CHN: Taxes and Revenues in the FY2016 Presidential Budget Request

The President’s budget would raise revenue to reduce the deficit and pay for new investments through reforms to the business tax system and by making changes that would require the wealthiest individuals to pay a fairer share of taxes.
Corporate Tax Reform
Corporations are currently parking an estimated $2 trillion in overseas tax havens to avoid paying taxes in the United States. The President’s budget proposes taxing those holdings at 14 percent. This one-time provision would raise $238 billion regardless of whether the corporations keep the income overseas or return it to the U.S. It would be used to pay for nearly half of the $478 billion cost of reauthorizing the six-year transportation bill. Without a new injection of money, the Transportation Trust Fund will run short of funds this year. The Fund pays for repairing existing roads and bridges and modernizing our infrastructure with investments in highways, freight, bus, subway, and passenger rail systems. The budget proposes that in the future, profits held offshore would be taxed a 19 percent minimum rate, again, whether or not they are brought back to the United States.

Aside from the revenue the temporary 14 percent offshore provision would bring, the President continues to call for revenue-neutral corporate tax reform. Revenue garnered from the 19 percent minimum tax and other changes to eliminate loopholes in the system would be used to lower the current maximum 35 percent corporate rate to 28 percent. The maximum rate for domestic companies would be lowered to 25 percent. Dave Camp (R-MI), retired former chairman of the House Ways and Means Committee, and other Republicans have also called for taxing corporate money stockpiled offshore but at a rate significantly lower than 14 percent, and for lowering the maximum corporate rate to 25 percent. While there are significant differences between the President’s corporate tax plan and that of Republicans, perhaps the common ground on taxing overseas holdings could be a starting place for reforming the corporate tax system now riddled with loopholes. Some large profitable corporations are using those loopholes to pay zero taxes, or in the case of General Electric for example, getting a tax rebate from the government. Advocates for low-income programs believe strongly that corporate tax reform must result in increased revenue to help pay for needed investments in infrastructure and human capital, including health, nutrition, housing, education, and other social programs.

Changes to the Individual Tax Code
The President’s budget calls for changes in the individual tax system to help pay for new investments in his budget, including expanded tax credits for middle-class and working families and investments in community college and preschool. First, his proposal would raise the top rate on capital gains and dividends for high-income individuals and couples to 28 percent, the rate in effect under President Reagan. Second, the budget would eliminate a provision that lets the wealthy avoid capital gains taxes on inherited, appreciated assets. Under current law, capital gains on assets held until death are never subject to income taxes, and the basis of inherited assets is immediately increased (“stepped up”) to the value at the date of death. The President’s proposal would end stepped-up basis, triggering a tax liability for capital gains. Exemptions would be included to avoid tax and compliance burdens for middle-class families. Third, the budget makes it more costly for large, highly-indebted financial firms to finance their activities with excessive borrowing by imposing a “financial crisis responsibility fee,” reducing the risk and burden on individual taxpayers. The capital gains changes and fee on the largest financial firms will bring in an estimated $320 billion over 10 years.

As in his previous budgets, the President would limit the tax subsidies the wealthiest taxpayers get from itemized deductions and other tax provisions to 28 percent. Under current law, a wealthy taxpayer in the 39.6 tax bracket who pays $10,000 in mortgage interest gets a tax savings of $3960. A middle-income taxpayer in the 15 percent tax bracket gets a tax savings of only $1500 on the same mortgage.

The budget also includes other provisions aimed at addressing now legal tax avoidance measures that significantly lower wealthy individual’s tax liability. Among them is the Fair Share Tax, also known as the ‘Buffett Rule’ named after billionaire Warren Buffett who called for reforming the tax code that allows him to pay a lower tax rate than his secretary. It would require very high-income taxpayers to pay a minimum of 30 percent of Adjusted Gross Income less a credit for charitable contributions, and would generate $35.2 billion over 10 years.

Advocates were deeply disappointed when the 2013 “Fiscal Cliff Deal” did not make permanent the positive changes made in 2009 to the Earned Income Tax Credit (EITC) and Child Tax Credit. These changes will expire in 2017 if Congress fails to act, moving 16 million people – including 8 million children – into or deeper into poverty. The President’s budget proposes to make these provisions permanent, and also expands and makes permanent the American Opportunity Tax Credit, which helps low-income college students. His budget also expands EITC for low-income workers without dependent children who currently can be eligible for only a very small EITC and who are the only group that can be taxed into poverty by the federal code. The new House Ways and Means Committee Chairman Paul Ryan (R-WI) agrees with the President on expanding EITC for childless workers.

Republicans have for many years resisted proposals to increase revenues. As pressure builds to reform the tax system, advocates will continue to work in support of new revenue from progressive funding sources.

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Budget and Appropriations
tax policy