President Trump vs Biden tax plan – what are the differences?

Why does it matter? And why is it so confusing?

With the US presidential election is right around the corner, and since we’re an accounting firm that loves taxes, it’s only right that we make a post discussing President Trump’s tax plan vs Former Vice President Joe Biden.

Now full disclaimer for this post, we are not advocating for either party here, but we simply want to explore the numbers.

So if you’re still undecided and want to form an opinion based on some real numbers then make sure you read this entire post.

As Benjamin Franklin once put it, “The only things that are certain in life are death and taxes.”

And with every election, the way taxes are split up is always a heavily debated topic.

And while the topic of taxes is important, it can quickly become very confusing and boring.

That’s why in this post, we want to do our best to simplify and breakdown President Trump vs Biden’s tax plan.

So we’re going to take a look at both presidential candidate’s differences in:

1. Individual tax rates,
2. Capital gains taxes,
3. Itemized deductions,
4. Child tax credit

…and more.

So now let’s dive in by first setting up some ground rules about what an effective tax system looks like.

What an Effective Tax System Looks Like

So according to the AICPA, which is the American Institute for Certified Public Accountants, an effective tax system is one that is…

• fair,
• neutral,
• simple, and
• economically efficient

Those are very similar words so let’s break it down.

A fair tax system should produce similar outcomes.

So if you compare the tax returns of two different taxpayers with the same income, you would expect them to have the same tax liability.

And if someone has a higher income than another then you would expect them to pay more in taxes. Because that would seem more fair or equitable.

A neutral tax system means that it doesn’t distort human behavior as much as possible.

So if tax laws are influencing your decision to donate to charity or buy a home, then that could be seen as tax laws that aren’t neutral.

A simple tax system is one that asserts certainty and simplicity right.

Like everyone should be able to understand how things are calculated and be sure of their accuracy.

Although, for most taxpayers in the US, the tax code can seem like a foreign language. For the average American, it is pretty straightforward to calculate.

And lastly, an economically efficient tax system is one that does not obstruct economic growth.

This one is a little bit harder to pin down and what you find most politicians debating over.

Measuring if a tax system is fair, natural, and simple is relatively easy. But a tax system that helps the economy grow, well that is challenging.

Now keep these in mind when we look at President Trump vs Biden tax plans.

Presidential Candidate’s Tax Plan Proposal Differences

1. Individual Tax Rates

So currently, the top tax rate for ordinary income, such as wages, is at 37%.

Now Biden would like to increase that to the pre-2018 rate of 39.6%, specifically for individuals with taxable income over $400,000.

So you can expect a 2.6% increase in taxes if you’re making over $400,000 under Biden‘s proposal

On the other hand, Trump would like to keep the 37% tax rate and has hinted at adjusting the middle-income taxpayer rate to 15%.

Biden‘s plan prioritizes fairness as it justifies a higher rate for higher earners.

And at the moment, we don’t have enough information about Trump’s proposal to lower the tax rate for middle-income taxpayers.

Right now we know that the individual tax rate wouldn’t change, which will slightly help out those higher-income earners.

2. Capital Gains

So a capital gain refers to profit that results from the sale of a cabin for assets like a stock, bond, real estate, or business.

Now you have short-term capital gains and you have long-term capital gains.

Short-term capital gains are profits that you generate in under a year. Whereas long-term capital gains mean you held the asset for at least a year and then you sold it.

Currently, the top tax rate for long-term capital gains is 20%. But based on your income it can be as low as 0%.

I’ll put up on the screen the current capital gain tax rate as of 2020.

President Trump has expressed interest in lowering the top rate for capital gains to 15%.

This means if you are holding an asset like a stock or real estate, you will make even more profit.

On the other hand, Biden wants to raise the long-term capital gains at the ordinary income tax rates for anyone whose taxable income is greater than $1 million.

This means if you’re making more than $1M a year then you will pay significantly more in taxes.

This is why we believe if President Trump loses and Biden wins then we could see a potential stock market selloff to avoid those higher tax rates.

Now arguably this isn’t fair for people who don’t have profitable assets, but economically the people with assets are the people who keep our economy strong.

3. Itemized Deductions

Now under President Trump, the standard adduction was increased for taxpayers in an effort to make a simpler tax system.

It eliminated the need for many taxpayers to calculate various itemize deductions.

On the other hand, many individuals with large mortgages and significant charitable contributions benefited from itemizing deductions.

In other words, with the standard deduction so much higher, it benefited those who had higher levels of deductions to itemize.

Now Biden would like to see itemize deductions capped at 28% for the taxpayers with incomes over 400,000.

Whereas Trump would like to make the existing standard deduction permanent after 2025 which is when it is set to expire.

So again, Trump’s plan does benefit higher-income earners but it forces them to spend money on the economy.

4. Child Tax Credits

Under the current federal law, you can get a $2000 child tax credit for a child under the age of 17 or $500 for dependents.

Now some people would argue that this credit is a significant benefit for lower-income families, which remember according to AICPA, the tax code should be as fair as possible.

But when you think about it, the child tax credit helps families who have children by taking care of some of their child expenses.

This helps them be on a level playing field with families who don’t have kids. So it still can be seen as equitable according to the description of fairness by the AICPA.

So Biden supports expanding the child tax credit to $3000 per child from the age of 6 to 17 years old.

And increasing it to $3600 for children under the age of six, which is a huge benefit for families with children.

Now as of now we don’t believe President Trump has proposed any major changes to the current child tax credit rules.

So if you have children then Biden‘s child care tax credit proposal may be attractive.

5. Deductions for Pass-Through Income

Under Trump’s presidency, if you own a pass-through business like a partnership or S corporation, then you may benefit from the 20% qualified business income deduction.

This basically means you’re allowed to take off 20% of your business income.

But this deduction is limited to certain types of companies which makes the tax law a little bit more complicated.

And remember according to AICPA, the tax laws should be fair, neutral, simple, and economically efficient.

Which in this case, it is an area where the rule could be seen as unfair (since it only applies to certain companies).

And it could be seen as not simple because of these more complicated tax provisions.

So Biden would like to phase out the deduction for those who have an income greater than $400,000.

Trump’s plan at the moment isn’t clear. But we would assume that he would like to keep this deduction in place since it was established during his presidency.

Now in our opinion, business deductions are great because they help support the economy and reward business owners who take on all the risks.

6. Corporate Tax Rates

Currently, under President Trump, the corporate tax rates which will be referred to as C corporations are taxed at a flat rate of 21%.

Biden would like to see the corporate tax rate at 28%.

And he proposed a 15% minimum tax on book income, which would make it likely more difficult for large corporations to report little to no income for tax purposes.

Trump has stated that he prefers a 20% tax rate but hasn’t released a formal proposal yet.

Biden’s proposal is primarily motivated by fairness.

Many US taxpayers are concerned that large corporations aren’t paying their fair share.

Especially when you hear companies like Amazon who pay very little in taxes even though they’re one of the biggest companies in the world.

While this is understandable, this position ignores that a significant portion of corporate taxes is ultimately paid by:

• workers,
• shareholders, and
• consumers

…as opposed to the companies themselves.

So even though Amazon may not be paying its “fair share” of taxes, we would imagine that their stakeholders like Jeff Bezos are.

Also, Biden‘s plan could be seen as unfair, because book income may not take into consideration the type of company and its costs.

Final Takeaways

So there it is, the Republican and Democratic candidates’ tax plan and ideas on several tax issues.

Here are some of our general observations.

Overall, Biden’s ideas concentrate on being more equitable and fair. So you see that he wants to impose taxes on more businesses and high-income earners.

Now President Trump’s tax plan focuses on encouraging economic growth with businesses through lower taxes on them.

Which of course all of this is not too surprising given the candidates’ allegiances.

And obviously, tax plan and policies shouldn’t be your only consideration when casting your ballot, but we hope this helps.

And speaking of taxes and business, if you need help with your business taxes or financial management, simply give us a call or contact us using this form.

We would love to help you out!