Biden’s corporate tax rate hike: looking for a spending plan

President BidenJoe Biden Progressive Democratic lawmakers urge Biden to replace Powell as Fed Chairman Pentagon posts photo of last soldier to leave Afghanistan overnight Defense and National Security – America’s longest war ends MORE Campaigns on pledge to raise taxes for the rich by reversing the Tax cuts 2017. Once in power, he issued several executive orders and the US bailout, quickly followed by his infrastructure proposal that found little support in Congress. This spending was a placeholder for his promised higher taxes on the rich (and indeed most others). The spending proposal may die, but higher taxes will reappear in other spending proposals or as a stand-alone tax “reform” bill.

The cancellation of the Trump administration’s tax cuts includes increase the corporate tax rate at 28 percent from its current 21 percent. Old President TrumpDonald Trump Progressive Democratic lawmakers urge Biden to replace Powell as Fed chairman Close examination of COVID origins marks victory for US intelligence agencies Jan. 6 panel is seeking records of those involved in the rally ” Stop the Steal »MORE lowered the rate by 35%, so Biden would take back half of it. Biden also proposes to reduce the top marginal personal income tax to its pre-Trump level of 39.6%, from 37%, plus the 3.8% investment tax on income in each case, reducing the highest included rate to 43.4%. There are other corporate tax increases in Biden’s plan, particularly moving away from Trump’s taxation of global income.

Congress fought for years to obtain higher taxes on foreign income from American companies and made significant gains. Bloomberg reporter Lydia O’Neal Explain that there has been a massive increase in the repatriation of dividends from overseas profits – about $ 1.6 trillion in the first three years of Trump’s tax policy – as corporate profits reinvested in the foreigners fell to about zero over the same three years. The growth of tax havens has slowed to almost zero. Congress is unlikely to want to reverse these benefits.

There are four reasons to oppose Biden’s corporate tax rate hike. First, it would make companies less competitive globally. According to the Organization for Economic Co-operation and Development (OECD), the Biden tax rate would take us from around 21st out of a set of 36 developed country countries in 2018 to the fifth highest tax rate. Second, the higher tax rate would increase the cost of capital for taxed companies, reducing their incentive to invest and reducing the employment and real wages of their workers and the workers who compete with them. Third, the tax hike would widen the gap in the taxation of capital income between companies that are effectively subject to corporate tax and those that are not. Fourth, the revenues from the tax rate increase are relatively small, especially compared to the costs of the programs to which it is tied.

Proponents of a higher corporate tax rate don’t realize the horse has left the stable: Most corporate income is not subject to the corporate tax rate. Over the years, the growth of corporations exempt from corporate tax has resulted in a decline in government revenue from tax – by 32.1% of federal revenue and 5.9% of gross domestic product (GDP) in 1952 at 9.0% and 1.5%, respectively, in 2016, the year before Trump’s tax cut.

Corporate tax widens the gap between the income of businesses and what owners receive from the investment. When there is no corporate tax, an owner pays the marginal tax rate of personal income tax, say 40.8% today. With a corporate tax rate of 21% on a first dollar of income, the same individual would receive 79 cents on the dollar of business income and pay 32.2 cents more in income tax, which would bring the total tax on taxable corporate income to 53.2 cents. The total tax wedge with corporation tax is 30.4% higher than that of the owner who is only subject to the personal income tax rate, which is a strong incentive to avoid corporation tax by changing business form or moving production overseas.

Raising the corporate rate to 28% (and the personal rate to 43.4%) would increase taxes on a dollar of corporate profits, leaving 72 cents on which owners would pay 31.25 cents more in corporate income tax. individuals. The total tax wedge would rise to 59.25%, or about 36.5% more than what untaxed individuals would pay on corporations. The incentive to quit the corporate tax roll would increase.

The Biden administration predicts that the additional revenue from the corporate rate increase will be around $ 2 trillion over 15 years, which is 50% more than the typical budget planning window. The actual result will likely be less than half that amount. In addition, public spending on infrastructure tends to crowd out private sector investment altogether, especially in infrastructure. Biden’s spending would have little or no effect on income, but his tax hike would have substantial negative effects on real GDP, income, productivity and real wages, essentially wiping out half of the gains of the larger tax cut observed between 2018-2020. The low income it generates will be more than offset by the larger losses in the private sector.

Corporate tax introduces inefficiency in the use of capital, with negative side effects on income and growth. Edwin G. Dolan, economist and author of several textbooks, wrote before the Trump tax cut that the optimal progressive corporate tax rate would be zero, integrating all corporate income to owners each year and taxing them at the individual tax rate. This is largely the current practice for a substantial portion of US capital income. This has long been the major objection and solution to the taxation of capital income – yet no one involved in the public debate on Biden’s tax hike has raised this objection.

Instead, the Secretary of the Treasury Janet YellenJanet Louise Yellen Progressive Democratic lawmakers urge Biden to replace Powell as Fed Chairman Larry Summers compares Fed policy to the Vietnam and Afghanistan wars Biden faces another huge decision outside of COVID and the ‘Afghanistan MORE and President Biden supported a European idea for a 15% minimum corporate tax reduce international competition between governments to attract capital inflows, essentially forming an international tax cartel to avoid competition. This would end efforts in the United States and Europe to integrate corporate income taxation, but in the United States, it would also accelerate the shift from the taxed corporate sector to an untaxed one.

John A. Tatom is a member of Institute for Applied Economics, Global Health and the Study of Business Enterprise at Johns Hopkins University and former head of research at the Federal Reserve Bank of St. Louis.

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