WHAT’S HAPPENING WITH THE TAX LAWS
Democrats Push for Massive Tax and Spending Measure
On September 13, the House Ways and Means Committee released details of the massive tax-and-spend proposal championed by Democrats. This is still not yet a final package. Changes are being made as I write. What we do know is that the package calls for about $3.5 trillion in new spending over the next ten years. During that same period, the promised tax increases will raise about $2.1 trillion in new money. During this process, I’ve seen no mention whatsoever about how these massive deficits will be paid for. It’s astonishing to me that such topic is not even on the table.
Here are some of the major proposals of the bill.
The top personal income tax rate would rise from 37% to 39.6%. This would reverse a change to the law brought about by the Tax Cuts and Jobs Act (TCJA), which was President Trump’s tax plan. There is also on the table a proposal to add a 3% “surtax” on individuals with adjusted gross income of more than $5 million. This is part of the overall philosophy of Leftist Democrats to attack and destroy wealth in the hands of private persons.
The House would return to the policy of high corporate taxes that marked U.S. tax policy prior to the TCJA. The TCJA cut the top corporate tax rate down to 21%. The current bill would increase it to 26.5%. The graduated corporate rates under the Democrat plan would look like this:
- 18% on the first $400,000 of income
- 21% on subsequent income up to $5 million
- 5% above $5 million
There is no provision in the bill to adopt Biden’s proposal to establish a 15% minimum tax on the profits a company claims for non-tax, financial-reporting purposes. That is to say, the plan to impose a tax on something other than a company’s net taxable profit as calculated under the Internal Revenue Code (as opposed to, say, SEC filings) seems to have failed.
House Democrats propose to raise the capital gains tax rate by 5 points, to 25%, for “certain high income individuals.” Apparently, that means individuals with adjusted gross income of more than $1 million. The 3.8% Obamacare tax on investment income is to be added on top of that. That means the top capital gains rate would be pushed to 28.8% on investment income.
The House proposal would double the federal excise tax on cigarettes. The tax on chewing tobacco would increase by just over 2,000%, and the tax on related tobacco products would go up over 1,600%.
The taxes on tobacco have not gone up in over ten years. Apparently, House Democrats are looking to make up for lost time. It is also apparent, from just this one proposal, that the Administration’s claim that none of the tax increases will affect anybody earning less than $400,000 per year is untrue, unless you believe that only people making $400,000 per year or more smoke cigarettes, or use pipe and chewing tobacco.
IRS Enforcement Funding
I have talked at length about the increased funding to be provided to the IRS. The plan will increase the agency’s funding by $80 billion over ten years. This means that the IRS’s annual budget would grow incrementally from about $13 billion in fiscal 2021 to about $21 billion over that time.
The IRS plans to use the bulk of the spending on tax law enforcement in general, and to increase tax audits in particular. They claim the target will be businesses and high-income individuals. To support this, two dubious reports and a Treasury Department editorial article (discussed in the next article, below) have been issued claiming that the richest 1% of income earners are responsible for up to 36% of all federal income taxes NOT paid to the government. See my article in the April/May 2021 issue of PTT on this point.
In any event, both business owners and tax pros must be prepared for the explosion of audits and enforcement action that is sure to grow from these reports. Our 2021 Taxpayers Defense Conference will focus on defending business tax audits. This conference is a must for any tax pro representing taxpayers before the IRS. See details below.
Congress and the Administration continue to push for the massive bank reporting regime that I discussed in the June issue of this newsletter. In fact, on September 7, the Treasury published an article on its website agitating hard for adoption of the bank reporting scheme that’s been laid out. The article portends a “robust attack” by the IRS through both audit and collection activity using ongoing access to bank records as a chief tool in the federal government’s latest war. See my discussion of this, below.
Ever since the TCJA became effective, Leftists in Blue States have been absolutely apoplectic over the cap on the deductibility of state and local taxes (SALT). The reason is that Blue States are notorious for high state and local taxes. The itemized deduction for SALT is now capped at $10,000. That means those paying more cannot deduct the excess on their personal tax returns.
There is currently no provision in the bill to restore the full deduction for SALT but Democrats in high-tax states are not giving up. Those from New York, New Jersey and other high-tax states continue to push to repeal the cap.
Ironically, as I have written in the past, the limitation on SALT deductions hits only high-income taxpayers. As a result, the full restoration of the SALT deduction in fact constitutes “tax cuts for the rich.” It might seem quite odd that Democrats are championing a provision that undeniably only benefits high income people. But in fact, there is logic in their thinking. Since the SALT cap became law, hundreds of thousands of people began fleeing high-tax states (CA, NY, NJ, CT, etc.) in favor of lower tax environments (FL, TX, TN, etc.).
You can be certain that politicians in high-tax environments do not want to continue to see their citizens voting with their feet. They could solve the problem by cutting their state and local taxes. But, alas, they most certainly will not do so.
Oil and Gas
The proposal does not include Biden’s plan to scrap a long list of tax advantages for the oil and gas industry. It does, however, provide for a 16.4 cents-per-gallon tax on oil and imported petroleum products. Again, I wonder whether only people earning $400,000 per year or more purchase petroleum products such as, say, gasoline. The fact is, any hike in federal gas taxes drives up the cost of just about every product in the market place.
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