Higher tax rates expected in Biden administration

Katie Deal , Washington Analyst,
US Equity Division

Rise in corporate and personal taxes to finance domestic programs.

Former Vice President Joseph Biden will inherit an economy beleaguered by the battle against the coronavirus if he wins the election in November. The recession will influence his legislative priorities in both the short and long term; however, Biden has indicated that he would raise an array of corporate and personal taxes to finance domestic programs, including Social Security, health care, green energy, and infrastructure projects.

Corporate Taxes: Higher Rates and Closed Loopholes

Biden’s tax plan would restore many provisions of the tax code in effect prior to passage of the 2017 Tax Cuts and Jobs Act (TCJA), netting approximately USD 3.8 trillion in new federal revenue over 10 years. The corporate rate would rise to 28% from 21%, still below the 35% pre‑TCJA rate. The administration would seek to double the tax on Global Intangible Low‑Taxed Income, or GILTI, which would bring the total rate up to 21%—affecting companies that generate offshore profits and benefit from tax arbitrage.

Biden’s plan also includes a minimum tax on corporate income, which would affect businesses with book profits of USD 100 million or higher. The tax is structured as an alternative minimum tax, in which corporations would pay the greater of their regular corporate income tax rate or the 15% minimum rate. Businesses would still be permitted to deduct net operating losses (NOLs) and receive foreign tax credits.

There is still uncertainty regarding how many of these tax proposals would become law, or whether Biden might modify them given the global recession and legislative compromise.

Biden’s tax plan would restore many provisions of the tax code in effect prior to passage of the
2017 Tax Cuts and Jobs Act…

Personal Income: Plan Would Target Wealthiest

Biden’s individual tax plans primarily target both the highest‑income earners and those who derive their income from investments. The Biden plan would revert tax rates to the pre‑TCJA rate of 39.6%, affecting earned income above USD 400,000. The plan would implement a 12.4% Social Security payroll tax on earned income above USD 400,000, split evenly between employers and employees in order to fortify the Social Security system and increase benefits for retirees at lower income levels.

Biden would also phase out the 20% qualified business income deduction (including qualified real estate investment trust dividends) for filers with taxable income above USD 400,000, and cap itemized deductions to 28% of value—mostly affecting those in the top tax brackets.

The Biden campaign’s wish list also includes plans to increase taxes on long‑term capital gains and qualified dividends. Here, too, the greatest impact would fall on the wealthiest taxpayers.

Additionally, Biden would eliminate the step‑up in cost basis for assets left via inheritance. Currently, the cost basis steps up to the value of the asset at the time of the donor’s death. If this proposal were enacted, the inheritor would retain the donor’s original and presumably lower cost basis—generating a larger capital gain if the assets were sold.

The two most important factors in projecting the trajectory of Biden’s legislative agenda
will be the state of economic recovery and the coronavirus, especially early in 2021.

Potential Impact of Proposed Tax Changes

David Giroux, T. Rowe Price CIO of Equity and Multi‑Asset and head of investment strategy, estimates the rate increases would collectively reduce S&P 500 company profits by 9% to 11%. However, some industries could benefit from increased spending, and we believe that a few sectors and companies may see fewer adverse effects.

An increase in tax rates would have less impact on earnings per share for utilities because taxes are passed on to customers. Energy exploration and production companies generally pay relatively less in cash taxes and so would benefit relative to other sectors. But these companies could be subject to the minimum tax rate provision, which would put pressure on utilities’ customer bills and rate base growth while potentially affecting energy companies in a higher‑price environment.

Non-US-domiciled companies would also escape a higher GILTI rate, since the provision only applies to US companies—though only 2.9% of the S&P 500 is domiciled overseas.

9% to 11%

Potential cut in S&P 500 profits from proposed hike in corporate tax rates.

Some High Hurdles to Passage

Whether such tax proposals are enacted hinges heavily on the outcome of Senate elections. Democratic control will be critical in determining not only how much of Biden’s legislative agenda would become law, but also the degree to which his priorities may have to shift to bring Republicans to the table. A tighter margin in the Senate means that more controversial provisions, like the corporate minimum tax, would be more difficult to accomplish.

The two most important factors in projecting the trajectory of Biden’s legislative agenda will be the state of economic recovery and the coronavirus, especially early in 2021. Were the country to continue to experience widespread spikes in infections amid social distancing, the path to recovery would be even more difficult to discern. A higher risk of crisis would make another deficit‑funded stimulus bill more attractive, resulting in the delay of tax rate increases until the economy is on more stable footing.

Sign up for US Equity insights from T. Rowe Price

Share this article:

Share on linkedin
Share on email
T.Rowe Price 2020 Election Blog
US Flag

Election 2020

Our US Political analyst reports from Washington on the campaign trail, see our insights into the impact of the election on your investments.

Important Information

For professional clients only. Not for further distribution.

This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.

It is not intended for distribution to retail investors in any jurisdiction.

This material is issued and approved by T. Rowe Price International Ltd, 60 Queen Victoria Street, London, EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. For Professional Clients only.

© 2020 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc.

ID0003458 (07/2020) 


You might be interested in…

See our comprehensive range of US equity funds

Thank you for registering for US equities updates. The latest insights will be sent straight to your inbox, in the meantime access our latest thinking:

Important Legal Information

This site is intended for financial intermediaries in the United Kingdom. I have read the terms detailed below and confirm that I am a financial intermediary and that I wish to proceed. By accessing this website, you consent to T. Rowe Price collecting information by way of cookies.

Information contained in the T. Rowe Price website is not intended for investors in any jurisdiction in which distribution or purchase is not authorised, including the jurisdiction of the reader of this information, where applicable. For example, the information herein is not for distribution to and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States of America to or for the benefit of United States persons.

Information obtained from this site is intended specifically for the individuals who have agreed to these Terms and Conditions and may not be redistributed without prior consent from the T. Rowe Price Legal department.

The information is designed for professional investors, including financial intermediaries or members of the media, and is published for informational purposes only. In particular, the information is directed at only informing persons falling within one or more of the following categories:

(a) A government;
(b) A bank or insurance company;
(c) A pension fund or charity;
(d) Persons whose ordinary activities involve them, as principal or as agent, in acquiring, holding, managing or disposing of investments for the purposes of a business carried on by them or whom it is reasonable to expect will, acquire, manage or dispose of investments for the purpose of such a business;
(e) Persons whose ordinary business involves the giving of advice, which may lead to another person acquiring or disposing of an investment or refraining from so doing;
(f) Representatives of the media for corporate and background information about T. Rowe Price.

Persons who do not fall into one of the above categories should not act upon the information contained herein.

Certain persons may have access to information regarding the T. Rowe Price Funds SICAV, an investment company incorporated as “Société d’Investissement à Capital Variable” (‘SICAV’) under the laws of Luxembourg and the T. Rowe Price Funds OEIC, an open-ended investment company (‘OEIC’) incorporated in England and Wales. The sub-funds referred to on the site are only offered by the current prospectus. The prospectus contains more complete information about the sub-funds, including investment objectives, charges and expenses. However, the prospectus and other information relating to the sub-funds will not be intentionally distributed to persons in any country where such distribution would be contrary to local law or regulation.

Past performance is not a guide to future performance. The value of securities and any income generated from them might decrease as well as increase. Changes in rates of exchange may also have an adverse effect on the value, price or income of securities. Investors should also be aware of the additional risks associated with investments in emerging markets, high yield securities and smaller companies.

This information herein does not constitute investment advice and the products described may not be available to or suitable for all investors. You should consider, if appropriate, obtaining independent professional advice before making an investment decision.

Unless otherwise noted, the content appearing in this Section of the T. Rowe Price website has been issued by T. Rowe Price International Ltd, 60 Queen Victoria Street, London EC4N 4TZ, which is authorised and regulated by the U.K. Financial Conduct Authority with the reference number 194667.