President Biden's ambitious corporate tax increase plan undoes more than just undo much of the overhaul made by his predecessor. It also offers a completely different vision of how the United States can become more competitive and how the bill can be paid.
When President Donald J. Trump and a Republican Congress rewrote tax legislation in 2017, most of the benefits went to the richest Americans, with lower tax rates for businesses and for profits from investments. The guiding principle, proponents argued, was that lowering taxes on businesses and investors would encourage businesses to expand, create more jobs, and create more wealth for all.
In contrast, the enlivening idea behind the tax plan the Biden administration put forward on Wednesday is that the best way to increase America's competitiveness and fuel economic growth is to raise corporate taxes to attract huge investments in Finance transportation, broadband, utilities, and more.
The Business Roundtable, the U.S. Chamber of Commerce, and the National Association of Manufacturers all welcomed the idea of pumping money into repairing and building national infrastructure, but backed off to raise corporate taxes.
"We are firmly against the government's proposed general tax increases that will slow economic recovery and make the US less competitive globally – the opposite of the goals of the infrastructure plan," said Neil Bradley, the chamber's chief policy officer, in a statement.
The biggest and most noticeable proposal is to cut back on the substantial cut in the corporate tax rate enacted under Mr Trump. In 2017, Republicans shrunk the rate from 35 percent to 21 percent. Mr. Biden wants to increase the interest rate to 28 percent on the way back.
The increase will "ensure that companies pay their fair share of taxes" and finance critical investments "in order to maintain the competitiveness of the United States and stimulate the economy," said the White House in its presentation of the plan.
The main purpose of the other provisions is to ensure that multinational corporations cannot avoid taxes on foreign profits. The hope is that this will reduce the temptation to set up operations or offices in foreign tax havens.
The plan, which lacks detailed provisions, is "both undoing and moving in new directions," said Mihir A. Desai, an economist at Harvard Business School. "The newer aspects relate to how our attitudes towards overseas business and global income are changing."
Through a series of complex and arcane provisions, the Biden government would essentially increase overseas profits more than domestically – increasing tax rates and requiring taxes to be paid on time rather than being pushed far into the future. It would also set a minimum tax on foreign income.
The suggestions were exactly what Mr. Biden had promised during the campaign, and the immediate responses were largely predictable. Republicans, corporate groups and conservative economists said they feared the rate hikes would hamper investment. Progressive groups and liberal economists welcomed the announcement, saying it would fill some blatant gaps.
Wall Street has been concerned about possible tax hikes since the presidential election, hoping a Washington stall would moderate Mr Biden's agenda. On Wednesday, a JPMorgan Chase spokesman said the bank's chief executive Jamie Dimon believes "the corporate tax rate for businesses in the US must be globally competitive as it is now."
Proponents countered that the changes would do much more to encourage growth and contain the excesses of the 2017 tax laws. Democrats have argued that the low-tax approach has not produced broad economic gains that only those at the top can benefit from. Targeted government spending on workers, students, and infrastructure would add much more for the money. In addition, companies base their decisions on a number of factors in addition to tax rates.
Even economists who favor low corporate rates recognize that the 2017 tax cuts did not result in a significant surge in investment. The gross domestic product grew by 2.4 percent in the two years before the law and by 2.4 percent in the two years after the law.
"There is essentially no evidence that the tax change boosted investment," said William Gale, co-director of the Urban-Brookings Tax Policy Center. He argued that investments rose in 2018 only because oil prices rose. While the tax law favored investments in equipment and structures, it found that the largest investments were made not in these areas but in intellectual capital.
Supporters also argue that the proposed changes are much fairer.
"The tax rate cut was overdue, but it may have been overdone," Gale said of Trump's tax cut. "It gave companies massive opportunities for profit," he said, rewarding them for investment decisions made in the past rather than offering new incentives to plow money back into their businesses.
Debates over the tax code are really debates about who has to bear the burden of paying for what society thinks is important – highways and bridges, clean water and high-speed broadband, basic research and development.
By shifting the tax burden, the Biden government says companies – which were among the biggest winners last time around – should take more of the tab this time around.
"We have urgent infrastructure needs and the fairest way to fund them is to reclaim some of the giveaways contained in the 2017 law," said Steve Rosenthal, senior fellow at the Tax Policy Center.
Mr. Rosenthal also indicated that a large portion of the increased tax payments would go to foreigners who own 40 percent of the shares.
The advertised tax rate – whether for companies or individuals – is often much higher than what many actually pay.
The Institute of Taxes and Economic Policy, which has long criticized American companies for avoiding paying their debts, conducted a study of Fortune 500 companies that were profitable and provided enough information to calculate effective tax rates. The institute found that these companies paid an average of 11.3 percent of their income for 2018.
And 91 of those companies, including Amazon, Chevron, Halliburton, and IBM, didn't pay federal income tax that year.
Existing exceptions and deductions are not distributed evenly. Industrial machinery, gas, oil, electrical, and chemical companies tend to have the lowest effective rates, often less than 5 percent.
Economists have debated who will actually bear the cost of higher corporate taxes – shareholders and owners or workers. Research by the Congressional Budget Office, the Treasury Department, and the Brookings Institution has found that those who own the company typically pay about three-quarters of a tax hike while the workers take care of the rest.
Mr Desai at Harvard welcomed the infrastructure investment but was put off by the impact of the tax hike on workers. "In a populist moment, it's good politics but bad economy," he said. He would prefer to tax individuals' capital income. He also pointed out that the laser-like focus on companies – unlike other companies that may be organized differently – puts large, successful companies at a disadvantage.
It is still unclear how much would be paid by other groups preferred by current tax legislation, including the richest Americans and corporations who pass income on to their owners or shareholders. (You pay normal rate tax on your custom returns.)
The Biden government has indicated that tax increases for the rich will help fund the second phase of the infrastructure plan, which is expected to be announced next month and will focus on priorities such as education, health care and paid vacation.
Gillian Friedman and Lauren Hirsch contributed to the coverage.