cannot be tilted toward corporate interests and the wealthy, while those that are sustained predominately by wages bear an unequal burden,” Treasury Secretary Janet Yellen said last week in Senate testimony. “Biden will require corporations and the wealthiest Americans to pay their fair share.”
Biden would target tax increases at those making more than $400,000 a year. His plan would raise about $2.1 trillion over a decade, according to the Tax Policy Center.
