Market Perspectives

The Biden Tax Plan: Key Takeaways for Today’s Investors


In his first 100 days in office, President Biden has proposed more than $6 trillion in federal spending. This includes the recently passed $1.9 trillion COVID-19 relief package, a $2.3 trillion infrastructure spending plan, and  $1.8 trillion for the American Family Plan targeting family and education programs.  The Biden administration has proposed a series of tax increases—predominantly impacting corporations and wealthy individuals—that it believes will offset spending in 15 years.

While Biden’s proposals are unlikely to pass Congress in their current form, the tax implications for taxable investors and corporations would be significant.  In this report, we outline some of the potential impacts—both on the broad market and individual asset classes—and share some key takeaways clients should consider when contemplating changes to their portfolios.

Tax Proposal Overview

Corporate Taxes

The Biden administration is proposing an increase in the corporate tax rate from 21% to 28%.  This would represent the halfway point between the current level and the 35% rate that was in place from 1993–2017.  Corporations accounted for only 7% of tax revenues in 2020, which represents an 80-year low and is a far cry from the nearly-30% levels  in the 1950s, according to the Tax Policy Center.  Among other notable provisions in the Biden plan is a minimum 21% global tax on the profits U.S. companies earn in each of the countries where they operate abroad.  The Tax Policy Center estimates these two tax increases could generate more than $1 trillion in revenues over the next decade.

While S&P 500 earnings are expected to grow in the next couple years, the proposed increase of the corporate tax rate to 28% is expected to negatively impact earnings by a percentage in the mid- to high-single digits.  A compromise to 25% would dampen the impact on earnings.

Corporate executives are likely to take measures to minimize the impact of tax increases.  Companies may change their capital allocations to boost the interest tax shield and increase reinvestment in an effort to depress taxable income and reduce cash taxes in the short term.

For multinational corporates with subsidiaries in low tax jurisdictions, the proposed global minimum tax could have a more significant impact on cash taxes than the increase in the headline corporate tax rate. Most likely to be affected are companies in sectors such as technology and communication services that generate a significant percentage of revenues outside the United States.

Individual Taxes

Wealthy individuals and families—approximately the top 1% earners—would bear the burden of the tax increases on an individual level.  The plan calls for increases to both income and capital gains tax rates and the elimination of several tax-reduction strategies.

Income Taxes

The plan would increase the top tax rate to 39.6% on the income of an individual making more than $452,700 and married couples making more than $509,300.  These new brackets would be enacted for the 2022 tax year under the current proposal, with rates representing a return to levels under the Obama administration.

Capital Gains Taxes

The Biden plan seeks to increase the top tax rate for long term capital gains (and qualified dividends) from 20.0% to 39.6% for households earning more than $1 million annually.  Factoring in the ObamaCare tax on investments, taxpayers in states that tax capital gains as regular income (e.g., California, New York) would effectively be taxed at rates above 50% on the growth in value of investments.  Taxes on long-term capital gains have not approached 40% since the late-1970s.  Historically, the highest capital gains tax was in the 1920s, when the maximum rate was 77%.  Rates fell shortly thereafter, with long-term capital gains generally taxed at levels below that of ordinary income.  This would no longer be the case under the Biden plan.

Tax Exemptions

While the Biden plan has no provisions for the estate tax, it would eliminate the step-up in basis on inherited property.  Currently, the cost basis on inherited capital assets such as stock and real estate is stepped up to the value on the date of the previous owner’s death, thereby relieving the recipient of any capital gains tax burden if they immediately sell the asset.  Biden’s proposal would tax inherited gains at the top tax rate of 39.6% after an exemption of $1 million plus $250,000 for a home (both exemptions would be double for married couples).  A separate provision would eliminate deferment of capital gains taxes on property sales by reinvesting the proceeds in other properties within six months.

Tax Enforcement

Biden is looking to allocate additional resources to the IRS to narrow the gap between the amount of taxes that are owed versus paid.  IRS Commissioner Charles Rettig recently estimated the shortfall could be as much as $1 trillion annually.


While an increase in the corporate tax rate would raise tax revenues that would offset some of the cost of the ambitious plans of the Biden administration, opponents cite the potential negative impact on corporate profits that could weaken the competitiveness of U.S. companies in the global economy.

At the individual/family level, the outsized increase in the long-term capital gains rate and the potential elimination of the cost basis step-up could entice investors with significant long-term capital gains to consider realizing gains prior to a rate increase.  The Tax Policy Center reports realized capital gains increased 60% year-over-year in tax year 1986 in anticipation of the maximum capital gains tax rate jumping from 20.0% to 28.0% in 1987.  Realized capital gains rose 40% year-over-year in 2012 in advance of the maximum tax rate increasing by more than 1,000 bps from 15.0% to 25.1% in 2013.

While tax changes could impact market returns, changes in capital gains tax rates and subsequent S&P 500 performance suggests there has not been a correlation.  At the extremes, the 1,000+ bps tax rate increase in 2013 and 800 bps decrease in 1997 each occurred during calendar years when the S&P 500 appreciated over 30%.

Asset Class Considerations

While it is still too soon to know exactly what these tax changes will look like, if they are passed into law, some initial thoughts around the potential impacts on individual asset classes are below.


  • As higher tax rates generally increase the value of tax management, taxable investors may opt to implement direct indexing portfolios in which they own securities directly and are able to effectively tax-loss harvest individual positions.
  • The mechanism by which ETF shares are created/redeemed generally leads to greater tax efficiency versus mutual funds.

Fixed Income

  • Higher corporate and personal tax rates may emphasize the importance of tax-exempt municipal bonds in taxable client portfolios. The potential revival of the Build America Bonds program in conjunction with proposed infrastructure legislation could lead to a surge in taxable municipal bond issuance.
  • Corporate tax increases may lead to companies increasing tax-exempt municipal holdings after exposure was reduced when tax rates were cut in 2018. The level of institutional demand for municipal bonds will be a function of the ongoing relative value versus taxable bonds.

Flexible Capital

  • Tax law requires investments be held for three years in order for carried interest to be taxed at long-term capital gain rates. However, several exceptions were issued by the IRS in January.
  • Removing the incentive to invest long term could lead to increased portfolio churn and changes in strategy.
  • Lower-returning strategies with long holding periods—including certain forms of credit—could become less economically viable for general partners if the rate of taxation effectively doubles.

Real Assets

  • Currently, investors can defer capital gains taxes when they sell one property and buy a like-kind property within six months. The elimination of this tax advantage for gains greater than $500,000 could result in significant real estate short-term sales, particularly in the commercial space, and lead to fewer transactions and less market liquidity.

Private Equity

  • Private equity firms are likely to seek to raise capital for funds focused on areas such as clean energy that could benefit from the Biden administration’s environmental agenda and key renewable energy tax credit extensions.

The tax treatment of carried interest as capital gains versus ordinary income was proposed by prior administrations, but never implemented.  The current proposal may usurp that scenario by increasing the capital gains tax to the same level as ordinary income.


President Biden has proposed funding a broad economic agenda predominantly through increased taxation for corporations and affluent individuals/households.  While the timing and scope of legislation ultimately passed by Congress is uncertain, higher tax rates relative to those under the prior administration appear to be inevitable.  The measures that go into effect will impact the economy; however, our review of historical changes in tax rates shows that this data is a poor predictor of future market returns—even with higher taxes weighing on corporate earnings.

Mindful of the impact of increased taxation, we believe careful monitoring and planning for taxable investors can potentially mitigate the overall tax burden in coming years, particularly in equity and fixed income.  Please feel free to reach out to your client service team with any questions.

All commentary contained within is the opinion of Prime Buchholz and is intended for informational purposes only; it does not constitute an offer, nor does it invite anyone to make an offer, to buy or sell securities.  The content of this report is current as of the date indicated and is subject to change without notice.  It does not take into account the specific investment objectives, financial situations, or needs of individual or institutional investors. Some statements in this report that are not historical facts are forward-looking statements based on current expectations of future events and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Information obtained from third-party sources is believed to be reliable; however, the accuracy of the data is not guaranteed and may not have been independently verified.  Performance returns are provided by third-party data sources. Past performance is not an indication of results.  @2021 Prime Buchholz LLC

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