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The election promises to bring more tax ramifications than any other election in recent history.
It presents an opportunity to rethink the tax code, potentially making it more pro-growth by moving away from income-based taxes towards consumption-based models. Such reforms could increase savings and capital investment, fostering a more robust economy.
Yet, some politicians appear to be weaponizing tax policies against entrepreneurs and the wealthy, reflecting a growing populism that views inequality and success as problems to be solved through higher taxes.
The stakes are incredibly high for small business owners. The outcome of this election will shape tax policies for years to come, and it’s imperative for entrepreneurs to stay informed and engaged in the political discourse surrounding tax policy.
But first, let’s take a step back to understand how we came to this point in time.
A brief history of income tax in the U.S
In 1913, the United States introduced the income tax, initially targeting only a very small portion of the population. It was truly a tax on the wealthy elite. It wasn’t until 1944 that the U.S. expanded the income tax to wages more broadly, but even then, it was largely on income that exceeded normal living expenses.
Fast forward to today, and income tax has become a routine part of American life. While income taxes were rising, so were corporate taxes. In fact, less than a decade ago, the U.S. had the highest corporate tax rate in the industrialized world.
The 2017 Tax Cuts and Jobs Act had a significant impact on both sets of taxes, cutting many individual taxes and reducing the corporate rate to 21%. Many of those cuts are set to expire at the end of 2025, giving the next White House and Congress an enormous impact on future tax policy.
Key points to watch
Given what’s at stake, small business owners need to be prepared to engage in a rigorous discussion about the future of the tax system.
Here are six key areas to understand:
1. Corporate taxes
The 2017 Tax Cuts and Jobs Act was a signature piece of legislation under former President Donald Trump. While there is some discussion among Republicans about how to reduce the budget deficit while extending tax cuts, it seems likely that a second Trump term coupled with sufficient Republican support in Congress would not increase the corporate tax rate. In fact, Trump reportedly said in June that he’d like to reduce the corporate tax rate to 20%.
While Vice President Kamala Harris hasn’t shared a detailed tax policy since becoming the Democratic nominee, based on how she is running her campaign so far, it seems likely she will continue most of the proposals of the Biden/Harris ticket. On the corporate tax front, the Biden/Harris administration has proposed raising the corporate tax rate back up to 28%. When combined with state taxes, this would again position the U.S. as having one of the highest corporate tax rates in the industrialized world.
2. Incentives
Every presidential administration uses tax incentives as a lever to drive their policy goals. Tax credits for having children, using daycare and caring for elderly relatives incentivize growing and caring for families. Tax deductions for home mortgage interest encourage home ownership. And deductions for investing in a 401(k) promotes retirement savings.
The Biden/Harris administration has created substantial tax incentives for purchasing electric cars and other green energy investments, shifting the direction of entire industries. We’re likely to see these types of incentives continue under a Harris/Walz administration. In addition, Minnesota Gov. Tim Walz is known to be a big supporter of child tax credits, helping create the nation’s largest such credit for low earners in 2023 — a $1,750 per child credit that began phasing out at $29,500 for single filers and $35,000 for married couples filing jointly.
Former President Trump has indicated that he would like to abandon the green energy initiative. Instead, we can expect that he and a Republican Congress would support a return of 100% bonus depreciation, which incentivizes businesses to invest in machinery, equipment and other assets.
3. Capital gains taxes
On the individual side, the Biden/Harris administration has said it aims to raise the top individual tax rate from 37% to 39.6%, increase the net investment tax from 3.8% to 5% and tax capital gains at ordinary income rates for income over $1,000,000. This would mean capital gains could be taxed at rates exceeding 50% when state taxes are included. Such changes could significantly impact entrepreneurs and investors who rely on capital gains for their income and would severely impact the tax consequences of selling a business.
4. Social security
The Biden/Harris administration has proposed increasing the social security taxes on business income, especially business income earned through pass-through entities such as limited partnerships and S corporations. All business income would be subject to social security taxes, not just employment income.
5. Wealth tax
There has been much discussion by the Biden/Harris administration about passing a wealth tax in the form of a new alternative minimum tax. While ostensibly this is only currently intended to affect individuals with greater than $100 million of net worth — and Vice President Harris already has adopted Biden’s pledge not to raise taxes on people earning less than $400,000 a year — recall that the income tax initially only affected the most wealthy. This tax, if passed and upheld by the courts, would likely affect many more Americans in the future, just as the income tax did and the original alternative minimum tax crept into the lives of everyday people.
6. Tariffs
Former President Trump has campaigned heavily on using tariffs as a revenue source and policy lever. Some of his ideas have included a 10% baseline tariff on all imports and a 60% tariff on imports from China. Such moves would increase costs for any small business that imports materials while potentially helping those that compete with overseas products.
Related: Could the 2024 Election Let Employees Take Your Trade Secrets? Here’s What You Need to Know.
Navigating uncertainty
Small business owners and entrepreneurs must pay close attention as this election season unfolds. Understanding the nuances of each candidate’s proposed tax policies is essential for making informed decisions that could impact your business and personal finances.
The evolving tax code reflects broader societal values and priorities. As debates intensify, stay informed so that you can navigate this shifting terrain. Engage with the discourse, understand the implications and exercise your vote.
The future of tax policy is in your hands.