President Biden’s plan to raise the corporate tax rate would weaken economic recovery and hurt competitiveness, according to a report by the Tax Foundation.
During the 2020 presidential campaign, Biden said he plans to raise the corporate tax rate to 28%, a sharp increase from the current 21% set by former President Donald Trump’s Tax Cuts and Employment Act but still well below the corporate tax rate 2017 is 35%.
The report found that the increase would bring the US state’s combined tax rate to around 32% – the highest statutory tax rate in the Organization for Economic Cooperation and Development. Such a tax hike would “increase capital costs in America” and “lower long-term economic output by 0.8 percent, cut 159,000 jobs and cut wages by 0.7 percent.”
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William McBride, vice president of federal taxes and economics for the Tax Foundation, told the Washington Examiner that most of these effects would be felt within 10 years of implementation. While projections relate to the long-term effects of new tax policies, McBride said the tax would hit companies that were forced to lay off employees during the pandemic.
“When the economy returns to normal, the biggest challenge is getting the laid-off back on. Since companies would be doing much of this hiring, a rise in corporate taxes would increase costs for these companies and slow the hiring process,” said McBride.
“Badly considered changes in tax policy, including business tax increases, would hamper economic recovery and limit long-term prospects,” the report said. “Understanding the potential impact of the proposed corporate tax changes, including the potential impact on American workers, consumers, and the wider American economy, can help prevent costly mistakes.”
Under current tax laws, the integrated tax rate of 47.5%, a combination of corporate taxes and taxes on dividends and capital gains, is in the middle of the range of corporate tax plans within the OECD. Countries like Ireland, Canada and France have incorporated tax rates of over 50%, while countries like Sweden, Japan and Italy have tax rates of 45% or less.
“With the highest integrated tax rate that businesses face today, the United States ranks close to midfield when compared to other OECD countries,” the report said. Biden’s plan, which includes increasing capital gains taxes, “would make the highest integrated corporate income tax rate in the US the highest in the OECD at 62.7 percent.”
Proponents of raising the statutory corporate tax rate called the move an efficient means of creating a more progressive corporate tax rate and suggested that Biden’s plan to provide a 10% tax credit for skilled investments in American-made manufacturing should offset a less competitive tax rate.
“With US corporation tax falling largely on above-average profits, or ‘rents,’ a statutory rate hike is a relatively efficient and progressive way to increase revenue,” wrote Thornton Matheson, a senior fellow at the Tax Policy Center. “Biden’s 10% Made in America” (MIATC) tax credit would provide a significant marginal allowance for skilled investment. The combination of the rate hike and tax credit would likely reduce total corporate investment slightly, but shift that investment significantly towards manufacturing. “”
Treasury Secretary Janet Yellen said the US would also work with the OECD to set global minimum corporate taxes and said during her Senate confirmation hearing that a multinational approach to corporate taxation could “stop a destructive global race to the bottom on corporate taxation”. ”
McBride said he was skeptical that the OECD would make significant strides in introducing a global minimum tax.
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“The OECD has been working to reach a consensus on minimum taxation for years and this process is likely to continue for many years and may or may not lead to an OECD-wide agreement,” said McBride. “The current status of the negotiations does not show any significant effects on our analysis.”