Tax Time! President Biden and His Proposed Tax Plan: What It Will Cost and Who’s Going to Pay

The Biden Administration’s tax proposal as a part of the American Jobs Plan is causing some wealthier Americans to grow concerned that they could end up paying substantially more in taxes if this plan gets passed by congress.

Even if you aren’t in a high-income tax bracket, don’t assume that you’ll escape this proposed reform without paying more in one way or another. Taxes enacted on industries that supply you with everyday goods are all but certain to pass on some, if not all, of their new tax responsibility to their customers.

With that as the backdrop, I’m going to lay out exactly which people and industries would be affected, what’s likely to change, and what the current status of the proposals.

An Overview of the Biden Tax Proposal

The Biden tax plan seeks to increase the rate paid by the highest earning individuals, corporations, reduce subsidies to the domestic oil and gas industries, and close loopholes to companies that incentivize storing profits and intangible assets in foreign tax havens.

In addition to those increases, the plan also seeks to make the temporary changes to the Child Tax Credit (CTC), Earned Income Tax Credit (EITC), and Child and Dependent Care Tax Credit (CDCTC) permanent.

In short, the Biden administration is claiming that they’re seeking to rebalance the sources of tax revenue so that labor (wages and salaries) represent a smaller portion of tax revenue while high-income earners and the methods through which they make money (capital gains, corporate earnings, intellectual assets, inheritance, like-kind exchanges, etc…) pay a greater portion of the overall tax revenue.

I’m not going to say that this plan wouldn’t do that, it appears it would, but it’s misguided to suggest that the working and middle class would save money while their share is paid by wealthier earners. It’s not a complex concept, and studies have been done that show when businesses pay more in taxes, they have less revenue to invest in growth, wage increases, and usually pass their additional operating expenses on to customers in the form of higher prices.

Keep in mind, while the corporate tax rate would increase, it’s not going to the levels seen before the Trump tax cuts of 2017 that brought the rate from 35% to 21%. It’s only been a handful of years that businesses have experienced these lower rates, so their adjustment wouldn’t be quite as painful should these rates have continued for many years.

To wrap this section up, I want to remind you that these are the Biden Administration’s ideas of what a tax plan should look like. There is nothing the White House can do to write a law; that can only come from Congress. While the Senate Democrats have just announced they’ve reached an agreement, it remains to be seen how closely they mirror Biden’s requests. 

What Specific Taxes Would the Biden Tax Plan Affect?

The Biden tax plan proposes to raise the income tax rate for the highest earners from 37% to 39.6%, enact a 39.6% tax rate for capital gains over $1 million, increase the corporate tax for 21% to 28%, and apply a 3.8% tax on pass-through income over $400,000.

A proposed book tax of 15% would be enacted on large corporations’ GAAP income over over $100 million (approximately 45 total) that manage to avoid paying taxes through deductions and clever accounting practices. This probably won’t affect the tax bill of anyone reading this, but if you’re a person who happens to order from a little-known online retailer named Amazon, you could see the cost of your online orders go up.

A little known tax called the Global Intangible Low Tax Income (GILTI) would be doubled from 10.5% to 21%. This tax is intended to prevent American corporations from avoiding paying their share by storing assets and earnings abroad, but disproportionately affects the oil and gas industry as they’re required to operate wherever the oil is, and that, more often than not, is abroad. While this is intended to bring in more revenue, it’s suggested in a recent Forbes article that US businesses will simply sell off these foreign assets as the tax will make the profitability of these foreign operations too precarious. This, in turn, results in no gain in revenue for the federal government as they’ve just forced business to give up their holdings.

Additionally, unspecified subsidies for oil and gas will be removed in favor of subsidies for clean energy sources. This combination could create a substantial rise in the price of gas at the pump, as well as the price of everything that requires shipping to get to market. This could result in a notable change to the prices of pretty much everything.

There’s a ton more information in the summary of the plan released by the Treasury Department this past April, if you want to hear it straight from the horse’s mouth.

What Type of People and Earners Should Be Concerned?

High earners, those that derive much of their income through capital gains, as well as the general population that buys products and services from corporations that will be affected by the increase in the corporate tax rate. Whether in the taxes they pay or the products they buy, it’s likely that every American will be spending more money under the Biden tax proposals.

How Worried Should I Be About This?

In all likelihood, much of what I’ve discussed in this article, and what the Biden administration requested initially, will pass. As of just a couple hours ago, the Senate Democrats announced that they came to an agreement and will pass the bill using the reconciliation, a parliamentary maneuver that allows the bill to pass with just 50 votes. Right off the top, this lets me know that the Democrats had zero hope that they could get even one yes vote from a Republican senator, meaning it’s probably pretty tax heavy.

At Sharp, we’re going to be keeping a close eye on exactly what comes out of this bill as soon as it’s available for us to read, and will keep you in the loop with anything we learn. This will include hard information as well as our assessment of what certain provisions really mean by ‘reading between the lines.’ We’re always seeking to put our years of experience in the business of helping business to our clients’ advantage.