Download full Board Memo 2021
President-elect Joe Biden has proposed changes that are estimated to increase tax revenue by $2.1tn over the next 10 years. However, whether these reforms will be enacted into law will be determined to a large extent by which party holds a majority in the Senate after the run-off election in Georgia. Any changes to US tax law could come into effect in 2021, but are more likely to occur in 2022.
Under the Biden proposals, well-paid individuals will face higher income and payroll taxes, while low- and middle-income individuals may benefit from expanded tax credits. For high-income individuals, the most important proposals in the plan include:
- a repeal of the 2018 tax cuts for individuals earning more than $400,000, increasing the marginal rate for these individuals back to 39.6 percent (from the current 37 percent) plus the 3.8 percent Medicare tax;
- imposing a 12.4 percent (combined employer/employee) social security payroll tax on wage and self-employment income above $400,000 (this tax currently does not apply to wage or self-employment income over $137,700);
- taxing capital gains and dividend income at ordinary income rates for individuals with incomes over $1m;
- a 28 percent cap on the benefit from itemized deductions and reintroduction of the “Pease Limitation” (a 3 percent reduction in itemized deductions per dollar of income above certain income thresholds, which was repealed in 2017); and
- a phase-out of the special “qualified business income” deduction for business income of individuals earned through partnerships and sole proprietorships (which has reduced the effective rate to about 30 percent) for individuals earning over $400,000.
Taken together, the increase in the marginal tax rate to 39.6 percent and the imposition of 12.4 percent (combined employer/employee) payroll taxes on incomes over $400,000 increase the effective marginal tax rate on earned income to over 55 percent (plus any state and local taxes). Biden’s proposal to tax capital gains at ordinary rates is not fully fleshed out (it calls only for “[a]sking those making more than $1m to pay the same rate on investment income that they do on their wages”). This clearly contemplates an increase in long-term capital gains rates to 39.6 percent, and possibly also subjecting capital gains to 12.4 percent social security payroll taxes. It is uncertain whether Biden would remove the $10,000 limitation on deducting state and local taxes which was implemented in 2017’s tax reform.
Corporations also face higher taxes under the Biden proposals. The plan would see the corporate tax rate increase from 21 percent to 28 percent, which would be lower than the 35 percent tax rate in effect prior to the 2017 tax reform but higher than the OECD average of 23.5 percent. Biden also proposes the implementation of a “book tax”, a corporate minimum tax equal to 15 percent of a corporation’s book income. The 2017 tax reform eliminated the alternative minimum tax for corporations; this move would reintroduce a corporate minimum tax (in addition to the base erosion anti-avoidance tax (BEAT), which effectively imposes a minimum tax on US companies making deductible payments to non-US affiliates).
For multinational companies, Biden has proposed a doubling of the tax on global intangible low taxed income (GILTI) of controlled foreign corporations (from 10.5 percent to 21 percent), calculating GILTI on a country-by-country (rather than an aggregate) basis and the elimination of the effective exemption (through a dividends received deduction) for income of controlled foreign corporations attributable to qualified business asset investment (QBAI) (which Biden referred to as a “loophole”). Elimination of the QBAI exemption and doubling the GILTI rate would effectively subject US corporations to current tax on worldwide income, albeit still at a lower rate than the rate on domestic income if the corporate tax rate increases to 28 percent. A return to current tax on worldwide income without an exclusion for returns from tangible assets would be a significant reversal from the changes introduced in 2017, which established a quasi-territorial tax system. The Biden proposals would also impose a 10 percent surtax on services and sales to US customers from a US company’s foreign affiliate. It is unclear how this surtax would interact with BEAT.
If the Republicans remain in control of the Senate, it is doubtful that many of Biden’s proposals will be enacted into law. There is unlikely to be bipartisan support for raising the corporate tax rate to 28 percent or for making significant changes to the GILTI regime; these proposals would have a significant impact on US corporations’ competitiveness globally. If the Democrats control the Senate, there is more scope for changes in tax law – but the Biden administration is nevertheless likely to face a political battle on significant tax increases.