Biden’s corporate tax plan targets income inequality
WASHINGTON >> From John Kennedy to Ronald Reagan to Donald Trump, US presidents have tackled corporate tax evasion schemes – and most of them have failed.
Now President Joe Biden is once again shaping the government’s views on loopholes, shelters and international havens that have long allowed multinational corporations to avoid taxes in ways that ordinary households cannot.
The idea is twofold: First, to help pay off Biden’s trillions in proposed spending – on everything from roads and bridges to green energy, internet access, job training, preschool leave and school fees. sick leave. And second, shifting the federal tax burden more to businesses and reducing America’s vast income inequalities. Wealthy investors reap the biggest deals when after-tax corporate profits accelerate.
“The burden,” said Thornton Matheson, senior researcher at the Center for Fiscal Policy, “would fall primarily on the wealthier people.”
Biden, in effect, wants to swing the pendulum backwards. At one time – from the early to mid-1950s – corporations accounted for 30% of federal tax revenues. Last year, their share barely exceeded 7%.
As businesses generated a smaller and smaller share of federal tax revenue, the burden fell more heavily on individuals, through income tax and the levies that pay Social Security and Medicare.
The president wants to prevent companies from hiding their profits in low-tax countries. To do this, he has proposed a minimum tax of 21% on the foreign income of multinationals and urges other countries to follow suit. His plan would also nullify what the administration sees as international loopholes in Trump’s 2017 tax laws.
To bolster its ability to stamp out tax evasion, the administration proposed adding $ 80 billion to the IRS budget over a decade to bolster the agency’s underfunded enforcement team. As part of his efforts to reduce the wealth gap in America, he also proposed to increase the tax rate on long-term capital gains for Americans who earn more than $ 1 million a year. .
Many analysts see Biden’s corporate tax plan as a game changer – if Congress passes it.
If passed, the minimum global tax of 21% “actually means the end of the tax haven as we have learned it,” said Alexander Arnon, analyst at the Penn Wharton Budget Model, a research organization associated with the University of Pennsylvania. .
Penn Wharton analysts estimate that a 21% global minimum tax and other international provisions of Biden’s tax plan would bring in $ 987 billion from 2022 to 2031, almost half of what the global tax plan of Biden’s companies would produce. Biden would raise an additional $ 892 billion from the centerpiece of his plan: an increase in the overall corporate tax rate to 28% from the 21% Trump reduced it in 2017, according to Penn Wharton’s analysis.
“It’s a great plan,” said Matthew Gardner, senior researcher at the Left Institute on Taxation and Economic Policy. “We cannot have a sustainable corporate tax system until we solve the problem of companies transferring their intangibles. This plan should put an end to that. “
Republicans and business groups are already lining up in opposition. The Business Roundtable, an association of CEOs, reported that 76% of top executives polled said the 21% global minimum tax would weaken their company’s competitiveness by forcing them to pay more tax on global profits than their international rivals. Biden’s tax hikes, the roundtable warned, could also limit business investment and hiring.
Chamber of Commerce director of policy Neil Bradley argued that the Biden plan would “slow down economic recovery and make the United States less competitive globally.”
In defense of Biden’s tax plan, his Treasury Department has said it will target “excess” corporate profits – unusually high profits that can result from a company’s near-monopoly power. These companies already have so much cash available to invest that higher taxes would not dissuade them, for example, from building a factory or hiring more workers, say the Treasury and some academic economists.
Ultimately, many analysts say they believe any deal on a higher corporate tax rate could be around 25% – less than Biden would like but higher than the current rate.
Governments have long been annoyed by the difficulty of collecting taxes from corporations that operate operations in several countries. The goal seems simple: “What they’re trying to do is tax where economic activity takes place,” said Ronald Graziano, managing director of accounting and tax research at Credit Suisse.
But the Organization for Economic Co-operation and Development estimates that governments lose up to $ 240 billion a year to companies that shift their profits from country to country to cut taxes.
The Biden plan would strengthen provisions to prevent businesses from playing with the system – for example, requiring their U.S. operations to purchase supplies from a subsidiary in a tax haven, thereby creating a tax-deductible expense in the U.S. high while putting profits in a low tax jurisdiction.
The existing law also consolidates all foreign income, giving businesses the ability to shift profits and tax credits from one country to another to minimize their U.S. tax bill.
“Right now it’s like a mixer approach,” Gardner said. “Companies are allowed to put all their foreign income in one big compartment to calculate this data. And that leaves room for a company that has a bunch of assets in a high tax jurisdiction to throw things in the Caymans just for the fun of it.
The Biden plan aims to put an end to this by assessing taxes on a country-by-country basis: If a company pays no taxes in a tax haven, its income in that country would be subject to the overall U.S. minimum tax of 21%.
Overall, businesses would face a tax hike. Among large multinationals, Credit Suisse estimates, the effective tax rate – what companies actually pay – would drop from 14% to 18% for Apple, from 17% to 22% for Microsoft, from 16% to 22% for Google Parent Alphabet and from 12% to 17% for Facebook. Some of the higher tax burden would ultimately fall on wealthy people, who disproportionately own shares of companies: New York University economist Edward Wolff found that the richest 10% of Americans own about 85% of wealth in stocks.
The Biden administration endorses an OECD initiative to get countries to sign a global minimum tax like the one it is proposing for the United States. companies. The idea is to prevent countries from cutting corporate tax rates to outbid each other for multinationals – at the cost of losing income that could help fund public works projects and social spending.
For the United States, however, international cooperation is “not strictly necessary to make the Biden plan work,” Gardner said. “If we put this in place unilaterally and give the IRS the tools it needs to enforce the laws, that’s all you need.”
As early as 1962, the Kennedy administration sought to collect more taxes from multinationals. But history suggests that corporate giants – and their armies of accountants, tax lawyers, and lobbyists – are endlessly creative in finding ways to keep revenues out of the IRS.
“Just as there is no limit to the ingenuity of 12-year-old boys who are in trouble,” said Gardner, “there is no limit to the ingenuity of companies to circumvent these regulations.”