Tax Reform on the Horizon: Current Developments and Updates

March 31, 2021

With the recent passage of the COVID-19 stimulus package, President Joseph R. Biden, his administration, and Congress have turned their attention to long-term economic recovery, deficit reduction, and tax reform. Proposals cover a broad range of tax policy issues, from raising the corporate income tax rate to reforming the current international tax regime. This LawFlash summarizes key elements of some of the tax reform proposals that have recently emerged.

Corporate Tax Rate

All entities taxable as corporations for US tax purposes are currently subject to a flat 21% federal income tax rate. Various proposals have been suggested to increase the corporate tax rate as a revenue raising measure. On March 31, 2021, President Biden released a fact sheet on his sweeping infrastructure plan (the American Jobs Plan), which proposes major federal investments in manufacturing, green energy, and broadband internet access, in addition to his tax proposals (the Made in America Tax Plan). The Made in America Tax Plan would increase the corporate tax rate to 28% and make various international tax changes discussed further below. The fact sheet provides that the tax changes are anticipated to raise $2 trillion over 15 years, which is intended to offset many of the costs of the American Jobs Plan. Additionally, on March 25, 2021, Senator Bernie Sanders (I-VT) released the “Corporate Tax Dodging Prevention Act,” proposed legislation that would impose a graduated corporate tax rate, with a top rate of 35%.

Carried Interest Legislation

On February 15, 2021, Representative Bill Pascrell Jr. (D-NJ-9) introduced the “Carried Interest Fairness Act of 2021” (HR 1068), legislation intended to reform the current carried interest tax rules. A carried interest is a partnership interest that is received in exchange for services to a partnership that entitles the holder to share in future partnership profits and not existing capital value. In general, carried interest recipients do not recognize compensation income taxed at ordinary individual federal income tax rates, the highest of which is currently 37%, upon grant of a carried interest. Instead, carried interest recipients are entitled to receive a distributive share of future partnership profits, which for many partnerships in the private equity context generally consist of long-term capital gains taxed at a rate of 15% or 20% (depending on taxable income and filing status).

The carried interest rules have long been the subject of tax policy debate. Some argue that carried interest is a form of compensation for services, which should be treated as compensation income taxed at ordinary income tax rates and subject to employment taxes. Others argue that carried interest is a payment similar to investment income, such as an economic return on goodwill, and should remain taxed at capital gains rates when otherwise applicable. Legislation effective for taxable years beginning after December 31, 2017 imposes a special three-year holding period requirement in order for certain carried interest recipients’ gain to earn long-term capital gains qualification. Due to the legislation’s inclusion of various exceptions to this holding period requirement and other considerations, some have argued the legislation is insufficient.

Representing the former view, the “Carried Interest Fairness Act of 2021” would tax carried interest at ordinary income tax rates and treat such interest as wage income subject to employment taxes. Capital gains taxation would still apply to general partners or managers who invest capital in the partnership; however, all income received that is disproportionate to the general partner’s or manager’s investment would be taxed at ordinary rates. As of the date of publication of this LawFlash, the legislation has been introduced to the House of Representatives.

Tax Incentives for Domestic Manufacturing

On March 12, 2021, the Joint Committee on Taxation published an analysis on present and prior law tax incentives for domestic manufacturers (JCX-15-21), which was used by the Senate Finance Committee in a hearing on the role of tax incentives in boosting manufacturing in America. In their opening statements, Senator Ron Wyden (D-OR) and Senator Mike Crapo (R-ID) focused on the utilization of tax incentives to resolve the supply chain crisis that has led to supply shortages, in particular related to the semiconductor shortage, and to boost domestic manufacturing. Some of the proposals considered at the hearing include:

  • The maintenance of competitive corporate tax rates.
  • The “Creating Helpful Incentives to Produce Semiconductors for America Act” (S. 3933), which was introduced by Senator John Cornyn (R-TX) and Senator Mark Warner (D-VA) in 2020. In general, the legislation would create a 40% refundable investment tax credit (which would be phased out over several years) for qualified semiconductor equipment or any qualified semiconductor manufacturing facility investment expenditures. As of the date of publication of this LawFlash, the legislation has been introduced to the Senate.
  • The “American Jobs in Energy Manufacturing Act of 2021,” proposed legislation which was unveiled by Senator Joe Manchin (D-WV) and Senator Debbie Stabenow (D-MI), on March 1, 2021. This legislation would provide an $8 billion increase of tax credits available to manufacturers and other industrial users to retool, expand, or build new facilities that make or recycle energy-related products.    

As indicated in the hearing, these proposals and the general use of tax incentives to resolve supply chain issues and boost domestic manufacturing have widespread bipartisan support, as well as support from industry members.

International Tax Reform

President Biden’s Made In America Tax Plan would make changes to several provisions added to the Internal Revenue Code of 1986, as amended (the Code) by the 2017 Tax Cuts and Jobs Act, including global intangible low-taxed income (GILTI), the base erosion and anti-abuse tax (BEAT), and the deduction for foreign derived intangible income (FDII). The Made in America Tax Plan would:

  • modify GILTI by raising the rate of the GILTI minimum tax to 21%, eliminating the exception from GILTI for qualified business asset investment (QBAI), and having GILTI apply on a country-by-country basis;
  • attempt to establish a global framework for minimum taxation by engaging in multilateral negotiations, encourage other countries to establish minimum taxation provisions, deny deductions to foreign corporations on payments that would strip profits out of the United States and into countries without such a minimum taxation provision, and replace the BEAT with a new provision (i.e., one that raises more revenue);
  • propose new rules to restrict inversions by US companies and add other rules to discourage companies from claiming residence in so-called “tax haven” jurisdictions;
  • deny tax deductions for offshoring jobs and provide credits for onshoring jobs;
  • eliminate the deduction for FDII and use the resulting revenue to fund US R&D development;
  • add a 15% minimum federal income tax on book income (profits reported to investors), which would apply to what the fact sheet calls “the very largest corporations”;
  • eliminate tax incentives for fossil fuels and restore polluter payments to cover the costs of environmental cleanups;
  • increase funding to the IRS to spur enforcement and collections; and
  • provide various tax credits to incentivize clean energy and clean energy jobs.

Certain details about the Made in America Tax Plan, such as revenue estimates and whether the plan will ultimately include tax proposals by other members of Congress discussed in this LawFlash, such as the implementation of a wealth tax, are not yet available.

On March 25, 2021, the Senate Finance Committee held a hearing on international tax reform based on a March 19, 2021 Joint Committee on Taxation analysis of US international tax policy (JCX-16-21). The hearing focused primarily on GILTI, the BEAT, and the deduction for FDII. Senator Wyden announced in his opening statement to the hearing that he, along with Senator Sherrod Brown (D-OH) and Senator Warner, will be releasing a proposed new international tax framework in the coming days.

Senator Sanders’ proposed Corporate Tax Dodging Prevention Act also would make various changes to the international tax rules, including provisions intended to equalize the tax rates on domestic and foreign income, modify the BEAT, and repeal the deduction for FDII.

Changes to the US international tax rules, such as raising the rate of GILTI, could also have broader impacts on the global tax system, including the Organisation for Economic Co-operation and Development’s global tax reform discussions.

Wealth Tax

On March 1, 2021, Senator Elizabeth Warren (D-MA) unveiled the “Ultra-Millionaire Tax Act of 2021,” a legislative proposal that would impose an annual tax on households and trusts with a net worth of $50 million and above. The legislation would levy an annual 2% tax on households and trusts with a net worth between $50 million and $1 billion and an additional 1% surtax, for a 3% overall tax, on the net worth of households and trusts above $1 billion. The wealth tax applies to an “applicable taxpayer,” which as defined includes individuals or any trusts (other than pension trusts exempt under 501(a) of the Code). Thus, 501(c)(3) entities organized as trusts would be subject to the tax, while 501(c)(3) entities organized as corporations would not be subject to the tax. Among other features, the proposed legislation includes an increase in the tax rate to 6% on households and trusts with a net worth of above $1 billion in any year that a universal healthcare bill is in effect, and a $100 billion investment to the Internal Revenue Service.

Proponents of the proposed legislation argue that it would bring in at least $3 trillion in revenue over 10 years, without raising taxes on households that have a net worth below $50 million. Detractors argue that a wealth tax such as the one in the proposed legislation would have an overall negative impact on the economy. It is likely that the legislation would face significant obstacles in the Senate.

Social Security Tax on Highly Compensated Workers

Under current law, a social security tax is imposed at an overall 12.4% rate on the first $142,800 of FICA-taxable wages, with 6.2% paid by the employee and 6.2% paid by the employer. Medicare taxes at a 1.45% rate paid by both the employer and employee apply to all FICA-taxable wages, and the Additional Medicare Tax, at a 0.9% rate paid just by employees, must be withheld by the employer from any employee’s FICA-taxable wages exceeding $200,000. As part of his campaign platform, President Biden proposed restarting the social security tax at the 12.4% rate split between the employee and employer on all FICA-taxable wage income over $400,000 in any year. An identical proposal was already introduced in the last Congress by Representative John Larson (D-CT-1) on January 30, 2019 as part of the “Social Security 2100 Act,” (HR 860). It is likely that this legislation will be reintroduced in the coming months. Since employers and highly compensated employees and self-employed persons would be dramatically affected by such legislation, we will be tracking any updates or hearings on the Social Security 2100 Act.


Specific details of these and other tax reforms proposals are continuing to emerge and we anticipate movement in the coming weeks. We will continue to monitor for potential tax reform and provide further information on any material developments.


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If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Daniel A. Nelson

New York
Mary B. Hevener
Richard S. Zarin
Ester Lee

Paul A. Gordon

San Francisco
Sarah-Jane Morin

Washington, DC
Alex E. Sadler