Top Tax-Related Takeaways From Biden’s Budget Proposal
On March 9, 2023, President Biden released his official budget. As expected, his budget priorities include increasing taxes on corporations and high earners, boosting spending on policy items like energy and education, and moving to reduce the deficit.
Budget Proposals Are Not Law
But before you rush out and make plans based on the budget, you should understand that the President’s budget, like all others that came before it, is a proposal. It’s not law. It’s a signal to Congress that this is what the administration wants to happen—but Congress doesn’t always follow the wishes of the President. President Bush, for example, was never able to fully repealed the estate tax (it’s still around), President Obama did not “cut the deficit we inherited by half” by the end of his first term in office, and President Trump did not eliminate the Affordable Care Act.
(If you’d like to read more on this topic, The New York Times did an analysis of proposed budgets and fiscal realities from the last 30 years—with charts—here.)
But presidential budgets do set the tone for—and often the stage for political showdowns over—fiscal policy for the coming year. That’s why it’s worth noting, even if it isn’t the current rule of law.
Here’s a look at some key tax-related provisions included in President Biden’s recent budget proposal.
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The proposal calls for an increase in the corporate income tax rate to 28%—higher than the current rate of 21% but lower than the pre-TCJA rate of 35%. For comparison, according to the Tax Foundation, the worldwide average statutory corporate income tax rate, measured across 180 jurisdictions, is 23.37%. When weighted by GDP, the average statutory rate is 25.43%. Under the OECD/G20 Inclusive Framework on BEPS (base erosion profit shifting), the global effective minimum tax rate will be 15%.
This would lead to additional changes, including the repeal of the base erosion and anti-abuse tax, known as BEAT. In its place, there would be an undertaxed payments rule, or UTPR, consistent with the model rules for OECD Pillar Two, which is part of the global tax deal and typically applies to high-earning companies. The UTPR would allow a country to increase the tax—sometimes called a top-up tax—on a multinational business that pays less than the proposed global minimum tax rate. The proposal makes clear, however, that US companies that benefit from US tax laws would continue to do so.
The proposal would also seek to increase the Global Intangible Low-Taxed Income—GILTI—tax rate on overseas income to 14% from the current 10.5%, calculated on a jurisdiction-by-jurisdiction basis.
The proposal would also boost the stock buyback surcharge signed into law under the Inflation Reduction Act from 1% to 4%. That should be no surprise, as it was mentioned as part of the State of the Union address. Corporate stock buybacks can be controversial since they tend to boost shareholder value rather than provide an incentive to re-invest in workers or technology. That’s true across party lines—in 2020, Donald Trump criticized companies that engaged in buybacks after a 2018 tax break and promised to prevent them from doing the same with Covid funds.
There are currently only a few tax incentives for US employers to bring offshore jobs and investments into the country. And, costs for offshoring US jobs are deductible. The proposal would create a new general business credit equal to 10% of the eligible expenses paid or incurred for onshoring a US trade or business. At the same time, the proposal would disallow deductions for expenses paid or incurred in connection with offshoring a US trade or business.
And citing “record profits in 2022,” the President’s budget would eliminate certain tax breaks for oil and gas company investments, including deductions tied to foreign production. Credit for enhanced oil recovery, oil and natural gas produced from marginal wells, and the expensing of intangible drilling costs are also on the chopping block.
The proposal would repeal the TCJA top tax rate cut for individuals, sending the rate back to 39.6% (it’s currently 37%).
The Net Investment Income Tax, or NIIT, sits at 3.8% and is imposed on certain kinds of passive income—typically investment income—of taxpayers with incomes of $200,000 or more for individuals ($250,000 for married couples filing jointly). The proposal would raise the NIIT rate to 5% for taxpayers making more than $400,000—at that threshold, the tax would also apply to other kinds of income, including pass-through income. The increased revenue would be directed into the Medicare Hospital Insurance trust fund.
The budget also proposes taxing capital gains at the ordinary income tax rates rather than favorable capital gains for taxpayers with more than $1 million in income.
The budget also calls for a so-called billionaire’s tax—a 25% minimum tax on the top 0.01% of taxpayers. As noted in my State of the Union cheat sheet, the name is a misnomer—the tax applies to total income, including unrealized capital gains income, for taxpayers with net wealth greater than $100 million.
The proposal would also seek to limit contributions to tax-favored retirement accounts, including IRAs, for single taxpayers with incomes over $400,000 ($450,000 for married taxpayers filing jointly). If that sounds familiar, it’s similar to the proposal in Build Better Back that was intended to eliminate the “Mega IRA.”
The “carried interest” loophole is also back in the public eye, and the President is seeking to close it. Under current law, certain investment managers can report part of their compensation as investment gains, which allows them to pay more favorable tax rates. The controversial tax break has been a target for years—President Trump had vowed to eliminate it in 2015, claiming that such managers were “getting away with murder” by not paying their fair share of taxes.
Another controversial tax break is also in the crosshairs again: like-kind exchanges. A like-kind or section 1031 exchange allows investors to delay paying capital gains on the sale of a property as long as the funds are used to immediately buy a similar property elsewhere. The break applies to properties used in a trade or business or for investment. Personal residences are treated differently—you can read about those here. The proposal would allow for a total like-kind deferral of gain up to $500,000 for single taxpayers ($1 million for married individuals filing jointly) each year. Gains over that amount would be taxed when the taxpayer transfers the property.
The proposal includes a ban on wash sales for cryptocurrency. Under current rules, taxpayers can’t claim a break if they sell securities for a loss and immediately repurchase them. But since cryptocurrency isn’t classified as a security, there’s no such wash-loss rule—that would change under the President’s budget.
The budget calls for the re-expansion of the Child Tax Credit to the levels under the American Rescue Plan. That means the credit would grow from $2,000 per child to $3,000 per child for children six years old and above and to $3,600 per child for children under six through 2025—it would also be fully refundable permanently.
Also related to refundable credits? The proposal would make permanent the Earned Income Tax Credit (EITC) expansion for workers without children.
The budget would also make healthcare premium tax credits permanent and provide “Medicaid-like coverage” to taxpayers in states that didn’t okay Medicaid expansion.
Trusts and Estates
The proposal does not suggest an increase in tax rates or lower thresholds for the federal estate and gift tax. However, the budget proposes some significant changes to the way that taxpayers would treat assets—specifically those that have appreciated.
Under the proposal, the donor or deceased owner of an appreciated asset (like a stock that has grown in value) would realize capital gains at the time of the transfer. The growth would be taxable to the donor or the decedent’s estate, and capital losses and carry-forwards would apply. The resulting basis after the transfer would be the property’s fair market value at the time of the gift or the decedent’s death.
A $5 million per-donor exclusion would apply to property transferred by gift during life. This exclusion could be used by the decedent’s surviving spouse under the same portability rules for estate and gift tax purposes. Additionally, transfers to a US spouse or to charity would carry over the basis of the donor or decedent so that capital gains would not be realized until the surviving spouse disposes of the asset or dies.
Property held in trust would not be exempt under the proposal. Gain on unrealized appreciation also would be recognized by a trust, partnership, or other non-corporate entity that owns property if that property has not been the subject of a recognition event within the prior 90 years.
The Biden budget would increase discretionary spending for almost every government agency. Exceptions include Homeland Security, Transportation, and the Small Business Administration.
In particular, the IRS budget would see a 15% boost to $14.1 billion. That price tag includes $290 million for business systems modernization, which did not receive any annual funding in 2023.
According to the administration, the budget is fully paid for under the revenue provisions and would reduce deficits by $2.9 trillion over 10 years.
This is, of course, just a snapshot. There’s a lot more to dive into if you have interest.
The Calculus Behind The ESG Battle Between The White House And Capitol Hill
When President Biden used his first veto (less than 60 days after his party no longer controlled both houses of Congress), the media reported on the event with much fanfare. That it had to do with a very narrow subject didn’t matter. But was all the chest pumping justified? Could it be that the issue was already moot even before Congress passed the joint resolution that inspired the veto?
On Wednesday, March 1, 2023, the Senate voted 50-46 to overturn the Department of Labor’s new Fiduciary Rule. This new Rule was to replace a similar Rule promulgated by the DOL under the Trump administration. At issue was the application of ESG criteria by ERISA fiduciaries to retirement plan investments.
What does ESG stand for?
“ESG stands for environmental, social, and governance,” says Andrew Poreda, VP and ESG senior research analyst at Sage Advisory Services in Austin, Texas. “ESG factors are non-financial (yet important) factors that are critical to the success of a corporation or entity.”
The concept isn’t entirely new. A similar philosophy called “Socially Responsible Investing” (“SRI”) emerged as a favorite among activists in the 1980s. It primarily targeted institutional investments in South Africa.
Going further back, religious organizations have practiced this form of exclusionary investing for quite some time. For example, it’s not unusual to see portfolios for church groups prohibit investments in “sin” stocks (alcohol, tobacco, and gambling) or stocks in the defense industry.
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Why is ESG important?
If ESG is just an SRI rose by another name, why has it suddenly become the center of such controversy? In short, it’s because it’s a little hard to define, and when it’s defined, it seems to run contrary to fiduciary practices.
Lawrence (Larry) Starr, of Cornerstone Retirement, Inc./Qualified Plan Consultants in West Springfield, Massachusetts, says, “There is no way to mandate something that is so poorly defined and differs widely in application from company to company and from investor to investor.”
As one of those investors, however, it’s critical you understand how other investors view ESG for the same reason it’s important for value investors to understand how growth investors think and vice versa.
“ESG is data that can provide a more complete picture of how a company operates beyond financial analysis alone,” says Bud Sturmak, the head of impact investing and a partner at Perigon Wealth Management in New York City. “ESG analysis helps to better understand a company’s overall stability, its opportunity to create shareholder value, and its exposure to critical business risks. ESG data can help inform sound investment decisions and allow you to tailor your portfolio to reflect your personal values.”
What is the main focus of ESG?
Starr says the primary reason ESG exists is “to provide ‘socially conscious’ investors with guidance as to a company’s attention to these (not well-defined) subjects.”
Again, if you look at things from the point of view of proponents, ESG, no matter how ill-defined up close, has a sincere intention when looking at it from the 30,000-foot level.
“The main purpose of ESG investing is to reward good corporate citizenship and encourage companies to act responsibly by allocating capital to companies that share the investor’s values,” says Rob Reilly, a member of the finance faculty at the Providence College School of Business and an investment consultant at North Atlantic Investment Partners in Boston. “Environmental criteria consider how a company deals with environmental risks and natural resource management, including corporate policies addressing climate change. Social criteria evaluate how a company manages relationships with customers, suppliers, employees, and the communities where they operate. Governance deals with a company’s leadership, board of director diversity, internal controls, executive pay, audits, and shareholder rights.”
This broad objective can have multiple tactics. How do these varying approaches impact the definition of ESG?
“This depends on one’s perspective,” says Matthew Eickman, national retirement practice leader at Qualified Plan Advisors in Omaha. “At a binary level, it’s either to invest in companies in an effort to support or advance social and environmental agendas, or it’s to invest in companies whose commitment to environmental, social, and/or governance issues situates the companies to perform well in the future.”
This confusion can lead some to question the real aim of ESG.
“It is a Machiavellian and subversive attempt by ESG woke proponents to seize and control how boards of directors in America run their company on ESG goals rather than profit and loss goals,” says Terry Morgan, President of OK401k in Oklahoma City.
What did the President and Congress hope to achieve by their actions?
Given the passion ESG generates on both sides, is it any surprise that it has become a political hot potato? And when something becomes a political hot potato, you need to guard against hyperbole.
“First, it should be noted that there is a disconnect between what the bill does and what some politicians are claiming it does,” says Poreda. “The intent of Congress’s joint resolution appears to be aimed at preventing retirement plans from investing in strategies that are aimed at pushing political and ideological agenda (e.g., ESG strategies are seen as being aligned with climate activism and ‘woke’ agendas).”
Indeed, it could be that both proponents and opponents of ESG may not have read the fine print of either the Trump or Biden Rules.
In a post published in the Harvard Law School Forum, Max M. Schanzenbach (Northwestern Pritzker School of Law), and Robert H. Sitkoff (Harvard Law School) wrote, “Much of the confusion that the 2022 Biden Rule endorses ESG investing, and that the 2020 Trump Rule opposed it, traces to the original proposals for those rules. The Biden Proposal favored ESG factors by deeming them ‘often’ required by fiduciary duty. The Trump Proposal disfavored ESG factors by subjecting them to enhanced fiduciary scrutiny. However, following the notice-and-comment period, the Department significantly revised those proposals before finalization. Neither final rule singled out ESG investing for favored or disfavored treatment. The final Trump Rule did not use the term ‘ESG.’ The regulatory text of the final Biden Rule refers once to ESG investing, but only to state that ESG factors ‘may’ be ‘relevant to a risk and return analysis,’ depending ‘on the individual facts and circumstances.’ This statement is true for all investment factors, ESG or otherwise.”
Certainly, political leaders possess the legal literacy to discern this similarity. Why, then, did we have all the fireworks surrounding the Joint Resolution?
“Unfortunately, this issue has become politicized and certain politicians believed these factors were being taken into account to achieve political rather than financial goals,” says Robert Lowe, a partner (through his professional corporation) of Mitchell Silberberg & Knupp LLP in Los Angeles.
Clearly, there is no consensus on the meaning of ESG. Perhaps, given there are multiple ideas concerning the definition of “ESG,” it’s only natural that the reasons behind the various maneuverings might also be divergent.
“Different supporters of the vetoed proposal had different intents,” says Albert Feuer of the Law Offices of Albert Feuer in Forest Hills, New York. “Many supporters believe risk return analysis should be subordinated to ESG factors that are not called ESG factors, such as investing in United States fossil fuel ventures to preserve jobs in those ventures even if they have poor risk-return profiles. These same supporters criticize ESG advocates of the divestment fossil fuel investments, which the regulation prohibits absent a showing that these investments will be replaced by those with a better risk-return profile. Other supporters have little confidence in financial analysts and free markets. They believe ESG factors are inherently bad and thus fiduciaries should be prohibited from considering them absent compelling evidence that in a particular situation, such factors would improve the risk-return profile of an investment.”
Marcia S. Wagner, Esq., president/founder of The Wagner Law Group in Boston, Massachusetts, in a Forbes.com interview, said that President Biden faced pressure from his own party. Starr agrees. He says Biden had no choice but “to bow to his far-left constituency, especially since he just approved major drilling for oil in Alaska. This gives him a countervailing argument to show he hasn’t abandoned his ‘progressive’ policies completely.”
In the end, you could have easily predicted the actions by all actors in the dance between the joint resolution and the veto.
“This was a foregone conclusion,” says Eickman. “Biden knew he couldn’t appear weak on this, even if he may not view the DOL regulation as having nearly the impact as Congress had suggested with its votes.”
Deutsche Bank Should Disclose Its Current Liquidity Levels To Investors
Investors’ fear about the financial health of banks globally was palpable today. As they swarm bank after bank, Deutsche Bank was next on their list. They pummeled Deutsche Bank’s stocks and bonds. And the price for protection against a Deutsche Bank’s bond default rose significantly as evidenced in the credit derivatives market.
Nothing new, in particular, came out about Deutsche Bank today. It is not as if market participants only discovered today that Deutsche Bank has a long history of weak risk controls and a list of scandals rivaling Credit Suisse. Every time that there have been scandals about Deutsche Bank’s poor risk management, the stock falls, but eventually investors seem to just shrug their shoulders and move on. Yet, when you look at the stock over a much longer period of time, investors have been showing their discontent with the beleaguered bank for over a decade. Deutsche Bank has never recovered from its high on April 1, 2007. In fact, the stock has fallen almost 95% since then.
Liquidity Risk Is Key
What investors should be monitoring for all banks is how liquid they are, that, is whether they can pay all their obligations when they come due. It is difficult, if not impossible to know, how liquid Deutsche Bank is right now. Banks are only required to disclose financial and risk information on a quarterly basis. By the time, market participants get this information, it is already old.
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According to Deutsche Bank’s Basel III Pillar III Risk Disclosures, as of the end of December 2022, Deutsche Bank’s Liquidity Coverage Ratio was 135%, higher than the minimum requirement of 100%. The figure tells us that at that end of 2022, Deutsche Bank had enough high-quality liquid assets such as cash, money market instruments, and unencumbered investment grade bonds, to cover net cash outflows in periods of stress. That figure has declined by 7% from 2018 when it was at 145%.
In the U.S., as a stand-alone entity, Deutsche Bank’s Liquidity Coverage Ratio at the end of December 2022 was 141%. Banks are not required to disclose this ratio more frequently, so no one outside of Deutsche Bank knows what the LCR is today.
Unlike Silicon Valley Bank, Deutsche Bank has a diversity of funding sources such as retail and corporate deposits from different geographies, short-term and medium-term credit lines, as well as access to wholesale funding. Stable sources of funding are always important, especially right now.
In comparison to its globally systemically important bank (G-SIBs) peers in Europe at the end of 2022, however, Deutsche Bank did not have as high a percent of liquid assets as a percent of total assets. It appears to be less liquid than Barclays, UBS, Société Générale, Credit Suisse, or HSBC HBA . Deutsche Bank’s LCR and Net Stable Funding Ratio, a measure of funding stability for a twelve-month period, are also both lower than most European banks in that peer group.
As of today, the global rating agencies had Deutsche Bank in the A – BBB+ range which is considered investment grade, and the outlook is stable or positive. The very nature of processes that have to be abided by ratings analysts means that market participants always move faster to exhibit what they think of any company.
What Deutsche Bank should be doing right now is disclosing granular information about its current liquidity levels, sources of funding, and capital ratios. That certainly would give market participants a good idea of how the bank stands. No one had banking chaos on their bingo card at the end of 2022. So why should we be relying on financial information from then? In this environment, opacity only unnerves market participants even more.
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Does Greed Drive Deutsche Bank And Other Banks Not To File Suspicious Activity Reports?
Deutsche Bank Needs Serious Laundering
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It’s Time For Some Serious Railroad Regulation
There are times that news coverage seems like an ongoing recreation of the Adam Sandler and Drew Barrymore movie 50 First Dates. Bad things happen and are then forgotten. Something happens again and rarely is it treated like an ongoing story. The public, other than those directly involved, also forgets and doesn’t press for closer coverage.
A current example is the railroad industry. Take the disastrous accident in East Palestine, Ohio that happened on just before 9p.m. on February 3, 2023. About 50 out of 149 cars derailed, according to ABC News. Out of the cars that went off the rails, 11 carried hazardous waste, including vinyl chloride, ethyl acrylate, and isobutylene. The last two are highly toxic and potentially carcinogenic.
Then came the mandatory evacuation, first within a one-mile radius, then two. Officials conducted a controlled burn of the substances, which turned into a heavy cloud. Eventually, the officials said that air and water samples were deemed safe. Except, the EPA found the chemicals in streams near the derailment site.
Later, large amounts of aquatic life would be found dead, even though officials had kept saying that everything was fine. Thousands of cubic yards of contaminated soil and millions of gallons of liquid waste have been collected. The State of Ohio has filed a lawsuit against Norfolk Southern NSC .
Back on February 21, U.S. Transportation Secretary Pete Buttigieg sent a letter to the rail line. One part of the multi-page paper: “Major derailments in the past have been followed by calls for reform – and by vigorous resistance by your industry to increased safety measures. This must change.”
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Yes, it must. But while an extreme issue, this isn’t the only rail accident that takes place in a year. In fact, there are literally thousands of varying degrees. Here’s a chart from the Department of Transportation:
In the latest year for which there is available data, 2021, 8,096 accidents occurred. Again, that could mean anything. But it does include 747 total fatalities and 4,647 injuries. Of those, 11 deaths and 2,577 injuries were of employees. Outside of grade crossings, where most of the troubles occur, there were 1,626 train accidents.
Total incidents in 2020 were 7,785. In 2019, 9,747; 9,682 in 2018; and 9,497 in 2017.
Shifting from such dangers and outcomes for a moment, think back to the impending rail strike in the fall of 2022. Many of the union workers were, and probably still are, deeply angry. Money was an issue, but the big holdup had been around attendance, sick time and scheduling. People get badly hurt working on rail lines and they need time to recover and get medical help. But rail companies, including BNSF Railway Company, owned by Berkshire Hathaway BRK.B with carefully avuncular Warren Buffett, don’t want to spend money on more staff.
No good crying poor. For perspective, the median value for all industries is 7.9%. The heights the railroad industry reaches are the fifth highest of any industry, only exceeded by money center banks (the really big ones), non-bank financial services, regional banks, and entertainment software. Look at “pre-tax, pre-stock compensation operating margin” numbers—before paying taxes or large stock grants. From that view, tobacco is at the top at 44.7%. And second highest? Railroads with their 42.4%.
If you look at the data only from the Bureau of Transportation Statistics, employee injuries and fatalities have been falling since at least 2000.
In large part because the companies keep cutting back staff. In October 2000, there were 220,200 railroad transportation workers. By October 2022, the number was 142,300. Over the same period, the number of hauled containers and trailers went from 782,694 to 1,129,125, up 40%.
They could easily afford more workers. Better technology. Additional safety measures. And still make carloads of cash. But they don’t and clearly won’t.
The executive branch has to step in. So does Congress. When last they did, though, it was to side with the owners because of concern that a strike would shake supply chain logistics. Railroads transportation account for about 28% of freight transportation in the U.S., according to the Federal Railroad Administration.
However, there’s another factor as well. As an OpenSecrets.org analysis shows, the rail industry spend $653.5 million on government lobbying over the last 10 years, “with the biggest splurges occurring between 2008 and 2012 where the industry lobbied an act aiming to enforce antitrust laws on the freight railroad industry.” The lobbying expenses in 2022 were only $24.6 million, the lowest annual amount, adjusted for inflation, in more than two decades. (Check the link to see the article for many more details.)
Profits and spending on political leverage—money is the key and people, whether employees or citizens who are in the wrong place at the wrong time, are eventually sacrificial.
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