(Bloomberg) — Democrats will likely prove successful in raising individual income tax rates and in strengthening audits of wealthy Americans as they work on overhauling the U.S. tax code in coming months.
That’s a key takeaway from a survey of 15 current and former White House and congressional aides specializing in tax policy completed by Bloomberg this month. A tax on unrealized capital gains, as envisioned by Senate Finance Committee Chair Ron Wyden, was deemed impossible to get through Congress, the survey showed.
President Joe Biden is planning what would amount to the biggest set of tax increases since 1993 to help pay for infrastructure, clean- energy and social initiatives as part of his longer-term follow-up to the $1.9 trillion pandemic-relief package. With Republicans voicing opposition, Democrats must secure their moderate members’ support in the 50-50 Senate, making the tax program politically challenging to pull together.
“There is fairly strong consensus to tax the rich and corporations more — but a fairly strong consensus means you need to get all 50,” said Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center and former counsel with the Joint Committee on Taxation. “Tax increases are hard, even good tax increases. Raising taxes harms some people.”
A corporate-tax hike, set to be a key component of the Biden plan, was seen as slightly more difficult to enact than boosting individual rates, with expanded levies on estates ranking just behind. The most likely tax change of all, according to the experts, is an expansion of credits for families, something that would add to the program’s total costs.
Another easy win, the survey suggests, is strengthening enforcement at the Internal Revenue Service. Treasury Secretary Janet Yellen said Tuesday that, along with tax-policy changes the administration plans, she would support funding for stepped-up IRS collection efforts.
The following is a ranking of tax measures, from the most likely to pass by the November 2022 midterm elections to the least likely. Respondents were asked whether each item was likely to be enacted, possible to get through, or not going to make it. With three points for being likely, a top score is 45.
1. Family Tax Credits (45 points)
All 15 survey participants viewed passage of an expansion in tax credits for families as likely. This was already a component of the pandemic relief bill signed this month. That featured a one-year expansion of the child tax credit, dependent care credit and the earned income tax credit.
Democratic lawmakers want to make those changes permanent — which would come with a price tag of $1.6 trillion for the child tax credit alone, according to a Tax Foundation estimate. Democrats are hoping that the increase for 2021 will prove to be so popular with voters that they’ll be able to secure an extension for beyond this year.
2. IRS Audits (44)
Audit rates at the IRS have plummeted in recent years, with Commissioner Chuck Rettig telling a congressional panel earlier this month that the agency has lost 15,000 enforcement personnel since 2010. Democrats in Congress have been proposing ways to increase audit levels by adding to the agency’s enforcement workforce and mandating higher examination rates of top earners. Collecting unpaid taxes from the top 1% alone could generate an additional $175 billion in tax revenue, according to a recent study.
3. Individual Income (42)
Biden on the campaign trail called to raise the top personal income tax rate to 39.6% for those earning $400,000 or more. However, the administration has yet to specifically define the thresholds for individuals as well as households.
4. Corporate Tax (38)
Biden is pushing to roll back part of President Donald Trump’s massive corporate tax cut from 2017, taking it up to 28% from 21%. That could raise $727 billion over a decade, according to the Urban-Brookings Tax Policy Center. Some respondents were skeptical that magnitude of an increase could get through Congress, indicating it could end up around 25%.
5. Levy on Estates (36)
Biden’s campaign-trail proposals reduced the threshold at which the estate tax applies, in addition to increasing the rate to 45%. David Kamin, deputy director of the White House National Economic Council, separately indicated in an interview last week that the administration is looking at removing a “loophole” for the ultra wealthy known as step-up-in-basis — which revalues assets such as stocks and real estate at market prices, rather than their original purchase cost, reducing tax liabilities.
5. Made in America Credit (36)
Tied for fifth on the list as most likely to be enacted is a push from Democrats for tax benefits for companies that build factories in the U.S. or increase domestic manufacturing capacity. Both changes would check of two priorities: addressing wealth inequality, as well as providing incentives for jobs at home.
6. SALT Cap (34)
Ever since Trump’s 2017 tax overhaul limited federal write-offs for state and local taxes, or SALT, to $10,000, Democrats have been seeking to reverse the change. It has proven to be a controversial — and expensive — task because the benefits largely flow to the top earners. Survey respondents said it’s possible that Democrats can push through a change, but it may be just a higher cap, rather than a complete repeal. Yellen said Tuesday she’d work with lawmakers to address “disparate treatment” stemming from the limit.
7. Minimum Tax on Foreign Income (31)
Biden’s campaign plan had an increase in the tax rate on profits U.S. companies earn abroad to 21% from 13%, undoing a change Trump made in 2017 and raising $442 billion in the process, according to Urban-Brookings estimates. Republicans and business advocates say boosting tax rates on domestic and offshore income alike could cause American companies to leave for other countries where the tax laws are more favorable. The idea of a global minimum tax is also currently the subject of negotiations between the U.S. and nearly 140 other countries at the Organization for Economic Cooperation and Development, so the U.S. could also adopt some international tax law changes to comply with a resolution that is expected to be reached later this year.
8. Capital Gains Tax (30)
Biden made higher taxes on capital gains for those earning $1 million or more income a centerpiece of his tax plan. “The richest Americans can totally escape tax on large amounts of their income coming off wealth,” Kamin in the interview. Biden has talked about a plan that would increase the rate on capital gains earnings to 39.6% from 23.8%, which could generate an estimated $373 billion in higher revenue. But the idea is politically tricky because Congress has given special breaks on investment income since 1921.
9. Itemized Deductions (24)
Biden’s campaign plan limited itemized tax breaks to 28%, or 28 cents for every dollar of income, for those making more than $400,000. He also called to restore another deduction limitation that has been temporarily paused since the 2017 tax law, which prevents taxpayers from using legal tax maneuvers to completely avoid taxes. Critics say it would hurt small business owners who largely pay taxes on their businesses via their personal tax filings.
10. Minimum Tax on Profits (22)
Biden has sought to address situations where major tech companies, like Amazon.com Inc, Netflix Inc. and Zoom Video Communications Inc., have largely been able to avoid paying federal income taxes in some years despite turning a profit because they used legal maneuvers, including write-offs for business expenses, to whittle down their tax bill. Biden campaigned on imposing a minimum 15% tax on corporations’ book income. The change would upend decades of differences to how companies compute their finances for tax purposes and faces significant hurdles to becoming law.
11. Payroll Tax on High Earners (20)
Biden campaigned on instituting higher payroll taxes on incomes above $400,000 as a means to increase Social Security funding. Currently, payroll levies are only applied to income up to $142,800. However, the idea is unlikely to comply with the rules for a budget-reconciliation bill — the vehicle Democrats would need to use to defeat a Republican filibuster — making its likelihood remote.
12. Wealth Tax Lite (17)
While Biden has eschewed progressive Senator Elizabeth Warren’s wealth-tax plan, there’s broader support for some effort to target asset holdings. Wyden, an Oregon Democrat and head of the powerful Senate Finance panel, has urged the White House to consider his plan to require wealthy individuals to pay taxes on unrealized gains of stocks, bonds and other assets annually, instead of when they are sold. The idea has been criticized for being very difficult for the IRS to administer and enforce.
Forecasts Pending
With the administration’s specific tax plans still pending, many Wall Street banks have yet to set their expectations. “We don’t have a house view on the financing mix of an eventual infrastructure bill, but all public comments point to higher taxes in core areas of corporate, high-income household and capital gains rate,” JPMorgan Chase & Co. strategists led by John Normand wrote in a note Friday.
(Updates with JPMorgan comment in final paragraph.)
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