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Billionaire tax out, corporate minimum tax in: Where the White House landed on tax plans

Administration officials say the plan would raise $2 trillion over 10 years to pay for climate and social programs

President Biden speaks in the East Room of the White House on Oct. 28. (Tom Brenner/Bloomberg News)

White House officials released a plan Thursday that they say would raise approximately $2 trillion in new revenue over 10 years to pay for their Build Back Better spending package, the result of months of tense negotiations with Congress over sweeping new tax measures.

The administration’s proposals, which still must be approved by Congress, include eight key policies aimed at raising revenue primarily from the wealthy and corporations — while jettisoning other ideas embraced by congressional Democrats and the administration itself over the course of negotiations.

The biggest sources of revenue to pay for the climate and social spending package include a major investment in the IRS to crack down on tax evasion; a new minimum tax on large corporations; and an overhaul of the international tax system faced by multinational corporations.

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But the plan leaves out many measures sought by the administration more aggressively targeting the rich, as well as key parts of President Biden’s 2020 campaign pledge to roll back the 2017 Republican tax cuts. For instance, the new framework leaves out Biden’s proposed higher tax rates on corporations, wealthy individuals and millionaire investors. It leaves out new proposed IRS bank reporting requirements, which set off a firestorm among conservatives, while also rejecting a billionaire tax on the wealthiest 700 Americans that proponents say would have reduced economic inequality.

While the plan leaves intact many of the specific measures from the 2017 tax cuts, economists say it would amount to effectively reversing the impact of President Donald Trump’s signature legislation by raising taxes on the same groups that greatly benefited from the GOP bill. Aside from the 2017 tax act, it would amount to among the biggest changes to the nation’s tax code in decades.

“This package takes limited steps in the right direction to pay for the spending programs the president is pursuing. This is real money,” said Steve Rosenthal, senior fellow at the Tax Policy Center, a nonpartisan think tank. “But the biggest steps — raising tax rates on corporations; tackling the wealthy amassing fortunes while paying little tax over their lifetimes — are not here.”

President Biden on Oct. 28 said that the White House had reached an agreement on a reconciliation package framework with congressional Democrats. (Video: The Washington Post)

The Biden administration has claimed the revenue changes it is putting forward will raise close to $2 trillion, but the nonpartisan Congressional Budget Office may produce different estimates. Details on many parts of the White House’s budget math remain unclear, and further negotiations may change how the tax code is redesigned.

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Below is a rundown of six of the biggest proposed tax changes in the White House’s new plan.

Major enforcement increases at IRS — $400 billion. The single biggest source of new revenue in the administration’s plan consists of massively beefing up enforcement at the IRS to close the “tax gap” — the difference between what is owed to the IRS in taxes and what is actually collected.

The IRS’s budget fell by 20 percent from 2010 and 2020 as the GOP successfully sought to curtail the agency, leading thousands of auditor and other tax collection jobs to be shed. Former IRS commissioner Charles Rossotti and current Treasury official Natasha Sarin have said the tax agency could raise as much as $1.4 trillion in additional tax revenue with better data, technology and personnel, while other research has found the richest 1 percent of Americans underreport more than one-fifth of their actual income.

The administration has pledged to reverse that trend with an approximately $80 billion infusion for the IRS — a massive increase for an agency with a $12 billion budget. That funding would help hire new agents, modernize the IRS’s technology and improve taxpayer service, among other changes.

But challenges abound. The administration initially said it would raise more than $700 billion from its IRS enforcement proposal, but that number was coupled with new reporting requirements likely essential to help the IRS know precisely how to use its new enforcement muscle. Those bank reporting requirements appear to have fallen out of the bill, after Treasury’s initial plan sparked a massive backlash among Republicans and conservatives.

The CBO has also said boosting IRS funding by $80 billion would raise roughly $200 billion in new revenue. It is unclear why the administration believes it will raise $400 billion, and an administration spokesman did not immediately return a request for clarity.

“It’s not immediately obvious how they get to $400 billion,” said Daniel Hemel, a tax law professor at the University of Chicago. “We need to see more details to assess whether this works or not.”

Overhaul of international tax code — $350 billion. Because of opposition from Sen. Kyrsten Sinema (D-Ariz.), the White House was forced to abandon its plans to raise the U.S. domestic corporate tax rate and the top marginal income tax rate paid by Americans earning over $500,000 per year.

One tax rate increase that survived, however, is the White House’s plan to raise the rate that U.S. multinational companies pay on their foreign profits, as part of the administration’s broader proposed overhaul of taxing those businesses.

The complicated change could prove crucial to the White House’s revenue plans. Under current law, U.S. multinationals operating abroad must pay an additional tax to the Treasury on foreign profits if they are operating in countries with low tax rates. That tax is avoided by many firms, because they can currently combine their tax rates in high-tax countries with their tax rates in the tax haven. For instance, U.S. companies operating in the Cayman Islands are theoretically supposed to pay the minimum tax. But if they also pay taxes in Germany, a high-tax country, they can effectively zero out that global minimum tax obligation.

The White House plan changes this in two ways — both by raising the new global minimum tax to a higher rate of 15 percent, and by moving to a “country-by-country” system to prevent a company from “blending” its global tax rate. At the same time, Treasury Secretary Janet L. Yellen is seeking a global tax deal in which most countries would agree to a new global minimum tax floor, which proponents say would discourage firms from relocating abroad despite the higher U.S. rate.

If successful, the measure could raise hundreds of billions of dollars in new revenue while encouraging firms to relocate their operations to the United States. Failure, on the other hand, could deplete the U.S. tax base with corporate defections abroad.

“You’re increasing the tax burden of being a U.S. multinational corporation, so the concern is corporations will shift their headquarters overseas,” said Kyle Pomerleau, a tax expert at the American Enterprise Institute, a conservative-leaning think tank. “But that’s what the administration has been trying to address with the international tax agreement.”

15 percent corporate minimum tax — $325 billion. Since the 2017 GOP tax cut, the number of Fortune 500 companies paying $0 in federal income taxes has continued to grow. One analysis found 55 corporations paid no federal income tax on more than $40 billion in profits last year, including brand names such as Nike and FedEx. The White House’s plan would aim to put an end to that practice, establishing a new “minimum tax” of 15 percent on all U.S. corporations earning more than $1 billion a year in profits. The minimum tax would be assessed on “book” income reported to shareholders, rather than on profits reported to the IRS.

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Political support for such a corporate minimum tax appears to be high, with Biden repeatedly blasting companies paying nothing and even Trump administration officials at one point exploring a minimum tax. But tax experts say the minimum tax may complicate the administration’s other goals. Corporations are able to achieve $0 tax payments because they use tax deductions authorized by Congress — such as for research and development, or green energy credits — to zero out their tax liabilities.

Democrats have said their minimum tax will exempt the legislation’s new clean-energy credits for firms, but some experts have warned the tax plan could still undercut the effectiveness of their legislation. Gregory Wetstone, president and CEO of the American Council on Renewable Energy, expressed concern in a statement on Tuesday that the minimum tax could diminish the effectiveness of the bill’s climate plank, by preventing corporations from offsetting the taxes on “depreciating” clean energy investments.

A new tax on wealthy businesses — $250 billion. To pay for the Affordable Care Act, President Barack Obama approved a new 3.8 percent tax on the investment income of rich people and other groups. Biden is proposing to broaden the tax to owners of businesses formed as “pass-through” entities as well. That would raise substantial sums of money from wealthy business owners, without violating Sinema’s opposition to corporate tax rate hikes. The tax is expected to apply only to owners of large pass-through firms.

New surtax on those earning above $10 million — $230 billion. Biden’s latest tax proposal includes a version of a plan first introduced by House Democrats to add a new 5 percent “surcharge” on annual income above $10 million, as well as an additional 3 percent surcharge on income above $25 million.

The plan would raise hundreds of billions of dollars from the wealthiest 0.002 percent of Americans, but it will do less to tackle concentrated wealth inequality than the “billionaire tax” pushed by Senate Finance Chairman Ron Wyden (D-Ore.). That plan — which faced a potential legal challenge in front of the Supreme Court — would have raised hundreds of billions of dollars from the 700 wealthiest Americans.

“With the surtax, there’s no question of its constitutionality. It seems much safer,” said Dean Baker, a liberal economist. “But it will do less about inequality, because this is not a hit to the richest people whereas the other one would have been.”

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Taxing stock buybacks — $125 billion. The Build Back Better plan also includes a new tax on large corporations that buy shares of their own companies, a move that increases the company’s stock price to the benefit of its shareholders. The intent of the provision is for these “stock buybacks” to be taxed the same way as corporate dividends — the traditional method for corporations to give money back to their investors. The administration has been light on details but said the stock buyback plan would consist of a 1 percent surcharge.

Conservatives are expected to fiercely resist these and the rest of the Biden tax proposals. “Stock buybacks can facilitate more investments if you give it back to investors, they reinvest it,” said Erica York, a tax expert at the Tax Foundation, a conservative-leaning think tank. “This is not going to help workers or help investment.”

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