2020 Election Tax Watch: Tax Policies of the Major Presidential Candidates

The U.S. presidential election is less than a week away and tax policy has become one of the major issues of this election. Tax policy affects business decisions and consumer behavior, so an understanding of the candidates and their detailed visions for tax policy will be inherent to successfully navigating the economic downturn triggered by the COVID-19 pandemic. Businesses and individuals should pay close attention to how any proposed policy may ultimately affect their total tax lability.

It is also important to keep in mind the fundamental role of Congress in passing tax legislation. Depending on the makeup of the White House, Senate, and House of Representatives, passing tax legislation may be difficult. For example, if both the Senate and House are of the same party as the successful presidential candidate, any changes in tax law may still have to be passed through the budget reconciliation process because 60 votes in the Senate generally would be needed to avoid using the reconciliation process (and it is very doubtful that there would be 60 members of the Senate from the same political party). Both in 2017 and 2001, passing tax legislation through reconciliation meant that most of the changes were not permanent; that is, they expired within the 10-year budget window. If any of the White House, Senate, or House are of a majority party different than the others, the chances of passing and enacting any agreed-to tax legislation becomes more doubtful.

The Tax Cuts and Jobs Act (TCJA) that was signed into law in 2017 largely reflects much of President Trump’s long-established policy goals. Many of the TCJA provisions expire after 2025, and President Trump generally supports making those provisions permanent. Additionally, President Trump’s plan includes the following payroll tax and individual income tax changes:

• Enacts additional tax cuts for middle-class taxpayers by lowering the 22% marginal income tax rate to 15%

• Reduces the long-term capital gains tax rate from 20% to 15% and creates a capital gains tax holiday that would eliminate capital gain taxes for a certain period

• Permanently extends the temporary postponement of social security tax for employees that is set to expire on December 31, 2020

• Extends the $2,000 Child Tax Credit past 2025

• Extends the TCJA standard deduction changes beyond 2025 and makes them permanent

Democratic presidential nominee Joe Biden would enact several policies that would raise taxes on both individuals and corporations. Biden’s plan includes the following income and payroll tax changes:

• Reverts the top individual income tax rate for taxable incomes above $400,000 from 37 percent under current law to the pre-Tax Cuts and Jobs Act level of 39.6 percent.

• Increases the corporate income tax rate from 21% to 28% and reinstates the corporate AMT on profits of $100 million or more

• Imposes a 12.4% social security payroll tax on income earned above $400,000, evenly split between employers and employees.

• Taxes long-term capital gains and qualified dividends for individuals at the ordinary tax rate of 39.6% on income above $1 million and eliminates step-up in basis for capital gains taxation.

• Caps the tax benefit of itemized deductions to 28% of value for individuals who earn more than $400,000

• Phases out the qualified business income deduction (Section 199A) for filers with taxable income above $400,000

• Increases the Child Tax Credit for 2021 from a maximum value of $2,000 to $3,000 for children 17 or younger, while providing a $600 bonus credit for children under 6

• Offers tax credits to small business for adopting workplace retirement savings plans.