Biden's Tax Proposals

President Biden's State of the Union address proposed some new taxes with few details. One of those was a Billionaire's minimum tax fleshed out slightly more at CNBC:

Biden renewed his call for levying a tax on billionaires and corporate stock buybacks to reduce the federal deficit.

“The tax system is not fair; it’s not fair,” Biden said. “The idea that in 2020, 55 of the largest corporations in America, of Fortune 500, made $40 billion in profits and paid $0 in federal taxes? $0? Folks, it’s simply not fair.”

The idea was popularized by progressives like Sens. Elizabeth Warren and Bernie Sanders in the 2020 campaign. Biden has vowed to not raise taxes on Americans earning under $400,000 annually.

“Now because of the law I signed, billion-dollar companies have to pay a minimum of 15%, God love them,” Biden said to jeers by Democrats. “15%! That’s less than a nurse pays!”

Biden previously proposed a 20% tax on billionaires in March of last year as part of his federal budget. In Tuesday’s State of the Union address, Biden called on Congress to “finish the job.” The proposal did not gain much traction then and is unlikely to go anywhere in the Republican-controlled House.

Another is a fourfold increase in a stock buy-back tax, which according to CNBC via Wonkette, is as follows:

As part of last summer's Inflation Reduction Act, Congress created, for the first time ever, a tax on stock buybacks — the practice of companies buying back big chunks of their stock so that the dividends for investors will be higher. . . . Unfortunately, it's looking like the one percent tax on buybacks in the IRA hasn't done much to slow companies' fondness for the practice, so during the State of the Union, Biden called for the buyback tax to be "quadrupled." As CNBC notes, 

While he didn’t provide details on a new tax proposal, a quadrupling could take the tax from 1% tax to 4%, and the White House could push for the tax to be gross rather than net of any shares issued for employee pay and [mergers and acquisitions].

Actually passing any such increase would be tricky, because Republican House, and as CNBC points out, the buyback tax last summer had to be pared back from two percent to one percent to get the vote of Sen. Kyrsten Sinema. Expect the call to increase the buyback tax to feature in 2024 campaigning even if it doesn't get any traction in the current Congress. Oh, and we bet Rep. Ruben Gallego will talk about Sinema's opposition to it in his bid to replace her.

As CNBC details, oil companies have been plowing much of their recent record profits into buying back stock, and tech companies that have been doing layoffs have nonetheless found some spare cash for buybacks — $40 billion last year, in the case of Meta (aka Facebook). Apple spent $90 billion on buybacks in fiscal 2022, too.

One law firm explains the existing stock buy-back tax here. It begins by summarizing the tax as follows:

The new 1% excise tax was enacted last summer as part of the Inflation Reduction Act of 2022 (“IRA”) and generally applies to any US corporation whose stock is traded on an established securities market and that repurchases more than $1 million of stock over the course of a tax year (a “covered corporation”).

Some other tax proposals aimed at people making more than $400,000 a year are likely to echo his proposals from March of 2022:

The “billionaire minimum income tax” calls for a 20% levy on households with a net worth of more than $100 million, affecting the top 0.01% of earners, according to a White House fact sheet.

The 20% tax applies to “total income,” including taxable earnings and so-called unrealized capital gains, or asset growth, with installment payment options and a credit to avoid paying tax on the same wealth twice, the U.S. Department of the Treasury outlined. . . . Senate Democrats floated a similar billionaire tax in October to help fund their domestic spending agenda. However, the proposal failed to gain broad support within the party. . . .

Moreover, if the levy had survived negotiations, it may have faced legal challenges, according to some policy experts, and the overburdened IRS may have struggled to enforce the law.

Biden’s version of the billionaire tax may create administrative challenges for certain taxpayers, such as business owners who fall above the $100 million threshold, according to Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center.

“Their assets are in their businesses,” he explained. “And it’s very difficult to value those assets.”

Many European countries have abandoned similar taxes due to the burden of assessing individual wealth, Gleckman said.

The budget includes other revenue raisers affecting individuals, such as hiking the top marginal tax rate, higher levies on capital gains for earners above $1 million and treating property transfers like a sale, among others.

As a practical reality, however, getting Congressional support for either measure when Republicans control the House and Democrats have only a thin, not veto-proof majority in the Senate, in which a former Democrat and a conservative Democrat, at least, are skeptical of the proposals.

The billionaire's minimum tax is a weird structure that makes sense politically but is clunky and would be hard to administer. The stock buy-back tax changes the rate on an existing new tax and might be more workable and politically attractive. Higher marginal tax rates for high income earners on ordinary income and capital gains respectively are easy to understand and implement at least.

It isn't clear to me if "treating property transfers like a sale" refers to limiting tax free 1031 exchanges of investment real estate, or to ending the carryover basis for capital gains tax purposes of gifts of appreciated assets and instead treating those gifts as "deemed sales", or to ending the step up in basis of capital gains at death and treating those transfers at death as "deemed sale" (which is what Canada does).

Simply refusing to extend tax breaks from Trump's 2017 tax bill is less flashy and won't happen until after the Presidential election in 2024, but is another option that is much easier to pass if gridlock in the legislative process continues. 

For example, Section 199A which provides a 20% deduction for the passthrough income of passthrough entities expires at the end of the year 2025:

Under current law, almost all the provisions of the Tax Cuts and Jobs Act that modify the individual income tax are scheduled to expire after December 31, 2025. The pass-through deduction is one of these provisions: as currently written, it will no longer be available to households beginning in 2026.

Hastening the currently scheduled expiration of some of these provisions might be a politically easier way for Biden to raise additional tax revenue.

There are myriad other ways to improve tax revenues from the affluent in a manner that advances sound tax policy. For example:

International Taxation

* Do not allow a deduction for payments made by U.S. taxpayers for intangible property owned by foreign taxpayers, regardless of location, including interest, and royalties on account of intellectual property.

Business Expenses

* Do not allow a business expense deduction for meals, lodging, or entertainment, unless the beneficiaries are employees or contractors who have this in kind form of compensation reported on their W-2 or 1099.

* Limit net operating loss carry forwards to three years, do not allow net operating losses to reduce income other than income from that business, and do not allow NOL carry forwards to reduce more than 50% of current taxable income from operating profits from the same business in any given year.

Retirement Savings and Social Security

* Set the maximum income that can be considered in a defined benefit plan's benefit formula equal to the Social Security/self-employment income tax cap, which would be increased to the current defined benefit plan cap. Make Social Security benefits tax free. Increase Social Security benefits to reflect this increased revenue if it can be done on an actuarially sound basis.

* Set a global cap on contributions from defined benefit plans and defined contribution plans (other than contributions in lieu of FICA taxes by governmental defined benefit plans) that can be made per year per person from all sources combined on a tax preferred basis of $10,000 per year, indexed, with defined benefit plans reporting an amount on an information return each year.

* Set an indexed $2,000,000 per beneficiary maximum dollar amount of combined defined contribution plan assets, which is reduced by a formula to take into account defined benefit plan benefits (but not below zero). If a firm has defined contribution plan assets in excess that amount, the excess is a required minimum distribution in the following year.

Capital Gains During Life

* Eliminate Internal Revenue Code § 1031 like kind exchanges for real property.

* Tax capital gains as ordinary income.

* Do not allow capital losses to be applied to income other than capital gains.

Whole Life Insurance

* Tax the increase in the cash value of a life insurance policy with cash value prior to death, which is not attributable to premiums in excess of premiums for comparable term life insurance premiums as taxable income (so that whole life insurance can't be used to generate tax free investment income).

Non-Profits And Municipal Bonds

* Eliminate the income tax exemption for all forms of municipal bonds that are currently tax exempt prospectively (i.e. for municipal bonds issued after the law's effective date).

* Tax the income of tax-exempt entities (e.g. charities and churches) from interest, dividends, capital gains, rent, royalties, and other sources of income from ownership of property at a flat rate equal to the highest individual income tax rate. In the case of payments of interest, dividends, and royalties paid by U.S. taxable limited liability entities or U.S. for profit businesses, withhold this at the source.

* End the charitable deduction for income tax purposes (but not gift and estate tax purposes). Allow a deduction for advertising expenses paid to charitable entities by businesses for advertising.

Gift, Estate, and Capital Gains Taxes At Death

* Treat assets owned by a decedent at death in estates that owe some estate taxes as if they were sold for fair market value on the date of death, subject to (1) a marital deduction - which would get a carry over basis, (2) the exclusion of gain on the sale of a personal residence that would have applied immediately prior to death (or half of that amount for a married decedent), (3) a limited step up in basis to fair market value at death to assets selected by an executor with a fair market value at death of death equal to the value of the assets which are exempt from estate taxation at death, and (4) an ability to elect a carry over basis at death for select assets.

* Eliminate the special step up in basis for capital gains tax purposes for community property.

* Allow a carry over basis at death election for assets to which the marital deduction does not apply for residences in which the recipient resides at the time of death, for vacant land, for farm real estate, for collectible tangible personal property like jewelry and art, for closely held business interests, and for property which cannot be liquidated at fair market value due to restraints upon alienation. The carry over basis must be disclosed on an asset by asset basis to the IRS and the recipient for each such asset for which an election is made.

* Reduce the exclusion from gift and estate taxation to $2,000,000 per per, person lifetime, indexed, inheritable by a surviving spouse. Make all transfers exempt from gift and estate taxation on this basis also exempt from generation skipping transfer taxation.

* Set the estate tax rate at the maximum individual income tax rate.

* Set the gift tax rate and the generation skipping transfer tax rate at the equivalent on a tax exclusive basis to the maximum individual income tax rate on a tax inclusive basis.

* Treat split-interest trusts (charitable remainder trusts, charitable lead trusts, grantor retained interest trusts, qualified personal residence trusts, etc.) as incomplete transactions until the death of the grantor or the completion of the trust term, whichever comes first, with the gift deemed to be made and valued at that time.

* Disallow minority interest discounts (including lack of marketability discounts for a sale of less than a 100% interest in closely held entity) and ignore control premiums in gifts of entity interests.

* Disallow the annual exclusion for gifts of interests in entities, including purchases of entity interests up to the amount of an annual exclusion gift made that are made within one year of receipt of the annual exclusion gift.

* Disallow the annual exclusion for gifts to trusts with Crummy powers.

* Treat taxes paid for the benefit of an irrevocable trust (for gift and estate tax purposes) that is taxed as a grantor trust as a gift taxable gift to the trust.