US Government Progresses Corporate Tax Reform Plans
In the US, plans for new tax rules for businesses and individuals are taking shape after the Ways and Means Committee of the House of Representatives released legislative proposals to be included in the Build Back Better Act, a substantial tax and spending bill. Here, we summarise the major tax elements of the package.
The objective of the Biden administration’s corporate tax plans is to raise revenues by increasing tax on large businesses. As such, the proposals abolish the 21% flat corporate tax introduced by the 2017 Tax Cuts and Jobs Act (TCJA) and replace it with a progressive structure with a top rate of 26.5% on income over USD5m. Notably, this departs from the plan outlined by the Biden administration in August, which proposed a 28% corporate tax rate.
The proposals would also increase the amount of tax paid under relatively new tax regimes introduced by the TCJA that are intended to discourage the shifting of profits to low-tax jurisdictions, namely the Global Intangible Low Tax Income (GILTI), Foreign Derived Intangible Income (FDII) and Base Erosion Anti-Abuse Tax (BEAT) rules.
Commensurate with Biden’s corporate tax agenda, the plan’s personal tax measures are intended to shift the tax burden towards wealthier taxpayers, including by increasing the top rate of income tax from 37% to 39.6%. This restores the top rate to the level it was prior to the introduction of the TCJA in 2018.
The 39.6% rate will apply on earnings exceeding USD450,000 for joint filers, USD425,000 for heads of households and USD400,000 for unmarried individuals, as well as estate and trust income over USD12,500.
Currently, the 37% rate applies to income exceeding USD518,401 for unmarried individuals and heads of households, and income over USD622,051 for joint filers.
Additionally, a 3% surtax would be imposed on modified adjusted gross income of USD5m.
Further, capital gains tax will be raised from 20% to 25% for certain high-income individuals.
Another measure would limit the deduction for qualified business income (QBI) by setting the maximum allowable deduction at USD500,000 in the case of a joint return, USD400,000 for an individual return, USD250,000 for a married individual filing a separate return, and USD10,000 for a trust or estate. A major feature of the TCJA, this deduction currently enables individuals to deduct up to 20 percent of their QBI, subject to certain exclusions.
The Build Back Better Act needs to pass both arms of Congress before landing on President Biden’s desk for signing. This is not guaranteed, given the Democrats’ slender congressional majority and inevitable Republican opposition. Probable amendments to the bill could also slow things down.
However, the decision to push the bill through using the budget reconciliation process means a final bill can clear the Senate with a simple majority instead of the majority of at least 60 votes that is normally required to pass major legislation. This will give the Democrats a considerable helping hand. As such, affected taxpayers should plan now for the likelihood of further major changes to the US tax code.