From President Biden labeling the Tax Cuts and Jobs Act as the “largest tax cut in American history,” to former President Trump asserting that Biden “wants to raise your taxes by four times,” the campaign rhetoric on taxes has been a source of confusion for many. To clear the air, let’s delve into the tax policies proposed by both candidates, comparing them to historical tax changes since 1940.
President Biden’s budget for FY 2025 proposes raising the corporate income tax rate from 21 percent to 28 percent, increasing the corporate alternative minimum tax from 15 percent to 21 percent, and increasing the top individual income tax rate from 37 percent to 39.6 percent, among other provisions. On a gross basis, Biden would increase taxes by $4.4 trillion before reducing taxes by nearly $900 billion through expanded tax credits and preferences. This would result in an average annual revenue increase of 0.94 percent of GDP, ranking as the 9th largest tax increase since 1940 and the 2nd largest outside of wartime.
Former President Trump, on the other hand, proposed several tax and tariff ideas, including new tariff hikes of 10 percent on all imports and 60 percent on Chinese goods, lowering the corporate income tax rate from 21 percent to 20 percent, and making the individual, estate, and business tax changes from the Tax Cuts and Jobs Act (TCJA) permanent. We estimate that these proposals would reduce revenue by 1.21 percent of GDP on average, ranking as the 6th largest tax cut since 1940. Overall, Trump’s tax and tariff proposals would amount to a tax cut of 0.5 percent of GDP, ranking as the 13th largest tax cut enacted since 1940.
It’s important to note that the five largest tax increases since 1940 all occurred during wartime, raising revenue between 1.16 percent and 5.04 percent of GDP, on average. By comparison, the 2018-2019 tariffs imposed by President Trump on more than $380 billion of foreign products increased customs duties between 0.1 percent to 0.2 percent of GDP, ranking as the 21st largest tax hike since 1940. President Biden has continued the bulk of those tariffs and proposed further increases.
The five largest tax reductions since 1940 are the Revenue Acts of 1945, 1948, and 1964; the Economic Recovery Tax Act of 1981; and the American Taxpayer Relief Act of 2012. They reduced revenue by between 1.6 percent and 2.89 percent of GDP, on average. By comparison, the 2017 Tax Cuts and Jobs Act (TCJA) enacted under Trump ranks as the 10th largest tax cut since 1940, reducing tax revenues by an annual average of 0.69 percent of GDP.
Understanding these tax proposals and their potential impact is crucial for responsible financial citizenship. It empowers individuals with the knowledge needed to make informed financial decisions and contribute to the well-being of their communities by fulfilling their tax obligations.