Corporate Tax

Company Tax Coverage in Construct Again Higher

Shortly after the election, the AAF scrutinized the Build Back Better agenda and found that the negative economic impact of trillion-dollar tax hikes could not even be outweighed by a disciplined program of productive (traditional and social) infrastructure investments. Of course, Eakinomics assumed the problem was resolved and efforts would be discontinued.

Unfortunately, the House Committees reported their portions of the Reconciliation Act, even though neither the Congressional Budget Office nor the Joint Committee on Taxation published a comprehensive set of committees of committee legislation. So at this point, you don’t know if the committees successfully followed the budget resolution instructions, or how much the whole effort is driving up spending, taxes and debt. In short, the budgetary implications are a black box.

But the economic implications are becoming more concrete, especially in the tax area. One of the key changes proposed in the House of Representatives bill is the increase in corporate income tax from 21 percent to 26.5 percent. In addition, it would increase the tax on overseas intangible income (FDII) – roughly the overseas income from intangible assets in the U.S. – and the global low-taxed intangible income (GILTI), which is intended as a minimum tax on income from located assets abroad.

From the perspective of the Tax Cuts and Jobs Act (TCJA) of 2017, it’s hard not to worry about these changes. Prior to TCJA, the loss of corporate headquarters was a chronic occurrence and the source of considerable disagreement. Not a single company has moved abroad since TCJA. Raising the quota to the third highest value in the OECD is an invitation to go back to the bad old days.

Now there are two new studies from the Penn Wharton Budget Model folks looking at the FDII and GILTI regulations and their implications for US multinationals. The first study concluded that the Ways and Means Act “would more than triple the US tax rate on foreign income for multinational corporations, a higher rate than a proposed global agreement currently negotiated by the OECD”. Correctly. This is not a modest tax hike; it is tripling the tax on foreign income by successful US firms, undermining their competitiveness. And the effective tax rate is higher than the government’s proposal to introduce a common, global minimum tax of 15 percent for all countries.

The second study follows directly from the first. That study concluded that the bill would increase reallocation of intangibles as it would raise the rate on FDII compared to the effective rate on GILTI. That makes sense. If the income from the same intangible asset is taxed less heavily when the asset is overseas (GILTI) than inland (FDII) then it’s just goodbye Des Moines and hello Dublin.

It’s hard to get excited about a bill that poses a budget disaster of unknown proportions but a well-defined economic threat.

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