Massive Tax Changes of Up to $5.8 Trillion on the Horizon
Published: April, 2021
Submission: April, 2021
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It was only a matter of time – following the election of President Biden and Democratic majorities in both houses of Congress – before the Biden administration and legislative leaders would turn their attention to changing the tax code. While it is early in what promises to be a loud and lengthy legislative debate in Congress, tax proposals introduced by high-profile senators Elizabeth Warren (D-MA) and Bernie Sanders (I-VT) designed to raise $5.8 trillion of new tax revenue over the next 10 years are garnering considerable attention. For context, according to the Congressional Budget Office, for fiscal year 2019 federal government revenues totaled $3.5 trillion and outlays were $4.4 trillion. In addition, President Biden unveiled his $2 trillion infrastructure plan on March 31, including plans for helping cover the costs.
President Biden's Infrastructure Plan
President Biden released the details of his infrastructure proposal - officially dubbed the American Jobs Plan - this week. While the $2 trillion spending plan does not represent the totality of the administration's approach to dealing with taxes, it does offer some key insights into the administration's direction.
One of the biggest tools for paying for the infrastructure plan would be an increase in the corporate tax rate to 28 percent - up from the current rate of 21 percent. In addition, the President's plan would target offshoring by raising the global minimum tax for U.S. multinational corporations to 21 percent and calculate it on a country-by-country basis. Beyond that, the administration is expected to encourage other countries to adopt similar minimum corporate taxes to discourage corporations from shifting operations to find more favorable tax environments.
The infrastructure proposal includes a number of other tax-related items, including denying expense reductions related to offshoring, enacting a minimum tax on large corporations' book income and ramping up tax enforcement against large corporations, among others.
The Sanders Proposals
It's important to note that Biden's plan is not the only one in discussion. Some are even more aggressive - representing the more progressive wing of the Democratic Party.
Sen. Sanders, who now chairs the Senate Budget Committee, introduced two bills on March 25 that would increase taxes for corporations and high-net-worth individuals by an estimated $2.8 trillion over the next ten years. The first Sanders proposal would return the corporate tax rate to 35% from the current 21% rate to raise an estimated $1.3 trillion over ten years. The bill would also change the way multinationals are taxed and raise $1.02 trillion over 10 years and tighten rules on companies that move operations offshore to reduce their tax liabilities.
The second Sanders proposal focuses on high-net-worth individuals and families, and it would reduce the estate tax exemption to $3.5 million. The bill would also put a $1 million lifetime cap on gift tax exemption. Sanders also proposes raising the estate tax rate starting at 45% and increasing to 65% based on the size of the estate. The draft estate tax bill would raise and estimated $430 billion during the next decade.
The Warren Proposal
Sen. Warren’s proposed legislation, the Ultra-Millionaire Tax Act, would establish a new annual tax of 2% of household wealth above $50 million and a 1% surtax (3% tax overall) on the net worth of households and trusts above $1 billion. The bill would also impact households with earned income above $400,000 or for capital gains income above $1 million. Warren projects her proposal would raise as much as $3 trillion, and states that a wealth tax is popular among voters on both sides of the aisle. The Ultra-Millionaire Tax Act also includes a gigantic increase in IRS funding by an average of $10 billion per year for the next ten years to hire more auditors and tax collectors, upgrade computers and improve taxpayer service. This represents an 87% increase over the President’s FY2020 budget request of $11.472 billion.
The legislation introduced by Sanders and Warren and Biden's infrastructure proposal represent the initial skirmishes of what will be a long debate that will likely end in the budget reconciliation process next fall. And while these bills face long odds against passage in their current form, they begin to reveal where the new Democratic majority is headed with respect to tax changes.
Waller tax attorneys will be monitoring and reporting on developments to reshape the Internal Revenue Code and providing insight and analysis as tax legislation begins to take shape. We encourage you to visit this site regularly and sign up to receive tax reform alerts as they happen.
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