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How would Joe Biden’s America look Economically?

July 29

Last week, former Vice President Joe Biden released a preliminary tax plan that outlines his goals and policy proposals as president. As of today, July 20th, 2020, Joe Biden is the overwhelming favorite to win the presidential election. In the Real Clear Politics average, Biden finds himself at 49.3% compared to Trump’s 40.7%. While many readers may say that the 2016 polls were wrong, I would note that most 2016 polls had Donald Trump within the margin of error while the 2020 polls find him well outside the margin of error. In other words, even if the polls were as wrong as they were in 2016, Biden would still easily win with over 300 electoral votes. Given that as of now, his election seems likely, we are going to examine Mr. Biden’s tax plan and consider the impacts that it may have on business.

Consistent with most Democrats over the past 20 years, Biden would raise taxes on the wealthiest group of Americans as well as large corporations. The most significant thing that Biden wants to do is impose a 12.4% social security tax on individuals with incomes over $400,000. So the $400,001st dollar would be subject to a 12.4% social security tax and every dollar from there. This will not directly impact small business as the employee would cover the entire 12.4% above $400k, as opposed to the traditional 6.2% split each party takes. However, as we will examine later, it may still have indirect consequences. The other significant portion is that he would tax capital gains above $1 million as traditional income. Under his plan, the rate would be 39.6% just as ordinary income is taxed. Finally, Mr. Biden would reverse the Tax Cuts and Jobs Act, bringing the highest tax bracket back to 39.6% from the current 37%; most of these changes would impact individuals more than businesses.

When it comes to business, most of Biden’s tax plan targets large corporations. The primary goal he has was to implement a 28% corporate tax rate. This is higher than the 21% it currently sits at but lower than the 35% rate under the Obama administration and previous presidents. The corporate tax rate is subject to much debate but is also fairly irrelevant in this case as most small businesses do not pay corporate taxes. The most significant tax burden small business will face under the Biden tax plan is increased personal income taxes and increased social security taxes for self employed people. Previously, a self-employed person stopped paying social security tax at $137,700. Under Joe Biden’s plan, you would get a break from $137,700 until $400,000 but then after $400,000, you would be required to pay social security tax once again. This is likely to be one of the bigger impacts that the tax bill will have. Most small business owners with incomes of more than $400,000 are not living off that, rather they are using most of that money to reinvest in their business. The Biden tax plan would leave less money in their pockets. Furthermore, the increase in income taxes would affect some business owners who declare their profits as their own personal income. They would also be subject to the increases Mr. Biden proposes.

Outside of the impact on individuals and business, we must also consider the impact the Biden Tax Plan would have on the economy. Estimates from the CBO (Congressional Budget Office) are that Biden’s tax plan would reduce GDP by 1.51% over the course of 10 years. The U.S. would lose 585,000 jobs versus if the Tax Cuts and Jobs Acts remained in place. At first glance this seems quite negative for the economy as there are over 50,000 jobs lost per year. However, there is one fatal flaw in this analysis. While CBO analyses of tax cuts are relatively straightforward, projecting the impact that a tax raise will have is much more difficult for the simple fact that we cannot determine how a Biden administration would spend the additional revenue its tax plan brings in.

Without considering how Biden would spend the money in stimulus, the CBO analysis shows only the impact that tax raise would have. This would clearly show negative numbers as tax increases themselves do not help the economy, rather it is the investment of the additional revenue from these tax increases that can boost the economy if spent wisely. For that reason, the CBO projections should be taken with a grain of salt. Biden has indicated he will spend much of the revenue on green energy and other jobs programs. Depending on your industry this could be very positive or negative and it is certainly something we will dive into in future articles. Please keep in mind that these articles are meant to inform you, not push you in a certain direction. We want our clients to have the best information and accurately understand our beliefs so they can make decisions for themselves. Over the next few weeks, we will take a deeper look at Mr. Biden’s plans for America as well as analyze his Vice Presidential pick when he announces it in the next 10 days.