The Obama administration has released its fiscal year 2016 budget tax proposals, which would raise taxes on the wealthy and multinational corporations stashing profits offshore, while promising middle-class tax cuts.
The Treasury Department released the so-called “greenbook” on Monday containing explanations of the administration's revenue proposals for FY2016. Many of the proposals are not expected to go far in the Republican-dominated Congress, although the administration is holding out hope that it will be able to find some common ground with Republicans who are eager for tax reform (see $4 Trillion Obama Budget Challenges Republicans on Income Gap).
“The President’s budget proposes targeted policies to strengthen the middle class, level the playing field for American businesses, create more fairness in our tax code, and lay the groundwork for long-term economic growth for our country that is broadly shared, all while setting a course to put our country on sound fiscal footing,” said Treasury Secretary Jacob J. Lew in a statement.
Business Tax Reform
In terms of international tax reform, the administration is proposing a 19 percent minimum tax on foreign income, along with a 14-percent one-time tax on previously untaxed foreign income that has been sitting abroad. The administration also wants to limit the ability of domestic entities to expatriate through tax strategies such as inversions. The budget proposes to restrict deductions for excessive interest of members of financial reporting groups.
In addition, the administration hopes to establish tax incentives for locating jobs and business activity in the U.S. and prohibiting tax deductions for shipping jobs overseas. It aims to limit the shifting of income through intangible property transfers. The budget also proposes to restrict the use of hybrid arrangements that create stateless income.
To provide tax simplifications for small businesses, the budget proposes to expand and permanently extend increased expensing for small businesses. The administration is also proposing to expand simplified accounting for small businesses and establish a uniform definition of small business for accounting methods. The budget proposes to eliminate capital gains taxation on investments in small business stock.
Another proposal would increase the limitations for deductible new business expenditures and consolidate provisions for start-up and organizational expenditures. In addition, the budget proposes to expand and simplify the tax credit provided to qualified small employers for non-elective contributions to employee health insurance.
Several proposals are aimed at encouraging manufacturing, research, clean energy, “insourcing,” and job creation. They include enhancing and making permanent research incentives, and extending and modifying certain employment tax credits, including incentives to hire veterans. In addition, the administration is proposing to modify and permanently extend the renewable electricity production tax credit and the investment tax credit, as well as provide a carbon dioxide investment and sequestration tax credit.
To encourage regional growth, the budget proposes to modify and permanently extend the New Markets Tax Credit and reform and expand the Low-Income Housing Tax Credit.
The administration also aims to encourage investment in infrastructure, such as by enhancing and making permanent research incentives, providing America Fast Forward Bonds and expanding their eligible uses, and providing a new category of qualified private activity bonds for infrastructure projects known as Qualified Public Infrastructure Bonds.
In terms of individual tax reform, the administration is proposing to reform the taxation of capital income to increase the share of taxes paid by the wealthiest as wel as impose a financial fee. The budget would also provide a new, simple tax credit to two-earner families, as well as streamline child care tax incentives to give middle-class families with young children a tax cut of up to $3,000 per child. The administration has also proposed to simplify and better target education tax benefits to improve college affordability, although it has backed away in recent days from a proposal to limit the tax benefits of 529 college savings plans. The administration said it also wants to provide incentives to make it easy and automatic for workers to save for retirement.
The administration aims to raise additional revenue by increasing taxes on the wealthiest, in part by limiting certain tax expenditures for the most affluent by capping their value at 28 percent. The administration is again calling for implementation of the so-called “Buffett Rule” by imposing a new “fair share tax.”
In addition, the budget proposes to eliminate a depreciation benefit for corporate jets and other general aviation passenger aircraft and to tax carried interest profits as ordinary income.
The budget also proposes to end tax breaks that allow professional services businesses to avoid self-employment payroll taxes. It also calls for restoring the estate, gift and Generation-Skipping Transfer tax parameters that were in effect in 2009. The budget would also modify the transfer tax rules for Grantor Retained Annuity Trusts and other grantor trusts.
To streamline tax administration, the budget calls for an increase in funding for IRS enforcement by creating a “program integrity cap.” The budget also proposes to improve the whistleblower program and take further steps to combat tax-related identity theft. The budget also includes an AICPA proposal to rationalize tax return filing due dates so they are staggered. It would also follow the recommendation of the National Taxpayer Advocate to increase the oversight and due diligence of paid tax return preparers.
In response to complaints about enforcement of the Foreign Account Tax Compliance Act against dual citizens, the budget would provide a modicum of relief for certain accidental dual citizens, allowing some expatriates to give up their citizenship without paying a high mark-to-market exit tax.
The budget proposals have attracted mixed reactions. “It is helpful that the administration has made some additional tax proposals, including in the international area,” said Michael Mundaca, co-director of national tax and co-director of the Americas Tax Center for Ernst & Young, and formerly Assistant Secretary of Tax Policy at the Treasury Department. “Tax reform is a complex issue with many moving parts, but as other countries continue to reform their tax systems, the United States needs to reform its system for business taxation if it wants to remain competitive. To make the progress necessary for tax reform to be accomplished before 2017, Congress and the administration need to start negotiations as soon as possible.”
Tim Wach, global managing director of the global tax consultancy Taxand, focused on Obama’s budget proposal to levy a one-off 14 percent “transition” tax on the cash piles held by U.S. companies.
“In Obama’s budget proposal, announced today, he plans to raise $238 billion by levying a one-off 14 percent 'transition' tax on the cash piles held by US companies overseas as well as a 19 percent tax on any future profits as they are earned,” Wach said in a statement. “This extra capital would go towards funding nearly half of a six-year infrastructure program to rebuild highways and bridges. Not for the first time, tax repatriation is being used as a means to fund government initiatives and fill a portion of the budgetary deficit. But this move ignores the crux of the issue. The primary reason for multinationals choosing to defer repatriation of foreign sourced profits is not because of their unpatriotic’ nature, as deemed by Obama, but because their profits will be slapped with a corporate tax rate of up to 35 percent if they were to bring these funds back home; one of the highest corporate tax rates in the world.”
House Ways and Means Committee chairman Paul Ryan, R-Wis., objected to much of the proposed budget. "For six years the president has pursued higher taxes and higher spending, and our economy has paid the price,” he said in a statement. “This budget is simply more of the same. The American people are working harder than ever to get ahead, and this administration wants to put up yet another roadblock: $2.1 trillion in new taxes. And despite this massive tax hike, the President's budget never balances, adding $8.5 trillion in more debt. This is simply unacceptable.
"I want to work with this administration, and I hope that we can find common ground,” Ryan added. “But the president has to demonstrate that he’s interested in governing, not just posturing. Tackling big policy challenges—like expanding American exports and reforming our tax code—requires not just hard work, but also an appreciation that our economy grows best from the bottom up with empowered individuals, rather than top down through government. We’re going to be focused on an optimistic agenda to move America forward, and I hope the president is willing to rethink his tax-and-spend approach so we can get things done for the American people."
Ryan's Democratic counterpart on the committee, Ways and Means Committee ranking member Sander Levin, D-Mich., reacted more favorably to Obama's proposal to make investments in infrastructure by taxing the overseas profits of U.S. corporations.
"The president's budget proposal takes direct aim at two of the nation's most pressing challenges, addressing an international tax system that encourages corporations to keep profits offshore rather than creating jobs in the U.S., and providing desperately needed revenue for our nation's crumbling infrastructure,” said Levin. “I look forward to reviewing the plan in detail in the days to come, beginning with Secretary Lew's appearance before our committee on Tuesday. I hope Republicans will give this proposal the full and serious consideration that it deserves."
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