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of the elections promises to bring more tax consequences 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 to consumption-based models. Such reforms can increase savings and capital investment, fostering a stronger economy.
However, some politicians seem to be up in arms tax policies against entrepreneurs and the wealthy, reflecting a growing populism that sees inequality and success as problems to be solved through higher taxes.
The stakes are incredibly high for small business owners. The outcome of these elections will shape tax policies for years to come, and it is imperative that entrepreneurs stay informed and engaged in the political discourse surrounding tax policy.
But first, let's take a step back to understand how we got to this point in time.
A brief history of the US income tax
In 1913, the United States introduced the income tax, initially targeting only a very small portion of the population. It was really a tax on the wealthy elite. It wasn't until 1944 that the US extended the income tax to wages more widely, but even then, it was mostly on income in excess of normal living expenses.
Fast forward to today, and the income tax has become a routine part of American life. As income taxes were rising, so were corporate taxes. In fact, less than a decade ago, the US had the highest corporate tax rate in the industrialized world.
The Tax Cuts and Jobs Act of 2017 had a significant impact on both tax brackets, cutting many individual taxes and lowering the corporate rate to 21%. Many of these cuts are set to expire at the end of 2025, giving the incoming White House and Congress great leverage over future tax policy.
Highlights to watch
Given what's at stake, small business owners should prepare to engage in a rigorous discussion about the future of the tax system.
Here are six key areas to understand:
1. Corporate taxes
The Tax Cuts and Jobs Act of 2017 was a piece of signature legislation under former President Donald Trump. While there is some discussion among Republicans about how to reduce the budget deficit by extending the tax cuts, it appears that a second Trump term coupled with sufficient Republican support in Congress would not raise the corporate tax rate. In fact, Trump reportedly said in June that he would like to lower 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's been running her campaign so far, it appears 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 to 28%. When combined with state taxes, this would again position the US as 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 nurseries and caring for elderly relatives stimulate the growth and care of families. Home mortgage interest tax deductions encourage home ownership. And deductions for investing in a 401(k) promote retirement savings.
The Biden/Harris administration has created significant tax incentives for the purchase of electric cars and other investments in green energy, changing the direction of entire industries. We will likely see these types of incentives continue under a Harris/Walz administration. Additionally, Minnesota Governor Tim Walz is known as a big supporter of child tax credits, helping create the nation's largest low-income credit in 2023 — a $1,750 credit. per child 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 him and a Republican Congress to support a 100% bonus depreciation return, which incentivizes businesses to invest in machinery, equipment and other assets.
3. Taxes on capital gains
On the individual side, the Biden/Harris administration has said it intends to raise the top individual tax rate from 37% to 39.6%, raise the net investment tax from 3.8% to 5% and the capital gains tax at ordinary rates. income for income over 1 000 000 dollars. This means that capital gains can be taxed at rates exceeding 50% when state taxes are included. Such changes could significantly affect entrepreneurs and investors who rely on capital gains for their income and would severely affect the tax consequences of selling a business.
4. Social security
The Biden/Harris administration has proposed increasing Social Security taxes on business income, particularly business income earned through pass-through entities such as limited partnerships and S corporations. All business income would be subject to the tax of social security, not just income from employment.
5. Wealth tax
There has been much discussion by the Biden/Harris administration of enacting a wealth tax in the form of a new alternative minimum tax. While this is ostensibly intended to only affect individuals with more than $100 million in net worth — and Vice President Harris has already endorsed Biden's pledge not to raise taxes on people making less than $400,000 a year — remember that the tax on income initially affected only the richest. This tax, if passed and upheld by the courts, will likely affect many more Americans in the future, just as the income tax and the original alternative minimum tax did in the lives of ordinary people.
6. Fees
Former President Trump has campaigned heavily on using tariffs as a source of revenue and policy leverage. Some of his ideas have included a 10% base tariff on all imports and a 60% tariff on imports from China. Such moves would raise costs for any small business that imports materials, potentially helping those competing with foreign products.
Related: Could the 2024 election let employees get your trade secrets? Here's what you need to know.
Navigating uncertainty
Small business owners and entrepreneurs should pay close attention as this election season unfolds. Understanding the nuances of the tax policies proposed by each candidate is essential to making informed decisions that can affect your business and personal finances.
The evolving tax code reflects broader societal values and priorities. As the debates intensify, stay informed so 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.