Corporate Tax

What’s in Biden’s $ 2 Trillion Company Tax Plan?

WASHINGTON – President Biden is calling for a $ 2 trillion corporate tax increase over 15 years to fund his infrastructure plan. Here are the basics of the revenue-generating side of the plan, undoing many of the changes from the 2017 Republican tax bill.

The proposals published at the end of March are closely related to Mr Biden’s tax plan. However, it does not include its proposals affecting taxes on the income of high incomes, capital gains, estates, and non-corporate businesses. These are expected in a future section of the President’s agenda.

How big is the tax increase?

Excluding the Biden Plan, corporate taxes are expected to amount to 1.3% of gross domestic product over the next ten years, according to the Congressional Budget Office. According to the administration, this plan would add 0.5 percentage points of GDP.

What happens to the corporate tax rate?

It would go from 21% to 28%. That’s still less than the 35% that existed before the 2017 law, but it would put the US back at the top of the big economies.

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Why is corporate tax important?

Higher tax rates lower the return on investment, so business groups say companies may be less likely to build factories or make other investments in the U.S. Some projects that make sense at a tax rate of 21% don’t make sense at a tax rate of 28%.

Did the 2017 corporate tax cut boost investment and boost the US economy?

The evidence is mixed. Many companies used the proceeds to buy back stocks and increase returns for investors. After the law was passed, there was also a slight increase in corporate investment. Republicans attribute the Trump-era tax cuts and other measures to falling unemployment and rising wages prior to the coronavirus pandemic.

Who pays corporate income tax?

This is a hotly debated question among economists. Many, including those on the Congressional Joint Tax Committee, say that most of the burden falls on capital owners such as corporate shareholders. This can be reflected in the share prices. Some of the burden is passed on to the general public. This can be done either through lower wages or higher prices than would otherwise be the case.

Those workers and shareholders include some people who earn less than $ 400,000, the threshold below which Mr. Biden has not promised any tax hikes; Biden aides said during the campaign that this promise applies to direct tax increases, not indirect ones.

What does the plan mean for US companies operating overseas?

The 2017 law provided a minimum tax on foreign profits made by US companies. Those who do not pay anything overseas pay a minimum tax of 10.5% to the US. The Biden Plan would increase this minimum tax from 10.5% to 21%, although this would still be lower than the 28% rate on domestic profits.

The Biden government is calling on other countries to work together on setting a global minimum tax rate. Without such an agreement, non-US companies could have an advantage over US-based companies.

Mr. Biden would also require companies to calculate this tax on a country-by-country basis. And it would change a provision that allows companies to exclude 10% of their tangible foreign assets from calculating the minimum tax base. This provision, the Democrats argue, provides an incentive to move factories abroad, but there is little evidence that companies actually made decisions based on this provision.

What is the reason for the tax changes on international income?

Democrats argue that the existing system gives companies an incentive to relocate jobs and operations abroad. Companies – especially those that manufacture heavy machinery or consumer goods – state that they generally have foreign branches to serve foreign markets.

The minimum tax should be high enough to limit the benefits of posting profits overseas, but low enough so that US companies do not face too much of a burden to compete with companies headquartered abroad that do not have similar taxes in their home country Countries. Corporations and Republicans have warned that higher taxes on US-based businesses could make them takeover targets for foreign-run businesses that would not be exposed to these taxes.

Do these tax changes affect companies headquartered abroad?

Yes. The plan would amend or repeal the property tax on erosion and anti-abuse that was introduced in 2017. This tax was designed to prevent foreign companies from deducting their US operations and bringing profits to their main low-tax countries.

The Biden Plan would change this tax so that companies can only move limited income to a country where there is no minimum tax. This new tax – called the Shield by the government – poses a threat to other countries and warns that their companies will face consequences if they fail to introduce minimum taxes.

What about incentives for domestic operations?

The 2017 law provides a special allowance for companies serving overseas markets from the U.S. and effectively allows companies to pay a tax rate of around 13% on that income. The Biden Plan would cancel this tax break and use the proceeds to pay for research and development incentives.

Is there a minimum tax?

In addition to all of the other proposals, the Biden Plan puts a 15% tax on companies’ end-of-year income if they don’t pay that much otherwise. This is intended as a kickback to and response to reports of companies paying little or no taxes.

What are the potential problems with this minimum tax?

Depending on how it is designed, such a minimum tax could undercut the tax incentives created by Congress, such as credits for renewable energy or research. It would also leave crucial tax decisions to the accounting authorities, who, unlike Congress and the Internal Revenue Service, set the rules for revenue from financial reports.

Biden’s infrastructure plan

The Biden government’s new plan deviates this tax significantly from what it proposed during the campaign. It makes the threshold of $ 2 billion in net income instead of $ 100 million. Businesses can avoid the tax if they have low tax rates due to tax credits for research, renewable energy, and low-income housing. This is a realization that not allowing these breaks could undermine the administration’s policy objectives in these areas.

According to the finance department, only 45 companies would likely pay the tax under the changes.

Write to Richard Rubin at richard.rubin@wsj.com

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