16 BARRON’S October 26, 2020
T
ax policy is taking center
stage in the final days
before the U.S. presidential
election. A lot gets
accomplished—or partially
accomplished, or at least
attempted—through the
tax code; this year, the two presiden-
tial candidates are claiming it as a tool
to lift the nation out of its deep eco-
nomic slump.
Their ideas are, not surprisingly,
starkly different: Former Vice Presi-
dent Joe Biden has a detailed plan to
raise taxes on corporations and the
top 1% of individual earners, and to
provide a host of tax breaks to moder-
ate- and lower-income families to ease
the financial straits brought on by the
pandemic and incentivize spending to
help recharge the economy.
In contrast, President Donald
Trump argues that any tax increase
for the wealthy would be ruinous to
the economy. He says that he wants to
keep the lower taxes enacted in 2017
in the Tax Cuts and Jobs Act,
or TCJA—which expires at the end of
2025—and pass even more tax cuts,
but he hasn’t released details.
Here’s how each candidate’s tax
policy would affect different segments
of the population.
Top Earners
Biden plans to raise the top marginal
individual income-tax rate from 37%
to 39.6%, which was the top rate until
the TCJA went into effect in 2018.
Biden would essentially accelerate
the expiration of the 37% rate—which
applies to taxable income of more
than $518,400 for individuals and
$622,050 for married couples. All
other brackets would remain at to-
day’s levels: 35%, 32%, 24% 22%, 12%,
and 10%. These rates are applied to
taxable income, the amount after all
deductions have been taken.
Top earners would also get pinched
with a new Social Security tax, which,
when combined with the Medicare tax,
is referred to as the payroll tax. Cur-
rently, the 12.4% Social Security tax is
applied to up to $137,700 of income.
Salaried employees split the tax with
their employers, paying 6.2% each. The
employees’ share is deducted from
their paychecks. Self-employed work-
ers pay the entire amount. Under the
Biden plan, the payroll tax would also
apply to income over $400,000, creat-
ing a donut hole in the policy: Income
from $137,700 to $400,000 wouldn’t
be subject to the levy.
Biden would also trim deductions
for people with income of more than
$400,000 in several ways.
His plan imposes a 28% cap on the
value of itemized deductions. So, in
the top tax bracket, every deductible
dollar would be reduced by 28%,
instead of 39.6%.
It also reinstates a phase-out of
deductions referred to as the Pease
Limitation for top earners, which
effectively reduces deductions on
every dollar by three cents.
Finally, owners of pass-through
entities such as S corporations or part-
nerships with income of more than
$400,000 would lose a 20% deduc-
tion enacted under the TCJA.
Trump’s plan for top earners is to
extend the provisions under the TCJA
beyond their scheduled expiration,
maintaining the top tax rate at 37%
and the 20% deduction for pass-
through owners.
According to an analysis by The
Tax Foundation, under Biden’s plan
the nation’s top 1% of earners would
see their annual after-tax income de-
crease by 11.3%; the next 4% of top
earners woud see after-tax income
drop by 1.3%. Under Trump, by leav-
ing the TCJA as is, the top 20% of
earners would see a 2.4% increase in
after-tax income.
How the Candidates’
Tax Plans Will Affect You...
Former Vice President Biden has a detailed plan that involves raising taxes on people with taxable income
of more than $400,000—essentially targeting the top 1%. President Trump wants to keep his 2017 law.
“All of Biden’s
proposals
try to avoid
a higher tax
bill for
taxpayers
earning less
than
$400,000.”
Garrett Watson,
Tax Foundation
By KAREN HUBE
Illustration by Ryan OlbryshOctober 26, 2020 BARRON’S 17
Middle-Income
Biden released his initial tax plan in
April, but has updated it to address
the financial hardships related to this
year’s economic contraction. He pro-
poses a long list of new or enhanced
tax credits. Among them:
- A temporary increase (which would
expire after the economy recovers) in
the child tax credit from a nonrefund-
able $2,000 per child up to age 16 to a
refundable $3,600 per kid up to age 6
and $3,000 for kids up to age 17. A
refundable credit is paid as a refund,
even if the person doesn’t owe taxes.
- An increase in the value of the child
and dependent care tax credit from a
maximum nonrefundable $2,100 for
two or more children, to a maximum
refundable $8,000.
- A $5,000 credit for informal
caregivers.
- A $15,000 credit for first-time home
buyers, and a credit to ensure that
rent and utility bills don’t exceed 30%
of monthly income.
- Expanding eligibility of the Earned
Income Tax Credit to childless work-
ers over age 65. Currently, the credit
isn’t available to these taxpayers.
There is no intentional tax increase
for people earning less than $400,
in Biden’s plan, but it is still a work in
progress, says Garrett Watson, senior
policy analyst at The Tax Foundation,
a nonpartisan think tank. “All of Bi-
den’s proposals try to avoid a higher
tax bill for taxpayers earning less than
$400,000,” Watson says. “If there are
places where they result in a higher tax
bill, they’ve said they’ll fix that.”
Trump plans to extend the current
law and has said he wants to cut taxes
on the middle class, but hasn’t dis-
closed specifics. He has alsovowed to
push through permanent cuts to the
payroll tax, which is used to fund So-
cial Security and Medicare.
In August, the president issued an
executive memorandum to allow em-
ployers to defer payroll taxes for any-
one earning less than $4,000 biweekly
for the rest of 2020. However, few
companies and employers are taking
advantage of the temporary measure,
citing administrative complications.
According to the Tax Foundation’s
analysis, Biden’s plan would increase
after-tax income for the bottom 20%
of earners by 10.8% through 2025; the
next quintile would see a 3.6% bump.
Under the TCJA, the bottom 20% of
earners are likely to see less than a 1%
increase in after-tax income, and the
next quintile, an increase of 1% to 1.5%.
Investors
Under Biden’s plan, investment profits
that exceed $1 million would be taxed
at regular income-tax rates of up to
39.6%, rather than the current highest
capital-gains tax rate of 20%. For gains
below $1 million, the current long-term
rate—for investments held for more
than one year—would still apply.
Biden’s plan keeps the capital-gains
tax rate the same for the bottom 99%
of earners: Married couples who have
taxable income of less than $80,
won’t owe any capital-gains tax; when
taxable income is more than $80,
but less than $496,600, a 15% tax
applies to gains. Couples with income
between $496,600 and $1 million
would pay a 20% tax.
Trump says that he wants to cut
capital-gains taxes. While he hasn’t
issued any details, capital-gains tax
cuts generally disproportionately fa-
vor wealthier people, because they are
far more likely to have money in regu-
lar, taxable brokerage accounts, and
more money in them. Money held in
individual retirement accounts,
401(k)s, and other tax-deferred plans
are never subject to capital-gains
taxes; investors generally don’t pay
income tax on the contributions, gains
grow tax-free, and money withdrawn
is taxed at ordinary income-tax rates.
Benefactors and Heirs
Most of Biden’s plan is aimed at taxing
the wealthy more, and reducing taxes
for people earning less than $400,
a year and who don’t regularly incur
millions in capital gains. Much of his
proposal is based on repealing the
TCJA, and working from there. The
same is true of his approach to the
estate tax, but his approach to how
assets are passed on after death is
perhaps the most controversial, and
least detailed, part of his plan.
The TCJA doubled the $5.49 mil-
lion per person estate-tax exemption
and adjusted it for inflation; now, any
individual can leave an estate up to
$11.58 million without incurring the
estate tax. The figure is $23.16 million
per couple. Biden plans to return the
exemption to its 2009 level of $3.
million per person, and raise the
estate tax rate to 45% from 40%.
Estate tax is paid by the estate it-
self, before the assets are divvied up
and given to the heirs. Typically, heirs
don’t owe any tax on property they
inherit, even if they sell it right away.
Here’s where things get a little sur-
prising, and light on specifics: Biden’s
plan would also eliminate the step-up
in cost basis at death. Under current
law, the cost basis, or purchase price,
of assets is reset to the current market
value at the owner’s death. Heirs may
inherit an asset with massive embed-
ded capital gains, but that capital-
gains clock is reset to zero on the date
of death, and tax is owed only on
appreciation after that. For instance,
if you inherit the home your parents
bought for $50,000 and, at their
death, was worth $800,000, your
cost basis would be “stepped up” to
$800,000. If you sold it right away,
you would not owe any tax.
Biden’s plan changes that and raises
a host of concerns and confusion.
“Some in the industry are calling this a
stealth estate tax, or a double tax,” says
Ali Hutchinson, managing director at
Brown Brothers Harriman. That’s be-
cause the levy is assessed based on the
estate’s fair market value. Example: An
estate of $6 million would owe estate
tax on about $500,000–the $6 million
minus the proposed $5.49 million
exemption—before it is distributed to
the heirs. They would inherit the prop-
erty with the original cost basis, so,
whenever they sold, they’d owe capital-
gains tax on the profit off the original
purchase price. In other words, the
same assets would be taxed twice.
It is unclear in the language of Bi-
den’s plan if capital-gains taxes would
be owed upon death of their owner,
regardless of whether the assets were
sold, or if the taxes would be triggered
when heirs sell the assets.
“This change would be a very big
deal. It would change the way people
manage portfolios,” Hutchinson says.
“We have people going through crazy
contortions to not realize gains toward
the end of their lives—hedging strate-
gies, borrowing. This could turn plan-
ning on its head.”
Clay Stevens, director of strategic
planning at Aspiriant, doubts that the
step-up will be eliminated. “They tried
to get rid of it in the early 1980s, but
realized it was an administrative night-
mare,” he says. For taxpayers, finding
the cost basis for all inherited assets is
one problem. And for the Internal Rev-
enue Service, “the assumption is the
cost basis is zero, unless it can be
proved otherwise.”
Typically, tax laws take effect in the
calendar year after they are passed, so,
if Biden is elected, it’s possible that any
new rules could be enacted in 2022—
though there certainly will be some
adjustments made from here.B
...AndtheEconomy
W
hile political rivals are forecasting
economicdevastation if former
Vice President Joe Biden were to
raise taxes on the wealthy and
corporations, many economists and tax
analysts who have modeled outcomes have
a different take.
The net effect of Biden’s proposals, when
analyzed independently of spending and
economic policies, would be negative eco-
nomic growth, ranging from -0.16% to
-1.62%, over the next 10 years, according to
analyses by the American Enterprise Insti-
tute and Tax Foundation.
Slowed growth is attributed to higher
taxes on the very wealthy, and major changes
to businesses taxation, including an increase
in the corporate tax rate from 21% to 28%, a
doubling of the tax rate on certain income
earned by foreign subsidiaries of U.S. corpo-
rations, and elimination of a 20% deduction
for owners of pass-through entities with
income of more than $400,000.
But when factoring in spending and eco-
nomic plans—including those for trade, im-
migration, education, housing, health care,
and other policies—the outlook varies
markedly by scenario.
An analysis by Moody’s Analytics finds
that if Biden wins and Democrats win a ma-
jority in both the Senate and the House and
enact his plans, average annual economic
growth would be 2.9% and average annual
wage growth would be 0.9% through 2030.
Moody’s finds that some 18.6 million jobs
would be created over Biden’s four-year
term, and full employment would be reached
in the second half of 2022. Full employment
is typically defined as an unemployment rate
under 5%. It is about 8% today.
If President Donald Trump wins the elec-
tion and Republicans win the majority in
both houses of Congress, the projected
economic picture dims: 10-year economic
growth would average 2.4%, wages would
grow by 0.7% over a decade, 11.2 million
jobs would be created over four years,
and full employment would be reached in
If Congress maintains its split majority,
with Republicans dominating the Senate and
the Democrats in the House, the economic
outcomes would be similar, regardless of
whether Biden’s or Trump’s tax policies are
in effect—though the result would be some-
what more favorable under Biden’s presi-
dency, according to Moody’s.
Analyses that compare the two candi-
dates’ plans are handicapped by a lack of
detail issued by Trump.—K.H.