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As the nation enters the final days before the election, President Donald Trump and former Vice President Joe Biden have promoted their respective tax policy plans as the better approach to help the American economy recover from the effects of the COVID-19 pandemic and directly support families and workers. President Trump has committed to continue building off of his administration’s 2017 tax bill, crediting the legislation for the economic growth in 2018 and 2019, where the unemployment rate fell to its lowest in half a century at 3.5%, In contrast, Democrats have argued that the tax bill has had little to no impact on economic growth, asserting that it does not do enough to support middle-income families and only helps corporations. The Biden campaign’s proposed plan would aim to increase taxes on corporations and the wealthiest Americans while providing relief to middle-class Americans by expanding federal programs and benefits. Tax Policy from Obama to Trump Under the Obama Administration, tax policy was largely driven by the need to rescue the economy from the 2009 financial crisis and implement stimulus measures. The top marginal corporate tax rate was 35%, one of the highest among members of the Organization for Economic Co-operation and Development (OECD), according to the Tax Foundation. Additionally, the average top tax rate on long-term capital gains was 23.8%, which included the taxes imposed by the Affordable Care Act (ACA). Other policies included tax hikes on high-income earners to ensure they paid a larger share than middle-income households. In response, Republicans argued that Obama’s tax policies left entrepreneurs and businesses worse off, stifling economic growth. As a result, President Trump led the effort to roll back Obama-era policies by working with a Republican-controlled Congress to rewrite the tax code and replace it with the Tax Cuts and Jobs Act of 2017 (TCJA). The bill reduced the top marginal corporate rate from 35% to 21% and cut the top tax rate on personal income from 39.6% to 37%. TCJA also allowed businesses to fully deduct the costs of new capital investments, providing significant relief to small businesses. Another provision established the Opportunity Zones (OZ) program to increase investment and create jobs in low-income communities. The historic tax overhaul narrowly passed the Senate with 51-48 votes along party lines, leading to ongoing criticism from Democrats. Assessing America’s Economic Success Since the enactment of TCJA, the White House has attributed the strong pre-pandemic American economy to the bill’s pro-growth reforms that provided more opportunities for workers across sectors and increased wages. The House Ways and Means Committee noted that the pre-pandemic economy’s unemployment rate dropped to one of the lowest levels in history and added 5 million jobs. Real disposable personal income per household also increased by nearly $6,000 since the enactment of TCJA. However, President Trump’s tax cuts are expected to add $1.9 trillion to the federal deficit, and ongoing trade wars over tariffs may impact growth in certain sectors, according to a 2019 Joint Economic Committee report. While the 2017 tax bill deserves credit for fueling economic growth, President Trump often asserts that he inherited a “disaster” from the Obama administration’s policies. As shown by data from the Bureau of Labor Statistics in the figure below, the economy was already making a steady recovery and trending upwards before President Trump took office. By the end of Obama’s second term, the unemployment rate had fallen to 4.7%. The average real Gross Domestic Product (GDP) growth was roughly similar to the rate seen under President Trump at 2.6%.   Overall, it is fair to conclude that Obama-era policies did help lead the American economy toward recovery and should not be characterized as a “disaster.” At the same time, the Republican tax bill did take adequate measures to build on that success by creating more access to capital, providing workers with more opportunities, and strengthening American manufacturing. Despite this historic success, the COVID-19 pandemic has presented a new economic challenge to overcome, as several businesses face the threat of permanent closure and consumer optimism remains uncertain due to a lack of more federal stimulus and an unstable job market. Throughout the 2020 campaign, President Trump and Democratic presidential candidate Biden have insisted that their respective plan is better equipped to lead the country out of recession. The Republican incumbent may hold an edge over his Democratic opponent on handling the economy, and American voters will have to choose between two different approaches as they confront the public health and economic crises. Recently released reports on the country’s economic performance in the third quarter indicate record growth, providing voters with their last major impression of this policy issue before the election. According to the Department of Commerce, the economy has recovered nearly 67% of the progress it lost from COVID-19. In addition, the country has recovered about 50% of the jobs lost from the shutdowns earlier this year. While the data reveals that the economy has made substantial progress in a short period of time, analysts estimate that GDP will contract 3.6% this year (when compared to the fourth quarter of 2019) and do not anticipate it will reach its pre-pandemic level until 2021. The figure to the left depicts the record GDP rebound seen in the third-quarter report. Feasibility to Implement and Potential Effects of Each Proposal The effects of the COVID-19 pandemic will likely continue impacting economic growth and jobs in 2021, underscoring the need to mitigate more potential damage by implementing a new vision for tax policy. Regardless of who wins the election, either a President Trump or President Biden will have to address TCJA provisions that are set to expire in 2022, which may drive some bipartisan negotiations. However, the feasibility of materializing either proposal into a reality will depend on the makeup of Congress. It is hard to envision a scenario where a White House and Congress from opposing parties can accomplish meaningful changes in business or individual taxation. During his Republican National Convention speech in August 2020, President Trump committed to broadening and expanding policies from TCJA and delivering on other priorities post-tax reform. He expressed support for extending the OZ program, which has helped develop economically disadvantaged areas and provided job opportunities for minorities. He has also called for more tax cuts to “boost take-home pay” for the middle-class and alluded to reducing the capital gains tax rate from its current 20% level. On incentives, President Trump has mentioned imposing a tariff on companies that do not move their operations to the mainland from overseas, in addition to creating a “Made in America” tax credit to encourage domestic production. In evaluating the impacts of tax policy under a Biden Administration, it is important to note that the post-election economic and political outlooks will serve as the driving factors for any changes to its proposed plan, especially if Republicans hold the Senate. As it stands, the former Vice President’s tax policies would raise tax revenue by about $4 trillion over the next 10 years. The primary sources of revenue could come from increasing the corporate tax rate to 28%, raising the top income rate to 39.6% for individuals earning income over $400,000, and capital gains taxes. These policies would be aimed at reducing income inequality, which will continue to be an area of focus for Democrats post-TCJA. Former Vice President Biden has also called for improving programs, such as the EITC and CTC, that provide much-needed relief for American families, especially as they weather the uncertainty of COVID-19. One notable similarity to the Trump tax plan is the call to establish a tax credit that would incentivize companies to revitalize domestic manufacturing. This seems to be an area of common ground for both parties, in an effort to counter China’s economic power. According to analysis by the Tax Foundation, the Biden plan would lower GDP growth by 1.62% over the long-term and lead to a 1.9% decrease in “after-tax income for all taxpayers on average.” However, the actual effects of either proposal are too difficult to predict as the nation continues to grapple with the effects of the pandemic. Congress would likely primarily focus on federal stimulus as its first policy item on the legislative agenda post-election. As noted earlier, both parties would also need to recalibrate their approaches to tax policy if the White House and Congress are split. Overall, current economic trends give President Trump the upper-hand in promoting his tax plan as the one to further heal the economy, but there are still several industries and workers who continue to struggle, and the Biden tax proposal does contain meaningful provisions that would help revitalize communities and provide families with financial support.
The views expressed above are solely the author's and are not endorsed by the Virginia Policy Review, The Frank Batten School of Leadership and Public Policy, or the University of Virginia. Although this organization has members who are University of Virginia students and may have University employees associated or engaged in its activities and affairs, the organization is not a part of or an agency of the University. It is a separate and independent organization which is responsible for and manages its own activities and affairs. The University does not direct, supervise or control the organization and is not responsible for the organization’s contracts, acts, or omissions.
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