March 31, 2021
Daniel Bunn, William McBride, Garrett Watson, Erica York
Ahead of President Joe Biden’s speech in Pittsburgh Wednesday night, the White House released a fact sheet on America’s proposed employment plan to fund additional spending on infrastructure and research and development. The proposal’s tax hikes are among the most damaging options for businesses to pay for increased spending. While the President’s plan emphasizes making goods in America, the tax hikes will increase US production costs, undermine American competitiveness and slow our economic recovery.
The American employment plan (Biden infrastructure plan) would increase taxes on companies in several ways:
The tax proposals in the American Jobs Plan (Biden Infrastructure Plan) are based on false assumptions about how corporate taxes work, how companies respond, and how workers are affected. Here are the facts:
An increase in the federal corporate tax rate to 28 percent would raise the combined US federal-state tax rate to 32.34 percent, higher than any country in the OECD, the G7 and all of our major trading partners and competitors, including China. This would hamper America’s economic competitiveness and diminish our role in the world.
When the US last had the highest corporate tax rate in the OECD, before tax reform in 2017 with the Tax Cuts and Jobs Act (TCJA), the US experienced several years of economic malaise, including chronically low investment, productivity and wage growth, as well as large distortions and avoidance regimes in the corporate sector. These included corporate relocations to low-tax countries, migration from the corporate to the non-corporate sector and a slowdown in business momentum. Because of this, the US lowered the corporate tax rate to compete with other countries around the world that lowered theirs long ago.
Whether we use corporate tax revenue as a percentage of GDP, average effective tax rates, or marginal tax rates, each metric shows that the effective corporate tax burden in the US is close to or above average compared to other OECD countries. An increase in corporate taxes would put the United States at a competitive disadvantage, whether looking at statutory tax rates or effective corporate tax rates.
- Contrary to the proposal’s claims of a “race to the bottom” on corporate tax rates, cuts in corporate tax rates have plateaued for more than a decade. When the US cut the statutory corporate interest rate from 35 percent to 21 percent in 2017, they weren’t racing to the bottom, they were moving towards the average. The combined US tax rate (state and federal) on corporate income is now 25.77 percent. The average corporate tax rate in the OECD countries (excluding the USA) is 23.4 percent.
- A 7 percentage point increase in the federal corporate income tax rate would reduce the after-tax return on corporate investment in America, leading to less investment, less productivity, fewer jobs and lower wages. We estimate that raising the federal corporate tax rate to 28 percent would reduce long-term economic output by 0.8 percent, eliminate 159,000 jobs and lower wages by 0.7 percent.
- Workers of all income scales would bear most of the tax increase. For example, the bottom 20 percent of earners would see a 1.5 percent drop in after-tax income on average over the long term.
- The structure of the tax on foreign profits of US companies, known as the GILTI, does not provide any incentive for offshoring.
- Critics of the design ignore the policy’s context, which includes the lower corporate tax rate and full spending on ephemeral assets. The tax burden of GILTI can be well over 10.5 percent, since it is a second tax layer next to foreign taxes. A company that decides to invest overseas based solely on the GILTI design would be ignoring the balance that the TCJA sought to strike with a genuine policy incentivizing investment in the US
- The lower tax rate for companies exporting to foreign markets was designed to make the US an attractive place for companies to hold their intellectual property. Instead of developing their IP assets in the US and then moving them overseas, FDII’s design makes the US an attractive place to hold IP. Just last week, Rob Portman (R-OH) referred to the fact that US companies have brought intellectual property back from offshore as a result of FDII.
- A minimum tax on corporate book income would complicate tax law as companies would be required to use two tax bases to determine their tax liability. It would outsource important aspects of corporate income tax to the Financial Accounting Standards Board (FASB) or require policymakers to meddle in financial accounting standards, reducing the value of financial income statements to business stakeholders.
- A minimum tax would also distort investment incentives when companies are liable for the minimum tax and reduce investment incentives by reclaiming provisions such as the R&D tax credit and accelerated depreciation deductions. The tax would undermine potentially existing investment incentives as well as those proposed by President Biden, such as the Made in America tax credit.
- The fact sheet argues that US corporations face low effective tax rates. One reason is that companies invest in the United States (and can legally withdraw that investment). It would be a mistake to think that such companies investing in the US should pay corporate taxes on that investment.
- There are real, legitimate reasons why a company might not have to pay corporate income tax in a given year, such as: B. Deductions for accelerated depreciation, R&D tax credits and net operating loss carryforwards (NOL).
- The American Jobs Plan would provide additional funding for the Internal Revenue Service (IRS) to improve auditing and enforcement. However, rather than simplifying the tax law to help compliance, the American Jobs Plan would greatly increase the complexity of the tax law by enacting policies such as a minimum tax on book income that make enforcement even more difficult.
- There are already guard rails in the existing tax system to check compliance. For example, the Joint Committee on Taxation (JCT) must approve any tax refund for a C corporation that exceeds $5 million. The IRS routinely audits large corporations; For example, in fiscal 2019, nearly 50 percent of the returns of large companies with assets greater than $20 billion were examined.
Rather than penalizing US manufacturing and adding complexity to the tax code, Congress should consider ways to incentivize greater dynamism and domestic manufacturing through a competitive and simplified corporate tax system.
Launch Resource Center: President Biden’s Tax Proposals