Both chambers of Congress are narrowly divided right now, and presidential polls are volatile but still close. Anything is possible in November.

Last week we took a broad look at the potential impacts of an election outcome that puts Republicans in control of Washington as the White House and Congress prepare to address the expiration of major tax reductions in the Tax Cuts and Jobs Act (TCJA). 

Here, we train that same analytical eye on the opposite possibility: a sweep where Democrats maintain control of the White House and Senate, and take control of the House from the Republicans. Of the three potential election outcomes — a GOP sweep, a Democratic sweep, or divided government — this is perhaps the most likely scenario to unleash a wave of pent-up tax reform priorities and ambitious policy proposals from the administration and Congress, tempered perhaps only by the size of the majorities in the House and Senate.

On the TCJA, President Biden's default position is to not raise taxes on individuals earning less than $400,000, which is laid out in the current draft of the Democratic party platform. This would presumably translate into an across-the-board extension of the individual rate cuts in the TCJA for those earning less than $400,000 including the 20 percent deduction under section 199A for the qualified business income of passthroughs. It's less clear how Democrats would address the expiring state and local tax (SALT) deduction cap. In any case, Democrats also want to raise the top individual rate to 39.6 percent.

Democrats have bigger plans to go on offense on tax policy beyond the TCJA. President Biden's game plan for tax reform is fleshed out in his annual budget. Much of it would resurrect the individual and corporate tax increases tossed aside during the 2021 effort to enact the Build Back Better Act (BBBA). Democrats want to raise the corporate tax rate from 21 percent to 28 percent, increase the corporate alternative minimum tax (CAMT) rate from 15 percent to 21 percent, and quadruple the one percent excise tax on stock buybacks.

A Democratic sweep would also greenlight an effort to fully adopt the legislative changes needed to comply with the Organisation for Economic Cooperation and Development's (OECD) Pillar 2 global minimum tax, including raising the rate on global intangible low-taxed income (GILTI), implementing country-by-country calculation of GILTI liability, and adopting an undertaxed profits rule (UTPR). Whether the existing proposals to alter the GILTI framework (also included in the ill-fated BBBA) will gain traction a second time around remains to be seen. But with further advancement and widespread adoption of the Pillar Two framework worldwide, the pressure to determine how best to legislate compliant domestic rules will be more acute, not less, as U.S. multinationals will face real burdens from other countries' imposition of the rules.

Another major proposal in the Greenbook is the repeal of the foreign-derived intangible income (FDII) deduction on the assertion that the revenue raised from its repeal could be used to incentivize research and development more directly and effectively, though no specific proposals have been publicized.

In the Senate, Finance Committee Chairman Ron Wyden (D-OR) has been articulating many of his own international proposals over the past three years. He's also likely to assemble a menu of potential revenue increases for lawmakers to consider in crafting a tax reform, a tactic he used during the 2021 tax debate.

As we saw in 2021, Democrats took a big swing at individual and corporate tax increases in crafting the BBBA, but given the need to find consensus with narrow majorities (particularly in the Senate), they had to settle for base hits like the CAMT and stock buyback tax in its successor bill, the Inflation Reduction Act (IRA). In other words, the size and scope of tax reform is defined not just by who controls Washington but by how much. When the vice president is on call to break tie votes and any one Senator can collapse the whole process, ambition tends to get tempered by political reality.

Next week, we'll conclude with a look at the potential impact of divided government, where the next president faces an opposing majority in one or both chambers of Congress. #TaxTake

In the News

Jorge commented in Bloomberg Tax on the newly proposed reporting requirements for IRS Form 6765 (Credit for Increasing Research Activities), used by businesses to claim the R&D tax credit: "It really created some significant carve-outs for small businesses [and] reduction of burdens."

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