It’s a matter of debate as to whether or not the future of democracy is at stake in this year’s presidential election.  But the future of your tax bill certainly is.  And the differences for successful business owners could be dramatic depending on who wins.

Although Democrat nominee and current vice president Kamala Harris has offered few new tax policy specifics, she did roll out a grab bag of expensive tax credits, including $25,000 grants for first-time homebuyers.  In addition, The Wall Street Journal reports that she’s expected to hew closely to Joe Biden’s tax philosophy.  And she did re-emphasize that she will stick to President Biden’s “no tax increases for earners under $400,000” pledge. 

With billions of dollars in proposed new tax credits and no new taxes for those below a  $400,000 income threshold, a Democrat administration will by definition be coming after higher-income taxpayers full force.

There have been enough public statements and published policy proposals from both sides to be able to compare a successful business owner’s likely tax bill under a Harris presidency compared to a second Trump presidency.  The differences are stark.

Trump Tax Legacy: Cuts and Jobs Act incentives

The defining tax policy of Donald Trump’s presidency was the 2017 Tax Cuts and Jobs Act (TCJA), which combined significant personal and corporate tax cuts with features that encouraged more aggressive business investment.

The TCJA lowered most individual tax rates; adjusted tax bracket thresholds upward; adjusted various personal tax credits; and limited state and local tax deductions, mortgage interest deductions, and charitable giving deductions.

On the business front, the TCJA lowered corporate tax rates dramatically, taking the U.S. from one of the highest corporate tax rates in the industrialized world to about the average rate of the nations belonging to the Organization for Economic Development and Cooperation (OECD).  It also allowed accelerated depreciation for investment in many kinds of business equipment while closing several corporate tax deductions and loopholes.

For successful small business owners, a key feature of the TCJA was its qualified business income deduction for up to 20% of the income of pass-through entities like S-corporations, sole proprietorships, and others. 

But a critical feature of the TCJA was that key provisions of it would sunset — expire — in 2025.  Why would Congress make such a critical thing as our fundamental tax policy, in effect, temporary?  Essentially, because it couldn’t have passed any other way, and the sunset provisions allowed the bill to overcome objections and legislative blocking mechanisms.

Donald Trump has said (no surprise) that his administration will renew and make permanent all of the TCJA’s provisions. 

The Biden/Harris administration (also no surprise) has said they’ll let most of the TCJA’s provisions expire, other than the expanded Child Tax Credit and a few other individual tax provisions.  The administration’s determination to scrap most of the TCJA forms the foundation for the dramatic divergence in tax outcomes for business owners under Democrats versus Republicans starting next year.

Harris reiterated last week that no one who makes under $400,000 would face a tax increase — though the devil is in the details.  Since every income group saw a reduction in its tax rate in 2017, allowing the provisions to expire would seem to logically impose a tax rate increase for everyone. 

In addition, the 2021 Inflation Reduction Act contained a massive increase in funding for IRS auditors, and the IRS’s own data show that 63% of 2023 IRS audits targeted taxpayers with incomes under $200,000.  So the idea that there’s some kind of legal fence around sub-$400,000 earners is illusory.

The Biden/Harris administration has also proposed hiking corporate tax rates by 33%, raising rates on high earners, and setting a minimum tax rate for them regardless of other tax considerations. 

Kamala Harris further tax background 

Historically, Kamala Harris has staked out very progressive taxation policies with aggressive marginal rates on high income earners and corporations.  As a presidential candidate in 2020, she advocated for the full repeal of the TCJA — not simply waiting for it to sunset. 

Highlights of her previously stated plans:

• Raising corporate taxes 66% to a marginal rate of 35%
• Pushing the top income tax rate to 39.6%.
• Taxing capital gains and dividends at ordinary income tax rates.

She would also give huge tax credits to middle- and low-income families that are estimated to cost the federal government more than $2 trillion over the next decade. 

Finally, she has in the past proposed “Medicare for All,” one of the most costly policies ever proposed at roughly $3 trillion annually.  Harris suggested a surtax of 4% on all incomes above $100,000 to pay for it.

The effects on a successful small business taxpayer

To look at the effect of who’s in the White House for the next four years, let’s examine what a sample successful small businessperson’s tax return might look for the exact same amounts of income this year versus in 2026, when the bulk of the 2017 Trump tax cuts expire, under both Trump’s and Harris’s stated or affirmed tax plans.

This analysis focuses on a successful small businessperson who is reporting combined income from all sources of just under $750,000.  The numbers in the example are drawn from an actual 2023 return and anonymized.  We can assume the same nominal income from all categories for 2026.

IRS data suggest that about 1% of all taxpayers reported more than $500,000 in income, so with roughly 167 million taxpayers, there would be roughly 1.67 million taxpayers whose returns might look like this — or worse.

Conclusions

What the sample data and calculations suggest is that the hammer will come down hard on high-income taxpayers if Kamala Harris is elected president and Congress doesn’t have enough votes to override her likely vetoes of any legislation that perpetuated the 2017 Trump tax cut. 

A taxpayer making $750,000 with relatively straightforward deductions and business investments could see his tax bill leap from about $150,000 under a Trump administration’s stated policies to $217,000 under a Harris administration’s proposed and inferred policies. 

That’s an increase of almost 45% in total tax dollars paid. 

That painful outcome for the successful taxpayer under Harris would largely be a result of two factors: a reversion to pre-2017 top marginal tax rates and the removal of the Qualified Business Income Deduction. 

And all that is before considering that the Biden/Harris administration let a budget footnote slip that indicated that it would seek a gigantic doubling of the capital gains tax. 

Our national tax policy and how it affects successful economic contributors will swing wildly on the hinge of this November’s election.  High earners will need to prepare for the possibility that the tax door may hit them square in the wallet. 

Bruce Willey is the founder of American Tax & Business Planning LLC.

Image via Pixabay.