Corporate tax cut party president Donald Trump will soon come to an end if his successor can prove he can make proposals to reverse half of the 2017 domestic income tax cut and radically overhaul levies on overseas profits.
President Joe Biden’s $ 2.25 trillion infrastructure-centric plan, drawn up by the White House on Wednesday, relies on higher corporate dues to pay it. The proposals would roll back tax breaks, which were at the heart of the 2017 Tax Cut and Employment Act, which was passed with only Republican votes.
Coupled with the increase in the corporate tax rate from 21% to 28%, companies would pay significantly more for their global profits than they did before Trump took office, experts said.
“They’re not just resetting the 2017 tax cuts,” said David Noren, former legal advisor to the Joint Tax Committee of Congress, who now advises corporate clients on tax planning. “They’re putting companies in a much tougher place than they were before TCJA.”
The government is also proposing to remove all fossil fuel tax breaks and remove incentives for relocating assets and jobs overseas.
The plan would largely overhaul the complicated matrix of carrot-and-stick incentives introduced in 2018 that govern how U.S. companies pay taxes on foreign profits. Critics said this did little to stimulate US investment or prevent companies from moving income and assets overseas.
In his place, Biden has proposed a global minimum tax of 21%. That would be an increase from the current roughly 13% that companies currently owe for offshore profits.
Trump’s tax law was designed to make it easier for American companies to compete with foreign competitors in countries where taxes were lower and international tax systems more permissive.
While the law lowered the tax burden on some overseas profits, other changes – like deductions for U.S. manufacturers who sell overseas and rules to prevent companies from moving intellectual property overseas – didn’t work as well as some Republicans who had drafted the law, had hoped.
Businesses ended up repatriating only a fraction of the foreign profits envisaged by the reform, and uncertainty about the longevity of a law passed with GOP votes has only led some businesses to wait and see.
In view of the 50:50 split in the Senate and the narrow majority of Democrats in the House of Representatives, Biden’s proposals face significant changes that give individual legislators additional powers to shape the final legislation.
Senate Finance Committee chairman Ron Wyden said he and Biden are “rowing in the same direction” but that he plans to start his own international tax plan next week with Democratic Sens. Sherrod Brown of Ohio and Mark Warner of Virginia to publish.
“While the proposals are different, our plans share the same goals: to incentivize job relocation to end overseas and to reward companies that invest in the US and their workers,” Wyden said in a statement on Wednesday.
Republicans have defended the 2017 tax bill, saying it reformed an archaic international tax system that made American companies primary targets for acquisitions and inversions.
“In addition to providing the United States with the highest combined corporate rate in developed countries, Biden also wants to impose a non-competitive minimum tax on American companies,” Republican members of the House Ways and Means Committee said in a joint statement on Wednesday. “America is the only country that now has a minimum tax on foreign income for domestic companies. Now President Biden wants every country to apply such a tax in return for their promise to keep the US minimum tax higher than other countries. “
Brian Deese, director of the White House National Economic Council, said the plans would help halt an “international race to the bottom” on corporate taxes. And he argued that the entire infrastructure program would prove beneficial to private sector companies.
“These public investments are among the most profitable investments when it comes to stimulating private investment,” he said in an interview with Bloomberg TV on Wednesday.
Mike Crapo, the top Republican on the Senate Finance Committee, warned at a hearing last week that the Democrats’ plans would bring back corporate inversions – deals where companies move their headquarters overseas for tax reasons – or the takeover of American companies by foreign counterparts could.
Inversions are especially difficult today because of regulations designed to prevent such maneuvers, according to Noren, who is now a partner in law firm McDermott Will & Emery. US companies would likely be targets for overseas buyers if the new tax rules became law, he said.
Trump’s cut in the US corporate tax rate from 35% to 21% proved a huge boon for the stock market. Many large US corporations said they would pass most of the savings from the relief on to their shareholders.
A year after the law went into effect, data showed companies like Apple Inc. and Walt Disney Co. were distributing the benefits in the form of share buybacks and dividends. In 2018, the tech industry approved the largest number of buybacks ever recorded, according to TrimTabs Investment Research. The $ 387 billion was more than three times what it was in 2017.
This trend would likely reverse with a higher corporate rate. However, the impact on economic growth can prove to be limited.
“Fundamentally, capital expenditures should not be impacted, provided companies are allowed to continue to issue capital immediately (as they did since the TCJA),” said Michael Feroli, chief US economist at JPMorgan Chase & Co. “Most studies indicate spending on the public infrastructures have supply-side benefits, ie private sector productivity increases when a larger stock of public infrastructure capital is deployed. “
The investment tax breaks, which Feroli is referring to, are slated to expire late next year – another battle for Democrats and Republicans for the legacy of Trump’s tax bill.