Politics An effective and politically viable option for corporate tax reform
Biden has reportedly offered to ditch his rollback of Trump-era tax cuts in a major infrastructure concession to GOP
Biden also offered to cut the amount of new spending he's seeking to $1 trillion. Republicans have barely budged in the negotiations.The move comes as the president continues a fourth week of negotiations with the GOP, who have ruled out any alterations to the 2017 Republican tax cuts. Biden had proposed raising the corporate rate from to 28% from its current level of 21% enacted under President Donald Trump's tax law.
Last weekend the finance ministers of the G-7 on a minimum corporate tax rate of at least 15 percent. This agreement will put a lot of pressure on the Biden administration to pass its recently proposed . The U.S. pushed hard for a global minimum tax as part of an overall deal to roll back taxes on digital services by European countries - which mainly hit large U.S. tech companies.
There are two major defects in the current U.S. minimum tax on American corporations, so the Biden proposals to increase corporate taxes deserve serious consideration. But a modified approach to corporate tax reform would be, politically, more realistic.
Biden proposes minimum corporate tax rate to fund $1 trillion infrastructure spending
President Joe Biden on Wednesday proposed an infrastructure package worth $1 trillion in new spending that would be funded without raising the corporate tax rate. The new pitch aims to avoid Republican scorn by sidestepping the president's previously proposed corporate tax rate hike. It would instead implement a minimum corporate tax rate of 15%, aimed at some of the most profitable corporations in the country.
First, the current law allows U.S. multinationals to apply America's ( sometimes a little higher) on an aggregate basis to their total foreign income, rather than on a country by country basis. Consider a U.S. multinational with foreign income of $1 billion and foreign taxes of $300 million in a high tax country like France, as well as $1 billion in foreign income and zero corporate taxes in a tax haven like Bermuda. By using an aggregate approach, the minimum tax would not be applicable to such a multinational because its total foreign taxes would equal 15 percent of its total foreign income ($300 million divided by $2 billion).
The Biden administration would remedy this defect by applying the U.S. minimum tax to each foreign country. This change is urgently needed because of foreign profits of U.S. multinationals continue to be allocated to tax havens - with minimal corporate taxes.
Rich nations confident on reaching tech tax deal
German finance minister Olaf Scholz says a minimum tax deal would "change the world".The agreement is expected to include a global minimum rate of corporation tax.
Video: Wealthy Americans are moving from high-tax states, report says (CNBC)
Second, the minimum tax allows U.S. multinationals to deduct from their foreign income a 10 percent return on their foreign tangible capital - e.g., factories and equipment located in foreign countries. Consider a U.S. multinational with $1 billion in tangible foreign capital, $170 million in foreign income and $10 million in foreign taxes - less than 6 percent of its foreign income. Since that multinational may deduct $100 million (10 percent of $1 billion), its foreign income would be decreased from $170 million to $70 million in calculating the U.S. minimum tax.
The Biden administration proposes to eliminate this deduction for returns on tangible foreign capital, in order to reduce the incentive to offshore facilities and jobs. that this deduction is justified because the minimum tax was aimed at corporate income from intangibles like patents, which can be easily moved to tax havens. However, there are several other countries, like , which have effective tax rates below 10 percent on corporate income derived from local facilities and other types of tangible capital located there.
Why Republicans don't want major corporations like Amazon to pay even a minimum tax rate of 15%
Biden is seeking a corporate tax rate of 28% to pay for infrastructure but he'd settle for major firms paying just 15%. That's too much for the GOP.The G-7 deal marks the start of a potentially historic measure, and signals support from key allies for a deal that would tamp down on tax havens - and work in tandem with tax increase proposals from the Biden administration.
Beyond these two design changes to the corporate minimum tax, the Biden administration proposes to raise the corporate tax rate to 28 percent and the minimum tax rate to 21 percent. However, given the unified to any increase in the corporate tax rate, it would have to be passed by budget reconciliation requiring unanimous support from Senate Democrats. And Sen. Joe Manchin (D-W.Va.) has publicly said that he would support a corporate tax increase to .
Together with a 25 percent corporate tax rate, the Biden administration should adopt the 15 percent corporate minimum tax rate coming out of the G-7 meeting, instead of the proposed 21 percent minimum rate. The 15 percent minimum rate is likely to attract broader support from the G-20 finance ministers, who meet later this summer. Moreover, if most industrialized countries adopt a minimum 15 percent rate, then American companies would be at a competitive disadvantage with a 21 percent U.S. minimum rate.
In sum, Congress should pass a 25 percent corporate tax rate with a 15 percent minimum tax on foreign profits of U.S. multinationals - calculated on a country by country basis without any deduction for returns on foreign tangible capital. Such a corporate minimum tax would raise a little less than $400 billion over 10 years, , as opposed to $500 billion for the Biden proposal for a 21 percent minimum corporate tax.
Robert Pozen is a senior lecturer at MIT Sloan School of Management and former president of Fidelity Investment. Research assistance was provided by Peter Hoffman, a MIT undergraduate.
Opinion: America's tax system is rigged to protect the rich and powerful .
Jeffrey Sachs writes the US tax system is designed to protect wealthy individuals and powerful corporations, and it is breaking the country in more ways than one. Much of the Republican Party lives and breathes to protect the rich and powerful from paying taxes, and Democrats like Sen. Joe Manchin of West Virginia too often side with them. Meanwhile, public opinion -- strongly supporting higher taxes on wealthy Americans and corporations -- counts for little because the rich have undue influence over the political class. © Getty Images But the severity of the problem cannot be overstated.