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Biden’s plan to overhaul tax code would close offshore tax loopholes

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President Joe Biden’s tax plan would hike the corporate tax rate to bring in $2.5 trillion over 15 years to fund the sweeping $2 trillion infrastructure proposal unveiled last week, according to details released Wednesday by the Treasury Department.

Ambitious in scope by any means, the Made in America Tax Plan would raise the corporate tax rate from 21 to 28 percent, establish a sort of alternative minimum tax for high-earning corporations and attempt to close loopholes around offshoring profits.

The plan would capture $2 trillion that otherwise would “flow out of the country,” according to a Wall Street Journal op-ed written by Treasury Secretary Janet Yellen.

There is clear support among voters for making behemoths in retail, technology, manufacturing and finance pay more tax.

In a speech on Wednesday, Biden said his tax plan would be more fair for middle-class Americans — a message likely to resonate with the electorate. There is clear support among voters for making behemoths in retail, technology, manufacturing and finance pay more. A recent survey by data firm Morning Consult found that roughly 60 percent of American adults think companies should be paying more in taxes — and nearly one-third of those say they “strongly agree” with higher corporate taxes.

At 28 percent, the U.S. corporate tax rate would be higher than the average statutory tax rate of 23.51 percent among Organization for Economic Cooperation and Development nations. State taxes could push the effective rate even higher, some policy experts said.

“Increasing the rate to 28 percent, when combined with state corporate taxes, would lead the combined U.S. rate to 32.34 percent, which would be the highest among OECD and G-7,” said Ben Koltun, director of research at Beacon Policy Advisors.

Advocates who want to see the Tax Cuts and Jobs Act wholly or partially reversed, though, argue that these percentages are moot because even after the Tax Cuts and Jobs Act lowered corporate taxes to 21 percent in 2017, many companies pay far less than that — if they pay anything at all. The share of taxes U.S.-based multinationals pay on their domestic profits is less than 8 percent, according to the Treasury Department.

But that doesn’t mean big business would pay that amount.

“Now the effective tax rate will be lower for a lot of these companies because of deductions they can take,” Koltun added.

Eric Toder, institute fellow at the Urban-Brookings Tax Policy Center, suggested the existing corporate tax structure has room for improvement.

“My view — shared by many tax experts — has always been that it is best for the government to define the measure of taxable income it thinks is appropriate instead of relying on accounting rules that were developed for a different purpose,” he said.

Some policy observers suspect the administration never intended for 28 percent to be the final number anyway, noting that Biden said, “I’m willing to negotiate that” on the percentage.

Critical Senate swing vote Joe Manchin, D-W.Va., has said he doesn’t want the corporate tax rate to be raised higher than 25 percent, and Republicans have been united in their opposition.

“[This is] leading us to believe that the final plan may look quite different from the current one,” said Eric Diton, president and managing director of The Wealth Alliance.

According to a recent report by the Institute on Taxation and Economic Policy, at least 55 of America’s biggest companies paid nothing in federal taxes for 2020, despite earning a collective $40.5 billion in pretax income. To address these kinds of discrepancies, the president’s plan would impose a minimum tax of 15 percent on firms with income of more than $2 billion and what the Treasury called “large discrepancies between income reported to shareholders and that reported to the IRS.” This minimum tax would affect, the agency estimated, fewer than four dozen companies.

This is a considerably more business-friendly stance than the version Biden proposed on the campaign trail, which would have set the threshold for the minimum tax at $100 million rather than $2 billion.

Even with this higher floor, the Treasury report makes the argument that the tax plan “reorients corporate tax revenue toward historical and international norms.” Supporters of the Tax Cuts and Jobs Act, which slashed the corporate tax rate from 35 percent to 21 percent in 2017, contend that paying more into federal coffers robs companies of cash they would otherwise spend on capital investment, wage gains and other activities that facilitate economic expansion. But numerous analyses in the ensuing years have found that post-tax-cut investment failed to live up to expectations.

Capturing income that companies have been able to keep out of reach is a key tenet of President Joe Biden’s promise to look out for the middle class.

Instead, stock buybacks soared, dividends rose and corporate profits hit record highs. While good news for shareholders, growing concern has been voiced among policymakers and even corporate executives about the deleterious effects of widening income inequality caused, in part, by these changes.

Supporters of the 2017 tax overhaul said dropping the U.S. tax rate to 21 percent would induce American companies to move profits back onshore, but this didn’t solve the fundamental problem, said Bill Smith, managing director of the national tax office for CBIZ MHM.

“There were numerous attempts to get repatriation … in the Tax Cuts and Jobs Act, but we didn’t really change the underlying efficacy of keeping money offshore,” he said.

The Treasury’s report also said foreign investors accrued much of the benefit of the Tax Cuts and Jobs Act’s corporate tax cuts, owing to the popularity of U.S. equities worldwide.

A bigger problem than the foreign vs. domestic question, Smith said, is that so much of the benefit went to investors in the first place, rather than wage-earning workers.

“Ma and Pa don’t have a million dollars in the market,” he said.

Even with the much narrower scope for minimum tax requirements and a willingness to haggle over the 28 percent rate, this focus on capturing income companies have been able to keep out of reach of the tax man by exploiting loopholes is a key tenet of Biden’s promise to look out for the middle class.

“He’s crusading not to let big corporations get away with it,” Smith said.


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