Democrat proposals to increase the tax rate for the Global Intangible Low-Taxed Income (GILTI) provision will make America less competitive, increase tax complexity for American businesses, and cost jobs and wages. These proposals would also give the U.S. higher taxes than the global agreement amongst foreign countries to set a foreign minimum tax rate of 15 percent.

What is GILTI? 

GILTI was created by the Tax Cuts and Jobs Act of 2017 and was included in the bill as a tradeoff for other tax cuts including ending the double taxation of American businesses and reducing the corporate tax rate to 21 percent, a rate in line with the rest of the developed world. 

GILTI establishes a minimum tax on foreign earnings of American businesses and was designed to discourage businesses from shipping profits overseas.

It is calculated by applying the corporate tax on net foreign income after a deduction of 10 percent on foreign tangible assets, or qualified business asset investment (QBAI). Businesses are allowed a 50 percent deduction on GILTI, resulting in an effective tax rate of 10.5 percent. Foreign tax credits can also be taken against GILTI equal to 80 percent of taxes paid, in which case taxpayers pay a 13.125 percent rate. Starting 2025, the GILTI rates increase from 10.5 percent to 13.125 percent and 13.125 percent to 16.4 percent.

What have Democrats proposed? 

President Biden proposed significantly increasing GILTI in his fiscal year 2022 budget proposal. Biden's plan calls for:

• Increasing the rate from 10.5 percent to 21 percent, which after the disallowance of foreign tax credits would provide a top rate of 26.25 percent. 
• Eliminating the deduction against taxable income for a 10 percent rate of return on tangible assets. 
• Assessing GILTI on a country-by-country basis, rather than a worldwide basis, a proposal that would create significant tax complexity for businesses.   

House Democrats have proposed a similar tax increase in their $3.5 trillion reconciliation proposal:

• Increasing the GILTI rate to 16.5 percent. 
• Reduce the deduction for Qualified Business Asset Investment (QBAI) to 5 percent.
• Assess GILTI on a country-by-country basis.
• Reduce the Foreign Tax Credit to 5 percent. 

Senators Ron Wyden (D-Ore.), Sherrod Brown (D-Ohio) and Mark Warner (D-Va.) have also proposed changes to GILTI in a discussion draft released in August. While they have not set a rate for GILTI, they propose shrinking the 50 percent deduction, which would raise the top rate. They also propose repealing the QBAI deduction and applying GILTI on a country-by-country basis for low-tax income.

Any of these proposals would make the U.S. less competitive. In addition to these tax increases, the Democrats want to significantly increase the corporate income tax. Biden has proposed raising the corporate tax rate to 28 percent (32 percent after state taxes), while House Democrats want to raise it to 26.5 percent (31 percent after state taxes). Either rate would be higher than foreign competitors such as China, which has a 25 percent rate, or Europe, which has an average rate of 21.7 percent.

How would this impact the US economy? 

Biden’s proposed changes to GILTI would lead to a $340 billion tax hike over the next decade, could eliminate one million jobs and cause $20 billion in lost economic activity, according to a recent EY report published by the National Association of Manufacturers. 

 As the report explains, Biden’s proposed GILTI tax increase could result in anywhere from a 200,000 to 3.1 million loss in jobs. The report estimates the most likely employment loss is approximately 1,000,000 lost jobs. Additionally, the changes would cause a decline in investment ranging between $10 billion and $20 billion. This is because the tax hike increases the cost of capital, making investing less profitable.  

The report also notes the following:   

• U.S. Multination Corporation (MNC) domestic employment is estimated to decline by between 0.6% and 10.9%  

• U.S. MNC domestic compensation is estimated to decline by between 2.2% and 10.4%  

• U.S. MNC domestic investment is estimated to decline by between 1.1% and 7.3%

EY also studied the impacts of the proposed changes to GILTI provision on economic activity in Texas. This study was commissioned by the Texas Association of Business by EY and the Bureau of Business Research at the University of Texas at Austin.  

In Texas, EY assessed that the most plausible employment effects of GILTI tax hikes for U.S. multinational corporations range between 16,000 and 33,000 lost jobs with a high-end estimate of 100,000 potential lost jobs. These changes could reduce gross state product (GSP) by up to $14.5 billion. 

Both President Biden’s and congressional Democrats’ proposed changes to the GILTI tax would hurt workers, the economy, and make U.S. businesses less capable of competing with foreign competitors. It would also undermine the TCJA’s territorial system and moves the U.S. once again towards a worldwide system of taxation. These proposals should be rejected.  

The IRS Criminal Investigation Division (IRS-CI) regularly violated taxpayers’ rights and skirted or ignored due process requirements when investigating taxpayers for allegedly violating the $10,000 currency transaction reporting requirements, according to a 2017 report by the Treasury Inspector General for Tax Administration (TIGTA). In addition, less than one in ten investigations uncovered violations of tax law.

These findings should be alarming to taxpayers given that President Biden has proposed creating a new comprehensive financial account information reporting regime which would force the disclosure of any business or personal account that exceeds $600. Not only would this include the bank, loan, and investment accounts of virtually every individual and business, but it would also include third-party providers like Venmo, CashApp, and PayPal.

Under the Bank Secrecy Act, financial institutions are currently required to report transactions exceeding $10,000 or multiple transactions in aggregate of $10,000 in a single day. TIGTA examined 306 investigations undertaken by IRS-CI between 2012 and 2014 for violating this law, where a total of $55.3 million assets were seized. During the audit, the sample size was narrowed to 278 investigations, as several did not meet the criterion for inclusion.

TIGTA found that only 8 percent of investigations uncovered violations of tax law. In many cases, IRS-CI had not considered reasonable explanations from those investigated, property owners were not adequately informed of their rights nor informed of seizure of their property, and outcomes in cases lacked consistency, violating the Eighth Amendment to the Constitution. 

Given these findings, a new reporting regime that includes the financial accounts of virtually every business and individual could see countless new cases of taxpayer abuse.

Very few taxpayers investigated by IRS-CI were found to have violated tax law.

Taxpayers investigated by IRS-CI were found to have violated tax law in just 21 of the 252 cases, or 8 percent. Similarly, out of the 278 cases, only 26, or 9 percent, of investigations established that funds came from an illegal source or was involved in another illegal activity.

Instead of establishing tax crimes, it appears that many of these investigations were merely IRS-CI fishing expeditions.

Businesses that dealt with a high number of currency transactions, such as retail, wholesale, service, automobile, restaurant, and gas stations were the primary targets for seizures. This involved the seizing of deposits into a bank account and blocking withdrawals from a bank account, which would likely have disrupted owners’ ability to run their business.

Many of these owners explained that funds withdrawn were simply used for business purchases. Over 90 percent of them were telling the truth.  

Interviews with property owners were primarily conducted after seizures.  

TIGTA found that in 92 percent of cases, interviews were conducted after the seizure of the interviewee’s property, oftentimes on the same day. This is important, as judges did not receive any information from interviews before making their probable cause determination.

In many cases, with explanations given by property owners, judges’ decisions would have been affected. 

This history of seizing property with little to no information outside of simple banking patterns should be alarming to taxpayers, given that the IRS is proposing to force the collection of new banking patterns.

IRS-CI did not consider reasonable explanations given by property owners. 

In many cases, there was little or no evidence that property owners’ reasonable explanations were considered by the IRS-CI. In fact, in 54 of the 229 investigations, owners provided reasonable explanations, such as “depositing business funds, withdrawing funds for inventory purchases, or conducting transactions under $10,000 due to insurance policy restrictions.”

In most instances, TIGTA found no evidence that CI attempted to verify the property owners’ explanations. 

In other cases, the property owners provided other types of reasonable explanations, such as “friends or unidentified bank representatives told them to conduct transactions under $10,000, they did not want to handle more than $10,000 cash due to the time and “hassle” of filling out forms, a desire to avoid bank fees, or for personal safety reasons.”

Again, TIGTA found no evidence that CI considered the defense offered or tried to verify them.  

CI procedures require that all “realistic” defenses are considered before a seized asset is forfeited. Against the rights of these owners, CI agents failed to even verify realistic defenses. Given the failure to follow procedure here, there is a compelling case that these owners’ Fourth Amendment right against unreasonable searches and seizures was violated. 

Taxpayers under investigation were not adequately informed of pertinent information, such as the purpose of the interview, proper agent identification, and that a seizure of their property took place. 

In 171 of 229 cases, special agents did not properly identify themselves as assistants to the United States Attorneys’ Office (USAO) when they were assisting on an investigation or TIGTA did not find evidence they did. This violates the Internal Revenue Manuals (IRM), which states, “that IRS employees... should advise those contacted that they are acting as assistants to the attorney for the government in conjunction with an investigation.” 

In 106 of 229 cases, the agents did not state the purpose of the interview or TIGTA did not find evidence they did. IRM procedures in Title 26 cases require special agents to advise the property owner regarding the purpose of the contact.  

For 181 of 229 cases, TIGTA identified a problem with the information provided to the property owner about the seizure. In 110 cases, the property owners were not informed until the end of the interview that a seizure took place. In 60 cases, the property owners were not informed that a seizure took place. As the TIGTA report explains, “For Title 26 cases, the IRM procedures requires special agents to advise the property owner regarding the purposes of the contact, and we believe this also relates to the requirement in Title 26 cases for special agents to advise the property owner that a seizure took place.” 

Outcomes in cases lacked consistency, violating the Eighth Amendment to the Constitution. 

The Eighth Amendment to the Constitution of the United States, precludes excessive fines and requires that penalties be proportionate to the offense. Additionally, under 18 U.S.C. § 983(g)(1), “a court is required to consider whether a forfeiture is proportional to the gravity of the offense giving rise to it.” 

TIGTA explains that many of the individual outcomes in seizure cases were disproportionate to the conduct of the taxpayers and were disproportionate to the outcomes in cases of similarly situated taxpayers.

Worse, outcomes did not appear to be consistently determined by the facts of the cases but rather by how willing a taxpayer was to engage in costly litigation against the government and the potential of a criminal prosecution if no settlement was reached.

The few cases where structuring cash transaction was proven, often through owners’ own admission, is where the most disproportionate outcomes were identified: 

“The most disproportionate outcomes identified for our sample results included cases for which the property owners were criminally charged and entered into plea agreements solely for legal source structuring. In nine cases from our sample, legal businesses and their owners were indicted for structuring cash transactions for which there was no evidence of any unlawful conduct other than structuring. The businesses included water amusement parks, pharmacies, used car sales, and coin and stamp dealers.” 

Disproportionate outcomes are a tell-tale sign of a violation of Eighth Amendment rights, as these rights demand proportionate penalties for the offense itself. The IRS-CI’s practice of determining outcomes by taxpayers “risk tolerance” is a dreadful, egregious violation of their rights.  

TIGTA found numerous cases where IRS-CI failed to uncover tax crime, violated taxpayers’ due process rights, failed to notify taxpayers of pertinent information, and improperly determined outcomes in violation of the Constitution.

Given that these investigations were conducted due to possible violations of the $10,000 currency transaction threshold, the Biden proposal to create an entirely new reporting regime for financial accounts that exceed $600 should be alarming to taxpayers. If this proposal is implemented, it is inevitable that we will see new cases of the IRS targeting and harassing taxpayers.

Rhode Island companies will get stuck with higher taxes than China and Europe if the Democrats' reconciliation bill is enacted.

The Democrats' reconciliation bill will saddle Rhode Island with a combined federal-state corporate tax rate of 31.6% vs. communist China's 25%.

The bill will also put Rhode Island companies at a competitive disadvantage vs. Europe: The European average corporate tax rate is 19%.

"As the country tries to recover from a once-in-a-century pandemic, Rhode Island's congressional Democrats must explain why they want to stick residents with higher taxes than China and Europe," said Grover Norquist, president of Americans for Tax Reform.

The Democrats' $3.5 trillion bill will impose the largest tax increase since 1968. It will raise individual income taxes, small business taxes, corporate taxes, and capital gains taxes.

If passed, the combined federal-state capital gains tax rate for Rhode Island residents would be 37.79% vs. China's 20%.

The burden of the corporate tax rate hike will be borne by workers in the form of lower wages, and by households in the form of higher prices. Higher corporate tax rates will also raise utility bills.

The non-partisan Joint Committee on Taxation recently affirmed in congressional testimony that the corporate tax rate hike will fall on "labor, laborers."

Testifying before the House Ways & Means Committee, JCT Chief of Staff Thomas A. Barthold said:

"Literature suggests that 25% of the burden of the corporate tax may be borne by labor in terms of diminished wage growth."

WATCH:

Economists across the political spectrum agree that workers bear the brunt of corporate tax increases. And 25% is on the very low end.

According to Stephen Entin of the Tax Foundation, labor (or workers) bear an estimated 70 percent of the corporate income tax. He wrote in 2017:

"Over the last few decades, economists have used empirical studies to estimate the degree to which the corporate tax falls on labor and capital, in part by noting an inverse correlation between corporate taxes and wages and employment. These studies appear to show that labor bears between 50 percent and 100 percent of the burden of the corporate income tax, with 70 percent or higher the most likely outcome."

A 2012 paper at the University of Warwick and University of Oxford found that a $1 increase in the corporate tax reduces wages by 92 cents in the long term. This study was conducted by Wiji Arulampalam, Michael P. Devereux, and Giorgia Maffini and studied over 55,000 businesses located in nine European countries over the period 1996-2003:

"We identify this direct shifting through cross-company variation in tax liabilities, conditional on value added per employee. Our central estimate is that $1 of additional tax reduces wages by 92 cents in the long run. The incidence of a $1 fall in value added is smaller, consistent with our wage bargaining model."

A 2015 study by Kevin Hassett and Aparna Mathur found that a 1 percent increase in corporate tax rates leads to a 0.5 percent decrease in wage rates. The study analyses 66 countries over 25 years and concludes that workers could see a greater reduction in wages than the federal government raises in new revenue from a corporate income tax increase:

"We find, controlling for other macroeconomic variables, that wages are significantly responsive to corporate taxation. Higher corporate tax rates depress wages. Using spatial modelling techniques, we also find that tax characteristics of neighbouring countries, whether geographic or economic, have a significant effect on domestic wages."

A 2006 study by William Randolph of the Congressional Budget Office found that 74% of the corporate tax is borne by domestic labor:

"Burdens are measured in a numerical example by substituting factor shares and output shares that are reasonable for the U.S. economy. Given those values, domestic labor bears slightly more than 70 percent of the burden of the corporate income tax."

A 2007 study by Alison Felix estimated that a 1 percentage point increase in the marginal corporate tax rate decreases annual wages by 0.7 percent. She concluded that the wage reductions are over four times the amount of collected corporate tax revenue:

"The empirical results presented here suggest that the incidence of corporate taxation is more than fully borne by labor. I estimate that a one percentage point increase in the marginal corporate tax rate decreases annual wages by 0.7 percent. The magnitude of the results predicts that the decrease in wages is more than four times the amount of the corporate tax revenue collected."

A 2012 Harvard Business Review piece by Mihir A. Desai notes that raising the corporate tax lands “straight on the back” of the American worker and will see a decline in real wages:

"Because capital is mobile, high tax rates divert investment away from the U.S. corporate sector and toward housing, noncorporate business sectors, and foreign countries. American workers need that capital to become more productive. When it’s 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."

Even the left-of-center Tax Policy Center estimates that 20 percent of the burden of the corporate income tax is borne by labor:

"In calculating distributional effects, the Urban-Brookings Tax Policy Center (TPC) assumes investment returns (dividends, interest, capital gains, etc.) bear 80 percent of the burden, with wages and other labor income carrying the remaining 20 percent."

"Democrats would be wise to oppose any tax increase," said Norquist.

In yet another disappointing jobs report, the Bureau of Labor Statistics (BLS) found that the U.S. economy added just 194,000 jobs in September. This is a far cry from estimates which predicted the economy would add 500,000 jobs. The unemployment rate now stands at 4.8 percent.

7.7 million Americans are still out of work and millions of Americans are still underemployed. About 4.5 million workers are employed part-time for economic reasons, meaning they would prefer to work full-time, but cannot gain the hours needed to do so.

Given the economy remains weak, now is a terrible time to impose trillions of dollars in taxes as the Democrats have proposed. Their most recently released bill includes numerous concerning tax increases: 

• The bill would raise the corporate rate to 26.5 percent, higher than communist China's 25 percent rate. Under this plan, the average combined state and federal corporate tax would be 31 percent. A corporate tax hike would be borne by workers and consumers. As noted by Stephen Entin of the Tax Foundation, workers bear nearly 70 percent of the cost of a corporate tax through lower wages and fewer jobs. Further, a 2020 study by the National Bureau of Economic Research found that 31% of the corporate tax falls on consumers. This tax hike would hit many small businesses as well. Over one million C-corporations are classified as small businesses, defined by the Small Business Administration as any independent business with fewer than 500 employees.   
    
• The bill would raise the capital gains rate to 25 percent. This tax hike will threaten business creation, business expansion, entrepreneurship, retirement savings, and jobs and wages.   
    
• This bill could impose $96 billion in tax hikes on tobacco and vaping. This will disproportionately harm the poorest Americans, as 72 of smokers are low-income earners. In some states, poorer smokers already spend one quarter of their income on tobacco.   
    
• This bill would also increase the top income tax rate to 39.6 percent. This tax increase will hit small business that are organized as sole proprietorships, LLCs, partnerships, and S-corporations. These “pass-through” entities pay taxes through the individual side of the tax code. Of the 26 million businesses in 2014, 95 percent were pass-throughs. Pass-through businesses also account for 55.2 percent, or 65.7 million of all private sector workers. More than half of all pass-through income would be taxed at this new, higher rate.

Today's disappointing jobs report shows that we still have a long way to go to fully recover from the economic damage the pandemic caused. Virtually every jobs report released under the Biden administration has been well below expected growth. Certainly, Democrats should be more concerned about safeguarding a fragile economy than ramming through their policy wishlist.