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Analyzing the American Families Plan 

David Stewart: Welcome to the podcast. I'm David Stewart editor in chief of Tax Notes Today International. This week: analyzing the American Families Plan. On April 28th, the Biden administration revealed more details on its American Families Plan, the second part of President Biden's Build Back Better Plan. We learned the new package would raise $1.5 trillion in revenue from wealthy taxpayers and investors to cover new support for families and workers.

What does this new plan reveal about the Biden administration's plan for the tax code? How has America reacted? And what's the likelihood that such a package can get through Congress? Here to talk more about this is Tax Notes White House reporter Jonathan Curry. Jonathan, welcome back to the podcast.

Jonathan Curry: Hey, Dave.

David Stewart: First off, can you start with an overview of the tax proposals included in the American Families Plan?

Jonathan Curry: Sure. At a high level, most of these proposals are aimed at wealthy taxpayers and investors so that's just sort of level-setting from the top. To kind of go through it in a list format, first he's calling to raise the top individual tax rate back to 39.6 percent. If you recall back in 2017, Republicans lowered it from 39.6 percent to 37 percent, and now this is just reversing that. He also wants to raise the top tax rate for capital gains and dividends that 39.6 percent. That's a pretty big change.

And he also mentioned wanting to end the special tax treatment for carried interest. Now by raising the top tax rate on capital gains to 39.6 percent, that tax break would already effectively be taken care of. But by making the change sort of in the law, this would be more of a permanent solution in case Congress wants to change rates in the future. He also wants to limit the tax treatment for like-kind exchanges to gains under $500,000. He wants to make permanent the TCJA's limit on excess business losses.

Going down the list even further, he wants to ensure that the 3.8 percent net investment income tax is applied consistently, but only to those making more than $400,000. If you've heard that threshold mentioned a million times in the campaign, it's popping up here back again.

He also wants to give the IRS a ton of money largely for enforcement. I mean, this is talking to the tune of $80 billion over a decade. By comparison, the IRS budget is currently only about $12 billion a year, so this would be adding another $8 billion on top of that. He said the efforts would be focused on enforcement for high-income taxpayers primarily. He said that they would not be increasing audit rates if you're earning under $400,000.

My personal favorite in this list, though, is he wants to eliminate stepped-up basis for gains that exceed a $1 million threshold. And I've covered trusts and estates and taxation of the wealthy, so this has always been kind of a hot topic. To be slightly pedantic since I know there's probably a lot of lawyers listening to this, it's not actually eliminating stepped-up basis because the basis of an asset would still be stepped up. It's just that now when it's stepped up, you have to pay taxes on the gain and the assets value. But again, that's only above that $1 million threshold.

So clearly he has quite a few revenue raisers, but that's not the only side of the tax plan. This package of proposals is called the American Families Plan for a reason. It's not because he wants to raise taxes on the wealthy families. It's because he wants to spend a lot of money on American families.

Part of that is through direct spending like hundreds of billions of dollars to pay for expanded universal pre-K, free community college, national paid family and medical leave program, and so on. But a large portion of this plan, about $800 billion in all, is about expanding tax credits for workers and families. So think the child tax credit and the earned income tax credit.

Now earlier this year, the American Rescue Plan temporarily expanded the child tax credit, as well as the dependent care credit, the earned income tax credit, and the ACA premium tax credit. But those expansions were temporary. They would all be expiring by the end of this year. This plan would extend the child tax credit expansion through 2025 and make the refundability portion of it permanent. And it would permanently extend the expanded EITC, dependent care credit, and the premium tax credit.

David Stewart: We're currently talking about the American Families Plan, but we also have the American Jobs Plan, which came out a few weeks ago and we discussed in an earlier episode, which we'll link to in the show notes. So how did these two plans?

Jonathan Curry: Well, from a spending side, the American Jobs Plan is focused more on traditional infrastructure as well as environmental priorities. And it's offset through tax hikes on corporations. The American Families Plan is plainly more family-oriented, and this one is offset by tax increases on higher-income taxpayers.

David Stewart: What's been the response to the American Families Plan from lawmakers, corporations, and the tax community at large?

Jonathan Curry: I think obviously it varies depending on who you ask. If you were to talk to Republicans in Congress, they're not really keen on any of the tax increases in either Biden's plans. From what I've heard, they're more in favor of user fee style pay-fors. So if you think of infrastructure like roads and bridges, they're looking more at say like a raise the gas tax or vehicle miles traveled tax. Something that where people who use the infrastructure are the ones that kind of bear the cost of it.

I think we'll also see a lot of interest groups rally around their pet causes. My colleague Kristen had a story about the reaction to effectively ending like-kind exchanges. And if you remember, Biden's not proposing to completely eliminate those, but by imposing that $500,000 cap, I'm told that those will put up a pretty hard cap on the market for those kinds of transactions. And so the response to that was pretty brutal from their perspective.

I think also too, with the stepped-up basis proposal. For example, Biden has that $1 million threshold, but there are people who argue that they're going to be taxpayers who you wouldn't normally think of as being sort of the rich who we're going to kind of fall victim to this. And so, for example, I was talking to a lawyer in New York about a similar proposal to end stepped-up basis for those above a $1 million threshold.

Sen. Chris Van Hollen, D-Md., from the Senate Budget Committee had a proposal on this called the STEP Act. And that proposal, similar to Biden's, does that threshold. And so this lawyer who lives in Harlem was telling me that there are people that she knows who maybe had bought a house back in the 1950s, one of those brownstones, and now it's worth — they may have bought it for $50,000, but it's worth $3 million now. And so there's a huge gain there that suddenly they might have to pay taxes on, even though you wouldn't normally think of them as being sort of your typical wealthy family.

So I feel like we might see that old quote, "Don't tax me' don't tax thee; tax that man behind the tree" kind of comes to mind. I think you'll see a lot of people sort of rallying to defend their cause and saying, "Well, not this one, but let's try that one instead."

David Stewart: All right. Now, what are the next steps for these two plans?

Jonathan Curry: Well, now the White House has said over and over that they're open to hearing other folks' ideas and how to pay for things. One thing I'll note, though: the American Rescue Plan Act earlier this year didn't change a whole lot from what Biden proposed initially to what Congress ultimately passed.

But that proposal, that package was seen as more of an emergency economic recovery package. These two new plans, the American Jobs Plan, the American Families Plan, these are more perspective I think. They're more of a policy wishlist without as much urgency behind them. So I wouldn't be surprised if lawmakers see a lot of room to craft their own sort of alternatives to the plan. And if that's the case, this could really drag out for quite a few months.

I'll also point out that while Biden has a lot of proposals here, they're pretty high level. So with the American Jobs Plan, the Treasury Department followed up a week later and they released a several pages-long report on the corporate and international tax changes that he proposed. But even that didn't give a lot of new detail. It just gave more of a policy justification for why they're doing what they're doing.

So we might do something similar here with the American Families Plan tax changes on the wealthy sort of making the case in more detail for why Biden wants to do this. But even if not, I think what I'll be looking forward to is to see the White House budget proposal, because we've been told Treasury is going to include its green book. That's its list of revenue proposals. And that always has kind of packed with details, kind of filling in the gaps on what to actually expect. And it's not quite legislative language, but it gives you a much better sense of exactly and sort of precisely what they want to do.

As for what comes next, I actually chatted more about this with Dean Zerbe. He's a former tax counsel of the Senate Finance Committee, and he's now a national managing director at Alliantgroup.

OK, so we're back and I'm now talking with Dean Zerbe. We're going to talk a little bit more about Biden's big plan. First question for you: so this American Families Plan has both revenue-raising and revenue-losing aspects to it. Do you expect much resistance in Congress to the tax credit expansions Biden is proposing?

Dean Zerbe: I think that's a good question. And I don't think so. In general Congress is pretty happy when they're giving away the candy. That tends to not raise too many problems when you're providing benefits and assistance. I think there might be a little bit of blinking about the overall number, the overall kind of bottom line if you will, about how much money is being spent. But that's the big picture. I think in terms of the specific proposals, child credit, things like that. No, I don't really expect there to be much pushback from the Democrats on that. And it's really going to be kind of a Democratic-only vote I believe out there.

And then on the revenue raisers, that I think in general they'll be supportive of, but I do think there'll be some provisions that they'll have to modify or get some pushback on as well. So a little bit different journey on the revenue raisers. It's always kind of the problem when you're giving it away, everyone's happy and loves you, but when you're taking it away, people start to get pretty unhappy and grumpy about it. So we'll see how it all unfolds.

Jonathan Curry: Sure, sure. So it sounds like the tax credits need a little refinement there, but there might be a little more challenge to the tax increases. Earlier in the podcast we went over some of the provisions in the plan. Which one of these do you think is going to face the most opposition in Congress?

Dean Zerbe: I think the capital gains is probably the one that's going to get a lot of grind. I think the OI increase to 39.6 percent. I see that will go through, but I think the capital gains is going to attract a lot of javelins from folks on it. Particularly [if] they get it to the highest levels where it may be actually losing money and not be a revenue raiser. That will really grind it.

I think the sweet spot for them may be around 28 percent. That's where I understand that you kind of hit the tipping point of getting the rate up, but you're still raising money as opposed to them losing money on it. So I think capital gains will be the one. I think the other one that maybe is a close second is this question about the step-up on basis. I think that may also attract a fair amount of grind from members.

And again, really what I anticipate is while they may invite the Republicans for tea and cookies that at the end of the day, this is really going to be a Democratic-only boat. They'll use reconciliation. They'll need the 50 votes there. And so they're going to — it's a 50-57 and a very tight House. That's where they're going to probably have to show some flex if you will in terms of accommodating senators in terms of capital gains.

And I think members will just kind of question, "What are we doing if it's not raising monies?" And then basis, I think stepped-up basis, particularly trying to accommodate small and medium business owners as well as family farms. And the administration to their credit has already noted that. But it's easy to say it. It's another thing to try to turn that into statutory fixes.

Jonathan Curry: So you mentioned the stepped-up basis in capital gains. I wrote a story recently about how some think tanks that scored Biden's proposals or various aspects of it, including the capital gains, and as you noted if you raise the capital gains rates up to 39.6 percent by itself, it's actually scored as losing revenue because people don't want to sell the gains. And so those gains are never realized.

But I've also seen that if that's paired with something like ending stepped-up basis, that that sort of changes the picture. And then all of a sudden it flips to being a pretty big revenue raiser. If one of these falls, does that mean the other one falls as well? Or are these linked and interconnected in a way that they have to go together the package? Or can it be divided up?

Dean Zerbe: I think that's an interesting point about the relationship between the two. I think obviously we'll have to see what the Joint Tax Committee actually comes out with in scores. They are the official scorekeepers as you know. And I get lots of people have their own magic eight ball that they want to use, but it'll be up to the Joint Tax Committee on that.

I do think you're right though, that there would be some connectivity in terms of the question about the capital gains rates. I'm skeptical I must admit just for the reasons you mentioned that people will be wanting to control what they're up to in terms of selling. Obviously with step-up in basis and tied to death that people can't control everything so that may limit what they're up to.

But I think it'll still be the difficulty of trying to get the carveouts crafted for family farms for businesses, small and medium business owners. Because that's one of the difficulties they face is that while people may have the vision right now of [former Amazon CEO Jeff] Bezos or somebody like that being involved, you're going to be dealing with a lot of folks who are saying, "Look, this was a family business. I get it. I'm rich, but I'm rich one day in my life for this business I built up for 40 years, or the farm I built for 40 years. Why is it I'm getting thumped?"

And again they've recognized that, but trying to translate that into how you make that exception happen is not easy. When I was on the committee, we struggled with that and they may find that equally challenging. So you're right. There is some connection there. I do think though, that members may just feel that this is quite a hit that they're putting on folks in terms of capital gains. And I think it just remains to be seen.

I think this is a real significant change from where we've been before. In other words one thing to raise ordinary income up a few points. A few points up, a few points down. That's kind of where folks have been, but this is a dramatic increase from where we've been for a long time. And so we haven't heard anything yet from members on it, but I think that they may really sharpen their pencils and think hard. Are they comfortable with how this is going to play out or work out? So we'll see.

I just think it is where it's going to be one of the more challenging areas that they've got. And you're right, there is, I'm sure, a relationship between the two provisions, but I think members will want to understand completely how they see this is going to impact businesses and investment.

Jonathan Curry: Now another aspect of Biden's plan on the revenue-raising side isn't actually a proposal to the tax code per se. It's about giving the IRS a pretty massive funding increase up to $80 billion. Do you think the IRS can use that money effectively to accomplish the goal of closing the tax gap and raising revenue through increased audits of high-income taxpayers?

Dean Zerbe: Yes. They propose this big increase in the IRS's budget and they've got big dreams of what they're going to accomplish with that of $700 billion in additional revenue over the period. And that is a pretty eye-blinking number I would say in terms of where the IRS has historically been.

Let's kind of start with some basics. Does the IRS need additional resources? Yes. Do they need to improve their infrastructure, particularly in the IT area? Yes, absolutely. And do we need a more marked enforcement presence particularly in certain sectors? Absolutely. So all those are in agreement. I think where there's concern is to have a high comfort level that that's going to translate into such a significant increase in dollars, and basically assume that or predict that. I think that's going to be a challenge at CBO and Joint Tax. We'll see it that way.

I've been through a lot of these and people always are kind of promising sugar plums dancing in terms of revenues raised by various enforcement efforts, and the dreams don't meet the reality more often than not. Again, that's not to say we shouldn't be doing these things, but to say, "Well, yes, this is going to be how we're going to pay for these things." There should be a lot of caution there.

In terms of your good question about can the IRS handle this? I think having a steady stream of set income over the years is important. I think that will help a lot. I think to immediately say, "Hey, here's the money bags. We're opening them at both ends and pouring them into the IRS." That's a pretty big challenge for the service to deal with. I think they can use some money immediately. And then I think it's more the steadiness of the dollars over time are what's going to matter.

But I think equally important is how they spend those funds is vitally important. In other words, look at it. It can't all be thumping. A lot of people in this country, the vast majority of people in this country, do want to pay their taxes and comply with their taxes. But it's the IRS in part in terms of service — getting their phones answered, getting their correspondence answered, having taxpayer assistance, having the advocate there.

In other words, that you're balancing the service part of the IRS as well as the enforcement. And both sides really need to be improved. And you'll get more compliance dollars coming in by doing both of those. And that's part of the real challenge for the IRS coming forward is to keep that balance and not just be, "OK well, we're going to go thump everybody" because that's going to naturally lead to a reaction the other way.

So I think they need the funding. I think it's good to get the commitment for that. I just think that everyone needs to keep their feet on the ground of what's possible in terms of revenues coming in. And I think it's quite ambitious for the administration to kind of have this asterisk if you will, saying this is going to pay for a lot of their hopes and dreams. So I think there's a lot of caution deserved in terms of what's possible in terms of additional enforcement and service efforts by the IRS.

Jonathan Curry: Yeah, I think that's very interesting. I'll note that there's quite a few former IRS commissioners who have come out sort of as supportive the funding increase. But there's also been a few, including former IRS Commissioner John Koskinen, who was quoted in a recent article by my colleague Bill Hoffman, remarking that he kind of questions what they're going to do with all that cash if like you said, it just suddenly shows up at once.

Well we've talked about what's in the proposal, but there are also some noteworthy tax proposals that are missing from this plan. I'm a trust and estates guy, and so the first thing missing to me was there was no direct changes to the estate tax. But there's also no repeal or modification of either the section 199A deduction for passthroughs or the state and local tax deduction cap, which has been a big priority for some congressional Democrats. So why do you think that is? And do you anticipate that those proposals are going to stay on the sidelines for long?

Dean Zerbe: You're right. It is kind of — tell me what we're not hearing about. And those are certainly three of the big ones. I think on a estate tax, the basis issue, obviously it gets to a fair amount of that, but it also I think reflects that — I'll tell you what. Estate tax is kind of putting your hand in a raccoon sack. I mean, there's just members on both sides of the aisle. It's a difficult area for them that again, it gets to the family farms to the small and medium business owners and just in general it's a very emotional issue.

And part of it is that the current estate tax regime ends in 2025. We go to older years. So it may be a little bit of, "Why do we need to go through all this misery when it's all going to go back to old law in 2025?" But I think they may still look at it. I think if they were to look at say the top rates for very big estates, I think they could probably take that on without too much grind. And this is again, I'm thinking really that the Democrats are going to be doing this, trying to get 50 votes to reconciliation.

So I think that's something they might come back to, particularly maybe if they are having problems, getting all of what they want through the step-up in basis issue. So I think that's an area that I wouldn't quite assume nothing's going to happen just yet, but you're right. It is interesting that they didn't. But I just think it's only the traffic can bear so much uncertainty and problems at one time.

I think section 199A is a very interesting provision, very important to small and medium business owners, particularly in the manufacturing space. It's a difficult provision, I think, for the administration. They've made a lot of talk about wanting to encourage domestic manufacturing. Well, it's a little tough on the one hand to say, "Hey, we really want to encourage "made in the USA" and domestic manufacturing. Oh, but by the way, we want to get rid of this tax break that is for those folks that are doing domestic manufacturing." So it's a challenge for them in that regard.

I don't know if there's a lot of hearts beating fast on the Hill either to get rid of it. To be honest, I don't know how much on the Hill they know about the proposal. I think they're going to have a hearing that may touch on it here in a few days and that may build it up. But I think it's still kind of in the "thinking about" [part,] not something that President Biden campaigned much on. And I think that matters, too.

In other words, when I think of an administration coming in on their tax proposals, I think they're strongest when they're talking about provisions. "Hey, I campaigned on this. I got the votes for this. It was very clear what I was." I think that makes members say, "Well, OK. The president's got a mandate. Let's let's at least look at this and see kind of why not?" I think when you're, "Well, we didn't ever talk about this. We didn't ever really mention it. But if you look at this footnote on page three, it refers to a study." You get the idea. Then it feels pretty attenuated and members begin to think, "Well, maybe this isn't really first on the list of things to do."

SALT is a very tricky item for them because of all the rhetoric about taxes and taxes on the wealthy, because I think we've all seen it, that the breakdown on who benefits from the state and local tax deduction, it really skews to high-end folks, very high-end folks in terms of the benefits. So any kind of pull back on it has the difficulty of then the Democrats being seen as well, "Hey, that's a big break for the very wealthiest" kind of deal. I think there's ways they could do it to provide say some modest benefit for more middle-income families and then phase it out would be a way to do it.

Because now they're a little bit in a difficult [situation of] why we told the members and pleaded with them never to make kind of line-in-the-sand statements because you may have to deal with that. But as you know, there's a number of members who came out on the Democratic side of the House that said kind of "Hell no, we won't go if we don't get something on SALT." And I don't think that they specified what that meant, which is helpful, but it's going to be a challenge for Speaker Nancy Pelosi, D-Calif., Given she's only got a five-seat majority to address that.

So you're right. It wasn't out there. And I think it's going to be difficult for them. It's a very expensive item. But again it's something that goes away in 2025. So there tends to be a view of again why are we spilling all this blood for a provision that's going to be going away here in some ways in just a bit, but we'll see. But I think that's going to be certainly something that they're going to have to address one way or the other in this bill. And that's going to not make it a speedy bill on this.

I think it was impressive how quickly the administration got through the first reconciliation bill that they put forward, kind of the spending relief package. But this package I think will be tied with the infrastructure package and it's going to be a slower boat because of challenges like this of how to deal with certain provisions that are out there.

Jonathan Curry: So looking ahead then, how do you anticipate that these packages — we have the American Jobs Plan and the American Families Plan. How do you see these moving through Congress? I mean, you mentioned a little bit that they're going to be tied to infrastructure. Is this going to be one mega bill or do you anticipate it being split up?

Dean Zerbe: I've been looking at that and trying to shake my crystal ball as best I can on how they're going to do that. And the latest sense I get is that they are going to try to do this as all one package. I think that they're, like I said, they may have tea and cookies with Republicans and then that won't go the way they want it to for the Democratic leadership. And then they'll look at putting the packages.

What I thought they might break it up. But my impression now is they will do it as one package, both of them. And that's where really the Democrats are right now is looking at the overall bottom line of what they want. There's not — even though you and I are talking about all these revenue raisers and things, they're more focused right now on the bottom line. OK, how big is this package going to be? $3.2 trillion? $2.5 trillion? And that's what they're really having to talk to members about and see what their comfort level is.

And my read is that they are looking at doing it all as one package. I think they'll be able to do that. Again, it's tight. We had to deal with it when I was in the Senate Finance committee with a 50-50 setup for the Republicans. We did it. It's not easy. You tend to pick up a lot of amendments. Every hour you're on the floor it seems like another senator comes in and has got another few billion dollars that they want to add here or there. But I think they'll be able to do it.

I think their desire is to try to get it out the door by July. But I think that is a very ambitious timeline. They've just really not even kind of gotten to the basic framework of "Yes, here's how much dollars we want to have." Much less down the road of, "Well, here's the revenue raisers we want. Here's what we're up to." So they've really not got the tax out and the hammers on that part of it. And that's not going to be easy either.

So I think July is pretty ambitious right now. Maybe they'll feel that they're beginning to see the end of days before they go for their August recess. And then it would be looking to be done in September. There are scenarios I understand where they think well, it'll unwind. I think these are kind of dreams of the Republicans that they'll kind of put their foot in it. I don't see that right now. I think there's a lot of agreement on a lot of things. There's a lot of spending. We haven't been talking about that, but there's a lot of money to make people happy with out there. And a lot of things that on the Democratic side there'll be fans of.

So I expect there'll be able to get a bill. Like I say, I have to kind of rein back here and there on things that folks want. And I think in some of these tax areas particularly that may be where the knife gets a little bit duller in terms of what they're trying to do on the revenue raisers. But I think they'll have the general framework of what they're trying to put forward in place.

Jonathan Curry: I think you made a good point noting Speaker Pelosi's pretty ambitious timeline of trying to get this done by July. But you also said it could stretch out even further than that. Is there a point where this runs the risk of running out of steam and just falling apart potentially?

Dean Zerbe: I understand the Speaker's desire to go, go, go. We saw that ourselves. You've got these narrow windows to make things happen. I remember when George W. Bush got reelected, there were ambitious plans on certain tax provisions and then Hurricane Katrina happened, and that just really quite frankly, took the wind out of the sails of doing all that. And everything was focused rightfully on Katrina and relief there.

And simply, events, take things over, and it's always so difficult to predict or anticipate. But there's always something coming around the corner if you will. And so I think they're wise to try to move. So there's always something that could gum them up. It may be that people will start to get concerned about the dollars. You may have issues with the economy, but more practically I think if you're not getting it done or feeling movement by the fall, you're already beginning to get the specter of the next election cycle.

As listeners know, the Republicans feel the winds in their sail for that. Folks will start getting nervous about where they are with redistricting kicking in. I think the more you've got members still in the golden globe of the election results and saying, "You bet. Let's do it. Let's get going." All the better. The more they're saying, "Hey, who's my opponent? Hey, what's happening come this next November?" That's going to get them more nervous about what they're doing and be thinking more about concerns and issues that maybe aren't as prevalent at this point where there's still the feeling of, ''Well, the president's gotten elected. He has an agenda. I want to make that happen."

So I'm sure the Speaker doesn't need any guidance from me, but the sooner the better. I get that. And I think if you're starting to drift into later fall, that would not be where you'd want to be. I would think they'd want to do it.

It affects another issue too, that we haven't really touched on, but I know matters so much to many of your listeners, which is effective dates. Because the more it moves into the fall, the more you're looking at effective dates that would then bleed into the next year or maybe a blended rate on ordinary income. But you get it. It kind of gets a little bit kinky if you will to kind of say, "Well, yes, we've only got 70 more days left in the year, but we're going to —." It just kind of becomes an administrative grind and it tends to be easier to just say, "Well, we're going to take this and start it all January 1."

So that's something that's a little bit in play as well, too. And that's something that for listeners I would expect you'll start to see when you start to see them laying down markers or what they're proposing, they have to put down effective dates at that point. Because that's the only way you can get a score. That is the Joint Committee on Taxation that does the scoring on our tax provisions. The first thing they'll ask is, "Well, what's the effective date?" Which, when you think about it, makes common sense. That you can't score something if you don't know when it's effective. So that will be another issue that'll play into it.

So right now I think they've got a pretty good road ahead of them. It doesn't immediately look like any roadblocks or problems, but better to get it out the door than to just meander and wander if you will.

Jonathan Curry: Certainly. It'll be very interesting to see how this all plays out. Well, Dean, that does it on my end. Thank you so much for taking time to talk with us today. It's been a pleasure and we'll be keeping an eye out to see how things play out.

Dean Zerbe: Thanks so much, Jonathan. Appreciate it.

David Stewart: And now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now from her home is Acquisitions and Engagement Editor in Chief Janelle Julien. Janelle, what will you have for us?

Janelle Julien: Thanks, Dave. In Tax Notes Federal, William Snape III, Laura Harris, and Theresa Geib completed a study on conservation easements. Jeffrey Pennell proposes a high-net-worth income tax that would be an alternative to the annual wealth tax advocated by Sens. Elizabeth Warren, D-Mass., and Bernie Sanders, I-Vt. In Tax Notes State, Libin Zhang analyzes President Biden’s proposal to increase individual and corporate income tax rates. Nikki Dobay reviews state tax legislation enacted in the first quarter of 2021. On the Opinions page, Nana Ama Sarfo looks at how the United States and Canada differ in their approaches to cryptocurrency third party information requests. Robert Goulder examines what factors make a digital services tax a success or failure. And now for a closer look at what’s new and noteworthy in our magazines, here is Tax Notes Executive Editor for Commentary Jasper Smith.

Jasper Smith: Thanks, Janelle. I'm here with Charlotte Tolman, a senior associate with Stibbe, to discuss her new regular column in Tax Notes International “In Step With Stibbe.” Welcome to the podcast, Charlotte.

Charlotte Tolman: Thank you, Jasper.

Jasper Smith: So last month we published the first installment of the column co-written with your colleague Michael Molenaars titled, "Combating Non-Arm’s-Length Transfer Pricing in the Netherlands." Can you briefly tell us what that article is about?

Charlotte Tolman: Yeah. Sure. So in our first article for our new column "In Step With Stibbe," we discuss a recently published consultation documents. Last March a draft bill law was published that targets transfer pricing mismatches in the Netherlands, and it is expected that these rules will become effective as of next year, so 2022. The proposal intends to avoid international double nontaxation by means of denying downwards transfer pricing adjustments. Such deductions are currently in principle allowed under the Dutch so-called informal capital doctrine.

And in short and under the current Dutch interpretation of the at arm's-length principle, any deemed at arm's-length expenses are in principle deductible regardless of whether any corresponding income is recognized or taxed at the level of the recipient. Under the proposed rules such deductions would no longer be allowed unless it can be substantiated that there is an actual inclusion of such income at the level of the recipients. And in our article, we will discuss the rules in greater detail and we will also discuss some practical paces.

Jasper Smith: Well, thank you so much, Charlotte, for that summary. And of course, if readers haven't seen it already, we hope that they go take a look. And your next article is slated to be published in a few weeks from now. So can you give us a preview of what's to come in that article?

Charlotte Tolman: Sure. Yeah, our next article will be published mid-May and in this article we will again discuss certain consultation documents that were published in March and April this year. These proposals contain again anti-abuse rules, but this time it's to tackle reverse hybrids and hybrid entity mismatches in the Netherlands.

These rules likely also become effective as of next year. So again, this is very relevant. And the first proposal concerns the introduction of the reverse hybrid mismatch rule. That is basically the final part of the ATAD implementation in the Netherlands. And a well-known example in this respect is the Dutch CbC structure, in which case a Dutch CV may become subject to Dutch corporate income taxation going forward.

And the second proposal is about amending the current Dutch classification rules for certain domestic and foreign legal entities. And although the letter contains some very welcome and practical clarifications to the Dutch parents classification methods, it's still a bit uncertain and there are a number of questions and uncertainties. So one of our remaining questions, for example, is what will happen to the classification of U.S. LLCs from a Dutch tax perspective? And I think that will be very relevant if that could be clarified. And in our article, we will discuss the proposals again and highlight some of the questions and problems that we foresee.

Jasper Smith: Fantastic. And again, we look forward to reading that one as well. So before we let you go today, can you just tell listeners where they can find you online?

Charlotte Tolman: Yeah, you can find me on LinkedIn. And my contact details can be found on my firm's webpage stibbe.com.

Jasper Smith: And of course you can find all of Charlotte's articles online at taxnotes.com. Be sure to subscribe to our YouTube channel, Tax Analysts, for more in-depth discussions on what's new and noteworthy in Tax Notes. Again, that's Tax Analysts with an 'S'. Back to you, Dave.

David Stewart: You can read all that and a lot more in the pages of Tax Notes Federal, State, and International. That's it for this week. You can follow me online @TaxStew, that's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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