Biden’s Economic Plan: First Major Tax Hike Since 1993

To help pay for the long-term economic program that is designed as a follow-up to the recent pandemic-relief bill, President Biden is planning the first major tax hike since 1993. This next initiative, which is expected to be bigger than the $1.9 trillion Covid-19 stimulus act, won’t rely just on government debt as a funding source. Key advisers are now making preparations for a package of measures that could include an increase in both the corporate tax rate and the individual rate for high earners since it’s clear that tax hikes will be a component of funding.

Tinkering with rates is fraught with political risk since each tax break and credit has its own lobbying constituency to back it. This helps to explain why the tax hikes in Bill Clinton’s 1993 overhaul stood out from the modest modifications done since. For the Biden administration, the changes are an opportunity not just to fund key initiatives, but also to address what Democrats argue are inequities in the tax system itself. The plan will test both Biden’s capacity to woo Republicans, and Democrats’ ability to remain unified.

Biden’s outlook has always been that Americans believe tax policy needs to be fair. He has viewed all of his policy options through that lens, which is why the focus is on addressing the unequal treatment between work and wealth. To even out the wealth, The White House expects to propose a suite of tax increases. Portions of President Donald Trump’s 2017 tax law will likely be repealed under taxes that were included in any broader infrastructure and jobs packages that benefit corporations and wealthy individuals.

The following are proposals currently planned or under consideration, in no particular order:

  • Raising the corporate tax rate to 28% from 21%
  • Paring back tax preferences for so-called pass-through businesses; like limited-liability companies (LLCs) or partnerships
  • Raising the income tax rate on individuals who are earning more than $400,000
  • Expanding the estate tax’s reach
  • A higher capital gains tax rate for individuals earning at least $1million annually

According to an independent analysis done by the Tax Policy Center, about $2.1 trillion would be raised by Biden’s campaign tax plan. Although the overall program has not been released yet, analysts are penciling roughly $2 to $4 trillion raised.

While debates over whether infrastructure will ultimately pay for itself, there have been efforts to make the expanded child tax credit in the pandemic-aid bill permanent. This could be proven difficult to sell if pitched as entirely debt financed. Experts say that investing in infrastructure may provide durable economic gains that support higher pay and promote the diffusion of gains across demographic lines and political persuasions. Democrats would need at least 10 Republicans to back the bill to move it under regular Senate rules.

Although the 1993 bill marks the last comprehensive set of increased taxes, Biden’s bill is much bigger. While Bush’s 1993 bill passed on a two-vote margin in the House, it required the vice president to break a tie in the Senate. This means that Biden’s bill might be in a similar position. Some argue that due to some proposals, Republicans may support the bill.
These proposals include:

  • A shift from a gasoline tax to a vehicle-miles-traveled fee to help fund highway projects
  • More money for the Internal Revenue Service

If passed, tax measures would likely take effect in 2022, although this may change depending on the unemployment rate in the next year or so.

Talley’s experienced team of tax professionals provides comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on the assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.