Tax hikes on wealthy individuals and corporations to pay for Biden agenda approved by the House Panel
The biggest set of U.S. tax increases in a generation took a major step forward on September, 15th 2021 with approval by the House Ways and Means Committee of $2.1 trillion in new levies mostly focused on corporations and the wealthy. On Monday, September 13th, 2021 The House Ways and Means Committee released its plan to raise taxes on upper-income Americans in the U.S. Capitol. The New York Times and the Wall Street Journal reported that Senior House Democrats released a draft proposal that could raise as much as $2.9 trillion to pay for most of President Biden’s sweeping expansion of the social safety net programs (aimed at expanding access to paid family leave, education and healthcare, and combating climate change) by increasing a bevy of different taxes on wealthy corporations, investors and high-income business owners.
Some of the highlights include:
House Democrats outlined tax increases they aim to use to offset up to $3.5 trillion in spending on the social safety net and climate policy.
The proposal includes top corporate and individual tax rates of 26.5% and 39.6%, respectively.
Corporations, wealthy focus of $2.1 trillion boost in levies
Differences remain with Senate, and SALT change still pending
The plan calls for top corporate and individual tax rates of 26.5% and 39.6%, respectively, according to a summary released by the tax-writing Ways and Means Committee. The proposal includes a 3% surcharge on individual income above $5 million and a capital gains tax of 25%. According to reporting from CNBC, It is not totally certain just how much the tax increases would raise and if the new revenue would offset the full investment in social programs. Democrats could ultimately cut the legislation’s price tag as centrists balk at a $3.5 trillion total.
The NYT’s article further explained that the revenue provisions outlined in a document obtained by The New York Times and reported earlier by The Washington Post “fall short of fully financing the entire package Democrats are cobbling together, despite promises by Mr. Biden and Democratic leaders that it would be fully paid for in order to assuage concerns from moderates in their caucus.”
It is pretty clear that Democrats have very few votes to spare in the House and none in the Senate, and moderate Democrats, such as Sen. Joe Manchin (W.Va.), have called for a narrower proposal with smaller tax hikes than the ones outlined Monday. Republicans are expected to mount unanimous opposition to the proposal, which would reverse many of the GOP tax cuts from 2017.
Democrats plan a committee vote this week on the House Ways and Means tax proposals, which would generate more than $2 trillion toward expanding Medicare, increasing renewable-energy tax breaks, and creating a national paid-leave program, among other items.
Current and proposed tax rates
If you look at the graph listed above, the rate structure provides for a rate of 18 percent on the first $400,000 of income; 21 percent on income up to $5 million, and a rate of 26.5% on income thereafter. Currently, it doesn't include a separate 3.8% tax on top earners and a separate proposed Ways and Means Committee 3% surtax above $5 million.
The NYT’s article also reported that to help generate what the draft’s authors estimate could be $900 billion in taxes on corporations, Democrats suggest additional changes to the tax code that are intended to bolster a global push to set minimum taxes for corporate income and crackdown on multi-national companies shifting profits to tax havens, a process that the administration is championing abroad.
Individual Tax Increases
The House Democrats are also pondering an increase to the top marginal income tax rate to 39.6 percent from 37 percent for households that report taxable income over $450,000 and for unmarried individuals who report more than $400,000. For people who make more than $5 million, the proposal would impose a 3 percent surtax, which is expected to raise $127 billion.
The WSJ reported that the committee also made up the money elsewhere with changes to the estate tax and several tax increases that would affect closely held companies whose owners pay those business taxes on their individual tax returns. The result is that passive investors who borrow against their assets and don’t sell would see relatively little change, while active business owners could see sharp increases in their marginal tax rates.
The top tax rate on dividends and long-term capital gains (the proceeds from selling an asset like a home, a boat or stocks) would rise to 25% from 20% and would apply when income reaches $400,000 for individuals and $450,000 for married couples.
Another WSJ article reported that “when combined with an existing 3.8% investment-income tax and the surtax, the new top rate on capital gains could be as high as 31.8%.”
The capital-gains tax increase would be effective as of Monday, with special transition rules for deals with binding contracts that haven’t been completed yet, according to the summary released by the committee.
IRC Section 1202 Qualified Small Business Stock
According to reporting from Accounting Today, also embedded in the plan: A call to axe the ability of taxpayers making $400,000 or more to cash in their QSBS 100% free of capital gains tax. Instead, such people would avoid tax on only 50% of their stock. They would owe the proposed higher capital gains rate of 28.8%, which includes the 3.8% Obamacare surcharge, on the rest. The current rate, with the surcharge, is 23.8%. This proposed restriction on QSBS would starve innovation, as many have income above the proposed cutoffs. The reason is because investing capital into startups is inherently risky, and taking away half of the tax benefit might discourage investors.
Limitation on Qualified Business Income
Pass-through entity businesses (partnerships and S corporations) which don’t pay the corporate tax but instead pay taxes on their owners’ individual returns, would be affected in several ways. They would face caps on a special deduction created in 2017, with individuals limited to a $400,000 deduction and married couples limited to $500,000.
Those businesses would also no longer be able to avoid paying a 3.8% tax on their active business income. Currently, taxes of that amount apply to wages, self-employment income, and passive income but not other types of income.
Businesses would face a series of tax increases if these proposals were signed into law. The top tax rate would rise to 26.5% from 21%. That is below the 28% that the Biden administration proposed but above the 25% that some Senate Democrats are seeking. Smaller companies would get tax brackets with lower rates.
International Tax Changes
Large corporations would also face new limits on interest deductions and higher taxes on their foreign income. Notably, the minimum tax on U.S. companies’ foreign income would go up from 10.5% to 16.6%, below the 21% the administration had sought. And companies would be able to use more of their foreign tax credits, softening the blow of that higher minimum tax.
The WSJ’s reporting explained that companies would be able to exclude an amount equal to 5% of their foreign tangible assets from that minimum tax, down from the current 10% but below the administration’s proposal to eliminate that benefit. The minimum tax would be calculated for each foreign country, as the administration has proposed.
Estate Tax Changes
The House Democratic committee also included a series of miscellaneous tax changes. It would reverse the doubling of the estate tax exemption that Congress created in 2017. Instead of that increase expiring at the end of 2025, it would end after December 31st, 2021. The plan would also limit several estate-planning techniques, including some uses of grantor trusts and asset transfers with discounted values.
High Income Retirement Accounts
High-income people with tax-preferred retirement accounts totaling $10 million or more would no longer be able to contribute to those accounts and would face sharply higher mandatory distributions once the account balances reached that level. The limit on contributions would only apply to single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation). In order to close these so-called “back-door” Roth IRA strategies, the bill eliminates Roth conversions for both IRAs and employer-sponsored plans for single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation). This provision applies to distributions, transfers, and contributions made in taxable years beginning after December 31, 2031. Furthermore, this section prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth regardless of income level, effective for distributions, transfers, and contributions made after December 31, 2021.
IRS Tax Enforcement Funding
The plan would invest nearly $79 billion over a decade in IRS tax enforcement to beef up tax revenue enforcement. That matches the administration plan, which would roughly double the size of the tax agency.
Drug Pricing Provisions & Cryptocurrency
The tax plan also outlines the possible inclusion of drug pricing provisions and changes in tax rules to “treat cryptocurrency the same as other financial instruments.”
The tax proposals may change before Democrats craft the final bill they hope to pass in coming weeks. The Ways and Means Committee will debate tax policy when it resumes its markup of the gigantic spending package this week. One final note by the NYT’s author is that the full committee still needs to release an advanced text of the legislation, and it is unclear if enough Democrats will embrace the package in the House and the Senate. In order to protect the economic package from a Republican filibuster and pass it with a simple majority, Democrats can spare only three votes in the House and must remain united in the Senate. We will be monitoring these potential tax law changes and updating you on any changes that happen.
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