President Biden on May 28 released a $6 trillion budget proposal, the first of his presidency, that calls for dramatically boosting federal government spending levels, financed, in part, by tax increases on corporations and high-income earners.
The budget proposal—which comprises more than 1,000 pages—estimates $4.17 trillion in revenues with slightly more than $6 trillion in spending, resulting in an annual budget deficit of $1.83 trillion for fiscal year 2022. Overall, the budget shows annual deficits of $1.3 trillion or more for each year from 2022 to 2031. In addition, the budget proposal estimates increases in GDP growth at approximately 2% throughout the decade, while debt would grow to 117% of GDP by the end of FY 2031.
It appears most of the new spending would be allocated toward the American Jobs Plan (e.g., transportation, water and broadband connectivity infrastructure, and clean energy and climate change spending) and the American Families Plan (e.g., spending on education, child care for low- and middle-income families, paid family and medical leave, and various tax credits for families and workers) that Biden announced earlier in the year, along with making various provisions of the American Rescue Plan permanent.
The tax and spending portions of the fiscal year 2022 budget includes no specific changes in retirement policy, which, in some ways, is good news because, for example, it does not include Biden’s campaign proposals to equalize the savings incentives in DC plans or to impose a financial transaction tax.
The budget includes several proposed tax increases to help pay for all the proposed new spending programs. Over the period 2022–2031, the Biden administration is calling for more than $2 trillion in corporate tax reforms, $754 billion in new revenues from increasing taxes for high-income earners and closing loopholes, and $717 billion in improved tax compliance and administration. Proposals that may be of particular interest to the advisory and plan sponsor community are discussed below.
Tax Treatment of Capital Gains
The FY 2022 budget calls for taxing long-term capital gains and qualified dividends for taxpayers with AGI of more than $1 million at ordinary income tax 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 income exceeds $1 million ($500,000 for married filing separately), indexed for inflation after 2022. 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 that was imposed to help pay for President Obama’s expansion of Medicare.
Notably, the proposal would be effective for gains required to be recognized after the date of announcement, which, in this case, was April 28, 2021, when the Biden administration first announced the proposal.
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 the Top Tax Rate
The FY 2022 budget also seeks to “ensure that high-income Americans pay the tax they owe under the law—ending the unfair system of enforcement that collects almost all taxes due on wages, while regularly collecting a smaller share of business and capital income.”
As such, the proposal would increase the top marginal individual income tax rate to 39.6%, which would be applied to taxable income in excess of the 2017 top bracket threshold, adjusted for inflation. In essence, this would bring the top marginal tax to 43.4% for those earning over $1 million, when factoring in the existing 3.8% surtax. In tax year 2022, the top marginal tax rate would apply to taxable income over $509,300 for married individuals filing a joint return, $452,700 for unmarried individuals (other than surviving spouses), $481,000 for head of household filers, and $254,650 for married individuals filing a separate return.
Increase the Corporate Tax Rate
In the area of restructuring the corporate tax code “to ensure that wealthy corporations pay their fair share and invest here at home,” the budget calls for increasing the corporate tax rate to 28% and a global minimum tax. The plan also includes measures to prevent corporate inversions and offshoring, as well as a new minimum tax on corporate book income.
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.
Information Reporting and Enforcement
In the area of improving compliance, the proposal would create a comprehensive financial account information reporting regime. As such, financial institutions would report data on financial accounts in an information return. The annual return will report gross inflows and outflows with a breakdown for physical cash, transactions with a foreign account, and transfers to and from another account with the same owner.
This requirement would apply to all business and personal accounts from financial institutions, including bank, loan, and investment accounts, except for accounts below a de minimis gross flow threshold of $600 or fair market value of $600.
The proposal would also expand the scope of information reporting by brokers with respect to cryptocurrency assets to include reporting on certain beneficial owners of entities holding accounts with the broker. According to the Treasury Department, this would allow the U.S. to share such information on an automatic basis with appropriate partner jurisdictions. The proposal, if adopted and combined with existing law, would require a broker to report gross proceeds and such other information as the Treasury Secretary may require with respect to sales of crypto assets with respect to customers, and in the case of certain passive entities, their substantial foreign owners.
What’s Next?
Submittal of the president’s budget is generally considered the opening salvo in the annual budget policy debates between Congress and the president.
In most cases—particularly when there is a divided Congress and president—a president’s budget proposal is immediately declared “dead on arrival,” but since that’s not the case with the current one-party rule, certain aspects of the president’s budget may have legs. In fact, a lot of the infrastructure proposals are already under negotiation between the Biden administration and members of Congress.
Still, with the margins particularly tight in the Senate, it will likely be difficult to enact any of the various tax increases.
Additional information is available online:
- FY 2022 Budget Proposal (with summary tables)
- White House Fact Sheet on FY 2022 Budget
- Treasury Department Explanation of Revenue Proposals
- FY 2022 Budget Estimates by Agency
