Tax Reform Plans – United States
Plans for new tax rules for businesses and individuals in the United States are coming together after the Ways and Means Committee of the House of Representatives released legislative proposals to be included in the Build Back Better Act, which is a substantial tax and spending bill. Below we’ll review the major element of these tax reform plans.
The main objective of the administration’s corporate tax plans is to increase revenues by raising the tax on large businesses. This proposal would see the 21% flat corporate tax rate introduced in the 2017 Tax Cuts and Jobs Act (TCJA) abolished for it to be replaced with a progressive structure with a top rate of 26.5% on incomes higher than 5 million USD. It’s worth noting that this differs from the plan outlined by the Biden administration which had initially proposed a 28% corporate tax rate.
The tax reform plans would also lead to an increase in the amount of tax paid under relatively new tax regimes introduced by the TCJA that aimed to discourage the shifting of profits to low-tax jurisdictions. These are the Global Intangible Low Tax Income (GILTI), Base Erosion Anti-Abuse Tax (BEAT) and Foreign Derived Intangible Income (FDII) rules.
Aligned with Biden’s corporate tax agenda, the tax reform plans are intended to shift the tax burden towards wealthier taxpayers. Included in this will be increasing the top rate of income tax from 37% to 39.6%. This restores the top rate to the level prior to the TCJA introduction in 2018.
This 39.6% tax rate will apply on earnings higher than $450,000 USD for joining filers, $425,000 USD for heads of households and $400,000 USD for unmarried individuals, as well as estate and trust income over $12,500 USD.
At this moment in time, the 37% rate applies to income above $518,401 USD for unmarried individuals and heads of households, and income over $622,051 USD for joint filers.
Furthermore, a 3% surtax would be imposed on modified adjusted gross income of 5 million USD.
Additionally, certain high-income individuals will see capital gains tax raised from 20% to 25%.
Another measure is to limit the deduction for qualified business income (QBI) by setting the maximum allowable deduction at;
- $500,000 USD in the case of a joint return,
- $400,000 USD for an individual return,
- $250,000 USD for a married individual filing a separate return, and
- $10,000 USD for a trust or estate.
A major feature of the TCJA, this deduction currently enables individuals to deduct up to 20% of their QBI, subject to certain exclusions.
The Build Back Better Act will need to pass both arms of Congress before landing on the President’s desk for signing. This is in no way guaranteed as the Democrats hold a slender congressional majority and will see inevitable Republican opposition. Amendments to the bill may also slow proceedings down.
Irrespective of this, the decision to push the bill through using the budget reconciliation process means. A final bill can clear the Senate with a simple majority as opposed to a majority of at least 60 votes that is normally required to pass major legislation. This is a huge helping hand for the Democrats. As a result, affected taxpayers should plan now for the likelihood of further major changes to the US tax code.