President Joe Biden’s Tax Structure
President Joe Biden’s American Families Plan would take significant steps proposing tax incentives with more excellent investment in three areas: family and child assistance, education, and tax cuts for middle and low-income families, among other things. Universal childhood education and two years of community college are among the educational elements. Additionally, there is enhanced college tuition aid for middle- and low-income families, expanded teacher training, and more significant funding for minority-focused schools and universities, which is a good option for citizens. As a result, the proposal would also address the country’s huge “tax gap,” or the difference between what taxpayers owe and what they pay, mainly attributable to the wealthy’s failure to pay their fair share of taxes. Unlike opponents who use provocative language to raise money from rich families, the President’s proposal approaches improving the tax code’s treatment of higher income brackets which is a good option.
Biden’s personal taxation proposal suggests that taxes on people with yearly earnings of less than $400,000 be kept from growing. The plan intends to put in place benefits that are basically in the form of tax credits that are fully or partially refundable. They include tax credits for children, legislated income for the poor, and tax credits for those with intermediate and low incomes who target affluent people for a duty hike. According to the proposal, the children and families provisions include enhanced wages and training of childcare laborers, subsidized childcare, federally paid leave initiatives for new parents for 12 weeks and three days to those who have lost their family members, and lastly, improved nutrition support for low-income students (York et al., 2020). While more information is needed, there is an option that the leave initiatives will be structured like the credit programs and paid leave enacted in reaction to the COVID-19 pandemic rather than government-run. Employers may be expected to offer paid leave, but they may be entitled to payroll tax credits to help defray the cost.
Likewise, individual taxpayers should be incentivized by Biden to increase their gains and income while avoiding deductions until later in the year. Removing the capital gain option will likely result in the elimination of some tax benefits currently offered to private equity management teams that profits from investment income allotments, such as “promote” and “carried interests.” However, a promoter may be advantageous since it can be issued and vested tax-free, among other reasons. It can also be applied to prevent the 12.4% Payroll Taxes component of the individuals’ Contributions Act tax for partners, which is now in effect (Watson & Miller 2020). It is also exempt from compliance with Sections 409A and 457A of the Code of Civil Procedure, which governs deferred compensation.
Personal taxpayers may need to raise their gains and income to avoid higher rates as a result of the Biden plan. However, this frequently clashes with the employer’s intention to defer deducting the comparable employee pay expense until final times, when the subtraction will be more advantageous. If annual incentives for 2020 productivity are paid in December 2020, as an example option, employees will have the chance of including bonuses in their earnings in 2020 at lower tax rates; however, the employer’s corresponding deduction will be deferred until 2020.
Taxpayers would be incentivized to choose their most valuable portfolios and consider making transactions to accelerate their returns if corporate rates rose. Simple gifts to controlled overseas firms, the acceleration of existing sale agreements, the offsetting of securities, and the entrance into “disguised sale” deals to partners are all examples of transactions that fall into this category. Furthermore, there would be an incentive to postpone deductions until later times when they are more helpful, such as deductions for employee remuneration, which would be advantageous in the long term. While the TCJA decreased the incentive to organize tax-deferred transactions by lowering the corporate tax rate from 35% to 21%, Biden’s proposed rate rise may shift the balance back the other way, resulting in tax-deferred restructurings and other trades more desirable.
Furthermore, Biden’s program includes a strong drive to reduce the tax deficit. Every year, the IRS misses out on up to $1 trillion in legally owed taxes. According to research, rich families contribute significantly to the tax gap, mostly via the use of offshore accounts and sophisticated business structures that the IRS, given its current resources, is poor to uncover during audits. Meanwhile, audit rates for wealthy taxpayers have decreased, owing largely to significant IRS budget cuts made since 2010. According to the IRS and Treasury Department, this investment would result in a net savings of $240 billion over ten years (York et al., 2021). The Biden proposal would invest $80 billion over five years to restore the IRS’s enforcement function, including training and recruiting audit employees and updating the agency’s technological capabilities.
People with higher income brackets derive a significant portion of their income from capital gains, such as increases in the value of company shares or real estate. When compared to wages and salaries, which account for the vast majority of most households’ income and are taxed on an annual basis, the income generated by capital gains is subject to “deferral.” As a result, this means it is not taxed in any given year unless the option of the asset being sold, effectively allowing the asset’s owner to choose when to pay tax. There would be no change under the Biden proposal since it would continue to allow affluent individuals to avoid paying taxes on a significant source of their income from year to year.
Watson, G., & Miller, C. (2020). Analysis of democratic presidential candidate payroll tax proposals. Fiscal Fact, 694. Web.
York, E., Parks, T., & Muresianu, A. (2021). Tracking the 2021 Biden tax plan and federal tax proposals. Tax Foundation. Web.