Companies would face higher taxes on domestic and foreign income
By Richard Rubin – The Wall Street Journal.
WASHINGTON—President Biden is calling for $2 trillion in corporate tax increases over 15 years to pay for his infrastructure plan. Here are the basics of the revenue-raising side of the plan, which reverses many of the changes from the 2017 tax law written and passed by Republicans.
The proposals released at the end of March hew closely to Mr. Biden’s campaign tax plan. But they don’t include his proposals affecting taxes on high-income individuals’ income, capital gains, estates and noncorporate businesses. Those are expected in a future segment of the president’s agenda.
How big is the tax increase?
Not counting the Biden plan, corporate taxes are projected to be 1.3% of gross domestic product over the next decade, according to the Congressional Budget Office. This plan would add 0.5 percentage points of GDP, according to the administration.
What happens to the corporate tax rate?
It would go up to 28% from 21%. That is still lower than the 35% that existed before the 2017 law, but it would put the U.S. back toward the top of the pack among major economies.
Why does the corporate tax matter?
Higher tax rates reduce the return on investment, so business groups say companies might be less likely to build factories or make other investments in the U.S. Some projects that make sense at a 21% tax rate won’t make sense at a 28% rate.
Did the 2017 corporate-tax cut encourage investment and boost the U.S. economy?
The evidence is mixed. Many companies used the proceeds to buy back stock and boost returns to investors. There was also a modest boost in business investment after the law passed. Republicans credit the tax cuts and other Trump-era policies for the decline in unemployment and increase in wages that happened before the coronavirus pandemic.
Who pays the corporate tax?
That’s a hotly debated question among economists. Many, including those at the congressional Joint Committee on Taxation, say most of the burden falls on the owners of capital, such as corporate shareholders. That can get reflected in stock prices. Some of the burden gets passed on to the public at large. That can either happen through lower wages or higher prices than would otherwise be the case.
Those workers and shareholders include some people making under $400,000, the threshold below which Mr. Biden has promised no tax increases; Biden aides said during the campaign that that pledge applies to direct tax increases, not indirect ones like this.
What does the plan mean for U.S. companies operating abroad?
The 2017 law created a minimum tax on foreign profits of U.S. companies. Those paying nothing abroad pay a 10.5% minimum tax to the U.S. The Biden plan would raise that 10.5% minimum to 21%, though that would still be lower than the 28% rate on domestic profits.
The Biden administration is urging other countries to cooperate with it in setting a global minimum corporate tax rate. Without such an agreement, non-U.S. based companies could have an advantage over U.S.-based firms.
Mr. Biden would also require companies to calculate that tax on a country-by-country basis. And it would change a provision that lets companies exclude 10% of their tangible foreign assets from the calculation of the base of the minimum tax. That provision, Democrats argue, provides an incentive to put factories abroad, but there is little evidence that companies have actually made decisions based on that provision.
What is the rationale for the tax changes on international income?
Democrats argue that the existing system gives companies an incentive to shift jobs and operations abroad. Companies—particularly those producing heavy equipment or consumer goods—say they generally have foreign operations to serve foreign markets.
The minimum tax was designed to be high enough to limit the benefits of booking profits abroad, but low enough so that U.S. companies didn’t face too large a burden in competing against foreign-headquartered companies that don’t have similar taxes in their home countries. Companies and Republicans have warned that higher taxes on U.S.-based companies could make them takeover targets for foreign-led firms that wouldn’t face those taxes.
Are these changes to taxes affecting foreign-headquartered companies?
Yes. The plan would alter or repeal the Base Erosion and Anti-Abuse Tax created in 2017. That tax was designed to prevent foreign companies from loading up their U.S. operations with deductions and pushing profits to their low-tax headquarters countries.
The Biden plan would change that tax so that companies are limited from shifting income to a country that lacks a minimum tax. That new tax—called Shield by the administration—acts as a threat to other countries, a warning that their companies face consequences if they don’t adopt minimum taxes.
What about incentives for domestic operations?
The 2017 law created a special deduction for companies that serve foreign markets from the U.S., and it effectively lets companies pay about a 13% tax rate on that income. The Biden plan would repeal that tax break and use the revenue to pay for incentives for research and development.
Is there a minimum tax?
On top of all the other proposals, the Biden plan imposes a 15% tax on the financial-statement income of companies if they don’t otherwise pay that much. That is designed as a backstop and a reaction to reports about companies paying little or no tax.
What are the potential problems with that minimum tax?
Depending on how it is designed, such a minimum tax could undercut tax incentives that Congress created, such as credits for renewable energy or research. It would also leave crucial tax decisions to accounting regulators who set the rules for financial-statement income, as opposed to Congress and the Internal Revenue Service.
Featured article licensed from the Wall Street Journal.