Update 523 — Taxes on the Table:
Whether, How to Pay for New Plans
This week, we will look at tax policy and proposals under discussion from the administration and in Congress. Today, we look at the fiscal side of the equation, how to finance spending going forward. On Friday, we will examine tax equity: what is a “fair share,” what can restore progressivity to a tax system yielding increasingly regressive, inequitable outcomes?
Meanwhile, the sad news came Monday that Walter Mondale, Vice President under Jimmy Carter and Democratic nominee for President in 1984, had died. He represented Minnesota in the Senate during the 1960s and 70s. A public servant noted for integrity, prolific and landmark legislator, and champion of the least powerful, he will be missed.
Also in Minneapolis yesterday, the jury’s guilty verdicts rendered in the Chauvin trial for the death of George Floyd mean that, in the words of Floyd’s brother, for now, “we can all now breathe again.”
With ambitious plans afoot for infrastructure and other federal domestic investment over the coming years, the question of cost arises. The $1.9 trillion American Rescue Plan enacted in March was deficit-financed for the most part, but the Biden administration has indicated that the American Jobs Plan will come with tax-financed offsets. Below, we’ll explore some big-ticket tax items that are currently on the table as well as others under discussion.
The federal revenue derived from taxes on corporations has shrunk from 23.2 percent in 1960 to 7.1 percent today. At a time when capital markets routinely break all-time valuation records, corporate America rightly expects a tax policy correction. Because firms benefit from and depend on national infrastructure as much as individuals do, the Biden administration is placing a special focus on corporate tax reform in order to raise revenue for the American Jobs Plan.
- Top Corporate Rate: The 2017 Trump tax cuts lowered the corporate rate from 35 to 21 percent, at a cost of $1.7 trillion over ten years. Such a deep and costly cut begs for reversal. The administration proposes a hike to 28 percent, restoring about half of the 2017 rate cut, but restoring none of the deductions available to firms before then.
On the Hill, Democrats have indicated broad assent to a 28 percent top corporate tax rate. But last week, Sen. Joe Manchin suggested a preference for a 25 percent rate, giving back 40 percent of the Biden proposal at a cost of $380 billion over ten years. A possible compromise could be reached by starting out with the Manchin rate and phasing into the Biden rate when the economic recovery demonstrates durability — a large-scale automatic stabilizer.
- Corporate Overseas Earnings: In a speech on April 5, Treasury Secretary Janet Yellen laid out an ambitious plan to raise the U.S. minimum international tax rate (the global intangible low-taxed income rate) on corporate earnings from 10.5 percent to 21 percent. Yellen has also set her sights on negotiating a global minimum tax worldwide, leading America’s charge with the OECD and G20 to stem the tax-rate race to the bottom among major industrial nations. Should Yellen succeed in raising the international tax rate, the new minimum would raise $692 billion over the next decade and likely more if other countries enact a similar tax.
- Corporate Minimum Tax: With the largest 1,500 corporations paying an effective tax rate of 7.8 percent, several Democrats have considered creating a minimum tax on net financial profits. On the campaign trail, President Biden proposed a 15 percent minimum book tax on net profits over $100 million dollars, which would raise between $141 to $184 billion over the next decade. But the tax was not included in Biden’s most recent tax plan.
Capital Income and Estate Taxes
- Mark-to-Market: A proposal from Senate Finance Chair Ron Wyden would not only treat capital gains as ordinary income, but would also tax unrealized gains for individuals with more than $1 million in capital income or assets greater than $10 million. Certain assets such as personal residences, family farms, and retirement accounts would be protected by more generous tax thresholds. Though there is no official score for this framework, one study estimates that just using mark-to-market on the top one percent of earners could raise more than $1.7 trillion in ten years.
- For the 99.5% Act (Sanders/Gomez): Currently, only estates valued over $11.5 million are taxed at a paltry 40 percent, with the number of estates paying the tax each year plummeting from 50,500 in 2001 to just 1,900 last year. This legislation dramatically broadens the estate tax by increasing rates and decreasing thresholds. Estates between $3.5 and $10 million would be taxed at 45 percent, with a gradual progressive increase in the rate to 65 percent for estates in excess of $1 billion. If enacted, this plan would raise $430 billion over ten years.
- STEP Act (Van Hollen): This legislation focuses on closing the estate stepped-up basis loophole by taxing unrealized gains in excess of $1 million. Payments on hard assets like farms or businesses can be paid in installments over a 15-year period. There are also special provisions to ensure wealthy families cannot avoid rules by abusing trusts. Closing this loophole could bring up to $41.9 billion in 2021 alone.
Other Tax Measures
- Federal Fuel Tax: The 18.4 percent gas tax is the primary source of revenue for the Highway Trust Fund, but it has not been increased since 1993. Some in Congress are proposing increasing it to cover the cost of future infrastructure spending. With certain sectors benefiting disproportionately from infrastructure investments, this method would presumably minimize the free-rider problem and avoid charging non-users.
- State and Local Tax (SALT) Deduction: This deduction for state and local tax payments was temporarily capped at $10,000 in the 2017 tax cut package. This boosted revenue by $80 billion, but its repeal is sought by Reps. Suozzi, Gottheimer, and Garbarino, leaders of the 30-member bipartisan “SALT” caucus on the Hill. If the SALT cap were repealed, 86 percent of the financial benefit would go to the richest 5 percent of households.
- Anti-Evasion Measures: A recent report estimates that the federal government loses nearly $500 billion in unpaid taxes each year, 36 percent of which are from the top one percent of earners. IRS Commissioner Charles Rettig told Congress last week that the tax gap could be closer to $1 trillion. The most detailed tax enforcement proposal is Rep. Khanna’s Stop CHEATERS Act, which would raise an estimated $1.2 trillion in revenue over 10 years by investing $100 billion into the IRS.
In Defense of Deficit Financing
In the aggregate, these tax proposals could raise close to $4 trillion in revenue. Given the Biden administration’s sizable spending measures to promote recovery from pandemic-induced economic downturns, reforming current tax code provisions would deliver adequate pay-fors for the American Jobs Plan. But regardless of which tax proposals see passage, it’s the amount financed by revenue as opposed to deficit finance that enables the same policies at a lower fiscal cost, thus providing more political cover, if done right.
Low interest rates, sustained, allow the U.S. to shoulder a heavier debt burden for a long period of time with little negative impact and historically low interest expense to the government. Deficit spending, under current circumstances, should be in the mix, reducing the economic impact that taxation would have on the recovery. A mix of taxes and deficit spending will be critical to funding and maybe passage of President Biden’s infrastructure package.