New ITEP Report Explains How the Biden Administration Can Act on Its Own to Fix Our Tax Code

A new report from ITEP explores how the Biden administration could solve some problems with our tax code through new regulations and executive actions. To be clear, this is no substitute for legislation enacted by Congress. For example, the tax provisions included in the Build Back Better Act (BBBA) that passed the House of Representatives in November would raise nearly $1.5 trillion over a decade and more revenue through enhanced tax enforcement aimed at wealthy tax evaders. This cannot happen without legislation.

But even if those reforms are enacted by Congress, loopholes will remain in the federal tax system that the administration can address on its own. To start, President Biden could focus on the regulations the Trump administration issued to implement the Tax Cuts and Jobs Act (TCJA). Several scholars have explained that President Trump’s Treasury Department wrote regulations that provide even bigger tax breaks to corporations and the richest taxpayers than Congress intended when it wrote that legislation. The Biden administration should, at the very least, issue new regulations that simply follow the law.

One of those scholars, Rebecca Kysar (who is now an official in the Treasury Department) listed astonishing examples of the Trump administration’s overreach in testimony before the House Ways and Means Committee in early 2020, such as:

• Banks Are Not Financial Services
  • The TCJA provides a 20 percent deduction for income from “pass-through” businesses but denies this break for “financial services.” In plain English, this means banks cannot take the deduction. Yet the Treasury Department’s regulations exclude taking deposits and making loans (what most of us would call “banking”) from the definition of “financial services.”
• Celebrity Chefs Have No Reputation or Skill
  • The deduction is also barred for businesses whose principal asset is the “reputation or skill” of the owners or employees, but the examples provided by Treasury clearly indicate that a celebrity chef’s restaurant profits would qualify for the deduction.
• Linens and Mattresses Are Permanent Improvements to Property
  • The TCJA provides various capital gains tax breaks for assets invested in designated “Opportunity Zones.” One way investors can meet the law’s requirements is to “substantially improve” property in an Opportunity Zone, which is defined as “addition to basis,” a term long used in tax law to refer to permanent improvements in property like replacing a roof on a building. The Treasury Department created a definition of this term that includes buying linens, mattresses, furniture and gym equipment.

The Trump administration also overreached with the regulations it issued to implement the international corporate provisions in TCJA. The problems in this area would largely be addressed if Congress enacts the international tax reforms in the BBBA, which fundamentally overhaul TCJA’s rules for multinational corporations. If Congress fails to do so, this is another area that requires new regulations from the Biden administration.

In one instance, the Trump administration bowed to pressure from foreign banks like Credit Suisse and Barclays to treat interest payments paid to these banks by their U.S. subsidiaries as domestic payments so that they avoid a provision of the law designed to block tax avoidance. In another instance, Secretary Mnuchin created a “high tax exception” in the international tax regime that existed nowhere in the tax act, lowering the tax bills of many multinational corporations. Legal scholars argue that these exceptions were not the intent of the tax act signed into law.

The Biden administration should revise these regulations to enforce the law as it was written and passed by Congress, not as big banks and multinational corporations have lobbied for it to be enforced.

Read the full report, What the Biden Administration Can Do on Its Own, Without Congress, to Fix the Tax Code.

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