May 7, 2021
What to expect in Washington (May 7)
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 is 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 long to court GOP support before potentially moving by budget reconciliation. 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.”
Politico this morning reported EY’s global vice chair of tax, Kate Barton, as calling the dynamic regarding the release of the tax plans a “‘first volley’ at negotiations. ‘We all need to stay on top of it.’”
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.”
A WCEY Alert on Biden’s tax proposals is available here.
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.
In the Democratic objection category, Representatives Cindy Axne (D-IA) and Jim Costa (D-CA) led a group of 13 House Democrats who represent farm districts in a letter to House leadership urging the exemption of family-owned farms from any potential changes to the stepped-up basis for capital gains in tax law, which the White House has said would be included.
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.”
Global tax – Politico reported Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, as saying of the BEPS 2.0 project 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 U.S. 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, 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.
Budget – 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. Treasury typically uses such “book-keeping maneuvers,” the AP noted, and the Bipartisan Policy Center said May 6 the debt limit “X Date” – when the federal government will no longer be able to meet all its obligations in full and on time – will arrive in fall 2021.
Financial services - The House Financial Services Committee May 6 held a virtual hearing on “Game Stopped? Who Wins and Loses When Short Sellers, Social Media and Retail Investors Collide, Part III.” It was the third hearing the Committee has held on market structure issues raised by the disruptions of January 25-29, when retail investors encouraged by social media drove up the prices of GameStop and other “meme stocks” in a bid to punish short-sellers. Witnesses included newly confirmed SEC Chairman Gary Gensler, who focused on a series of factors that were involved in January’s volatility, including gamification and user experience; payment for order flow; equity market structure; short-selling and market transparency; social media; and market clearance and settlement.