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This election could bring more tax consequences than any other election in recent history.
This creates 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, supporting a more robust economy.
However, some politicians appear to be using tax policy against businesses and the wealthy, reflecting a growing populism that sees inequality and success as problems to be solved with higher taxes.
The stakes are extremely high for small business owners. The final result of this election will shape tax policy for years to come, and businesses need to stay informed and engage in political discourse about tax policy.
But first, let’s take a step back to understand how we got to this point.
A Brief History of the US Income Tax
In 1913, the United States introduced an income tax, initially covering only a very small portion of the population. It was actually a tax on the wealthy elite. It was not until 1944 that the United States prolonged the income tax to cover wages more broadly, but even then it applied mainly to income in excess of normal living expenses.
Fast forward to today, and the income tax has grow to be a routine a part of American life. While income taxes were rising, corporate taxes were rising. In fact, lower than a decade ago, the United States had the highest corporate tax rate in the industrialized world.
The Tax Cuts and Jobs Act of 2017 had a significant impact on each sets of taxes, cutting many individual taxes and lowering the corporate rate to 21%. Many of those cuts will expire at the end of 2025, giving the next White House and Congress enormous influence over future tax policy.
Key points to watch
Given what’s at stake, small business owners should be prepared to engage in a rigorous discussion about the way forward for the tax system.
Here are six key areas to understand:
1. Corporate taxes
The Tax Cuts and Jobs Act of 2017 was former President Donald Trump’s signature laws. While there is ongoing debate among Republicans about how to reduce the budget deficit while extending tax cuts, it seems likely that a second Trump term, combined with sufficient Republican support in Congress, won’t result in an increase in the corporate tax rate. In June, Trump reportedly said he would really like to lower the corporate tax rate to 20%.
While Vice President Kamala Harris has not shared detailed tax policy since becoming the Democratic nominee, judging by how she has run her campaign so far, it seems likely that she is going to proceed with most of the proposals in the Biden/Harris ticket. On the corporate tax front, the Biden/Harris administration has proposed raising the corporate tax rate back to 28%. Combined with state taxes, this is able to once 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 leverage to pursue its political goals. Tax deductions for having children, attending kindergartens and caring for elderly relatives provide an incentive to develop and care for the family. Tax relief on mortgage interest encourages home ownership. And deductions for investing in a 401(k) promote retirement savings.
The Biden/Harris administration has created significant tax incentives for electric automobile purchases and other green energy investments, changing the direction of entire industries. It is likely that these kind of incentives will proceed under the Harris/Walz administration. Additionally, Minnesota Governor Tim Walz is known to be a strong supporter of kid tax credits, helping to create the nation’s largest such credit for low-income earners in 2023, the $1,750 per child credit, which has begun to phase out and was $29,500 for single people and $35,000 for life claimants. married couples submitting joint testimony.
Former President Trump has signaled that he would really like to abandon his green energy initiative. Instead, we will expect that he and the Republican Congress will support a 100% refund of bonus depreciation, which inspires firms to invest in machinery, equipment and other assets.
3. Capital gains taxes
On the individual side, the Biden/Harris administration has stated that it intends 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 odd income rates for income over $1,000,000. This would mean that capital gains may very well be taxed at rates in excess of fifty%, after state taxes are taken into account. Such changes could significantly impact entrepreneurs and investors whose income is based on capital gains and would seriously impact the tax consequences of selling a business.
4. Social security
The Biden/Harris administration has proposed increasing Social Security taxes on business income, especially business income earned through pass-through entities comparable to limited partnerships and S corporations. All business income, not only employment income, can be subject to the tax on social security.
5. Property tax
There has been much discussion in the Biden/Harris administration about implementing a wealth tax in the type of a latest alternative minimum tax. Although it is now ostensibly intended to only apply to people with a net value of greater than $100 million – and Vice President Harris has already accepted Biden’s pledge not to raise taxes on people earning lower than $400,000 a 12 months – it is vital to keep in mind that the income tax initially applied only to the wealthiest . This tax, if enacted and upheld by the courts, will likely affect many more Americans in the future, much as the income tax and the original alternative minimum tax crept into the lives of on a regular basis people.
6. Tariffs
Former President Trump campaigned heavily on using tariffs as a income and policy leverage. Some of his ideas included a basic tariff of 10% on all imports and a tariff of 60% on imports from China. Such moves would increase costs for any small company importing materials, while potentially helping firms competing with foreign products.
Navigating uncertainty
Small business owners and entrepreneurs need to pay close attention to how the election season unfolds. Understanding the nuances of each candidate’s proposed tax policy is essential to making informed decisions that might impact your online business and personal funds.
The evolving tax code reflects broader societal values and priorities. As debates intensify, stay tuned to navigate this changing terrain. Take part in the discourse, understand the consequences and solid your vote.
The way forward for tax policy is in your hands.