President Joe Biden speaks at the White House on Tuesday, April 6, 2021. Biden has assembled a team of economists and tax professionals who spent the last several years critiquing the Trump administration’s tax law and proposing new measures to reform it, in hopes of stomping out profit shifting.
Image: Amr Alfiky/The New York Times
WASHINGTON — The Biden administration unveiled a tax plan Wednesday that would increase the corporate tax rate in the U.S. and limit the ability of American firms to avoid taxes by shifting profits overseas.
Much of the plan is aimed at reversing a deep reduction in corporate taxes under President Donald Trump. A 2017 tax bill slashed the corporate rate to 21% from 35% and enacted a series of other provisions that the Biden administration says have encouraged firms to shift profits to lower-tax jurisdictions, like Ireland.
Some of the provisions in President Joe Biden’s plan can be enacted by the Treasury Department, but many will require the approval of Congress. Already, Republicans have panned the proposals as putting the U.S. at a disadvantage, while some moderate Democrats have indicated they may want to see some adjustments, particularly to the proposed 28% corporate tax rate.
Administration officials estimate the proposals will raise a total of $2.5 trillion in new tax revenue over 15 years. Analysts at the University of Pennsylvania’s Penn Wharton Budget Model put the estimate even higher, estimating a 10-year increase of $2.1 trillion, with about half the money coming from the plan’s various changes to the taxation of multinational corporations.
Here are some of the main provisions included in the plan and how they’re intended to work.
Raise the corporate tax rate to 28%
The plan aims to raise the corporate tax rate to 28% from the current rate of 21%, a level that would put it more in line with global peers. Right now, the U.S. raises less corporate tax revenue as a share of economic output than almost all other advanced economies, according to the Organization for Economic Cooperation and Development.
The administration sees raising the rate as a way to increase corporate tax receipts, which have plunged to match their lowest levels as a share of the economy since World War II.
Ensure big firms pay at least 15% in taxes
Many large companies pay far less than the current tax rate of 21% — and sometimes nothing. Tax code provisions allow firms to reduce their liability through deductions, exemptions, offshoring and other mechanisms.
The Biden plan seeks to put an end to big companies incurring zero federal tax liability and paying no or negative taxes to the U.S. government.
The White House wants to impose a 15% minimum tax on what’s known as “book income” — the profits that firms report to investors but that are not used to calculate tax liability. Such income can make a company appear very profitable, rewarding shareholders and company executives, even as the firm pays little or no tax.
“Large corporations that report sky-high profits to shareholders would be required to pay at least a minimum amount of tax on such outsized returns,” the Treasury Department said. The administration would require that companies with annual income of $2 billion or more pay a minimum 15% on their book income. It estimated that 45 corporations would have paid such a tax if the proposal had been in place in recent years.
The proposal is narrowed from the version Biden proposed in the campaign, which would have applied to companies with $100 million or more in book profits per year.
Strengthen the global minimum tax
The plan aims to strengthen a global minimum tax that was imposed on U.S. companies as part of the Trump administration’s 2017 tax package by raising the tax rate and eliminating some exemptions that weakened its impact.
The Treasury Department would double the so-called global intangible low-taxed income (or GILTI) tax to 21%, which would narrow the gap between what companies pay on overseas profits and what they pay on earned income in the U.S.
And it would calculate the GILTI tax on a per-country basis, which would have the effect of subjecting more income earned overseas to the tax than under the current system.
Punish U.S. companies that headquarter in low-tax countries
A provision in the plan known as SHIELD (Stopping Harmful Inversions and Ending Low-tax Developments) is an attempt to discourage U.S. companies from moving their headquarters abroad for tax purposes, particularly through the practice known as “inversions,” where companies from different countries merge, creating a new foreign firm.
Under current law, companies with headquarters in Ireland can “strip” some of the profits earned by subsidiaries in the United States and send them back to the Ireland company as payment for things like the use of intellectual property, then deduct those payments from their U.S. income taxes. The SHIELD plan would disallow those deductions for companies based in low-tax countries.
Push for a global agreement to end profit shifting
The Biden administration wants other countries to raise their corporate tax rates, too.
The tax plan emphasizes that the Treasury Department will continue to push for global coordination on an international tax rate that would apply to multinational corporations regardless of where they locate their headquarters. Such a global tax could help prevent the type of “race to the bottom” that has been underway, Treasury Secretary Janet Yellen has said, referring to countries trying to outdo one another by lowering tax rates in order to attract business.
Republican critics of the Biden tax plan have argued that the administration’s focus on a global minimum tax is evidence that it realizes that raising the U.S. corporate tax rate unilaterally would make American businesses less competitive around the world.
Replace fossil fuel tax subsidies with clean-energy incentives
The president’s plan would strip away long-standing subsidies for oil, gas and other fossil fuels and replace them with incentives for clean energy. The provisions are part of Biden’s efforts to transition the U.S. to “100% carbon pollution-free electricity” by 2035.
The plan includes a tax incentive for long-distance transmission lines, would expand incentives for electricity storage projects and would extend other existing clean-energy tax credits.
A Treasury Department report estimated that eliminating subsidies for fossil fuel companies would increase government tax receipts by over $35 billion in the coming decade.
“The main impact would be on oil and gas company profits,” the report said. “Research suggests little impact on gasoline or energy prices for U.S. consumers and little impact on our energy security.”
Doing away with fossil fuel subsidies has been tried before, with little success given both industry and congressional opposition.
Beef up the Internal Revenue Service
The IRS has struggled with budget cuts and slim resources for years. The Biden administration believes better funding for the tax collection agency is an investment that will more than pay for itself. The plan released Wednesday includes proposals to bolster the IRS budget so it can hire experts to pursue large corporations and ensure they are paying what they owe.
The Treasury Department, which oversees the IRS, noted in its report that the agency’s enforcement budget has fallen by 25% over the last decade and that it is poorly equipped to audit complex corporate filings. The agency is also unable to afford engaging in or sustaining multiyear litigation over complex tax disputes, Treasury said.
As a result of those constraints, the IRS tends to focus on smaller targets while big companies and the wealthiest taxpayers are able to find ways to reduce their tax bills.
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