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May 9, 2021

Americas Tax Policy: This Week in Tax Policy News for May 7

This Week (May 10 - 14)

Congress: The House and Senate are back in session. Senate Environment & Public Works Ranking Member Shelley Moore Capito (R-WV) is expected to lead a group to the White House to discuss potential compromise on transportation infrastructure legislation. On May 12, President Biden hosts House Speaker Nancy Pelosi (D-CA), Republican leader Kevin McCarthy (R-CA), Senate Majority Leader Chuck Schumer (D-NY), and Senator McConnell at the White House.

Tax gap hearing: On Tuesday, May 11 (2:30 p.m.) is the Senate Finance Subcommittee on Taxation & IRS Oversight hearing, "Closing the Tax Gap: Lost Revenue from Noncompliance and the Role of Offshore Tax Evasion." 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 Rossotti.

Fairness hearing: On Wednesday, May 12 (2:00 p.m.), the House Ways and Means Select Revenue Measures Subcommittee will hold a hearing on "Funding Our Nation's Priorities: Reforming the Tax Code's Advantageous Treatment of the Wealthy."

Last Week (May 3 - 7)

Biden on corporate rate: President Biden May 5 defended tax increases proposed to pay for transportation-related and human infrastructure plans, but also said he is "open to compromising" on the proposed corporate tax rate increase to 28%. Congress was out this week and a sit-down with moderate Republican senators who have a smaller infrastructure plan free of tax increases likely happens next week, with more talks likely thereafter. Democrats must decide how much patience to have in courting GOP support for what clearly would be a smaller, more traditionally focused infrastructure bill before potentially pulling the plug on those negotiations and moving to a more partisan approach that would require moving a larger bill utilizing budget reconciliation procedures. Biden said in the wake of the TCJA "corporations aren't investing any money in [R&D], what's most of it going to? Buying back their own stock, stock dividends." Asked if he is open to a corporate increase to 25%, the President said, "I'm open to compromising, yes. It doesn't have to be exactly what I say … I'm not willing to deficit spend … It's fair to say this is about making the average multi-millionaire pay just a fair share." In Louisiana May 6, President Biden said "This is all about making a choice — a choice between giving tax breaks to the super wealthy and to corporations, and investing in working families, who are going to build the country," and referenced reducing the "tax cut to between 25 and 28." A New York Times report said: "Mr. Biden's comments reflect both a read of public polling and a negotiating tactic. He is presenting the tax increases not simply as a method of paying for his sprawling agenda, but as a policy goal on their own, aimed at narrowing gaps in income and wealth that have been exposed in stark terms by the coronavirus pandemic. He and his aides see a chance to turn the issue against Republicans who have long preached tax cuts and hammered Democrats for supporting any tax increases."

A WCEY Alert on Biden's tax proposals is available here.

McConnell says no tax increases: The President may be willing to compromise but he 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 Kentucky May 3, 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." On May 5, Senator McConnell said, "One-hundred percent of our focus is on stopping this new administration," adding, "We're confronted with severe challenges from a new administration, and a narrow majority of Democrats in the House and a 50-50 Senate to turn America into a socialist country, and that's 100% of my focus." He said support from his members is airtight: "What we have in the United States Senate is [total] unity from Susan Collins to Ted Cruz in opposition to what the new Biden administration is trying to do to this country."

Process: 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."

International tax: A May 7 Wall Street Journal (WSJ) story focused on the deduction for foreign-derived intangible income (FDII), the "carrot" in the TCJA (with GILTI the "stick") to "spur companies to locate easy-to-move intellectual property in the U.S. when faced with a relatively even tax choice about where to book such income," and that the Biden plan proposes to eliminate. The WSJ said: It isn't clear whether that incentive has changed investing decisions. "I cannot think of a company who said, 'We have moved stuff out of the U.S. because of this theoretical incentive,'" said Ray Beeman, a former House GOP tax aide who is now a principal at accounting firm EY LLP. "You don't do everything for tax purposes."

Reflecting a proposal in Biden's Made in America Tax Plan, second-ranking Senate Democrat Dick Durbin (D-IL) May 5 announced his Stop Corporate Inversions Act (S. 1501) to treat a combined foreign corporation as a domestic corporation if the shareholders of the former US corporation own more than 50% of the new combined foreign corporation, or if the affiliated group that includes the combined foreign corporation is managed and controlled in the US and engages in significant domestic business activities in the US. Durbin has sponsored this legislation in previous congresses.

Corporate tax incidence: 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.

Tax gap: The difference between taxes owed and paid has taken on a new allure given IRS Commissioner Rettig's estimate that the gap 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 at least help fund infrastructure legislation. On May 3, President Biden 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." A Senate Finance subcommittee holds a hearing on the issue next week and witnesses include former IRS Commissioner Charles Rossotti, who has a plan relating to the reporting of financial account inflows and outflows. Below is a brief summary of the President's proposal, the Rossotti Shrink the Tax Gap plan, and a 2019 paper by Summers and now-Treasury official Natasha Sarin.


President Biden

Rossotti 'Shrink the Tax Gap'

Summers-Sarin paper

Information reporting

While very short on details, the Treasury has suggested that financial institutions provide additional information to the IRS, purportedly leveraging the information that they already know about account holders, requiring that they add to their regular, annual reports information about aggregate account outflows and inflows.

1099New report would be required for individual taxpayers whose income was in the top 25% of all filers and who had income from low visibility sources; IRS would determine which taxpayers; new rules would apply to banks, traditional financial institutions, online payment systems, mobile payment apps, cryptocurrency exchanges.

Increase reporting requirements, including for partnership/S corporation income, nonfarm proprietor income, rents, and royalties


Direct roughly $80 billion to the IRS over a decade to fund an array of priorities — including overhauling technology to improve enforcement efforts

Make more effective use of technology to use all the information the IRS has but cannot use efficiently

Increase IRS IT and analytics investment


Transform the auditing process to be the last step in resolving the deficiencies in returns that are identified and analyzed by technology

Increase examination rates for individual income tax filers, estate, employment, and corporate tax returns

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.

Budget and debt limit: Following a report last week that Democrats could try to attach a debt limit increase to a budget reconciliation bill, the Treasury Department told lawmakers this week that extraordinary measures used to postpone the must-act date beyond the August 1 reinstatement of the limit could be exhausted "much more quickly" than normal given the unusual circumstances of the global pandemic, the AP reported. Asked about the matter during the White House press briefing May 7, Treasury Secretary Janet Yellen said "it is exceptionally challenging this time to try to figure out just how long those measures are going to last, in part because of higher and more volatile spending and revenue numbers associated with the state of the economy and the pandemic … and we are concerned that there are scenarios that we give a very limited amount of additional time through the use of extraordinary measures." Asked for specifics, she said, "there are scenarios in which some sometime during this summer the extraordinary measures would run out." The Bipartisan Policy Center projected May 6 the date when the federal government will no longer be able to meet all its obligations in full and on time will be in fall 2021.

Global tax: Politico May 6 reported Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, as saying of the BEPS 2.0 project, and specifically relating to the minimum tax rate to be set as part of a model minimum tax proposal, that while there could be an agreement on the architecture of the deal in the summer, a decision on a global rate wouldn't come until October, once the US has decided on its minimum levy. "Saint-Amans said that getting a global minimum rate at least close to 21 percent was possible, even as lower-tax countries like Ireland have been more vocal in their questions about that idea," the report said. The WSJ earlier reported: The U.K. is open to U.S. proposals for a global minimum corporate-tax rate, provided that it goes hand-in hand with a fairer split of the tax take from U.S. tech giants under Pillar 1, U.K. Treasury Chief Rishi Sunak said, adding that he also said international tax rules are a layover from an earlier era and weren't designed for the modern digital economy. "France and Germany have also said they'd be supportive of such a package," the story noted.


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