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May 5, 2021

What to Expect in Washington (May 5)

Congress is mostly out this week and the current focus is whether a bipartisan compromise can be struck between President Biden's $2 trillion-plus infrastructure proposal and the $568 billion alternative proposed by senators including Environment & Public Works Ranking Member Shelley Moore Capito (R-WV), who is expected to lead a group to the White House when the Senate is back in session the week of May 10. However, the President isn't shying away from a fight over whether major tax increases should fund the plan, and Senate Republican leader Mitch McConnell (R-KY) is just as adamant in the other direction, declaring that his members won't vote for a bill over $600 billion or that includes tax hikes.

In remarks at Tidewater Community College in Portsmouth, VA, May 3, the President said, "here's what the American Families Plan doesn't do: It doesn't add a single penny to our deficit. It's paid for by making sure corporate America and the wealthiest 1% just pay their fair share … I don't want to punish anybody, but everybody should chip in. Everybody should pay something along the road here."

He said the choice is between more tax relief for the wealthy or providing community college for all, and that money from shutting down "tax havens" and other "fair share" measures can pay for "universal pre-K for every 3- and 4-year-old in America." The President alluded to the work of former Treasury Secretary Larry Summers and others on the tax gap, and said, "It's the consensus [that] if you increase the disclosure requirements for banks and financial institutions on accounts for the wealthiest Americans to reduce tax cheating … [it] would recover $70 billion per year that currently goes unreported and unpaid." He called for ending stepped-up basis and raising the capital gains rate for those with incomes over $1 million.

In Kentucky May 3, two days post-Derby, Senator McConnell said, "We're open to doing a roughly $600 billion package, which deals with what all of us agree is infrastructure and to talk about how to pay for that in any way other than reopening the 2017 tax reform bill."

Asked during the May 4 press briefing whether the White House envisions both the Jobs and Families plans — i.e., infrastructure and human infrastructure — being combined into one bill, Press Secretary Jen Psaki said, "We're open to a range of mechanisms for the president's ideas moving forward but exactly what you're talking about is part of the discussion we're going to have with members of Congress. And there's an openness to a smaller package, to different components moving forward together, we will leave those mechanics to leaders in Congress, but what we're discussing with them is where we can find agreements on many of the proposals … " She continued to say regarding the insistence of some members that the SALT deduction cap be repealed in the infrastructure bill, "it would be additional cost" and "you have to determine either how to pay for it [or] what other things are cut out."

Tax — A May 4 Wall Street Journal (WSJ) story on the incidence of corporate tax said, "Economists have long puzzled over the question of who pays the corporate tax. 'This is one of the great mysteries in public finance, and so empirical estimates are people feeling around to try to figure it out,' said Mihir Desai, a finance professor at Harvard Business School." JCT assigns 75% of the long-run burden to owners of capital and 25% to workers, while "the Tax Foundation … says the split is 50-50. Harvard's Mr. Desai said he thinks the split is about even," the story said.

The difference between taxes owed and paid has taken on a new allure given IRS Commissioner Rettig's estimate that it may be $1 trillion per year in the age of cryptocurrency, with proposals and mentions from the President and comments from the business community that narrowing the tax gap should fund infrastructure. The Senate Finance Subcommittee on Taxation & IRS Oversight holds a hearing, "Closing the Tax Gap: Lost Revenue from Noncompliance and the Role of Offshore Tax Evasion," on May 11 (2:30 p.m.) Chairman Sheldon Whitehouse (D-RI) co-sponsors international tax legislation and 2nd-ranking Senate Republican John Thune (R-SD) is ranking member. Witnesses include former IRS Commissioner Charles Rossotti, who has a proposal at here.

Rossotti is among five former commissioners to pen a joint May 4 Washington Post opinion piece saying the Biden plan "would restore our tax administration system to make it far fairer and more effective" and "produce a great deal of revenue" by narrowing the tax gap.

Treasury Secretary Janet Yellen participates in the White House press briefing on Friday, taking questions.

Financial services — Stocks briefly dipped on Tuesday after Secretary Yellen suggested that the Federal Reserve might have to raise interest rates to keep the economy from "overheating" in response to new spending. "It may be that interest rates will have to rise somewhat to make sure that our economy doesn't overheat, even though the additional spending is relatively small relative to the size of the economy," Yellen said in an interview at the Atlantic's Future Economy Summit.

At an appearance later in the day, however, Yellen clarified that she wasn't predicting or endorsing any action by the Fed. "I don't think there's going to be an inflationary problem, but if there is, the Fed can be counted on to address it," Yellen said at the WSJ's CEO Council Summit. Inflation "is something we're watching very carefully, and there are tools to address it in the event that that occurs. But I really feel that this [spending] is necessary to make sure that the pandemic doesn't result in permanent scarring of workers and families in our economy, that we're able to get back on track quickly." The Dow Jones Industrial Average eventually posted a small gain on the day and yields on shorter-term Treasurys were little changed.

Pensions — There aren't House votes during this second of two Committee Work Weeks, but committee business includes today's (11 a.m.) Ways & Means markup of Chairman Richard Neal (D-MA) and Ranking Member Kevin Brady's (R-TX) bipartisan "Securing a Strong Retirement Act of 2021." Provisions include:

  • an expansion of auto-enrollment and auto-escalation by requiring all new plans created to incorporate both features;
  • enriching the startup credit for small businesses, and providing a new credit for employer contributions;
  • boosting the Saver's Credit to provide a greater incentive to modest-income workers to save;
  • increasing the 'catch-up' contribution limit for individuals over age 60 to $10,000;
  • increasing the age at which individuals must take required minimum distributions from 72 to 75;
  • exempting individuals with less than $100,000 in savings from having to take minimum distributions;
  • allowing 403(b) arrangements to offer collective investment trusts as an investment option;
  • allowing 403(b)s to participate in Open MEPs;
  • allowing employers to match their workers' student loan repayments with retirement plan contributions;
  • requiring 'catch-up' contributions to qualified plans to be made in Roth form (catch-up contributions to IRAs are not covered by the provision);
  • allowing employers to make matching contributions to Roth accounts; and
  • allowing SIMPLE and SEP Roth IRAs.

A JCT score and description are here.

Culture — Ernst & Young LLP and Carnegie Hall are pleased to present a special musical program in recognition of the longstanding EY support of Carnegie Hall. This program explores the enduring appeal of Beethoven with performance excerpts by The Philadelphia Orchestra. Our special virtual program, for EY professionals and clients, will be on Monday, May 10, at 5:30 p.m. Register


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