What Biden’s Tax Plan Means for Businesses

Written By: Stephanie Rao, W’24

President Biden recently released his tax plan for his new presidency. In this blog, we’ll discuss the details of Biden’s tax plan and its effect on businesses and investors.

Details of Biden’s Tax Plan

  • Raise taxes on individual incomes and small business owner incomes that are above $400,000 from 37% to 39.6%

  • Increase the corporate income tax rate to 28% and put in place a corporate minimum book tax, which is a tax that’s shown on the company’s financial statements

  • Restore the “Pease” limitation, which capped how much taxpayers could claim, on itemized deductions for taxable incomes above $400,000

  • Tax small business owners with incomes over $400,000 a 12.4% Social Security tax

  • Eliminate the 20% small business income deduction

  • Repeal the Tax Cuts and Jobs Act of 2017 components for high-income filers 

  • 21% tax on Global Intangible Low Tax Income from foreign subsidiaries of US firms. Assess GILTI per country 

  • Make permanent the New Markets Tax Credit 

Overall Effect of Biden’s Tax Plan on the Economy

In general, Biden’s tax plan seems like it would slow down the economy by reducing long-term GDP by 1.62%. Capital stock would likely decrease by 3.75%, accompanied by a loss of 542,000 full-time jobs. The main economic impact of Biden’s tax proposals comes from his harsher tax on corporations. By 2030, it’s predicted that for the top 1% of taxpayers, this tax would result approximately in 7.7% less after-tax income, and for average taxpayers, it would lead to 1.9% decrease in after-tax income. It appears like his tax plan will result in decreased American GDP and US incomes. Nonetheless, foreign investors, who are not subject to the increased tax burden in the U.S, may be compelled to invest more in the US, which could potentially offset the decrease in domestic investment. The problem with this is that return on investments would go to foreign investors instead of staying within the United States. The dollar value will also increase due to the increased demand for the U.S. dollar from foreign investors, increasing the trade deficit as well. 

Nonetheless, a benefit of this tax plan is that it makes the tax code more progressive by making people who make the most amount of money pay the most in taxes. Biden’s plan forces large businesses, which have often found ways to not pay the entirety of their tax bill, to pay the tax dollars that they owe. He plans to use part of these tax dollars for his $2 trillion infrastructure package. With this tax plan, companies have to step forward and pay the government the money they own and can no longer store income overseas to avoid paying as many taxes. Biden’s tax plan seeks to stop this profit-shifting and force companies to contribute to the government’s investment in bridges, roads, and water pipes. This tax plan also dissuades inversions, where U.S. companies merge with companies from other countries to create a new firm located overseas. Biden is trying to ensure companies make more of their investments in the U.S, instead of abroad that way employment numbers can increase as more jobs are created, resulting in economic growth. 

Biden’s tax plan is likely to hit small businesses hard, especially during their recovery in the pandemic. Its increased taxes on small business owners with incomes above a certain amount will end up hurting small businesses, who have already been struggling through this pandemic. There’s also no indication that a Biden-Harris administration would delay tax hikes during this recovery. 

Biden’s Tax Plan Effect on Investors

Biden’s tax plan is going to encourage investors to invest and close deals quickly before the tax plan gets put into place. For example, Merger and Acquisition (M&A) activity could spur rapidly as private equity firms try to finish deals quicker because sellers prefer selling in a lower tax environment. Sellers will also likely seek higher valuations for their companies in order to balance out the higher corporate tax rates and capital gains changes. Because future deals are going to be expensive, most sellers and buyers will try to accomplish as many as they can right away.

The Biden administration is also predicted to take a harder stance on antitrusts. Vertical and diagonal mergers, acquisitions of competitors, and expansions into adjacent industries by dominant firms are going to be scrutinized more heavily.

Sources: Committee on Ways and Means, Tax Foundation, CFO Dive, Benchmark International, The Middle Market, The New York Times

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