Biden Tax Plan: What It Means for Your Pocket

Newly sworn in American President Joe Biden’s pre-election tax plans are going to be enacted soon. These plans are going to raise the taxes on people whose annual income is over $400,000. Taxes would be increased on individual income, capital gains, and payroll. Joe Biden has also planned to raise the taxes on corporations by increasing the corporate tax rates and enforcing a corporate minimum book tax. The Biden Tax Plan is expected to boost America’s federal tax revenue by $3.2 trillion over 10 years. 

When accounting for macroeconomic feedback effects, the plan would collect about $2.8 trillion the next decade. This is slightly lower than what many experts had estimated earlier. It’s mainly because of the revenue effects of the coronavirus pandemic and economic downturn and new tax credit proposals introduced by the Biden campaign. This tax plan is going to reduce America’s already stagnant GDP by 1.62% over the long term (as per the Tax Foundation’s General Equilibrium Model). Conventionally speaking, the Biden Tax Plan is expected to reduce after tax income by 7.7% by 2030 (for the top 1% taxpayers) and 1.9% drop for everyone else. Let’s find out more about the Biden Tax Plan and its implications.

Biden Tax Plan: All You Need to Know

What are the details of the Biden Tax Plan?

Biden’s plan includes the following payroll tax, individual income tax, and estate and gift tax changes:

  • Imposes a 12.4 percent Old-Age, Survivors, and Disability Insurance (Social Security) payroll tax on income earned above $400,000, evenly split between employers and employees. This would create a “donut hole” in the current Social Security payroll tax, where wages between $137,700, the current wage cap, and $400,000 are not taxed.
  • 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.
  • Taxes long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6 percent on income above $1 million and eliminates step-up in basis for capital gains taxation.
  • Caps the tax benefit of itemized deductions to 28 percent of value for those earning more than $400,000, which means that taxpayers earning above that income threshold with tax rates higher than 28 percent would face limited itemized deductions.
  • Restores the Pease limitation on itemized deductions for taxable incomes above $400,000.
  • Phases out the qualified business income deduction (Section 199A) for filers with taxable income above $400,000.
  • Expands the Earned Income Tax Credit (EITC) for childless workers aged 65+; provides renewable-energy-related tax credits to individuals.
  • Expands the Child and Dependent Care Tax Credit (CDCTC) from a maximum of $3,000 in qualified expenses to $8,000 ($16,000 for multiple dependents) and increases the maximum reimbursement rate from 35 percent to 50 percent.
  • For 2021 and as long as economic conditions require, increases the Child Tax Credit (CTC) 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. The CTC would also be made fully refundable, removing the $2,500 reimbursement threshold and 15 percent phase-in rate.
  • Reestablishes the First-Time Homebuyers’ Tax Credit, which was originally created during the Great Recession to help the housing market. Biden’s homebuyers’ credit would provide up to $15,000 for first-time homebuyers.
  • Expands the estate and gift tax by restoring the rate and exemption to 2009 levels.

Biden’s plan also includes the following proposed business tax changes:

  • Increases the corporate income tax rate from 21 percent to 28 percent.
  • Creates a minimum tax on corporations with book profits of $100 million or higher. The minimum tax is structured as an alternative minimum tax—corporations will pay the greater of their regular corporate income tax or the 15 percent minimum tax while still allowing for net operating loss (NOL) and foreign tax credits.
  • Doubles the tax rate on Global Intangible Low Tax Income (GILTI) earned by foreign subsidiaries of US firms from 10.5 percent to 21 percent.
  • In addition to doubling the tax rate assessed on GILTI, Biden proposes to assess GILTI on a country-by-country basis and eliminate GILTI’s exemption for deemed returns under 10 percent of qualified business asset investment (QBAI).
  • Establishes a Manufacturing Communities Tax Credit to reduce the tax liability of businesses that experience workforce layoffs or a major government institution closure
  • Expands the New Markets Tax Credit and makes it permanent.
  • Offers tax credits to small businesses for adopting workplace retirement savings plans.
  • Expands several renewable-energy-related tax credits, including tax credits for carbon capture, use, and storage as well as credits for residential energy efficiency, and a restoration of the Energy Investment Tax Credit (ITC) and the Electric Vehicle Tax Credit. The Biden plan would also end tax subsidies for fossil fuels.

Other proposals not modeled due to a lack of detailed information include:

  • Imposing a new 10 percent surtax on corporations that “offshore manufacturing and service jobs to foreign nations in order to sell goods or provide services back to the American market.” This surtax would raise the effective corporate tax rate on this activity up to 30.8 percent.
  • Establishing an advanceable 10 percent “Made in America” tax credit for activities that restore production, revitalize existing closed or closing facilities, retool facilities to advance manufacturing employment, or expand manufacturing payroll.
  • Equalizing the tax benefits of traditional retirement accounts (such as 401(k)s and individual retirement accounts) by providing a refundable tax credit in place of traditional deductibility.
  • Eliminating certain real estate industry tax provisions.
  • Expanding the Affordable Care Act’s premium tax credit.
  • Creating a refundable renter’s tax credit capped at $5 billion per year, aimed at holding rent and utility payments at 30 percent of monthly income.
  • Increasing the generosity of the Low-Income Housing Tax Credit.

What is the effect of Biden’s Tax Plan on Gross National Product (GNP)?

Several of Biden’s tax proposals, such as imposing ordinary income tax rates on capital gains and dividends for those earning over $1 million and raising estate and gift taxes, would lead to a decline in America’s economic output (GDP) and the income earned by Americans in general. By estimating the plan’s effect on Gross National Production (GNP), we can examine how the plan would reduce American incomes.

Taxes levied on domestic saving may reduce the ownership of American investment by domestic residents. The American economy is still open to international investment, so they can pick up the slack for domestic investment opportunities. These foreign investors won’t be subject to the increased tax rates. While increased international investment helps reduce the effect of the tax change on domestic output, it would also change the composition of that output’s ownership. In the case of international investment, returns to those investments would instead flow to foreign owners, rather than to Americans.

The result of this capital flow is a wedge between GDP (economic output) and GNP (American incomes). Biden’s tax plan would produce this wedge by raising taxes on domestic savers, resulting in lower American incomes and greater foreign ownership of domestic assets. This would also manifest in a shifted balance of trade, increasing the trade deficit, all else held equal.

The Tax Foundation’s General Equilibrium Model assumes that C corporations and the U.S. government can receive financing from abroad without changing interest rates, while the pass-through sector may not be able to fully use foreign capital inflows when tax rates change. 

This means the service price of capital may increase for the pass-through sector, producing lower investment and long-run economic output. What it means is that the Biden Tax Plan is going to lead to U.S. savers reducing economic output for pass-through firms and shift the ownership of C corporations away from domestic residents due to increased foreign financial inflows. All else being equal, this reduces long-run American incomes, and the increased foreign financial inflows drives up the value of the dollar, which increases the trade deficit, all else held equal.

According to the Tax Foundation’s General Equilibrium Model, the Biden tax plan would reduce long-run GNP by about 1.83%. The discrepancy between the GNP and GDP is a result of foreign investment flowing into the US that the US economy’s output stays above the GNP after the change of tax rates as well.

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