Joe Biden campaigned last year as both a moderate and a progressive. As he prepares to take the oath of office on Wednesday, discerning the policy direction of his new administration seems clear enough, at least in two areas: regulation and tax policy. On regulation, Biden promises a return to the aggressive and sometimes imaginative enforcement of the Obama era. His administration is poised to reverse Donald Trump’s deregulatory moves across the board. Environmental, labor, educational, and many other rules will begin to resemble their pre-Trump form. Biden will also turn back the calendar four years in finance. Some working in newer areas, like financial tech and cyber currencies, may be shocked. During the last great push for financial regulation, under Obama, these areas were so marginal in the financial landscape that they captured little or no official interest. That won’t be the case this time around.
Biden’s choice of longtime confidant and former Delaware senator Ted Kaufman to run his transition suggests still more severe financial regulation. Kaufman in the past has pressed for stringent requirements on disclosure, reporting, and transparency in how brokers handle stock orders and automated trading, and for tough limits on how much Washington can tap Wall Street veterans for high-level government posts. He even suggested amending the Dodd-Frank financial reform legislation to forbid banks from holding more than 10 percent of the nation’s deposits. Had his amendment passed, it would have forced the breakup or downsizing of some of the biggest banking names in the world. Biden also spoke during the campaign about establishing a Post Office bank, creating a government-run credit-reporting company, increasing access to capital in historically underserved communities, and extending mortgage lending to lower-income people. All these measures would face much rougher sledding than a simple return to an Obama-like regulatory regime. They will require legislation and would surely face considerable opposition not only from Republicans but also from Democrats who won by narrow margins or have ties to the financial industry. Financial firms and their allies in the U.S. Chamber of Commerce and the Business Roundtable, for example, would bolster that resistance. If any of these measures did pass, they would likely be watered down.
Biden has already modulated the tax proposals he offered during the campaign. His promise to repeal Trump’s 2017 tax reform is already off the table, since it would have broken another campaign promise not to raise taxes on anyone earning less than $400,000 a year. The wide gaps in the federal budget will also make it hard for Biden to deliver on his promise to let taxpayers once again write off all state and local taxes from their federal tax obligation. He has promised to “discuss the matter with Congress,” but for the time being, this is a dead issue.
On corporate taxes, Biden would impose three increases. He would raise the statutory rate from 21 percent to 28 percent. He would add a 15 percent minimum tax for corporations with over $100 million in profits, if deductions would otherwise allow them to pay less (this would work much like the alternative minimum tax in the individual code). He would also double, from 10.5 percent to 21 percent, the tax charged on foreign income from licensing and fees on intellectual properties, crafting the law such that the government could impose the tax selectively on a country-by-country basis. Republicans and the business lobby would fight all three measures but would likely show more resistance on the last two. The reason has to do with the original purpose of the 2017 corporate tax reductions, which were not meant as a gift to business but rather to bring U.S. corporate taxes in line with international norms. Prior to the 2017 reform, U.S. rates were so much higher than any other country’s that U.S.-based multinationals were keeping profits abroad to avoid paying the high rates on repatriated funds. The proposed increase in the statutory rate would indeed tend to undermine this intended effect, but it is not so significant that Republicans, the business lobby, and some Democrats could not compromise. The minimum tax, however, would face Republican and some Democratic opposition as antigrowth, job-destroying, and harmful to the competitiveness of American industry because capital spending is the main source of deductions. The tax hike on licensing and fees on intellectual property would also face considerable pushback, not least from Big Tech, because these fees are a major factor in overseas sales. The selective application of the law, too, would arouse objections because it resembles centralized industrial planning.
On personal income taxes, Biden would raise the maximum individual rate on income over $400,000 a year from 37 percent to 39.6 percent. He would cap itemized deductions at 28 percent of income for those earning more than $400,000 a year, impose a 12.4 percent Social Security payroll tax on all income for those in the highest bracket, and repeal the break on pass-through income for this class of taxpayers. These changes would increase the tax burden on higher-income Americans some 16 percent. All Americans would also face the re-imposition of the individual mandate to buy health insurance. Lower-income Americans would see increased tax breaks: a jump in the earned-income tax credit for older taxpayers, a rise in the Child and Dependent Care Tax Credit, from a maximum of $3,000 presently to a fully refundable $8,000 ($16,000 for multiple dependents)—and, just for 2021, an increase in the Child Tax Credit from today’s $2,000 maximum to $3,000, with a $600 bonus for children under six. That, too, would be fully refundable. No doubt some of these measures would face resistance from more than just Republicans, but the great battles will likely occur around Biden’s plans for capital gains and inheritance taxes. For households with annual incomes above $1 million, he would raise the rate on capital gains from 23.8percent to 39.6 percent. Biden would also change current arrangements on inheritance. Today, those willed appreciated assets pay taxes only when they realize the gains, and then only on the gains since they received the assets. The Biden plan would insist that heirs pay taxes on all gains, even before they are realized.
Were such provisions to pass into law or even just look likely to pass, they would cause an immediate selloff in financial markets as asset holders sought to realize gains under the present lower tax rate. These monies would likely go back into the market quickly. The inheritance changes, however, would have a more lasting depressive effect on market prices, in that each transfer would force heirs to sell assets in order to pay the tax due. In general, the provisions would discourage savings, putting further downward pressure on asset prices and reducing the funds available for capital investments.
Biden’s tax plans would, according to strict accounting, provide an additional $3.3 trillion in federal revenues over ten years. Accounting for the brakes on growth these changes represent would reduce that figure to $2.5 trillion, or slightly less. An annual revenue hike of $250 billion would, on average, reduce projected federal deficits only about 20 percent, allowing deficits to swell further with any new spending initiatives. Taxes and regulation are, of course, only part of the policy picture. The rest will await details on Biden’s spending plans. If we can believe Biden’s campaign promises, these will be substantial, including his version of a Green New Deal and other infrastructure spending. Presently, these plans are too vague to support much analysis, though they, even more than tax and regulatory policy, will determine the direction for the nation’s finances.