Last week the Biden government unveiled its Made in America Tax Plan to fund infrastructure investments. The Biden Plan is a bold, ambitious, and innovative proposal to reform U.S. corporate and international tax laws and eradicate the damage caused by the 2017 Trump Tax Act. This week Senator Ron Wyden, the Democratic Chair of the Finance Committee, released his own international tax reform proposal. Unfortunately, the Wyden Plan relies heavily on ideas passed by the GOP in 2004, and is itself a step backwards from some elements of the Trump tax law.
The Biden Plan has six main elements:
- Increase in corporate tax rate from 21 to 28 percent;
- Eliminate dividend exemption from overseas subsidiaries of US multinational corporations that encourage job offshoring;
- Increase the minimum tax rate for foreign profits to 21 percent and apply it separately for each foreign country.
- Tightening of the rules against company expatriations that occur when a US company nominally relocates its headquarters abroad in order to save taxes.
- Replace an ineffective tax on shifting profits out of the US with an effective tax that applies to countries that do not impose a similar minimum tax on their multinational companies. and
- Repeal of the unjustified and illegal export subsidy in the Trump Tax Act 2017.
Each of these elements is fully justified. The corporation tax hike is long overdue when 91 Fortune 500 companies paid $ 0 corporation tax on U.S. income in 2018. According to a recent analysis by the Joint Committee on Taxation, the Trump Tax Act of 2017 cut the average corporate tax rate in half, from 16 percent to less than 8 percent in 2018.
The Trump tax bill also created an incentive to move jobs overseas by exempting the first 10 percent foreign subsidiaries of U.S. multinationals earn for real investments (such as factories) from U.S. tax. The Biden Plan cancels this unjustified subsidy.
The Trump Tax Act left a weak minimum tax rule on income US multinational corporations earn through foreign subsidiaries at half the US corporate tax rate, and allowed for averaging between high and low tax countries, encouraging profit shifting to low tax countries. The Biden Plan increases the minimum tax rate to 75 percent of the US tax rate and eliminates averaging.
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The Trump tax bill did nothing against corporate expatriations. The Biden Plan treats any company headquartered in the US or with more than half of its shareholders as a US domestic company, regardless of where it is incorporated. This rule eliminates expatriations to avoid the minimum tax.
The Trump tax bill included a weak and ineffective minimum tax against shifting profits from U.S. subsidiaries of foreign multinationals to their overseas parents. This rule was further overridden by regulations passed by the Trump Treasury. The Biden Plan replaces this provision with a strong minimum tax and makes it inapplicable to foreign multinational corporations from countries that impose a minimum tax on their own multinational corporations. This creates a strong incentive for overseas to comply with the US minimum tax of 21 percent, thereby reducing the race to the bottom that has shaped international taxation since the Reagan administration.
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Eventually, the Biden plan removes the Trump tax bill export subsidy, which was just a godsend for US multinational corporations but did nothing to lure foreign investment into the US. It is illegal under WTO rules, making the US vulnerable to trade sanctions.
Unfortunately, the Wyden Plan is much weaker in all of these dimensions, with the exception of the corporate tax rate (which may need to be lowered anyway to meet Sen. Manchin’s demands) and the removal of the offshoring incentive (where it coincides with Biden’s is identical). .
For the minimum tax on foreign subsidiaries, the Wyden Plan proposes a tax rate lower than 21 percent and does not apply it per country, but only to all low-tax areas together. This creates an incentive to avoid the US minimum tax on profits relocated to a tax haven (e.g. the Cayman Islands at 0 percent) by averaging it with a foreign country with higher taxes whose taxes are still below that US minimum tax rate (e.g. Ireland at 12.5 percent). This in turn creates an incentive to shift profits from the US to countries with lower taxes in order to lower the minimum tax. The idea stems from the 2004 Republican Tax Act, largely written by corporate lobbyists.
The Wyden Plan is silent about corporate expatriations such as the Trump Tax Act. This leads to a repetition of the expatriations that incriminated the Obama administration.
In terms of minimum tax for overseas multinational corporations relocating profits out of the US, the Wyden Plan is much weaker than the Biden Plan. For example, the tax can be fully offset against domestic tax credits, which are often unwarranted subsidies for activities that the multinational corporations would have been doing anyway.
Ultimately, while the Wyden Plan eliminates the Trump export subsidy, it replaces it with an “innovation subsidy,” which rewards large corporations for research and development activities that they would have undertaken anyway. The Wyden plan also provides a further subsidy for R&D and US administrative costs. This idea also comes from the GOP law of 2004, but was repealed as ineffective in 2017. This spending is a primary reason companies like Amazon pay very little in taxes on domestic income on tens of billions in domestic profits. While the Biden Plan also offers domestic research incentives, it also includes a minimum tax of 15 percent on the financial income of U.S. multinational corporations, which would ensure that Amazon and its colleagues don’t pay zero tax while making immense profits to shareholders like Jeff Bezos Report.
In sum, the Biden Plan is a truly progressive tax reform, while the Wyden Plan is primarily a centrist (i.e., corporatist) reform disguised as progressive. The Biden Plan is the optimal policy, with an understanding that compromise is required to get through Congress. The Wyden Plan sets the compromise before negotiations even begin, which is always a mistake. One would hope that real progressives like Sen. Warren and Sen. Whitehouse, who are both on the finance committee, see it for what it is.