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Biden-Harris tax plan
By D P Sengupta
Nov 24, 2020

We are now almost three weeks after the general election in the USA. News channels have unanimously called the election in favour of Mr. Joe Biden. But the incumbent President, unorthodox that he is in every way, refuses to concede and announced recently in a press conference that he is the winner, by the way. To give him his due, he has delivered on his right leaning policies even though he was elected by disenchanted voters promising them that he will drain the swamp and eliminate corruption in the Washington establishment.

Almost, the first thing Mr. Trump did after becoming the President was to enact the Tax Cuts and Jobs Act (TCJA) that gave tax breaks to all but particularly to the rich and to the corporate sector. Of course, Mr. Trump himself is a business man. He has indeed made money but has also underwent bankruptcy proceedings. He has steadily refused to disclose his tax returns and had not still done so even though all his predecessors since 1973 have released theirs. Ultimately, New York Times broke the news on September 27, 2020 that he has paid a princely sum of USD 750 in his two years of presidency in 2016 and 2017 and nothing in the last 10 out of 15 years. In his first campaign when he was competing against Ms. Hillary Clinton, he in fact boasted that not paying taxes makes him smart. That reminds me of the another billionaire, hotelier Leona Helmsley who was ultimately convicted of tax evasion and during her trial, one of her employees testified having heard her saying “We don't pay taxes, only the little people pay taxes.”

Because of the primaries by which candidates are selected to run for the Presidency, we know that Elizabeth Warren and Bernie Sanders of the Democratic party had their comprehensive tax plans that formed an important part of their campaigns and although there were differences, both of them advocated a wealth tax for the very rich and an increase in the top marginal rates in respect of the high income brackets. In order to get elected as the Democratic party candidate, Mr. Joe Biden had to accommodate the more radical flanks of the Democratic party and we find some elements of their tax plans being incorporated in the Biden tax plan. Unlike those of Bernie Sanders and Elizabeth Warren though, Biden's tax plans are not comprehensive and have to be culled out from his white paper - the central theme of which seems to be a concern for improving the social justice in a deeply divided American society.

But Biden's tax plan has to be discussed in contradistinction to that of Donald Trump. In fact the Biden-Harris campaign describes its tax plan in contradistinction to that of Mr Trump. It is called appropriately “A tale of two tax policies: Trump rewards wealth, Biden rewards work. ( https://joebiden.com/two-tax-policies/ ) The following discussion is based mainly on the elements that are found in the same document.

Referring to studies by tax experts, the campaign asserts that out of President Trump's 1.5 million tax give away, 83% will go to the top 1% of income earners. President Trump's tax cuts for the corporations were predicated on the theory espoused by many that such tax cuts would be beneficial for the economy and that the companies would invest the money saved in creating more jobs. The Biden campaign complains that President Trump's tax cuts benefited foreign investors and that instead of ploughing back the money in creating new jobs, the corporations actually slashed jobs, shifted production facilities abroad and passed on the profits to wealthy investors (perhaps in the form of share buy backs). It asserts that following Mr Trump's tax breaks, in 2018, 91 of the Fortune 500 companies paid no Federal income taxes and instead of creating new jobs, in fact, had laid off 26,000 workers.

Biden's campaign being more racially diverse, it openly talks of the racial divide in the American society and asserts that an average black and Latino family receives less than ½ of the tax savings than an average white family. Therefore, as opposed to Trump's tax cuts, Biden promises tax cuts for the middle and lower income earners while making the wealthiest Americans and Corporations to pay more taxes. He makes a promise that he will not raise taxes for any person making less than $400,000 per year.

Although very briefly, Biden's campaign makes a distinction between income from investment and income from labour and makes the point that under Donald Trump, the wage earners are more heavily taxed while income from investment is taxed lightly- 22% as compared to 15%. In passing, we may note that in a race to attract investment, such a policy is being followed by many developing and middle income countries including India as well. The main reason for such light taxation of investment is the preferential rate of taxation of dividends and capital gains. We may also note that Mr. Trump had promised in his re-election bid to lower the capital gains tax further from the current 23.8% to 15%.

This is a point that has been extensively discussed by progressive economists such as Thomas Piketty, Stiglitz, Emmanuel Saez, Gabriel Zucman and others who have asserted in recent times that such a tax system exacerbates the inequality in American society. According to a UBS paper (Taxing the Superrich- Florian Scheuer), in the USA, the pre-tax national income of the top 1% of American households was about 12% in the 1980s but has recently doubled to about 25% and similarly, the share of net wealth of the top1% has increased from roughly 25% in the 80s to around 40%. The share of the bottom 50% has simultaneously declined.

The more radical members of the Democratic party had, therefore, suggested top income tax of 70% while some had suggested an annual and progressive wealth tax.

Biden's tax plan does not specifically mention any wealth tax as yet. It is also very sketchy and merely mentions among others that the Biden team will ask the wealthy to pay their fair share by - 'asking those making more than $1 million to pay the same rate on investment income as they do on their wages'.

However, implementing a regime of capital gains taxation that treats capital gains in the same way as ordinary income in the hands of individuals will be a very substantial and major change as countries generally give preferential treatment, particularly to long term capital gains, which in turn exacerbates the existing inequality in the society since substantial gains typically accrue to the higher echelons of the society.

The other main points of Biden's tax plan are increasing the corporate tax rate from the current 21% to 28%. Mr. Trump had reduced the corporate tax rate in his effort to make America great again and bought into the argument that the US corporate tax rate was one of the highest amongst the OECD countries, thereby making the American companies uncompetitive. While 28% is not the highest corporate tax rate amongst the OECD countries, such an increase of about 7% in the corporate tax rate in the USA as promised by the Biden campaign may indicate a reversal of policy of competitive tax rate cut of the corporation tax found elsewhere including in India.

In so far as individual income tax rate is concerned, Biden campaign promises to increase the marginal rate at the top back to 39.6%, which was reduced by President Trump from 39.6% to 37%. Unlike the reduction in corporate tax rate that was permanent, this reduction in individual tax rate was however, supposed to expire in 2025.

In the USA, many benefits are administered through the IRS. In that vein, one of the most talked about benefits is the increase in the Child Tax Credit (CTC). As promised by the Biden campaign, Biden will increase the CTC to $3,000 per child for children ages 6 to 17 and $3,600 for children under 6. He will also make the CTC fully refundable so that hard-pressed families can access these resources quickly. And, he will allow families to receive monthly payments if they so choose. He has also proposed other tax credits- such as tax credits that help working families pay for the cost of caring for an aging loved one and tax credits to help families buy their first homes and build wealth - up to $15,000.

Biden's tax plan will also affect international tax regime, particularly offshoring to low tax jurisdictions. We may recall that the TCJA had introduced the so called GILTI ( Global Intangible Low Taxed Income), which is now subject to widespread discussion under the aegis of the OECD under the so-called Pillar 2. Biden's plan rather pithily says that it will impose "a true minimum tax on ALL foreign earnings of United States companies located overseas so that we do our part to put an end to the global race to the bottom that rewards global tax havens. This will be 21% - TWICE the rate of the Trump offshoring tax rate and will apply to all income."

Presently, the GILTI income of a Controlled Financial Corporation ( CFC) is included in the income of the shareholder and then there is a deduction available only for the corporate shareholders under section 250 of the Revenue Code that is 50% for years up to the year 2025 and 37.5% from 2026 with the result that the tax payable on GILTI income is 10.5% (50% of 21%) and 13.125% respectively. The GILTI tax kicks in only when a foreign jurisdiction has a tax rate lower than 13.125%. Besides, the first 10% return on assets is exempt from its purview. Biden has claimed that the GILTI provision, in practice creates an incentive to increase investment abroad. Therefore, his campaign promises to double the tax payable by shareholders of such US owned foreign corporations from 10.5% to 21%.

Biden's plan also includes a penalty for offshoring, a provision that may affect the subsidiaries of Indian companies operating in the USA as well as US MNCS outsourcing to India. The campaign promises 'Imposing a tax penalty on corporations that ship jobs overseas in order to sell products back to America'. It seems that this penalty surtax will sit on top of the regular corporate tax and will be applicable to services as well. Therefore services such as call centres will be affected and the tax rate on such companies will come to 30.8%.

The USA had an alternate minimum tax (AMT) both for individuals and corporates. Donald Trump through his TCJA had not only abolished the corporate AMT for tax years beginning after 31 December 2017 but also provided for a refund of AMT credits by the year 2021. The AMT exemption provision for corporates is of course slated to expire by the end of 2025.

Biden promises to re-impose the minimum tax for corporates. The campaign proposes to impose 'a 15% minimum tax on book income so that no corporation gets away with paying no taxes'. It is not clear if this will be the same as that of the AMT that was in force in the USA . However, it is proposed on book profits and it seems that this tax may be more in line with our Minimum Alternate Tax (MAT).

The most progressive of direct taxes, the Estate tax has been progressively diluted over the years in the USA. It seems that there was bipartisan support for abolishing the tax which was dubbed as death tax by George Bush Jr to increase its repugnance amongst the people. In fact, the Estate tax stood repealed for one year in 2010 and then started kicking back . Currently, although the tax is still there, but very few pay this tax and little revenue is raised since the exemption level currently is 11.58 million $ per individual. The liability to pay the tax is on the inheritor. There was discussion in the US press about Biden's plan to tax the unrealised capital gains at the death of a taxpayer. This does not find place in the Biden-Harris tax plan discussed above. So, one doesn't know how things will actually pan out.

All in all, the Biden-Harris tax plan is radically different from anything that the Republicans want. In fact, the Republicans are all for reduction in taxation so that the size of the government is reduced, while the Democrats believe in progressive income taxation and to raise resources for social spending. The problem with the Biden Presidency will be that for taxation measure, senate and House approval will be needed since the President can block a legislation as Mr. Trump has often done, but he cannot legislate. While the Democrats have a thin majority in the House, the Senate as currently stands is equally split and may go either way in the January election in Georgia. In the event of a Republican victory, it will not be possible to get any legislation passed that is dramatically opposed to the Republican ideas. As brought out by the recent Panorama programme of the BBC, the American Society at the moment is deeply and dangerously divided and considering that Joe Biden has repeatedly asked for unity, it is difficult to see how any significant departure from the past will take place.

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