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The corporate provisions in President Biden’s tax plan would also go a long way toward creating a better-functioning system, writes Amy Hanauer.
Stefani Reynolds/Bloomberg
About the author: Amy Hanauer is the executive director of the Institute on Taxation and Economic Policy.
Despite the drama about getting majorities of lawmakers to support it, the tax bill before Congress right now would deliver fundamental reform. The Build Back Better proposal raises revenue from corporations and the wealthy, blocks corporate tax avoidance, and funds crucial priorities that help the U.S. economy thrive. The money raised delivers public health, green infrastructure, worker training, child care, and more—all of which would help ensure a healthy, productive workforce and a streamlined way to get products to markets. Even if individual parts of the package are scaled back, the legislation as a whole will change how America does business.
President Biden’s initial proposal was stronger. Still, the bill that emerged from the House Ways and Means committee would make the tax system more progressive, raise taxes on the richest 5% of Americans and on foreign investors, and cut taxes overall for other income groups. Sens. Joe Manchin (D., W. Va.) and Kyrsten Sinema (D., Ariz.) inexplicably want to further water down the plan. But sizable majorities of voters in both of their states support the plan. Hundreds of thousands of children, retirees, and workers in Arizona and West Virginia will be better off when it passes.
The individual and corporate provisions in the bill together raise $2.1 trillion over 10 years, enough to make a meaningful dent in collective challenges like educating the next generation or preparing for a climate or health crisis. Income taxes that individuals pay directly would rise only for the richest households, including just half a percent of West Virginians and 1.1% of Arizonans. Those who gain the most from our system, the richest 1%, pay 97% of the individual tax increases in this bill.
The corporate provisions would also go a long way toward creating a better-functioning system. As of now, many U.S. corporations avoid paying federal corporate income tax entirely. My colleagues at the Institute on Taxation and Economic Policy identified 55 large profitable corporations that paid no income taxes in 2020. They also examined corporations that were profitable each of the three years of the Tax Cuts and Jobs Act passed under President Trump and found that 39 paid nothing over those three years while another 73 paid less than half the statutory rate of 21%.
It’s not just a few avoiders: U.S. corporate tax collection is low across the board. Corporate taxes accounted for just 1% of U.S. GDP in 2019, lower than every major economy, lower than all OECD countries except Hungary, Latvia and Greece, and lower than at any point in recent history outside of recessions.
Americans might not follow all the minutiae, but they get that taxing corporations and the wealthy to pay for essentials makes sense. More than six in 10 voters support the bill as a whole, and enthusiasm rises when survey respondents hear about the tax increases. Republican lawmakers stand in unified opposition to the whole proposal. A handful of Democrats have raised objections to different elements, but the tax-raising provisions address some of those worries, such as Sen. Manchin’s concern about adding to the debt. And it’s worth noting that one Senate Democrat, Finance Committee Chair Ron Wyden, supports strengthening the proposal by better taxing unrealized capital gains for billionaires.
Tax collection is low for myriad reasons, but improved policy can address all of them. Current law allows corporations to shift billions of dollars into offshore tax havens. This month, Ireland, Estonia and Hungary were the last three of 136 countries—representing 90% of the world economy—to sign a groundbreaking new agreement ensuring a minimum 15% corporate tax rate. This should smooth the way for reform here.
President Biden’s tax plan addresses this and other forms of tax avoidance. It raises the statutory corporate tax rate from 21% to 28% (still lower than before the Trump tax law). It changes rules that now tax foreign profits of American corporations more lightly than their domestic profits. It ensures that offshore corporate profits are subject to a total tax rate (including taxes to companies’ home countries and to the foreign countries where they do business) of at least 15%. And it limits domestic giveaways by ensuring an overall 15% minimum tax rate on all “book” income, the income that corporations report to their shareholders.
The wealthiest Americans and foreign investors gain most from low corporate taxes, because low taxes increase corporate profits, which go to owners and shareholders. In an increasingly unequal America, the richest 25 billionaires paid an effective tax rate of just 3.4% on their income between 2014 and 2018. Yet billionaires saw their wealth increase by $1.8 trillion during the first year and a half of the pandemic. These inequities necessitate a fairer tax system.
Congress has a rare opportunity to pass transformative tax reform that reduces inequality, ensures that the wealthiest people and corporations pay their fair share, and provides substantial revenue to take on climate, health, and infrastructure crises. It is urgent that our lawmakers rise to this challenge.
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