President Obama on Feb. 2 submitted a budget proposal for the government’s 2016 fiscal year that includes new revenue raisers originally presented in the State of the Union address.
Specifically, those proposals would do the following:
- Impose a one-time 14% tax on unrepatriated foreign income
Increase the capital gains rate from 23.8% to 28% for individuals in the top tax bracket
Modify estate and gift taxation to generally require that property gifted or bequeathed at death to someone other than the decedent’s spouse be treated as sold for its fair market value, subject to certain exceptions
Impose a fee on large financial institutions
Limit the accrual of tax-favored retirement benefits
The budget proposal also includes a number of proposals to “reduce the value of tax expenditures” included in previous budgets, or based on provisions included in tax reform discussion drafts. Among the proposals are those that would do the following:
- Tax partnership carried interests as ordinary income
Require service professionals to pay full self-employment taxes, regardless of the form in which their business is organized
Impose a 19% minimum tax on the foreign earnings of U.S. multinationals
Limit corporations’ ability to invert by not respecting the foreign status of the inverted entities if there is more than 50% continuity of ownership (versus 80% under present law) or if the fair market value of the domestic entity’s stock exceeds the fair market value of the acquiring foreign entity’s stock, management control of the combined entity is primarily in the United States and business activities in the country of the acquiring entity are not substantial
Consistent with the president’s State of the Union message, the budget includes a restructuring of tax incentives for post-secondary education and a number of different tax cuts for individuals. However, those provisions would reduce overall government receipts by only $290 billion, far less than the total amount of proposed increases on businesses and individuals.
Political implications and outlook
Tax proposals in the administration budget have virtually no chance of being enacted in their entirety. Significant portions of the Republican congressional leadership have declared the president’s budget “dead on arrival,” and it is difficult to imagine the passage of a $1.4 trillion tax increase by the current Congress.
The budget’s principal message is arguably not its treatment of taxes, but rather its rejection of the existing budget sequestration rules. To accommodate spending increases while keeping budget deficits below a targeted 3.2% of gross domestic product, the administration needed to include a wide range of revenue raisers.
Many of these revenue raisers have been discussed in the context of a major tax reform plan that would reduce marginal corporate rates. The taxation of existing offshore earnings has been associated with a conversion to a more territorial system of taxation. Repurposing those revenues for infrastructure improvement, as proposed in the budget, would severely compromise the progress of tax reform.
Nonetheless, some of the tax provisions included in the budget cannot be safely ignored. Some of the individual tax cuts proposed will likely prove attractive. Additionally, revenue is needed for certain spending projects, like the renewal of the Highway Trust Fund.
In addition, there may be increasing pressure on congressional Republicans to break the budget sequestration limits based on political concerns centering on the 2016 presidential election, as well as foreign affairs involving the threat of terrorism. Finally, the budget proposals can provide a convenient starting point for what the administration finds acceptable and could insist on including in major tax reform.
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