President-elect Joe Biden was very clear that his proposed tax policy would result in higher tax burdens for large corporations and high net worth individuals. However, his ability to enforce these tax priorities is less clear and depends on a number of important factors that are beyond his control.
Biden won't move into the White House until January 20, but his agenda in his early days in office could be shaped by what happens this month in the final days of the current 116th Congress. An unproductive lame duck session will force the upcoming Congress and the Biden administration to start the new year to deal with residual business, including priority funding decisions and other measures to address the health and economic impact of the global pandemic, the has worsened All our lives we have made millions of people unemployed and forced countless companies to close their doors. And even a productive lame duck session could result in the administration and Congress feeling an urgent need to do more on these issues before focusing on new priorities.
Another pivotal moment that will help determine the path of the new administration will come today, January 5th, when Georgia voters cast their ballots in the runoff election for the two state seats in the US Senate occupy. The outcome of these races will be of crucial importance to Biden as they will determine which party controls the Senate when it takes office just 15 days later.
If Democrats win the two seats in the Senate, they will control both the House of Representatives and the Senate (albeit with the least amount of leeway), as well as the influential tax writing committees in both houses. This will give Biden a chance to pass some significant tax policy changes, including a number of potential tax increases that would have a significant impact on businesses and certain high-income individuals. But the narrow majorities in both chambers would leave little room for error as he navigated the sometimes conflicting priorities of the legislature in the party's progressive and moderate wings.
However, if Republicans win one of those seats in Georgia, they will retain control of the Senate, and the ambitious plans Biden promoted during his campaign – and the more progressive ideas some Democrats seek to advance during his tenure – will likely mitigate the realities a divided government.
Regardless of how the two Georgia races are resolved, Biden hopes his deep Capitol Hill experience and relationships – cultivated throughout his 36 years in the Senate and eight years as Barack Obama's Vice President – will enable him to make bipartisan compromises. His business dealings experience will be especially relevant if the Republicans retain control of the Senate due to the runoff.
An early test of Biden's tax policies and his ability to bridge the partisan divide in Congress could come if he executes his plan to seek another coronavirus aid package. Biden has called the plan being debated in the current Congress "a down payment at best," and has pledged to seek broader relief after taking office. In early 2021, however, there will be a natural tension between the Biden government's desire to stabilize the economy and growing Republican concerns about the size and scope of the deficit.
Broad lines now, details later
Biden's tax agenda is based on his belief that the benefits of the Tax Cuts and Employment Act of 2017 for large corporations and high net worth individuals have been too compromised and that the federal income tax system needs to be reshaped to ensure that these taxpayers make “their” contributions fair share. "This reshuffle would come through higher top tax rates as well as" base broadening "that would limit or eliminate various incentives currently available to these taxpayers.
So far, Biden has largely outlined his tax policy vision. His plans include proposals like a higher corporate tax rate (28%) and a minimum tax of 15% on book income for companies that have net income greater than $ 100 million but do not owe US income tax. On the individual side of the Tax Code, he proposed changes, e.g. These include increasing the tax rate on ordinary income, capital gains and dividends, phasing out the deduction for pass-through business income for certain taxpayers, and increasing the impact of inheritance tax. But neither as a candidate nor as elected president has published detailed tax policy documents or provided a substantial, tax-focused business address. As a result, we do not know enough specific details to make accurate estimates of the impact of its proposals on federal revenue or to forecast the impact of its proposals on particular industries or companies. We'll likely see more details on some of Biden's proposals when he sends his first budget to Congress later in 2021.
Prepare for tax changes
Despite the uncertainties described here and the fact that Congress will have its own ideas for shaping tax law, significant changes in tax law remain a real possibility in the next few years.
In the short term, companies should pay special attention to tax extensions and temporary tax regulations, some of which will expire in late 2020, although Congress's ability to deal with tax extenders will largely depend on where the Covid bailout package stands. The Biden government will prioritize assistance to those facing pandemic-related economic hardship over large corporate tax rules.
In the long run, Biden's campaign proposals on policy issues like climate change, healthcare, infrastructure, and college affordability will almost certainly require additional federal spending, which he will offset with additional income from large corporations and wealthy individuals.
Regardless of which party controls Congress, we can expect the Biden government to rely heavily on its regulator to write rules for implementing existing laws in a way that is consistent with its agenda. The agencies have a lot of leeway in interpreting the laws, but they cannot rewrite them. If Congress does not take action, the corporate rate will not rise from its current level. Still, the agencies' power to write effective rules will be central in the years to come and will attract the attention of tax advisors.
With this in mind, it is not too early to begin assessing the proposals put forward, modeling potential outcomes, and planning the appropriate action as those proposals move from high level plans and topics of conversation to fully elaborated legislation on substance, effective date and possibly carveouts and anti-abuse rules.
This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.
Information about the author
Steve Gallucci is National Managing Partner of Deloitte's US CFO Program and Banks Edwards is Managing Partner of Deloitte Tax LLP of the Washington National Tax Practice.