President Joe Biden recently unveiled his Made in America Tax Plan as part of his ambitious infrastructure agenda. The problem, however, is that the plan would reduce the incentive to make most things in America.
At the heart of the $ 2 trillion package is a paradox: infrastructure projects are designed to improve the competitiveness of the United States, but will be accompanied by corporate tax increases that do just the opposite. While rebuilding roads, bridges, and other infrastructure is a laudable goal, funding them with taxes that suppress private investment and damage our global competitiveness undermines that goal.
The Biden plan would raise the corporate tax rate from 21% to 28%. Research by the Tax Foundation found that this 7-point jump would undermine America’s current competitive advantage. A rise in the federal corporate income tax rate to 28% would raise the US state’s combined tax rate to 32.3% – more than any country in the Organization for Economic Co-operation and Development (OECD), the G7, and all of our major trading partners and Competitors including China.
In addition, we found that the proposed corporate income tax increase would reduce workers’ after-tax income at all income levels. For example by almost 1.5% for the bottom 20% of the workforce. An increase in the enterprise rate would also reduce long-term economic output by 0.8%, cut 159,000 jobs and cut wages by 0.7%.
And this is just one proposal in the plan that would reduce American investment and result in a more burdensome and complicated corporate tax system. President Biden is also proposing a new minimum tax of 15% on the book revenues that large companies show on their financial statements. This follows different accounting rules than taxable income. It would increase taxes on multinational corporations by increasing the minimum tax on foreign profits to 21%, changing it to be calculated on a country-by-country basis, and removing the 10% exemption for foreign capital investments. Also, his plan would remove the withholding that encourages companies to relocate intellectual property to the United States, despite providing a tax credit for certain onshoring activities and denying expense deductions for jobs that have been relocated.
It is inadvisable to change corporate tax law so drastically in the middle of a pandemic and less than four years after the last major tax overhaul. It is common practice to fine-tune the policies over time, but these changes create more uncertainty and headaches for businesses looking to grow as the economy recovers, and create more jobs for accountants than the jobs we need to rebuild. Changing the already complex international rules and introducing a new tax on corporate book revenue would complicate tax legislation and create headwinds for additional corporate investment.
To finance a large infrastructure package with minimal damage to the economy, policy makers should pursue revenue streams that focus on the root of the problem: repairing our infrastructure. Policy makers should consider a few possible options that, while not politically popular, are only useful.
It is a good start when the Americans who use the roads pay for the roads. Raising gas taxes is one way to do this, but cars are moving from fossil fuels to being energy efficient. Rather than using taxes on fuel as a proxy for road traffic, introducing a tax directly on vehicle miles may be an even better solution that reflects the changing economics of the auto industry. Consumers want cars that are economical, and communities want reliable roads and bridges. The introduction of a vehicle mileage tax records the lost income from gas taxes and would link the financing of the infrastructure with its users. Biden’s government could also consider broader consumption taxes, such as a carbon tax, to fund the proposed spending and meet the climate and green energy goals.
As President Biden pushes his infrastructure plan, he should avoid taxes that make things harder to do in America.