Tax and deficit implications of the election

David Joy, Chief Market Strategist – Ameriprise Financial

US Capitol building framed by autumn leaves


Key Points

  • Current deficit trends now reflect additional spending to support the U.S. economy early in the pandemic.
  • Higher taxes may be necessary in the future.
  • Current policy proposals from Trump and Biden would not aid the deficit.

On Sept. 2, the Congressional Budget Office (CBO) published its outlook for the 10-year federal budget ending 2030. It incorporates the economic impact of the COVID-19 pandemic, including fiscal and monetary responses.

The highlights include a:

  • 2020 budget deficit of $3.3 trillion, or 16% of gross domestic product (GDP). It’s the largest deficit since 1945.
  • 2021 estimated deficit of $1.7 trillion, or 8.6% of GDP. The deficit is expected to average 4% of GDP over the 10-year forecast horizon.

The CBO also estimates the nation’s publicly held debt-to-GDP ratio will rise this year to 98%, up from 79% at the end of fiscal 2019. It would end 2030 at 109% of GDP, the highest in history.

Given these deficit trends, it might be reasonable to assume higher taxes after the presidential election. The amount would depend on the proposals from Trump and Biden, control of Congress and taxpayer income levels.


The Trump proposal

President Trump has not mentioned higher taxes. On the contrary, he has mostly spoken about cutting taxes.

Trump has expressed lower payroll taxes on individuals, lower capital gains rates and lower rates for the inflation-indexing of capital gains. He also has endorsed extending the individual tax code provisions from the Tax Cuts and Jobs Act (TCJA), currently set to expire after 2025.

For businesses, he has proposed:

  • “Made in America” tax credits
  • Tax credits for jobs brought back from China
  • 100% expensing for certain essential industries
  • Expanded opportunity zones

Without additional details, it’s not possible to estimate the budgetary impact of Trump’s proposals. Unless economic growth exceeds most independent forecasts, they would likely have little positive impact on the budget deficit, since they further reduce government revenue. Alternatively, the proposals could be offset by spending cuts elsewhere.


The Biden proposal

Former Vice President Biden has proposed changes to the tax code for both individuals and businesses.

Biden’s plan would represent little change for individuals earning less than $400,000 per year. For those earning above this level, however, the change could be significant.

Biden proposes to:

  • Reinstate the top marginal rate of 39.6% from the current 37%
  • Impose a 6.25% increase in the Social Security tax on income above $400,000
  • Cap the value of itemized deductions at 28%
  • Restore the Pease limitation on itemized deductions
  • Phase out the qualified business income deduction
  • Eliminate the stepped-up basis for capital gains (under certain limited circumstances)
  • Tax dividends and capital gains as ordinary income for those earning above $1 million

For businesses, Biden proposes raising the statutory income tax rate to 28% (the TCJA lowered it from 35% to 21%). He also proposes a 15% corporate minimum tax, reducing the deductibility of global intangible low-tax income, ending certain real estate loopholes and imposing sanctions on tax havens and outsourcing. He has proposed instituting manufacturing tax credits, expanding certain renewable energy tax credits and eliminating fossil fuel subsidies.

Biden’s proposals could generate significant new revenue, but he also proposes an ambitious spending plan. The net result is no appreciable impact on the deficit, according to an analysis by the American Enterprise Institute.

Leading up to the presidential election next month, it’s important to keep in mind that Congress controls the purse strings. The ability of any president to enact proposals depends on which party controls Congress. In the meantime, we believe investors should continue to maintain a well-diversified portfolio. Stay in contact with your Ameriprise financial advisor and monitor your progress toward your financial goals.


Sources: Unless otherwise noted, all statistical and tax information is from FactSet or Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.