The White House fact sheet estimates that the proposed tax hikes, expected to gross in more than $ 2 trillion, would take 15 years to fully offset the cost of the spending programs.
According to the White House press release, corporate taxes under the Made in America tax plan would increase as follows:
- Set the corporate tax rate to 28 percent. Under the Tax Cut and Employment Act (TCJA) of 2017, Congress lowered the corporate tax rate from 35 percent to 21 percent. The Made in America Tax Plan would raise the corporate tax rate to 28 percent.
- Discourage offshoring from US corporate activities. Currently, some US companies are reducing their corporate tax liability by offloading certain activities overseas. President Biden wants to prevent these operations from being offshored by increasing the global minimum tax. The Made in America Tax Plan would do this by: (i) increasing the Global Low Intangible Income Tax Rate (GILTI) to 21 percent; (ii) apply GILTI on a country basis to generate profits in tax havens; and (iii) elimination of the 10% Deduction for Qualifying Corporate Investments (QBAI). The GILTI regime imposes a tax on foreign income and subjects U.S. shareholders of controlled foreign corporations (CFCs) to tax most of the income generated by a CFC that generates a return of more than 10 percent on certain property, plant and equipment. Currently, US companies receive a 50 percent deduction on their GILTI tax rate, resulting in an effective tax rate of 10.5 percent (ie 50 percent of the US corporate tax rate of 21 percent). Biden’s proposal would double the effective GILTI tax rate from 10.5 percent to 21 percent. In addition, GILTI is currently calculated using an aggregation method that allows US shareholders to offset foreign income from multiple CFCs. The introduction of a country-based calculation method through the Made in America Tax Plan would attempt to remove the benefit of balancing income with high and low taxes.
- Encourage other countries to introduce higher minimum taxes on companies. In addition, President Biden hopes to reduce the prevalence of offshoring by replacing the soil erosion and abuse tax (commonly known as BEAT) introduced for this purpose by the TCJA with a provision President Biden believes to be more effective. In part, the proposal would, in part, target payments to companies headquartered in countries with no corporation tax on foreign income. The White House press release said this reform could encourage these other countries to join a global initiative to set a strong minimum corporate tax.
- Prevent turning back or applying for tax haven residences. In another attempt to reduce the incidence of offshoring, President Biden seeks to make it more difficult for US companies to acquire or merge with a foreign company in order to avoid US taxes (ie, by “reversing” or using a tax haven as residence). The White House press release gave no details of how this would be accomplished.
- Refuse deductions for offshoring. The Made in America tax plan would deny deductions related to offshoring jobs and provide a tax credit for on-shoring jobs. The White House press release did not specify what deductions the Made in America tax plan would target and did not provide details of the tax credit.
- Removal of FDII (Foreign Derived Immaterible Income) deduction. As part of the TCJA, Congress lowered the tax rate on FDII for US companies with an FDII deduction. FDII is that portion of a US company’s intangible income derived from serving foreign markets and determined on a formulaic basis. The rules that apply to FDII work together with the GILTI rules. The Made in America tax plan aims to eliminate the FDII deduction and use the resulting revenue to expand alternative research and development incentives that the government believes are more effective at creating jobs in the US are.
- Eliminate a minimum tax of 15% on book income for large companies. The president’s tax reform would also include a minimum tax of 15 percent on book revenues of any large corporation. Book income is the amount of income companies that publicly report to shareholders on their annual accounts. For private companies, book revenue would likely include the amount of revenue reported in their audited financial reports or financial reports to banks. The White House press release clarifies that this reform is intended to act as a backlash to the other tax reforms of the Made in America tax plan to ensure that the largest corporations pay US corporate taxes.
- Eliminate fossil fuel tax preferences and reinstate superfund taxes. The Made in America Tax Plan aims to (i) eliminate certain subsidies, foreign tax credits, and other tax preferences for the fossil fuel industry, and (ii) reintroduce a defunct pollution tax that funds the Environmental Protection Agency’s Superfund program has been. The Superfund program helps pay for the remediation of polluted sites. The program is currently funded by the Superfund Trust Fund, but prior to 1995, when Congress allowed the agency to expire, the Superfund program was funded not only by the Trust Fund but also by polluter taxes. President Biden is trying to raise funds for the Superfund program by reintroducing these polluter-pays taxes.
- Extend Enforcement Against Businesses. The Made in America Tax Plan intends to expand tax compliance measures for large corporations and high-income Americans through an increase in the Internal Revenue Service’s resources. The White House press release went on to say that a broader enforcement initiative will be announced in the coming weeks.
The Made in America tax plan only provided for an increase in corporate taxes. However, a press conference at the White House revealed that additional tax hikes for high-income individuals will be announced in the coming weeks.
“The Biden Administration’s tax proposals, which have been included in their infrastructure plan, are a predictable menu of corporate tax increases that will play a role in the legislative process, although they correlate little with the ‘user payments’ approach traditionally used for infrastructure investments,” said the former congressman Phil English by Arent Fox. “Taken together, these massive corporate taxes will reverse some of the amendments to the Tax Reduction and Employment Act and place the United States with the highest corporate tax burden in the OECD. Higher tax rates and a minimum tax on book receipts are creating new offshoring pressures for which this proposal offers unclear remedies. Corporate tax hikes, international tax shifts, and tax penalties for the energy industry will fuel a heated debate as Congress, faced with fiscal challenges, hunt for revenue to fund new initiatives during a pandemic recovery. “
The Made in Tax America plan is likely just the opening salvo in a battle over infrastructure spending and tax increases to pay for the spending. In view of the heavily divided congress, infrastructure and tax burdens are facing considerable hurdles. Already several New York and New Jersey Congressional Democrats have insisted they would not vote for any tax bill unless that included lifting the cap on state and local taxes imposed by the TJCA.