Senate Democrats have just kicked off the process to use budget reconciliation to pass their $3.5 trillion tax-and-spending proposal with just 50 votes in the Senate (plus Vice President Harris’ tiebreaker). Under the leadership of Majority Leader Chuck Schumer (D-NY), they have released a memo outlining how they plan to spend $3.5 trillion through President Biden’s “Build Back Better” agenda and -- more importantly -- how they plan to pay for the new spending with new taxes, tax increases, increased IRS enforcement, and “health care savings.”
There are five broad categories of provisions that may allow Democrats to raise the $3.5 trillion necessary to pay for their new proposed spending. Those categories are:
- Raising taxes on U.S. businesses by changing the corporate side of the tax code;
- Raising taxes on high-income individuals by changing the individual side of the code;
- Increasing the IRS budget for enforcement purposes and allowing the IRS to collect more financial information from U.S. financial institutions in order to reduce the tax gap;
- Requiring Medicare to negotiate prescription drug prices in the Part D drug benefit on a national basis (rather than under current law, where individual plans negotiate prices); and
- Assessing a tariff on certain carbon-intensive imports.
NTU has written about each of these topics before. See below for a quick summary of NTU resources and hyperlinks to further information.
On Raising Corporate Taxes
President Biden has proposed increasing the corporate tax rate by a third (from 21 percent to 28 percent), doubling the rate U.S. companies pay on income earned abroad (from between 10.5 and 13.125 percent to between 21 and 26.25 percent), repealing a deduction businesses receive for income derived from exports to other countries, creating a new tax rule to prevent multinational companies from moving U.S.-source income abroad, eliminating a number of tax provisions related to energy development, production, and distribution, and more.
NTU is deeply concerned that the above proposals would ultimately harm U.S. workers, who bear a significant portion of the corporate income tax. Proposals to increase the corporate tax rate should be treated, in part, as a tax hike on U.S. workers, violating the spirit if not the letter of President Biden’s pledge not to raise taxes on households making less than $400,000. Proposals to reform international taxation threaten to undermine U.S. tax competitiveness with close economic peers and U.S. tax sovereignty, especially if other countries win carve-outs or exemptions during global tax negotiations that do not apply to U.S. companies. And unfortunately, proposals to do away with dozens of tax provisions related to energy development, production, and distribution paint with too broad a brush, and would repeal several provisions of the tax code that ensure U.S. companies can simply recover their full costs of doing business.
For more resources, see:
- NTU Letter to Senate Finance: “Pro-Growth Tax Policy Can Drive U.S. Manufacturing Boom”
- NTU Post: “Initial Reactions to the 130-Country, 15% Corporate Minimum Tax Agreement”
- NTU Memo: “Senate Dems' Energy Bill Confuses Legitimate Cost Recovery With ‘Subsidies’”
On Raising Individual Taxes
The “tax the rich” slogan is convenient for bumper stickers, but the consequences of these proposed pay-fors reach much further than the $400,000 and above threshold. Reversing the positive changes made under the Tax Cuts and Jobs Act (TCJA), including raising the top individual income tax rate to 39.6 percent, would negatively impact small businesses and magnify problems already in the tax code. Individuals who own/operate small businesses, including S corporations, sole proprietorships, and partnerships could see themselves caught up in this tax hike. An increase to the top tax rate would worsen the marriage penalty as Americans face a steeper tax cliff.
Unsurprisingly, Democrats are pushing to close so-called “loopholes,” which are, in some instances, long-standing priorities for progressives to redistribute what they see as an unfair accumulation of wealth. Taxing capital gains as ordinary income (a change from 20 percent to 39.6 percent under President Biden’s proposal) would harm economic growth as American businesses are in the midst of recovering from the global pandemic. This change would decrease liquidity as holders of assets would be less inclined to sell and face a substantial tax increase. Proposed changes to the treatment of carried interest and “stepped-up” basis would disincentivize investment and harm taxpayers by discriminately raising taxes on long-term investments. Meanwhile, while the Biden administration states that family-owned businesses and farms won’t be swept up in the repeal of the stepped-up basis, skepticism is more than warranted. Lawmakers should be looking to encourage private sector investment, not place onerous tax burdens on investment and capital.
For more resources, see:
- NTU Post: “American Families Plan Includes Troubling Tax Provisions, Spending on Well-to-Do”
- NTU Letter to House Ways and Means: “Carried Interest Tax Hike Would Stifle Innovation”
- NTU Policy Paper On SALT deduction: “Hello! You’ve Been Referred Here Because You’re Wrong About the Tax Cuts and Jobs Act”
On Increasing the IRS Budget
NTU Foundation’s experts recently warned that the tax gap -- the difference between taxes owed and taxes paid, which policy experts debate could be anywhere from $381 billion to $1 trillion per year -- is “No Trillion Dollar Silver Bullet.” Unfortunately, some lawmakers seem intent on treating it that way, betting that an $80 billion investment in the IRS and increased information reporting requirements for financial institutions would net the federal government $700 billion in new revenue over the next decade. NTU Foundation pointed out numerous flaws with both existing tax gap estimates and policymakers’ current proposals to reduce said tax gap. Most importantly, the IRS has for years demonstrated that it lacks the capacity, skill level, and responsibility to handle such a large infusion of taxpayer dollars (and new expectations) in such a short period of time. NTU recently released a set of recommendations for lawmakers to include along with any increase to the IRS budget, and we hope Congress sees many of these reforms as prerequisites -- rather than window dressing that accompanies a flashy budget boost.
For more resources, see:
- NTU Foundation Policy Paper: “The Tax Gap: No Trillion Dollar Silver Bullet”
- NTU Policy Paper: “14 Recommendations for Congress and the IRS as They Attempt to Narrow the Tax Gap”
On Requiring Medicare Prescription Drug Negotiation
Policymakers have proposed different versions of allowing national, top-down price negotiations in Medicare Part D for years. The nonpartisan Congressional Budget Office (CBO) has also had the same response for years: allowing for price negotiations will not provide significant savings for taxpayers unless Medicare had some statutory leverage over the manufacturers they would negotiate with. The two most common forms of leverage, 1) a national formulary and 2) mandatory price concessions, rebates, taxes, or fees, are incredibly problematic for patients and for U.S. companies and their workers. A national formulary could threaten patient access to medications, whereas mandatory price concessions, rebates, taxes, or fees would threaten patient access, punish American companies and workers, and potentially impact America’s world-leading role in the research, development, production, and distribution of innovative medical products.
For more resources, see:
- NTU Post: “Senate Finance Drug Pricing Framework Risks Similar Pitfalls of Price-Setting H.R. 3”
- NTU Issue Brief: “A Taxpayer- and Market-Oriented Path Forward for Federal Prescription Drug Policy”
On Levying New Tariffs Against Carbon-Intensive Imports
NTU recently wrote on this new proposal from Sen. Chris Coons (D-DE) and Rep. Scott Peters (D-CA) and highlighted numerous flaws with this specific proposal and with carbon tariff proposals in general. Our top concerns include 1) regulators setting a tariff rate based on difficult-to-determine domestic regulatory compliance costs, 2) the U.S. risking World Trade Organization (WTO) challenges and retaliatory actions from trade partners in levying the tariff, and 3) lawmakers’ exclusion of an export rebate for U.S. companies to accompany the import tariff. Congressional aides told The New York Times they expect to raise between $5 billion and $16 billion per year from the carbon tariff, making this proposal a tiny portion of the proposed spending offsets but one with major implications for international trade and for cooperation on climate change.
For more, see: