LGT's Profit Sense

The U.S. Department of Treasury released the General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals, commonly known as the “Greenbook,” on March 9, 2023. This document provides an overview of the White House’s proposed budget. According to the Greenbook’s introduction, the budget proposals would “raise revenues, expand tax credits for workers and families, improve tax administration and compliance, and make the tax system more equitable and efficient.” The following is a summary of some trends in the proposed budget, along with highlights of changes it would make to the Internal Revenue Code (IRC) and tax policies.

Increased Tax Rates for Corporations

Corporate Income Tax Rate

Currently, C corporations pay a flat rate of 21% in income tax. Shareholders then pay income tax on various types of dividends. If the White House’s budget passes, the corporate rate would increase to 28%.

Increased Excise Tax on Stock Buybacks

Publicly-traded domestic corporations must pay a 1% excise tax on certain stock buybacks. This has, at times, been a way for corporations to distribute money to shareholders at a lower tax rate than if they paid dividends. The proposed budget would lessen this disparity by raising the excise tax rate to 4%.

Global Intangible Low-taxed Income

U.S.-controlled foreign corporations (CFCs) receive favorable tax treatment for income earned abroad in certain situations. By not taxing Global Intangible Low-taxed Income (GILTI), the IRC encourages CFCs not to move money further away from the U.S. The new budget would make much of this income subject to U.S. taxes.

Increased Tax Rates for High-Net-Worth Individuals

Increased/Minimum Tax Rates

The top marginal individual income tax rate is currently 37% for the following groups:

• Married, filing jointly: $450,000
• Married, filing separately: $225,000
• Head of household: $425,000
• Single: $400,000

The proposed budget would increase the rate for these groups to 39.6%. It would also establish a minimum tax of 25% for people whose net worth exceeds $100 million, dubbed the “minimum billionaire tax.”

Investment Income Taxation

The White House is proposing to increase the Net Investment Income Tax (NIIT) rate from 3.8% to 5% for high-net-worth taxpayers with income from pass-through business entities. This would include an additional Medicare tax increase, providing more funding for that program.

The budget would also raise the tax rate for capital gains and qualified dividend income for taxpayers with income of more than $1 million. In combination with the NIIT at current rates, that would be a total rate of 40.8% (37% + 3.8%). If the proposed increases in the top marginal tax rate and the NIIT become law, the rate would be 44.6%.

Reducing Tax Avoidance

Corporate Distributions vs. Dividends

Corporate distributions to shareholders can be subject to several forms of taxation. Taxpayers have used various methods to reduce the amount of tax owed on these distributions. The new budget would require taxation of most corporate distributions as dividends.

Carried Interest Loophole

Under current law, the carried interest loophole allows people in certain partnerships to pay capital gains tax on their income instead of regular income tax. Since this typically involves large amounts of money, it means a difference between a 25% and 37% tax rate. The proposed budget would require taxing much of this money as ordinary income.

Estate and Gift Tax Loopholes

The number of ways people have devised to save on estate and gift taxes is almost too many to count. The proposed budget would take aim at several of these loopholes. One example involves intentionally defective grantor trusts (IDGTs). Currently, a grantor can transfer assets into an IDGT without incurring any tax liability, thereby removing it from their estate altogether. Among several changes to the use of IDGTs, the proposed budget would require grantors to recognize gains on those transfers.

Tax Relief for Individuals and Families

Expanded Tax Credits

The proposed budget would expand the Child Tax Credit until at least 2025 and make it fully refundable on a permanent basis. It would also make permanent the expansion of the Earned Income Credit in the American Rescue Plan, which allows workers who do not have children to qualify for the credit.

Other Changes

Tax Consequences of Onshoring or Offshoring Jobs

The proposed budget would create a new tax credit for businesses that “onshore” jobs, which means they bring jobs from overseas to the United States. The credit would be equal to 10% of the eligible costs associated with the onshoring process.

At the same time, the budget would discourage offshoring of U.S. jobs. Businesses that send jobs overseas would not be able to deduct their offshoring expenses.

Private Prison Income

An executive order issued by the White House on January 26, 2021 prohibits the U.S. Department of Justice from contracting with privately-operated prison facilities. The new budget builds on that policy by modifying the rules for Real Estate Investment Trusts (REITs). Dividends paid by REITs are deductible if the income mostly comes from approved sources. Rental income from private prisons would no longer be on the list of approved income.

Fossil Fuel Tax Preferences

The IRC provides a variety of incentives that, according to the Greenbook, “encourag[e] more investment in the fossil fuel sector than would occur under a neutral system.” The proposed budget would eliminate many of those incentives.