Stimulus and McConnell Will Likely Inhibit Biden’s Tax Hike Plan
(Bloomberg) -- President-elect Joe Biden has pledged to repeal President Donald Trump‘s tax cuts as soon as he is inaugurated, but the ongoing financial crisis and the prospect of a Republican-controlled Senate could waylay that proposal for the foreseeable future.
Biden will likely soon send a deficit-financed economic recovery bill to Congress, delaying any progress on a tax-increase plan for at least a couple of months, despite his pledge to work to reverse the tax cuts on day one of his presidency.
Biden would find a receptive audience for his plans in the House. But if Republicans continue to control the Senate -- which depends on the outcome of January runoffs for both Georgia seats -- they have the power to block his tax agenda.
In the months before the election, Congress failed to reach agreement on stimulus legislation to combat the economic effects of the ongoing coronavirus health crisis. Wall Street and corporate accountants fear that having Biden in the White House will mean significantly higher taxes. But there’s skepticism that any changes could pass either chamber in the foreseeable future with an economy still hobbled by the outbreak.
“Any president will have a difficult time raising taxes right away in the middle of a pandemic,” said George Mateyo, chief investment officer at Key Private Bank. “I don’t want people to overreact. I think they may be delayed.”
A Republican-controlled Senate would be Biden’s biggest roadblock to passing any tax increases. Republicans, many of whom have signed Americans for Tax Reform’s pledge to oppose tax hikes, are also eager to defend Trump’s tax cut, which they say is his key legislative achievement.
Grover Norquist, the president of Americans for Tax Reform, said there is next to nothing that the two parties agree on in terms of tax policy, which means that little will happen while Washington remains in a divided government.
“If there were low-hanging fruit, it would have already happened,” he said.
House Democrats are likely to use the two years until the 2022 midterm elections to pass a series of symbolic tax-increase bills that could die in the Senate. Democrats can use Senate inaction as a campaign cry. Biden’s best chance to implement his tax-hike plan would likely be if Democrats were to win a Senate majority and hold onto control of the House in the 2022 midterms.
Democrats have public opinion on their side. Pew Research in 2019 found that about 60% of Americans say they are bothered “a lot” by the feeling that some corporations and wealthy people do not pay their fair share in taxes.
If Democrats manage to win a small Senate majority, Democrats could use budget procedures to start passing new tax laws that would roll back some of Trump’s tax cuts for top earners and businesses, as well as passing new levies on offshore corporate profits and capital gains income to fund his policy agenda.
If Biden’s tax vision is realized, it would mean as much as $4 trillion in new taxes concentrated on the wealthy and businesses over the next decade. Economists are divided about the long-term impacts of his ideas, with left-leaning groups pointing to economic gains from deficit reduction and gross domestic product expansion. Right-leaning economists say higher taxes will decrease wages and economic growth in the long-run.
Biden is relying on a series of tax increases mostly on corporations and individuals earning at least $400,000 a year to pay for trillions of dollars for infrastructure investment, child care access and programs to curb the cost of college degrees.
Businesses of all sizes are concerned that a Biden win would mean that their taxes could increase -- perhaps drastically. Biden has proposed raising corporate rates to 28% from 21%, repealing a valuable tax break for many small business owners and raising the top tax rate for those earning at least $400,000 to 39.6% from 37%.
Biden would also implement new payroll taxes on those earning at least $400,000 and limit tax breaks for those high earners. He has also proposed to effectively double the tax on income from capital-gains -- profits from the sale of securities, real estate or business interests -- for those earning at least $1 million.
“History tells us that presidential tax plans don’t often come true on a word for word basis,” John Gimigliano, a principal-in-charge at accounting firm KPMG. But campaign proposals are “important directionally,” in understanding a candidates’ priorities, he said.
©2020 Bloomberg L.P.