Just Taxes Blog by ITEP

House Ways and Means Provisions to Raise Revenue Would Significantly Improve Our Tax System But Fall Short of the President’s Plan

House Ways and Means Provisions to Raise Revenue Would Significantly Improve Our Tax System But Fall Short of the President’s Plan

September 15, 2021

Steve Wamhoff
Steve Wamhoff
Director of Federal Tax Policy

The Ways and Means Committee, the tax-writing body in the House of Representatives, is continuing its work today on tax provisions in a reconciliation bill. The provisions to raise revenue would be huge improvements to our tax code, but they are not as effective as those proposed by the Biden administration.

High-income people and corporations would pay more than they do today, which is a monumental change. But some wealthy billionaires like Jeff Bezos would continue to pay an effective rate of zero percent on most of their income, and American corporations would still have some incentives to shift profits offshore.

The Ways and Means bill raises income taxes on high-income individuals, but not as much as President Biden’s plan.

The bill contains many of the exact, or nearly exact, details for tax increases on high-income individuals that are included in the Biden administration’s plan.

For example, the Ways and Means proposal would:

  • Restore the top income tax rate on “ordinary” income to where it was before the 2017 tax law was enacted, 39.6 percent.
  • Remove carveouts in the 3.8 percent health tax so that certain business income going to the well-off no longer escapes this tax.
  • Raise $200 billion by increasing funding for the IRS to enforce tax laws against wealthy individuals.

On the other hand, the Ways and Means bill would not increase taxes on income from wealth as much as the administration’s plan.

The bill narrows the gap between how we tax income from wealth and how we tax income from work, but not as much as President Biden’s plan.

The administration’s plan includes two important reforms to ensure that income from wealth is no longer taxed less than income from work, at least for the very rich. The Ways and Means proposal includes a watered-down version of one reform and completely excludes the other.

  • The administration’s plan would completely remove the special, lower income tax rate for capital gains and stock dividends for those with taxable income of more than $1 million, meaning millionaires would pay 39.6 percent on all types of taxable income. By contrast, the Ways and Means proposal would raise the special rate for capital gains and stock dividends to 25 percent (and effectively 28 percent for those with incomes exceeding $5 million and subject to a new surtax of 3 percent), meaning income from wealth would be taxed at a rate closer, but not the same as, the rate imposed on income from work.
  • The administration’s plan would mostly remove the biggest break of all, the exemption for unrealized capital gains on assets left to heirs, often called the “stepped-up basis rule.” Unrealized capital gains account for most of the income going to certain billionaires like Jeff Bezos and Elon Musk every year. These gains are not included in taxable income until assets are sold and are excluded from taxable income forever when an individual dies and leaves assets to heirs. The Ways and Means bill excludes the President’s plan to sharply limit the exemption for unrealized capital gains on assets left to heirs (to tax most unrealized capital gains upon a wealthy individual’s death). This means that the effective income tax rate paid by Elon Musk and Jeff Bezos on most of their income will be zero if they leave most of their assets to their heirs—an egregious outcome that perpetuates our nation’s severe levels of racial and economic inequality. Some lawmakers defend this by citing the false arguments that the President’s proposal would hurt family businesses and family farms even though the President’s plan expressly excludes them.

The Ways and Means bill would crack down on wealthy tax cheats but would not go as far as the administration’s plan.

Like the administration’s plan, the Ways and Means bill would raise $200 billion by increasing funding for the IRS to enforce tax laws against wealthy individuals. But the Ways and Means bill does not include the administration’s idea to raise even more revenue by requiring banks to report the total amount of income going in and out of personal accounts.

The Ways and Means bill raises revenue from corporations, but not as much as the Biden plan.

The Biden administration proposes to raise the statutory corporate income tax rate from 21 percent to 28 percent, which is still lower than the 35 percent rate in effect before the 2017 tax law was enacted. The Ways and Means Committee proposes a statutory corporate income tax rate that is a little lower than what Biden proposes, 26.5 percent.

Of course, the effective income tax rate paid by corporations is usually lower than the statutory rate because of the special breaks and loopholes that allow companies to avoid paying. Many of these breaks and loopholes allow companies to shift profits offshore. The Ways and Means proposal would reduce offshore tax breaks but does not go as far as the administration’s plan.

The Ways and Means bill narrows the gap between how we tax domestic profits and how we tax offshore profits, but not as much as the Biden plan.

Under current law, some offshore profits of American corporations are not taxed at all because they fall within an exclusion (equal to a 10 percent return on tangible offshore investments).

  • The administration’s plan eliminates this exclusion, while the Ways and Means bill cuts it in half, meaning offshore profits would still be excluded except to the extent that they exceed 5 percent of a company’s tangible offshore investments. The Ways and Means bill could therefore preserve some of the incentive for companies to invest offshore rather than in the U.S. to shield some of their offshore profits from U.S. taxes.

Under current law, when offshore profits of American corporations are subject to U.S. taxes, they generally are subject to just half the rate that applies to domestic profits, which means offshore profits are more advantageous than profits generated in the U.S.

  • The administration would narrow the gap between the domestic rate and offshore rate by subjecting offshore profits to a rate of 21 percent, which is 75 percent of the rate it proposes for domestic profits. The Ways and Means bill would allow a larger gap to exist by taxing offshore profits at a rate of 16.5 percent, which is about 62 percent of the rate it proposes for domestic profits.

The timidness of the Ways and Means Committee’s international corporate tax reforms seems to result from an argument put forth by some lawmakers that the administration’s proposals would cause U.S. tax policy to deviate too much from international efforts, an argument that has been refuted by labor unions and by ITEP.

Ways and Means Bill Does Not Go as Far in Cracking Down on Breaks for the Fossil Fuel Industry

The administration’s plan includes eliminating some $35 billion in tax provisions benefiting the fossil fuel industry and replacing them with tax incentives for clean energy and carbon storage. These reforms are not included in the Ways and Means bill. It is possible the Ways and Means Committee was swayed by the industry’s fear tactics suggesting runaway oil and gas prices, even though the administration has pointed to research suggesting that there would be very little impact on domestic energy prices.

Make No Mistake, the Ways and Means Bill Is a Big Step Forward

Earlier this year, the Biden administration put forth a transformative tax proposal that would raise significant revenue, reduce corporate tax avoidance, and substantially increase taxes paid by the wealthiest individuals. The Ways and Means committee has kept some of those important reforms but has diluted others in ways that will leave some of the work of tax reform undone. The proposal from the Ways and Means committee does not go as far as the Biden administration’s plan, but it nonetheless makes the U.S. tax code more equitable and will raise substantial revenue from those most able to pay.