On March 28, 2022, President Joe Biden released his FY 2023 Budget of the U.S. Government (the “Budget”).[1] In a statement regarding the Budget, President Biden stated the following:
My Administration is on track to reduce the federal deficit by more than $1.3 trillion this year . . . We spent less money than the last Administration and got better results: strong economic growth, which has increased revenues and allowed us to responsibly scale back emergency spending. My budget will continue that progress, further reducing the deficit by continuing to support the economic growth that has increased revenues and ensuring that billionaires and large corporations pay their fair share.[2]
Notably, President Biden’s pursuit of a $1.3 trillion reduction to the federal deficit and the support of “economic growth” are largely based on proposed changes to the current tax system—changes that will not just affect the millionaires and billionaires and multinational corporations. For a complete copy of President Biden’s FY 2023 Budget, click here. A high-level summary of the proposed tax changes is outlined below.
A “Fairer Tax System”
Under the title, “Putting the National on a Sound Fiscal and Economic Course,” the Budget states that the proposed investments will be “more than paid for through reforms that would create a fairer tax system.”[3] The three major reforms are reproduced below:
Proposes a New Minimum Tax on Billionaires. The tax code currently offers special treatment for the types of income that wealthy people enjoy. This special treatment, combined with sophisticated tax planning and giant loopholes, allows many of the very wealthiest people in the world to end up paying a lower tax rate on their full income than many middle-class households. To finally address this glaring problem, the Budget includes a 20 percent minimum tax on multi-millionaires and billionaires who so often pay indefensibly low tax rates. This minimum tax would apply only to the wealthiest 0.01 percent of households—those with more than $100 million—and over half the revenue would come from billionaires alone.
Ensures Corporations Pay Their Fair Share. The Budget also includes an increase to the rate that corporations pay in taxes on their profits. Corporations received an enormous tax break in 2017. While their profits have soared, their investment in the economy did not. Those tax breaks did not trickle down to workers or consumers. Instead of allowing some of the most profitable corporations in the world to avoid paying their fair share, the Budget would raise the corporate tax rate to 28 percent, still well below the 35 percent rate that prevailed for most of the last several decades. This increase is complemented by other changes to the corporate tax code that would incentivize job creation and investment in the United States and ensure that large corporations pay their fair share.
Prevents Multinational Corporations from Using Tax Havens to Game the System. For decades, American workers and taxpayers have paid the price for a tax system that has rewarded multinational corporations for shipping jobs and profits overseas. Last year, the Administration rallied more than 130 countries to agree to a global minimum tax that will ensure that profitable corporations pay their fair share and incentivizes U.S. multinationals to create jobs and invest in the United States. The Budget contains additional measures to ensure that multinationals operating in the United States cannot use tax havens to undercut the global minimum.[4]
The “Billionaire Minimum Income Tax” (“BMIT”) has certainly attracted much news coverage. Outside of the fact that the proposed income tax sets a mandatory minimum tax for one, albeit small, segment of U.S. taxpayers, the BMIT also incorporates the taxation of unrealized capital gains. The BMIT proposal begs several questions, including (1) whether the BMIT is supported by the Sixteenth Amendment, and (2) how the Internal Revenue Service (that is already operating with a hand tied behind its back) would administer the BMIT (e.g., valuing unrealized capital gains particularly related to non-public investments). Further, corporations will also feel the sting through a proposed increase to the corporate tax from 21% to 28%—a veritable “middle ground” between the 21% tax rate of the 2017 Tax Cuts and Jobs Act (“TCJA”) and the pre-TCJA tax rate of 35%.
Additional Tax Proposals
However, the proposed tax changes do not stop there. According to Table S-6, Mandatory and Receipt Proposals, the Budget envisions more changes, such as:
- Strengthening taxation of high-income taxpayers:
- Increasing the top marginal income tax rate for high earners (i.e., increasing the top individual tax bracket to 39.6%);
- Reforming the taxation of capital income;
- Modifying estate and gift taxation:
- Modifying income, estate, and gift tax rules for certain grantor trusts;
- Requiring consistent valuation of promissory notes;
- Improving tax administration for trusts and decedents’ estates;
- Limiting duration of generation-skipping transfer tax exemption;
- Closing loopholes:
- Taxing carried (profits) interests as ordinary income;
- Repealing deferral of gain from like-kind exchanges;
- Requiring 100 percent recapture of depreciation deductions as ordinary income for certain depreciable real property;
- Limiting a partner’s deduction in certain syndicated conservation easement transactions;
- Extending the period for assessment of tax for certain Qualified Opportunity Fund investors;
- Establishing an untaxed income account regime for certain small insurance companies;
- Expanding pro rata interest expense disallowance for business-owned life insurance;
- Correcting drafting errors in the taxation of insurance companies under the TCJA; and
- Defining the term “ultimate purchaser” for purposes of diesel fuel exportation.[5]
Investment in the Department of the Treasury
President Biden’s Budget also requests increased investment in the Treasury and Internal Revenue Service. Of note, the Budget states, in part, the following:
[T]he agency’s funding and staffing levels have not kept pace with its expanding scope. To ensure that taxpayers receive the highest quality customer service and that all Americans are treated fairly by the U.S. tax system, the Budget provides a total of $14.1 billion for the Internal Revenue Service (IRS), $2.2 billion, or 18 percent, above the 2021 enacted level. This includes an increase of $798 million to improve the taxpayer experience and expand customer service outreach to underserved communities and the taxpaying public at large. The Budget also provides $310 million for IRS Business Systems Modernization, which is 39 percent above the 2021 enacted level, to accelerate the development of new digital tools to enable better communication between taxpayers and the IRS. Increased funding for the IRS would also facilitate more effective oversight of high-income and corporate tax returns. . . .
The Budget provides $210 million for the Financial Crimes Enforcement Network, $83 million above the 2021 enacted level, to increase oversight of the financial sector, strengthen corporate accountability, and provide adequate support to law enforcement and investigative entities. . . .
The Budget provides $293 million for Treasury’s Departmental Offices, a 26-percent increase over the 2021 enacted level, to rebuild institutional capacity and strengthen the role of Treasury policy offices.[6]
Conclusion
The Budget certainly proposes multiple changes to the current federal tax system and enforcement agencies. While taxpayers (and tax practitioners) would generally benefit from increased investments in the Internal Revenue Service to help with administration, the proposed tax changes likely evoke polarizing viewpoints. At the end of the day, the Budget is a proposal and faces various hurdles in Congress, particularly in an election year.
[1] Budget of the U.S. Government (Fiscal Year 2023), The White House (Mar. 28, 2022), available at https://www.whitehouse.gov/wp-content/uploads/2022/03/budget_fy2023.pdf.
[2] Statement by President Joe Biden on the FY 2023 Budget, The White House (Mar. 28, 2022), available at https://www.whitehouse.gov/briefing-room/statements-releases/2022/03/28/statement-by-president-joe-biden-on-the-fy-2023-budget/.
[3] Budget, at p. 35.
[4] Budget, at pp. 35-36.
[5] Budget, at p. 132.
[6] Budget, at pp. 97-98.
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