President Joe Biden has proposed raising the corporate tax rate from 21 percent to 28 percent as part of his plan to raise taxes by as much as $4 trillion over the next decade. Biden also wishes to impose a 15 percent corporate minimum tax and to double the tax rate on Global Intangible Low Tax Income (GILTI) and impose it on a country-by-country basis.
Raising taxes on businesses would reduce jobs, lower workers’ wages, harm Americans’ retirement savings, and hurt already struggling businesses. A particularly concerning effect, though, is that raising the corporate taxes would hurt the United States’ global competitiveness.
Joe Biden’s Corporate Income Tax Hike Would Establish the United States’ Rate as One of the Highest in the Developed World.
Under Joe Biden’s proposed 28 percent rate (resulting in a combined corporate tax rate of about 32 percent), America’s rate would be higher than key competitors such as the United Kingdom (19 percent), China (25 percent), Canada (26.5 percent), Ireland (12.5 percent), Germany (29.9 percent) and Japan (29.74 percent), according to data compiled by the Organisation for Economic Co-operation and Development (OECD).
Many countries also have lower rates on businesses that innovate and invest. For instance, China has a 15% rate for industries including high tech enterprises, while the United Kingdom has a 10 percent “patent box” rate for businesses that depend on patented inventions and innovations.
Before Republicans passed the Tax Cuts and Jobs Act in 2017, the United States had the highest corporate tax rate in the developed world. The U.S. rate was unchanged since 1986 while the rest of the world, including European countries, had continually lowered their corporate tax rates in recognition of the competitive edge they received from this tax cut.
According to a 2018 paper in the National Tax Journal by Lyon and McBride, by 2017 the United States’ combined (national and subnational) corporate tax was 38.9 percent. At that time, the OECD’s average was 23.9 percent. Because of the 2017 tax cut, the United States’ combined tax is now 25.8 percent. Though it is still higher than the OECD average, it is a significant improvement.
An article from Caroline Harris of the U.S. Chamber of Commerce explains that Biden’s corporate tax increase “would cause the United States to drop from 21st to 30th on overall competitiveness, a position even lower than before tax reform, and to fall to 33rd on corporate taxes.” Surely, during an economic downturn, this is a poor direction to be heading in.
Corporate Tax Hikes Would Drive Investment Overseas, Leading to Significant Economic Damage
Because corporate tax hikes encourage companies to do business elsewhere, less money will be invested into the U.S. economy. The result is less jobs, lower wages, and a slower recovery. A study released by EY found that American companies suffered a net loss of almost $510 billion in assets between 2004 and 2017 due to the high U.S. rate. If the corporate rate was lower between 2004 and 2017, the study estimates that U.S. companies would have acquired a net of $1.2 trillion worth of assets, meaning that more than $1.7 trillion in assets were lost because of the uncompetitive U.S. rate.
A Treasury Department study estimated that “a country with a 1 percentage point lower tax rate than its competitors attracts 3 percent more capital.” This is because raising the corporate rate makes the United States a less attractive place to invest profits.
If Joe Biden raises the corporate tax rate, he will discourage businesses from investing in the United States. Capital is mobile, so a tax increase can result in this jobs and investment going overseas.
As a Harvard Business Review piece explains:
“When capital is invested elsewhere, real wages decline, and if product prices are set globally, there is no place for the corporate tax to land but straight on the back of the least-mobile factor in this setting: the American worker. The flow of capital out of the United States only accelerates as opportunities in the rest of the world increase. This is the key to understanding why, despite political rhetoric to the contrary, reforming the corporate tax is central to improving the position of the American worker.”
Increasing corporate taxes would also revive the problem of corporate inversions and foreign acquisitions of U.S. businesses. Concern over inversions grew during Obama’s second term in 2014, when a number of large American businesses with combined assets of $319 billion announced plans to invert.
Inversions occur when a U.S. business merges with, or acquires, a foreign business with the intent of incorporating the new, combined entity overseas. This was due to the U.S. tax code being uncompetitive, forcing some businesses to merge with foreign companies in order to experience more reasonable tax rates in other countries.
The inversion problem was virtually eliminated when the TCJA was signed into law. In fact, after the TCJA, companies began to come back to America. If the corporate tax rate is increased, a 15 percent corporate minimum tax is implemented, and the tax rate on GILTI doubled, we’d see this trend reversed.
Because of the TCJA, BEA data from the first year after the law was implemented showed that it contributed to faster growth for things like employment and expenditures for property, plant, and equipment (PP&E) and research and development (R&D). This reversed “a long-term trend where growth at foreign affiliates outpaced that of U.S. parents.”
Increasing corporate taxes will have dire effects on the United States’ global competitiveness. It will make it easier for foreign businesses to acquire American businesses, driving hundreds of billions of dollars away from the U.S. economy. It will also lead to drastic declines in investment and capital in the United States, ultimately to the detriment of American workers.
The coronavirus pandemic has caused incredible harm to American businesses and workers. Still, Joe Biden is championing the idea of increasing the corporate tax rate to fulfill his misguided, poorly thought-out promise to punish “greedy corporations.” Instead, he will punish American workers and the U.S. economy.