Biden’s Tax Plan May be Dead on Arrival
Joe Biden, the president-elect, has been eyeing a tax plan that would increase taxes on those with income over $400,000. Biden has stated that he wants to end the carried interest “loophole,” the capital gains preference, and the increased estate and gift tax limits. At this moment, any chance of repealing portions of the Tax Cut and Jobs Act would require that the Democrats win at least 50 seats in the Senate—Vice President Harris would act as the tie-breaker in the Senate. (Democrats could use the same Budget Reconciliation procedures to pass changes to Title 26 that Republicans used in 2017 to pass the Tax Cuts and Jobs Act). At the present, it looks like Democrats are unlikely to win more than one senate seat in Georgia—and even that single seat looks like a long shot—which means that Biden’s proposed changes may not be happening in the near future.
But here are a few things to be on the look out for if Democrats manage to win both senate seats in Georgia. First, Biden is likely to raise the top marginal rate back to 39.6%. Second, Biden may remove the capital gains preference for individuals earning more than $1,000,000 per year. This would treat long-term capital gains as ordinary income ending a preference for income from capital income versus wage income for the very wealthy. Third, the corporate tax rate would likely increase from 21% to 28%. This would be an increase from current levels but would not go back to the 35% rate that was in effect under Obama. Fourth, Biden may reduce the federal estate and gift tax exemption from $11.58 million to $3.5 million per individual. In addition, the top tax rate of the federal estate and gift tax would rise to 45% from the current top rate of 40%. Finally, Biden has mentioned a desire to change IRC § 1014 step-up basis by treating death as a realization event and taxing any built-in-gain.
There are a litany of possible changes to the Tax Cut and Jobs Act if Democrats win the two senate seats in Georgia. However, given that the possibility of a Democratic victory is remote, it is likely that all of these proposals are dead on arrival. This may be good news for wealthy taxpayers in the short term, especially those that that are subject to the estate and gift tax since it increases the planning window of opportunity. However, time is not infinite, and it is worth noting that Republicans will once again be on the defensive with regards to the open Senate seats in 2022. Any reprieve may be limited. If Democrats fail to get 50 Senate seats, it may be safe to say that Biden’s tax plan will need to be put on the back burner for at least a couple of years, if not his entire first term.