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The House Ways and Means Build Back Better Bill is a First Step Toward a Fairer Tax Code

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The broken tax code has been an important factor enabling the dramatic increase in inequality over recent decades that has led to a less dynamic and less just economy. The revenue component of the Build Back Better legislation authored by Chair Richard Neal (D-MA) and approved by the Ways and Means Committee on September 15 is a long-awaited first step toward fixing a fundamentally flawed and inequitable tax code. That portion of the bill raises more than $2 trillion in a highly progressive way to fund essential investments in a stronger and more inclusive economy.

The committee includes many of those investments in other components of the bill—clean energy, paid leave, health care coverage, and an extension of the Biden Child Tax Credit, which is already changing millions of children’s lives for the better—among other important investments and tax cuts for families.

The revenue legislation includes many critical tax reforms that make the wealthy and corporations pay more toward their fair share. However, it is not as strong as President Joe Biden’s plan in important respects. While the bill takes great strides toward tax fairness, in some ways, it should be improved as the legislative process proceeds.

Major steps toward tax fairness in the Ways and Means Build Back Better bill

Repealing major giveaways in the 2017 tax law. The bill* repeals or overhauls many of the most regressive giveaways in the Trump tax law, the Tax Cuts and Jobs Act of 2017. Rolling back these four giveaways raises nearly $850 billion over 10 years and helps ensure they are not extended. Of the four giveaways, the corporate rate cut is permanent but the other three expire after 2025.

  • Top bracket rate: The bill repeals the 2017 law’s cut to the top marginal tax rate, restoring it to 39.6 percent. The top rate would apply to taxable income above $400,000 for unmarried individuals and $450,000 for couples.
  • Corporate rate: The bill reverses much of the corporate tax rate cut from 2017 that provided a massive windfall to corporations without the positive effects that its boosters promised. The 2017 law cut the rate for large corporations from 35 percent to 21 percent. The bill raises it to 26.5 percent.
  • Passthrough deduction (“199A”): The new 20 percent deduction for most passthrough business income was perhaps the single worst provision of the Trump tax law. More than 60 percent of it benefits the richest 1 percent, including billionaires who lobbied for it. It has created new avenues for gaming the tax code. The Ways and Means bill caps the amount of the deduction to $500,000 for couples and $400,000 for single people. This eliminates most of the windfall for the richest taxpayers, albeit not as much as a corresponding proposal from Senate Finance Committee Chair Ron Wyden (D-OR).
  • Estate tax: The 2017 law doubled the estate tax exemption to what is now an astronomically high $23.4 million for couples and $11.7 for single individuals. Under these parameters, less than 0.1 percent of estates pay any estate tax. The Ways and Means bill repeals this needless giveaway for the wealthiest heirs.

Rebuilding the Internal Revenue Service (IRS). The bill provides the $80 billion requested by President Biden to rebuild the IRS. Years of budget cuts decimated the agency’s ability to pursue wealthy and corporate tax dodgers. The IRS funding is a significant advance toward a fair economy and racial equity. It will enable the IRS to reverse the trend of increasingly lax enforcement for wealthy individuals and large corporations. It will allow the IRS to better serve taxpayers by equipping the agency with modern technology.

Implementing a surtax on extremely high-income people. The bill includes a 3 percent surtax on income above $5 million—a small tax on the richest sliver of Americans that would raise $127 billion in revenue. In 2018, less than 0.04 percent of Americans reported more than $5 million of adjusted gross income, according to IRS data.

Raising the capital gains tax rate. The richest 1 percent of Americans receive 80 percent of the benefit of the preferential tax rates for capital gains and dividends, and the top 0.1 percent receive 58 percent. The bill would raise the top capital gains rate from 20 percent (or 23.8 percent when including Medicare-related taxes) to 25 percent (or 28.8 percent), raising $123 billion from the highest-income Americans. In addition, the adjusted gross income surtax on incomes exceeding $5 million, discussed above, applies to both ordinary income and capital gains.

Closing the Medicare tax loophole. The bill closes a major loophole that allows high-income business owners to avoid paying either the Medicare tax that workers and the self-employed pay on earned income or the parallel tax that investors pay on unearned income, known as the net investment income tax, or NIIT. In so doing, it essentially ensures that all Americans pay Medicare tax regardless of how they earn or receive their income and raises more than $250 billion in revenue.

Reforming the U.S. international tax code. The bill includes major reforms to the international tax system, including, most importantly, a 16.5 percent minimum tax on overseas profits applied on a country-by-country basis. This will go much further toward shutting down corporate tax havens than the weak global intangible low-tax income (GILTI) regime enacted in 2017. The bill reduces the 2017 law’s deduction for foreign-derived intangible income (FDII)—a wasteful and counterproductive giveaway that “subsidize[d] monopoly profits and encourage[d] exodus of physical capital” from the United States—in the words of Brookings’ William Gale. The bill strengthens tax code provisions aimed at preventing companies from stripping profits out of the United States. The bill also includes important provisions reforming aspects of the post-2017 international tax system that favor offshore fossil fuel income.

This is not an exhaustive list of the critical and progressive tax reforms in the bill. It takes great strides toward a fairer tax code in many other ways.

How the Ways and Means bill can be improved

Reforming the capital gains tax base. While the Ways and Means bill raises capital gains tax rates, it does not fundamentally reform the capital gains tax base. Currently, because capital gains are not taxed until sold and never taxed if never sold, billionaires can avoid paying income taxes on their gains for their entire lives—the most fundamental way that the tax code favors income from wealth over income from work. In 2019, now-Senate Finance Chairman Wyden put forward a plan to tax millionaires’ gains as they accrue, whether sold or not. President Biden took a more moderate approach: repealing the “stepped-up basis” loophole so that if an asset is never sold, gains on it would be taxed on gift or bequest. His plan exempts $1 million of gain per person and specifically protects owners of family farms…

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