President Biden on Friday is set to unveil his first full budget along with Treasury’s Green Book, which will provide the first detailed look at key revenue proposals in the American Jobs Plan and American Families Plan.
We already know that Biden aims to raise the top individual income tax rate from 37 percent to 39.6 percent, tax capital gains as ordinary income for high earners, and increase the corporate income tax rate from 21 percent to 28 percent. But other aspects of the president’s tax plan are less clear, including effective dates for the various proposals.
Here are some questions to ask when you look at Biden’s tax plan:
Can Biden Stick to His $400,000 Pledge?
Much has been made of the president’s pledge to never raise taxes on those earning below $400,000 annually. The Green Book may shed light on how the administration expects to stick to that benchmark. When scoring the Biden campaign tax plan, TPC found that, on average, he would substantially increase taxes on high-income households while reducing taxes on those making about $330,000 or less. But experiences within income groups can differ, and judging the success of Biden’s pledge may depend on how he defines income.
What About TCJA Expirations?
During the campaign, Biden called for repealing those portions of the 2017 Tax Cuts and Jobs Act (TCJA) that benefit households making above $400,000. However, after 2025 changes to individual income tax rates, credits, and deductions impacting households at all levels of income will expire. This includes the much-talked-about $10,000 cap on state and local tax deductions, the deduction for pass-through business income, the TCJA’s expansion of the child tax credit, and the increased standard deduction.
Does Biden plan to repeal the high-income provisions before 2025, let them expire as scheduled after 2025, or something else?
Also, how would Biden treat some TCJA corporate tax provisions that are scheduled to change in the coming years? The ability of firms to immediately write off the cost of new investments is due to start to phase down after 2022, while the way firms deduct interest payments for R&D expenses will also start to change next year. What will Biden do about them?
How Much Revenue Will He Raise From Closing the Tax Gap?
The president wants to raise about $700 billion over the next decade from improved tax enforcement. The two key proposals: $80 billion in additional funding for the IRS and enhanced information reporting requirements for financial institutions.
As noted here previously, it may take some years for the IRS to show a significant return from added funding, since it will take time to acquire and ramp up new resources and personnel. Enhanced reporting may discourage tax evasion, but it’s important to get the details right to prevent those rules from becoming onerous and mistargeted.
More information on the administration’s tax gap plan will make it easier to assess how much revenue the proposal could generate.
How Will the Corporate Revenue Raisers Work?
We know what tax rates the Biden administration wants to impose on corporate earnings, but the upcoming budget may include more detail on how multinational firms would calculate their earnings. To prevent profit-shifting, Biden has called for a 15 percent minimum tax on a corporation’s “book income” reported to shareholders, but that may only apply to a few firms.
On the international front, Biden is proposing a global minimum tax and repealing two pieces of the TCJA’s corporate tax structure – the Base Erosion and Anti-abuse Tax (BEAT) and the Foreign Derived Intangible Income (FDII) tax break. Treasury can help fill in the blanks on other outstanding questions, like how the administration would implement its replacement for the BEAT and deny deductions on profits in countries without a strong minimum tax.
What About the Estate Tax?
Biden is also seeking to change the tax treatment of wealth that’s transferred after the taxpayer dies. For households that earn $1 million or more, he would tax capital gains as ordinary income. And for estates of more than $1 million, he’d tax unrealized gains when an asset is passed on to an heir, as if the asset had been sold. However, the White House already signaled it will include exceptions for family-owned businesses and farms.
But what about the estate tax? The Biden campaign called for restoring 2009 rules by lowering the exemption to $3.5 million from $11.7 million and raising the rate to 45 percent from 40 percent. Because of the interplay between the estate tax and Biden’s new tax on unrealized gains at death, we need details on both to know how the president wants to treat inheritances comprehensively.
Given how ambitious the Biden campaign’s tax proposals were, it’s no surprise that we don’t yet have line-item details on each provision. Let’s see if the budget and Green Book will fill in some of the gaps and better inform this important policy debate in the coming months.