In his first 100 days as president, Joe Biden has proposed more than a dozen significant changes to the U.S. taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code that would raise upwards of $3 trillion in revenue and reduce incentives to invest, save, and work in the United States. While proposing ways to pay for new spending and for expanded refundable tax creditA refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit. s is laudable, the Biden administration has chosen to pursue inefficient tax increases that would undermine economic growth and reduce U.S. competitiveness.
After signing the $1.9 trillion American Rescue Plan into law, Biden has proposed two additional multi-trillion-dollar spending proposals—the $2.65 trillion American Jobs Plan and the $1.8 trillion American Families Plan—to be partially financed by tax increases on corporations, higher-income households, and pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. es. Biden’s plans also include expanded tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s for preferred business activities and for lower- and middle-income households.
Under Biden’s proposals, the United States would return to the top of the global charts for its top statutory tax rate on corporate income and top marginal tax rate on capital gains and dividends. Significant portions of the income in estates would face a double tax, and the U.S. would become an outlier in its tax treatment of foreign earnings of multinational corporations. Such policies depart from traditional, and more efficient, funding sources for public infrastructure investments and come with significant trade-offs in terms of competitiveness, American output, and American incomes.
The American Jobs Plan (AJP) would fund infrastructure investments and increased spending on other priorities by increasing the tax burden on domestic and foreign earnings of corporations. It would:
- Raise the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate from 21 percent to 28 percent.
- Raise the tax on Global Intangible Low Tax Income (GILTI) to 21 percent, calculate it on a country-by-country basis, and eliminate the exemption of a 10 percent return on tangible investment abroad (QBAI).
- Impose a 15 percent minimum tax on corporate book income, which would be levied on a firm’s financial profits instead of taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. for firms with revenue over $100 million.
- Repeal the Foreign-Derived Intangible Income (FDII)Foreign Derived Intangible Income (FDII) is a special category of earnings that come from the sale of products related to intellectual property (IP). If a U.S. company holds IP in the U.S., such as patents or trademarks, and has sales to foreign customers based on that IP, the profits from those sales face a lower tax rate. deduction, which incentivizes firms to move intellectual property (IP) into the U.S.
- Provide a tax credit for certain onshoring activity and deny expense deductions on jobs that were offshored.
- Increase corporate tax enforcement.
- Eliminate certain deductions and credits for the fossil fuel industry.
- Expand and restructure certain green energy tax credits.
The American Families Plan (AFP) would fund $1.8 trillion of increased spending on educational and childcare-related policies by increasing the tax burden on high-income individuals and pass-through businesses. It would:
- Raise the top marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. on individuals to 39.6 percent.
- Apply ordinary income tax rates, including the proposed 39.6 percent rate, to capital gains income of individuals with more than $1 million in taxable income.
- Tax unrealized capital gains at death with a $1 million exemption for single filers and $2 million exemption for joint filers, with additional exemptions for certain types of assets.
- Apply the 3.8 percent net investment income tax to all income above $400,000, including active pass-through income.
- Make permanent the 2017 tax law’s 461(I) limitation on pass-through businesses’ losses above $250,000 for single filers and $500,000 for joint filers.
- Limit 1031 Like-Kind Exchange deferral for gains above $500,000.
- Tax carried interest as ordinary income.
- Increase individual tax enforcement and enact new reporting requirements for financial institutions.
The American Rescue Plan (ARP) enacted one-year expansions of three refundable tax credits: the Child Tax Credit (CTC)The federal child tax credit (CTC) is a partially refundable credit that allows low- and moderate-income families to reduce their tax liability dollar-for-dollar by up to ,000 for each qualifying child. The credit phases out depending on the modified adjusted gross income amounts for single filers or joint filers. , the Earned Income Tax Credit (EITC)The Earned Income Tax Credit (EITC) is a refundable tax credit targeted at low-income working families. The credit offsets tax liability, the total amount of tax debt owed by an individual, corporation, or other entity to a taxing authority like the Internal Revenue Service (IRS), and can even generate a refund, with earned income credit amounts calculated on the basis of income and number of children. , and the Child and Dependent Care Tax Credit (CDCTC). The proposed American Families Plan would extend and make permanent the American Rescue Plan’s expansions. It would:
- Extend the enhanced Child Tax Credit of $3,600 for children under 6 and $3,000 for children age 6 through 17 through 2025.
- Make permanent full refundability of the Child Tax Credit, eliminating the income phase-in of the credit.
- Make permanent the near tripling of the Earned Income Tax Credit (EITC) for workers without qualifying children, including doubled phase-in and phaseout rates and higher phase-in and phaseout income levels.
- Make permanent the expanded Child and Dependent Care Tax Credit (CDCTC), which covers up to 50 percent of qualifying childcare expenses up to $4,000 for one child and $8,000 for two or more children.
The first 100 days of the Biden administration have witnessed proposals that would dramatically increase the burden of federal taxes by raising marginal tax rates on capital and labor. The current approach would increase the cost of investing, saving, and working in the United States. Relying on relatively inefficient forms of taxes to fund increased federal spending means more economic harm per dollar of revenue raised than alternative forms of funding, potentially undercutting benefits of public investments and creating a headwind to the economic recovery.
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