The Biden administration on March 28 issued its fiscal year 2023 budget, which would reduce the national deficit by approximately $1 trillion over 10 years primarily by increasing the corporate tax rate to 28% and introducing a minimum tax on billionaires.
The White House also released the General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals, commonly known as the “Green Book,” a more detailed description from the Treasury Department of the administration’s tax and revenue proposals.
Proposed Tax Changes
Under the administration’s billionaires’ minimum income tax proposal, the top one-one hundredth of one percent (0.01%) of American households -- those worth over $100 million – would pay a minimum tax of 20% on all of their income, including unrealized investment income that currently is untaxed. According to a fact sheet released by the White House, revenue collected under this tax would reduce the deficit by about $360 billion over the next decade.
The budget proposal would increase the top marginal tax rate to 39.6 percent for individuals with income over $450,000 (if married and filing a joint return), $400,000 for unmarried individuals, $425,000 for head of household filers and $225,000 for married individuals filing a separate return. The proposal would be effective for taxable years beginning after December 31, 2022, and after 2023, the thresholds would be indexed for inflation.
The administration also proposes taxing capital income of high-income earners at ordinary rates, so that long-term capital gains and qualified dividends of taxpayers with taxable income of more than $1 million ($500,000 for married filing separately) would be taxed at 37 percent (40.8 percent including the net investment income tax). This is a change from last year’s proposal, which would’ve lined up the capital gains rate with the highest individual rate.
Moreover, the budget would treat transfers of appreciated property by gift or at death as realization events, and the donor or deceased owner of an appreciated asset would realize a capital gain at the time of the transfer.
The proposal would increase the amount of the tax penalties that apply to paid tax return preparers for willful, reckless or unreasonable understatements, as well as for forms of noncompliance that do not involve an understatement of tax. In addition, the proposal would amend current law provide the Secretary of the Treasury with explicit authority to regulate all paid preparers of federal tax returns, including by establishing mandatory minimum competency standards.
Acknowledging that “tax compliance and enforcement with respect to digital assets is a rapidly growing problem,” the proposal would amend current law to require reporting with respect to any account that holds digital assets maintained by a foreign digital asset exchange or other foreign digital asset service provider (a “foreign digital asset account”). Reporting would be required only for taxpayers that hold an aggregate value of assets in excess of $50,000.
The proposed budget would also increase funding for the IRS to $14.1 billion, an increase of $798 million above FY 2021’s amount. According to a statement released by Treasury Secretary Janet L. Yellen, this increase would “improve the taxpayer experience and expand customer service outreach to underserved communities and the taxpaying public at large.”
The budget also provides $310 million for IRS Business Systems Modernization to accelerate the development of new digital tools to enable better communication between taxpayers and the IRS. According to Yellen’s statement, “Increased funding for the IRS will also facilitate more effective oversight of high income and corporate tax returns.”
Proposed International Tax Changes
The Green Book references the two-pillar October 8, 2021, OECD/G-20 agreement on minimum taxation, more specifically, Pillar Two of the agreement and the model rules published on December 20, 2021. The model rules describe two interlocking systems -- an Income Inclusion Rule (IIR), which imposes a top-up tax on a parent entity with respect to the low-taxed income of a member of its financial reporting group, and an Undertaxed Profits Rule (UTPR), which denies deductions or requires an equivalent adjustment to tax liability to the extent the low-taxed income of a member of the group is not subject to an IIR.
To increase alignment between the U.S. international tax rules and the international system emerging under Pillar Two, the budget proposes the repeal of the current base erosion anti-abuse tax (BEAT) and its replacement with a UTPR that is consistent with the UTPR described in the Pillar Two model rules. The proposal also includes a domestic minimum top-up tax that would protect U.S. revenues from the imposition of UTPR by other countries. Separately, the proposal would provide a mechanism to ensure U.S. taxpayers would continue to benefit from U.S. tax credits and other tax incentives.
The proposal would keep the global intangible low-taxed income (GILTI) deduction constant, raising the GILTI rate in proportion to the increase in the corporate rate. Thus, since the proposal would increase the tax rate for C corporations from 21% to 28%, the 28 percent tax rate would consequently increase the GILTI rate in tandem. The new GILTI effective rate would be 20%, applied on a jurisdiction-by-jurisdiction basis.