14 May 2021 - Events
The race for the 2020 Democratic US presidential nomination started out with an exceptionally wide field but now, practically speaking, the race has narrowed to just two candidates: Joe Biden and Bernie Sanders. While Biden’s tax policy proposals are less sweeping than Sander’s proposals, both candidates, if elected, would be looking to make significant changes to the existing tax regime.
Biden proposes returning to the pre-Tax Cuts and Jobs Act (“TCJA”) ordinary income tax rate of 39.6%, while Sanders proposes even greater increases in ordinary income tax rates, with a top rate of 56%. Both Biden and Sanders have also proposed eliminating preferential treatment for capital gains for taxpayers earning above a certain amount: Biden says he would tax capital gains at ordinary income rates for taxpayers earning above $1 million, and Sanders has proposed the same but for taxpayers earning over $250,000.
Both candidates also have plans to reduce the estate tax exemption amount from its current level of $11.58 million and eliminate the step-up in basis of assets to fair market value at death. Sanders has gone a step further than Biden, and has also proposed raising the estate tax rate (with a top rate of 77% on assets in excess of $1 billion).
One concept that the two candidates do not agree on, though, is the creation of a new “wealth tax”. Biden has proposed no such tax, but Sanders has proposed creating a wealth tax in the form of an annual tax on the net worth of assets of the wealthiest 0.1 percent of U.S. households. To reduce the likelihood of wealthy taxpayers evading this tax, Sanders plans to impose an exit tax of 40 percent on the net value of assets under $1 billion and 60 percent on the net value of assets above $1 billion if such taxpayers try to expatriate to avoid the wealth tax. While this type of wealth tax would likely face challenges under the U.S. Constitution, if it does become law it could significantly reduce the estates of the wealthiest U.S. taxpayers. The rates Sanders has proposed for his wealth tax are set out in the table below:
Both Biden and Sanders have also proposed increasing the corporate tax rate. The TCJA reduced the corporate income tax rate from 35 percent to 21 percent. Biden has proposed raising the corporate tax rate to 28%, while Sanders has proposed raising it to its pre-TCJA level of 35 percent.
However, whether any of Biden’s or Sanders’ tax proposals have a chance of becoming law is dependent not just on the presidential race. The Democrats would also have to gain a majority in the Senate, which would require them to win a gain of at least three seats, in order for any of these tax increases to have a real chance of being passed into law. Recent polling seems to indicate that the Democratic seat most at risk is in Alabama, but with four Republican seats also considered ‘toss-ups’, including Arizona, Colorado, Maine, and North Carolina, there would seem to be potential for the Democrats to take the Senate.
Regardless of who wins the Democratic nomination, US taxpayers can expect some form of tax increase if the Democrats win the presidency and gain a majority in the Senate. To plan for the potential for Democratic tax reform, US taxpayers should begin considering options to take advantage of the lower tax rates in place today since there will not be much time to put such plans into place in the weeks between the election this November and a potential Democratic inauguration next January.