Biden proposes higher corporate tax rate, 20% billionaire minimum tax

By Paul Bonner

President Joe Biden's administration released its $6 trillion budget Monday for the federal government's 2023 fiscal year, which begins October 2022.

Also on Monday, Treasury released its general explanations of the budget's revenue proposals, known as the Greenbook.

Revenue provisions in the proposed budget prominently include what an administration fact sheet calls a new billionaire minimum income tax of 20% on both realized and unrealized gains and other income of the nation's wealthiest individuals. The budget also would increase the corporate tax rate from the current 21% to 28% and institute measures supporting the United States' participation in a global minimum tax.

Billionaire tax

The billionaire tax would apply on the basis of net worth: Households worth more than $100 million would pay 20% on their "full income," which consists of "standard taxable income plus unrealized income," according to the fact sheet. Those already paying more by that measure would not owe additional tax. An initial "top-up payment" on unrealized income could be spread over nine tax years, and any subsequently required top-ups over five years.

The fact sheet calls the proposal a "prepayment of tax obligations," apparently meaning that taxpayers would not pay tax on gains a second time when they realize them.

According to the fact sheet, the billionaire minimum tax would be imposed on only 0.01% of American households, and over half the revenue it raised would come from households with more than a $1 billion net worth. According to a table of projected revenue effects, it would reduce projected federal budget deficits by a cumulative $1.4 trillion in fiscal years 2023 through 2032.

As the fact sheet noted, under current law, all taxpayers' unrealized income generally remains untaxed until a recognition event occurs, such as when an asset that has appreciated in value is sold or otherwise disposed of (or, if it has depreciated, results in a loss).

The Greenbook also proposes to tax long-term capital income and qualified dividends at ordinary-income rates for taxpayers with taxable income of more than $1 million, rather than the current rates topping out at 20%. It would also treat transfers of appreciated property by gift or on death as realization events, as opposed to the current step-up in basis to fair market value that most assets receive at the death of a decedent.

Currently, the fact sheet states, in a typical year, billionaires pay 8% of their total realized and unrealized income in taxes. The budget's initial "message of the president" asserts that, under the budget, no one earning less than $400,000 would pay more in taxes than now.

In addition, the budget proposes to restore the top marginal income tax rates for individuals to 39.6%, as it was before its reduction in 2018 to the current 37%, by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97.

Partnership provisions

The Greenbook describes a proposal to tax carried interests as ordinary income. Another provision would prevent basis-shifting by related parties through partnerships, and yet another would limit a partner's deduction in certain syndicated conservation easement transactions.

Estate and gift tax

The budget would modify estate and gift taxation by requiring the remainder interest in a grantor retained annuity trust (GRAT) at the time the interest is created to have a minimum value for gift tax purposes equal to the greater of 25% of the value of the assets transferred to the GRAT or $500,000. Another provision would limit the number of generations to which a generation-skipping transfer exemption may apply. Still another provision would limit the use of donor-advised funds to avoid the payout requirement of a private foundation.

IRS funding

The budget would provide a total of $14.1 billion in funding for the IRS, an increase of $2.2 billion, or 18% above the 2021 enacted level, with funding specifically earmarked for the Service's Taxpayer Experience initiative and improving its taxpayer services. It would provide $310 million for the IRS's business systems modernization effort, 39% above the 2021 enacted level, to "accelerate the development of new digital tools to enable better communication between taxpayers and the IRS."

Other IRS funding priorities include robust tax enforcement, particularly of high-income and corporate returns. The Greenbook describes expanding the IRS's authority to require electronic filing of information  returns filed by taxpayers reporting large amounts or by "complex business entities."

Energy provisions

A number of budget line items concern energy, mostly by curtailing preferential provisions for fossil fuels, including:

  • Repealing the enhanced oil recovery credit;
  • Repealing the deduction for costs paid or incurred for any tertiary injectant used as part of a tertiary recovery method;
  • Repealing the credit for oil and gas produced from marginal wells;
  • Repealing expensing of intangible drilling costs;
  • Repealing expensing of mine exploration and development costs; and
  • Repealing the exemption from the corporate income tax for fossil fuel publicly traded partnerships.

Other provisions

The budget and Greenbook also would:

  • Make the adoption tax credit refundable and allow certain guardianship arrangements to qualify;
  • Adopt an "undertaxed profits rule, which would replace the current Sec. 59A base erosion anti-abuse tax (BEAT) to better align U.S. tax policy with international tax policy and the Pillar 2 rules of the Organisation for Economic Co-operation and Development/G20 framework on base erosion and profit shifting";
  • Provide a tax credit that would would create a new general business credit equal to 10% of the eligible expenses paid or incurred in connection with reducing or eliminating a trade or business or line of business currently conducted outside the United States and starting up, expanding, or otherwise moving it to the United States, to the extent it increases U.S. jobs;
  • Remove tax deductions for transferring jobs overseas;
  • Conform the definition of "control" in Sec. 368(c) with the corporate affiliation test under Sec. 1504(a)(2);
  • Expand access to retroactive qualified electing fund elections under the passive foreign investment company (PFIC) rules of Sec. 1295(b)(2); and
  • Expand the definition of a foreign business entity for purposes of information reporting under Sec. 6038 to include taxable units.

The budget would also support housing and urban development by making the new markets tax credit permanent and allowing selective basis boosting for bond-financed low-income housing credit products.

The tax provisions, like the entire budget and Greenbook, would require congressional enactment to become law.

— To comment on this article or to suggest an idea for another article, contact Paul Bonner at paul.bonner@aicpa-cima.com.

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