In an effort to generate more revenue to fund a massive package of infrastructure spending, President Joe Biden’s administration is trying to add bureaucracy to an already too large part of the corporate tax system. Fortunately, there is a very sensible alternative.
BERKELEY – As part of its comprehensive infrastructure plan, President Joe Biden’s administration is seeking to raise the US corporate tax rate from 21% to 28%, with a minimum tax of 21% on US companies overseas. According to Treasury Secretary Janet Yellen, the goal is to stop an international “race to the bottom” by getting other countries to introduce similar minimum corporate taxes.
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Unfortunately, the proposed measures appear to be designed for an earlier era when it was easy to identify the factories and refineries where companies produced and earned their profits, and where a company’s nationality largely depends on the location of its main operations and shareholders was determined. In modern times, multinational companies with international shareholder bases operate global supply chains and create value with intangible capital without a natural location. Trying to change a tax system based on where a company is resident and whose profits are made therefore means trying to replace the race to the bottom with a race to the past.
If the United States accepts the proposed measures but fails to get others to go along with it, it has faced a less competitive tax system. But even if it succeeds, it will have a system that will have to be constantly modified to keep up with economic realities that continue to diverge from the core concepts on which the system is based.
Fortunately, there are alternatives that are much better suited to the realities of the modern economy. State-level guidelines in the United States over the past few decades have steadily shifted towards taxing companies based on the location of their sales. In these countries, moving away from taxes based on the location of payroll and property, plant and equipment has proven beneficial for investment and employment. In addition, “targeted” taxation, if passed at the national level, could solve the international profit shifting problem that the Biden reforms are intended to face.
The key reform would be a “Destination Cash Flow Tax” (DBCFT). This would mean, among other things, an immediate expense on all investments, eliminating the tax break for corporate bonds, and imposing marginal tax adjustments to eliminate taxes on export revenues and tax deductions for import costs. Ultimately, only domestic cash flows would be taxed. And since transactions between domestic companies and related foreign parties would have no tax ramifications for the US, the practice of profit shifting would disappear.
In addition, the marginal tax adjustments would shift the place of taxation from where products are made to where they are sold. Since domestic production would not impose an additional tax on companies, America would become a more attractive place to invest in jobs. A huge added benefit would be that the plethora of complicated tax regulations designed to prevent companies from moving profits and production overseas could be kept as unnecessary artifacts of a bygone era rather than being expanded under the Biden Plan.
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Since the tax system does not impose any particular burdens on US companies, any measures aimed at preventing them from relocating their headquarters overseas to escape US citizenship could go down in history instead of making the matter any further confuse. And tying tax liability only to transactions within the US would relieve the Internal Revenue Service of the burden of tracking down information about companies’ overseas operations.
Readers can identify the DBCFT by its appearance in 2016 when Republicans Paul Ryan and Kevin Brady proposed it. The system ultimately failed to make it into the Tax Cut and Employment Act of 2017, as its sponsors’ insistence on immediate and full adoption of a then-unknown reform was met with opposition from other Republicans. Furthermore, the Trump administration’s clash with America’s traditional allies created a controversial relationship with little attempt to explain the reasons for the reform, let alone push for its adoption abroad.
However, the Biden government, with its express wish for international cooperation and domestic bipartisanism, has a better chance of success. As an effective tax on corporate profits, the DBCFT is not only progressive; It is actually more progressive than the current US corporation tax, which makes US workers less productive by discouraging investment.
A simple tax that provides a sustainable, progressive source of income and incentives for domestic investment and employment (even if the tax rate is increased) should appeal to many congressmen, regardless of their political leanings. The choice between a modern corporate tax and a race to the past should be clear.