Biden Budget Crafts ‘Top-Up Tax’ to Meet Global OECD Agreement

An exterior view of the building of U.S. Department of the Treasury is seen in Washington, on March 27, 2020. Olivier Douliery/AFP via Getty Images

The U.S. Treasury Department has proposed a measure to ensure that the 15 percent global corporate minimum tax is properly instituted.

As part of President Joe Biden’s $5.8 trillion 2023 budget documents published on March 28, the Treasury put forward the new Undertaxed Profits Rule (pdf). This would replace the present U.S. Base Erosion Anti-Abuse Tax, or BEAT.

Under the plan, the federal government would install a “top-up tax” that makes certain multinational corporations pay an effective tax rate of 15 percent and conform to the Organisation of Economic Cooperation and Development’s (OECD) standards agreed to last year.

The policy instrument would generate additional revenue since it would reject deductions for taxes paid in areas with lower rates, almost guaranteeing that they face the minimum levy. The administration’s budget projects that it would raise $239 billion over a decade.

“The higher tax rate and expanded base would reduce the incentive for foreign-based multinational companies to shift profits offshore and encourage adoption of the global minimum tax. The exception for payments subject to sufficient tax would focus BEAT on payments to low-tax jurisdictions, the Treasury Department stated in the budget papers.

“However, since the recent legislative proposals for BEAT reform, there have been developments in the OECD international tax negotiations that provide another model for enforcing the new international tax agreement in coordination with the rest of the world.”

Treasury Secretary Janet Yellen speaks at a conference in Washington on Jan. 19, 2022. Nicholas Kamm/AFP via Getty Images

In December, the OECD established a 136-nation international agreement that would see member countries impose a 15 percent minimum tax on the income of corporations. Proponents defended the policy by arguing that it eliminates a race to the bottom in relation to tax policy, ensuring corporations pay their fair share.

An official told Reuters that the Treasury was prepared to work with Congress to enact legislation that the plethora of benefits of federal tax credits and other corporate incentives would remain intact.

The Treasury added that its revenue proposals suggest the undertaxed profits rule would be relevant to corporations with more than $850 million in global annual revenue. Moreover, the department noted that the new system would address the costs of goods sold by manufacturing firms to service businesses.

Sweeping Tax Changes

Biden’s budget advanced several sweeping changes to the tax code that primarily target corporations and wealthy Americans (pdf).

As part of some of these proposals, the Biden administration recommended raising the corporate tax rate to 28 percent from 21 percent, increasing the top individual tax bracket to 39.6 percent, and introducing a 20 percent minimum tax levy on the top 0.01 percent of earners and households worth more than $100 million.

The president’s new 20 percent minimum tax would target billionaires’ income and unrealized capital gains.

“President Biden is a capitalist and believes that anyone should be able to become a millionaire or a billionaire,” the White House said in a statement. “He also believes that it is wrong for America to have a tax code that results in America’s wealthiest households paying a lower tax rate than working families.”

“As a result, this new minimum tax will eliminate the ability for the unrealized income of ultra-high-net-worth households to go untaxed for decades or generations,” the administration added.

It’s unclear how much support Biden can muster from congressional Democrats on some of these plans.

But AE Wealth Management Chief Investment Officer Tom Siomades says many of these measures won’t generate too much pushback because most people aren’t billionaires.

“The part of the budget gimmick that bothers me is the taxing of ‘unrealized gains’ this has the potential to become a modern-day version of the Alternative Minimum Tax (AMT),” Siomades told The Epoch Times. “Remember the AMT was passed so ’rich' people would pay some taxes, and over time, it ensnared common folks.”

Income taxation is one thing because the money has already been made, but a tax on unrealized gains will force investors to sell so they can have the cash to pay the bill, he adds.

“It’s just not realistic and in my view contrary to the principles of capitalism,” Siomades said.

“The billionaire tax is a gateway tax that will target more and more people who are not, in fact, billionaires if it is passed.”

Still, even with these new or revised revenue-generating instruments, the federal deficit and national debt are expected to rise substantially over the next decade, warns Peter Tanous, the founder and chairman of Lynx Investment Advisory.

President Joe Biden introduces his budget request for fiscal year 2023 at the White House on March 28, 2022. Anna Moneymaker/Getty Images

“The President’s budget, like all the budgets in previous years from both Republican and Democratic administrations, will continue to balloon the Federal deficit, which is now approaching $30 trillion,” Tanous told The Epoch Times, adding that the costs of servicing this debt have “reached alarming proportions.”

“It is about to get much worse as interest rates rise.”

Although the White House is championing a projected $1 trillion reduction in the budget deficit over 10 years, the U.S. government is still on track to accumulate more than $14.4 trillion in deficits during this span.

The administration projects that the U.S. government will spend more than $1.3 trillion in interest on the debt by 2032.

Earlier this month, the Federal Reserve raised the benchmark fed funds rate by 25 basis points for the first time since 2018. The Federal Open Market Committee (FOMC) is anticipated to raise rates six more times this year, and the early signals suggest that policymakers will move on a 50-basis-point increase at the next two-day meeting in May.