The most important thing to know about the tax bill proposed by Richard Neal (D-MA) of the House Ways & Means Committee is that it is big. It’s really big. The Parliamentary Taxation Joint Committee has increased taxes on businesses and high-income households by about $ 2.1 trillion over a 10-year period due to a large-scale plan, and used about $ 1.2 trillion to reduce taxes mainly on low- and middle-income households. , Estimates to reserve the remaining $ 900 billion. To help pay for new domestic spending.
This is more modest than President Biden’s budget, which cuts taxes on low-income households by $ 1.1 trillion and raises taxes on businesses and the wealthy by about $ 3.6 trillion. But it’s still huge. Among many provisions, Neil looks like this:
• Re-tax multinationals (only four years after tax cuts and employment laws do the same).
-Significant tax increases for high-income households and businesses.
・ Increase the IRS enforcement budget.
• Deepen government support for families with children by extending the generous new provisions for refundable tax credits that Congress temporarily adopted earlier this year.
-Increase many tax subsidies for alternative energy.
Here are some hits and mistakes:
High income surcharge.. As Biden suggested, the Ways & Means draft will raise the highest rate to 39.6 percent. However, if the adjusted total income is $ 5 million or more, a new 3 percentage point additional tax will be levied. This seems to replace Biden’s broader plan to raise taxes on capital gains. But apart from this, Neil will launch a new 39.6% bracket for $ 450,000 for co-filers ($ 400,000 for singles). Adding another bracket starting at $ 5 million is … strange.
Capital gain. The bill raises the maximum capital gains rate from 20% to 25% (plus 3.8% net investment income tax). Neil reduced Biden’s plan to raise capital gains to the highest rate of return and abandoned the president’s plan to tax unrealized capital gains on death. It will encourage some investors to hold their assets until they die so that they can pass them on to their heirs tax-free.
Child tax deduction. The bill provides a permanent full refund of child tax credits under the US Relief Program. It will be a boon for very low income families. However, to make the cost look low, we will only extend ARP’s other credit expansions until 2025. This adds even more provision to the very long list of tax increasers, which technically expires every few years but is still updated many times.
Corporate tax rate. Biden wanted to raise the rate from 21 percent to 28 percent. Neil settled at a maximum tax rate of 26.5%, and lower taxable income companies had lower tax rates. But even his streamlined plans will raise about $ 540 billion in 10 years.
International taxation. The Ways & Means bill seems to be a more conservative version of Biden’s plan. It strengthens them overall, but retains some important provisions of TCJA. And it sets a minimum tax of 16.5% on world income. But how do these complex provisions work together?
Enforcement of IRS.. Biden couldn’t convince the Republicans to vote for the Senate infrastructure bill, so Democrats seem to squeeze it into social spending measures. Even if it gets there, the money is urgently needed by the IRS. Neil omitted Biden’s plan to request new information reports from banks and other financial institutions.
Pass-through deduction. TCJA has created a special 20% deduction for eligible income in pass-through businesses such as partnerships. Biden proposed to abolish tax cuts in the presidential election, but as a result, there was little or no economic benefit. But he took it off the budget. Neil will limit the interests of some high-income taxpayers. It’s better than nothing, but why not abolish it altogether?
Carry interest. The bill aims to strengthen the tax incentives that managers of private equity funds and other investment companies have enjoyed over the years. Most of their compensation is treated as capital gains rather than ordinary income and is therefore taxed at a much lower tax rate. The bill would require managers to earn more than $ 400,000 to hold their investments for five years instead of three to qualify for long-term capital gains tax rates. The average holding period for these assets is 6 years.
SALT cap.. A group of Democrats in the Blue States has vowed to oppose (and therefore kill) the social spending bill unless it rolls back the TCJA cap on state and local tax (SALT) deductions. But the Ways & Means bill is silent on this issue. Perhaps Democratic leaders are waiting to figure out how much money they need to spend on SALT reform before deciding what to do.
Tax simplification.. Legislators were at least providing idea lip services. However, this draft does not seem to get in the way because it complicates tax law. In part, the bill is full of thresholds and phasing out to keep Biden’s promise not to raise taxes on households under $ 400,000. Not to mention the new special interest tax deductions it creates. Tax credits for local newspapers to partially offset salaries? Really?
Neil’s draft is just the beginning of a months-long process. But like most big and ambitious suggestions, it’s a combination of hits and mistakes.