President Biden released a nearly $6 trillion fiscal year 2023 budget proposal on March 28, outlining his tax and spending priorities over the next decade, including a new minimum tax on wealthy Americans.
While the budget outlines broad-based themes, such as prioritizing education and college affordability, improving public health, creating jobs and increasing affordable housing, it does not include any broad-based proposals to address retirement security.
Overall, the budget proposal estimates $4.6 trillion in revenues with roughly $5.8 trillion in spending, resulting in an annual budget deficit of $1.15 trillion for FY 2023. The budget also seeks to reduce the federal budget deficit by $1 trillion over the next decade through additional tax reforms described as ensuring that “corporations and the wealthiest Americans pay their fair share.”
In addition, the proposal would require corporate executives to hold on to company shares that they receive for several years after receiving them, and prohibiting them from selling shares in the years after a stock buyback. “This would discourage corporations from using profits to re-purchase stock and enrich executives, rather than investing in long-term growth and innovation,” the budget proposal states.
While the deficit projections have improved since last year, the budget still estimates annual deficits in excess of $1 trillion for each year from 2023 to 2032, totaling $14.4 trillion over the period. The budget further shows increases in real GDP growth at an average of 2.4% throughout the decade, while debt would grow to 106.7% of GDP by FY 2032.
“My budget details the next steps forward on our journey to execute a new economic vision, reduce costs for families, reduce the deficit, and build a better America. It is a budget anchored in my bed-rock belief that America is at its best when we invest in the backbone of our Nation: the hardworking people in every community who make our Nation run,” President Biden stated in his budget release.
And while the proposal does not include broad-based changes in retirement policy, it also does not include the changes that were included in the House-passed Build Back Better Act that sought to place limitations on high-income taxpayers with large retirement account balances and eliminate “back-door” Roth IRA conversions.
The budget, however, does includes several proposed tax increases to help pay for all the proposed new spending programs and deficit reduction. Over the period 2023–2032, the Biden administration is calling for:
- $1.6 trillion in corporate tax reforms;
- $722 billion in new revenues from increasing taxes for high-income earners;
- $68 billion from closing so-called tax loopholes;
- $47 billion from making certain changes in estate and gift taxation;
- $15 billion from improving tax compliance and administration; and
- $11 billion in relation to modernizing rules related to digital assets.
New Minimum Tax
To ensure that wealthy Americans pay what the administration describes as their “fair share,” the budget proposal includes a new 20% minimum tax that would be implemented on both ordinary income and unrealized capital gains for all taxpayers with wealth (that is, the difference obtained by subtracting liabilities from assets) in excess of $100 million. The administration contends that this minimum tax would apply only to the wealthiest 0.01% of households and over half the revenue would come from billionaires alone.
The proposal also would apply only to those who do not already pay at least 20% in tax on their combined income and gains. The administration estimates that the proposal would generate $360 billion in revenue over 10 years.
Tax Treatment of Capital Gains
Like last year, the FY 2023 budget calls for taxing long-term capital gains and qualified dividends of taxpayers with taxable income of more than $1 million at ordinary rates, with 37% generally being the highest rate (40.8% including the net investment income tax), but only to the extent that the taxpayer’s taxable income exceeds $1 million ($500,000 for married filing separately), indexed for inflation after 2023. This would be an increase from the current 23.8% capital gains tax rate—the 20% marginal rate plus a 3.8% net investment tax.
Additionally, the donor or deceased owner of an appreciated asset would realize a capital gain at the time of the transfer. For a donor, the amount of the gain realized would be the excess of the asset’s fair market value on the date of the gift over the donor’s basis in that asset. For a decedent, the amount of gain would be the excess of the asset’s fair market value on the decedent’s date of death over the decedent’s basis in that asset. That gain would be taxable income to the decedent on the Federal gift or estate tax return or on a separate capital gains return.
Increase Top Marginal Rate
The proposal would increase the top marginal tax rate to 39.6% The top marginal tax rate would apply to taxable income over $450,000 for married individuals filing a joint return, $400,000 for unmarried individuals (other than surviving spouses), $425,000 for head of household filers, and $225,000 for married individuals filing a separate return. After 2023, the thresholds would be indexed for inflation. The proposal would be effective for taxable years beginning after Dec. 31, 2022.
Increase the Corporate Tax Rate
In the area of restructuring the corporate tax code, the budget calls for increasing the corporate tax rate from 21% to 28% and a global minimum tax. The plan also includes measures to create a tax incentive to bring offshore jobs and investments back into the U.S., while proposing to reduce the tax benefits that exist under current law for expenses incurred to move U.S. jobs offshore.
Tax Carried Interest
As for “closing loopholes,” the proposal would generally tax as ordinary income a partner’s share of income on an “investment services partnership interest” (ISPI) in an investment partnership, regardless of the character of the income at the partnership level, if the partner’s taxable income (from all sources) exceeds $400,000.
Accordingly, such income would not be eligible for the reduced rates that apply to long-term capital gains. In addition, the proposal would require partners in such investment partnerships to pay self-employment taxes on such income. To prevent income derived from labor services from avoiding taxation at ordinary income rates, the proposal assumes that the gain recognized on the sale of an ISPI would generally be taxed as ordinary income, not as capital gain, if the partner is above the income threshold.
Additional proposals that may be of interest include:
- requiring employers to withhold tax on failed nonqualified deferred compensation plans (estimated to raise $6.8 billion over 2023-2032);
- providing for information reporting by certain financial institutions and digital asset brokers for purposes of exchange of information (estimated to raise $2 billion over 2023-2032);
- requiring post-retirement medical and life insurance benefits to be funded over the longer of the working lives of the covered employees on a level basis or 10 years, unless the employer commits to maintain those benefits over a period of at least 10 years; and
- clarifying the tax treatment of on-demand pay arrangements.
Under the Department of Labor’s budget, the administration also calls for shifting the timing of single employer premiums paid to the Pension Benefit Guaranty Corporation.
What’s Next?
While the submittal of a president’s budget is typically done in early February, it is generally one of the first steps in the annual budget policy debates between Congress and the president. Congress will now develop its own set of budget and spending proposals for fiscal year 2023, which begins Oct. 1, 2022.
In most cases—particularly when there is a divided Congress and president—a president’s budget proposal is immediately declared “dead on arrival.” While that’s not the case with the current one-party rule, there are tight margins in both the House and Senate, and not a lot of room to maneuver, as was seen during the Build Back Better debate that stalled earlier this year in the Senate.
Additional information is available online:
- FY 2023 Budget Proposal (with summary tables)
- Treasury Department Explanation of Revenue Proposals (the so-called “Greenbook”)
- FY 2023 Budget Estimates by Agency
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