Biden Aims to End Corporate Tax Cuts Rewarding Investors

The corporate tax-cut party President Donald Trump kicked off will soon be over if his successor proves able to enact proposals to roll back half of the 2017 domestic income-tax reduction and to radically revamp levies on profits earned abroad.

President Joe Biden’s $2.25 trillion infrastructure-centered plan, laid out by the White House Wednesday, relies on higher corporate levies to pay for it. The proposals would change tax benefits that were at the center of the 2017 Tax Cuts and Jobs Act passed solely with Republican votes. Along with boosting the corporate income tax rate to 28% from 21%, businesses would pay significantly more on their global earnings than they did before Trump took office, experts said.

Biden Aims to End Corporate Tax Cuts Rewarding Investors

“They’re not just rolling back the tax cuts from 2017,” said David Noren, a former legislative counsel to the congressional Joint Committee on Taxation who now advises corporate clients on tax planning. “They are putting companies in a much much tougher spot than even before TCJA.”

The administration is also proposing to eliminate all fossil-fuel tax breaks and repealing incentives to move assets and jobs offshore.

Biden Aims to End Corporate Tax Cuts Rewarding Investors

The plan would largely revamp the complicated matrix of carrot-and-stick incentives implemented in 2018 that govern how U.S. companies pay taxes on foreign profits -- which critics have said did little to spur U.S. investment or stop companies from shifting income and assets abroad. In its place, Biden has proposed a 21% global minimum tax. That would be an increase from the roughly 13% that corporations currently owe on offshore earnings.

Trump’s tax law intended to make it easier for American companies to compete with foreign competitors in countries where taxes were lower and international tax regimes were more permissive.

Repatriation Disappointed

While the law lowered tax bills for some foreign profits, other changes -- like deductions to benefit U.S. manufacturers who sell abroad and rules to prevent companies from moving intellectual property offshore -- didn’t work as well as some Republicans who drafted the law had hoped.

Companies ended up repatriating only a fraction of the foreign profits envisioned by the reform and uncertainty about the longevity of a law passed with GOP votes only led some companies to adopt a wait-and-see approach.

Biden’s proposals face significant changes, given the 50-50 split in the Senate and the Democrats’ narrow majority in the House, which gives extra power to individual lawmakers to shape the final legislation.

Senate Finance Committee Chairman Ron Wyden said that he and Biden “are rowing in the same direction,” but that he plans to release his own international tax plan, along with Democratic Senators Sherrod Brown of Ohio and Mark Warner of Virginia, next week.

“While the proposals are distinct, our plans share the same goals of ending incentives to ship jobs overseas and rewarding companies that invest in the United States and its workers,” Wyden said in a statement Wednesday.

Republican Defense

Republicans have defended the 2017 tax law, saying that it reformed an archaic international tax system that made American companies prime targets for takeovers and inversions.

An increase in the federal corporate rate to 28% would raise the average combined state and federal rate to 32.34%, which would be the highest among the G-7 countries, according to the right-leaning Tax Foundation. Republicans say this would harm economic growth and increase the cost of investment in the country.

“In addition to giving the United States the highest combined corporate rate in the developed world, Biden wants to impose an uncompetitive minimum tax on American companies,” Republican members of the House Ways and Means Committee said in a joint statement Wednesday. “America is the only country that now sets a minimum tax on the foreign earnings of domestic companies -- now President Biden wants every country to impose such a tax, in exchange for his promise to keep the U.S. minimum tax higher than other countries.”

The U.K. government recently announced a plan to raise corporate tax rates to 25% in 2023, from 19%, for businesses with profits over 250,000 pounds ($345,000). That would be mark the first hike since 1974 in the country. Rates in Canada, France, Germany, Italy and Japan are all above 25%.

White House National Economic Council Director Brian Deese said the plans would help stop a “race to the bottom internationally” on corporate taxes. And he argued that the overall infrastructure program would prove beneficial to private sector companies. “These public investments are among the highest-return investments in terms of spurring private investment,” he said in an interview with Bloomberg TV Wednesday.

Mike Crapo, the top Republican on the Senate Finance Committee, warned at a hearing last week that Democrats’ plans could bring back corporate inversions -- deals where companies move their headquarters overseas for tax purposes, or takeovers of American businesses by foreign counterparts.

Buybacks Boomed

Inversions are particularly difficult today because of regulations designed to prevent such maneuvers, according to Noren, who’s now a partner at the law firm McDermott Will & Emery. U.S. companies would likely be targets for foreign buyers if the new tax rules were to become law, he said.

Trump’s reduction in the U.S. corporate-income tax rate to 21% from 35% proved to be a huge boon for the stock market. Many major U.S. companies said they would turn over most savings from the relief to their shareholders.

Read More: Amazon and Other Big Tech Stocks May Move on Biden Tax Plans

A year after the law was enacted, data showed that companies such as Apple Inc. and Walt Disney Co. were among those distributing the benefits in the form of share buybacks and dividends. In 2018, the technology industry authorized the greatest number of buybacks ever recorded, according to TrimTabs Investment Research. The $387 billion involved was more than triple the amount in 2017.

In terms of economic growth, the goal of encouraging companies to redeploy tax savings into assets and job creation had only mixed results, said Karen Brown, a law professor at George Washington University who focuses on taxes.

There was a boost soon after the law was passed, but that has moderated lately, and hasn’t lived up to the expectations set out by the Trump administration, she said. Similarly, the negative impacts of a tax rate increase might also prove to be relatively limited.

“In principle there should be no hit to capital spending provided that firms are still allowed to immediately expense capital outlays (as they have since the TCJA),” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. “Most studies indicate that there are supply-side benefits to public infrastructure spending, i.e. productivity in the private sector gains when it employs a larger stock of public infrastructure capital.”

The capital spending tax benefits that Feroli refers to are set to begin phasing out at the end of next year -- setting up another fight for Democrats and Republicans over the legacy of Trump’s tax law.

©2021 Bloomberg L.P.

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