WASHINGTON – The Biden administration unveiled a tax plan on Wednesday it would increase the corporate tax rate in the United States and limit the ability of American companies to avoid taxes by shifting their profits overseas.
Much of the plan is to reverse a steep corporate tax cut under President Donald J. Trump. A 2017 tax bill reduced the corporate rate from 35% to 21% and enacted a series of other provisions that the Biden administration said encouraged companies to shift their profits to low-rate jurisdictions. taxation, like Ireland.
Some of the provisions of President Biden’s plan may be passed by the Treasury Department, but many will require congressional approval. Already, Republicans have criticized the proposals as putting the United States at a disadvantage, while some moderate Democrats have indicated they may also wish to see adjustments, particularly to the proposed corporate tax rate of 28%.
Administration officials estimate the proposals will raise a total of $ 2.5 trillion in new tax revenue over a 15-year period. 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, about half of the money coming from the various changes made by the plan for the taxation of multinational companies.
Here are some of the main provisions included in the plan and how they are supposed to work.
Increase 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 bring it closer to its global peers. Right now, the United States collects less corporate tax revenue as a share of economic output than almost any other advanced economy, according to the Organization for Economic Co-operation and Development.
The administration sees the rate hike as a way to increase corporate tax revenues, which have fallen to their lowest levels as a share of the economy since World War II.
Ensure that large companies pay at least 15% in taxes
Many large companies pay much less than the current tax rate of 21% – and sometimes nothing. The provisions of the tax code allow companies to reduce their liability through deductions, exemptions, relocations and other mechanisms.
The Biden Plan aims to end large corporations that incur no federal tax liability and pay no taxes or negative taxes to the US government.
The White House wants to impose a minimum tax of 15% on what’s known as “book income” – profits that companies report to investors but are not used to calculate tax liability. Such income can make a business appear very profitable, rewarding the shareholders and managers of the business, even if the business pays little or no tax.
“Large corporations that report exorbitant profits to shareholders would be required to pay at least a minimum amount of tax on these inordinate returns,” the Treasury Department said. The administration would require that companies with annual revenues of $ 2 billion or more pay a minimum of 15 percent on their accounting revenues. He estimated that 45 companies would have paid such a tax if the proposal had been implemented in recent years.
The proposal is restricted to the version proposed by Mr. Biden in the campaign, which would have been applied to companies with $ 100 million or more in book profits per year.
Strengthening the global minimum tax
The plan aims to strengthen a global minimum tax that was imposed on American businesses as part of the Trump administration’s 2017 tax package by increasing the tax rate and eliminating certain exemptions that have weakened its impact.
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The Treasury Department would double the so-called Global Low-Tax Intangible Income Tax (or GILTI) to 21%, reducing the gap between what companies pay on overseas profits and what they pay. pay on income earned in the United States.
And it would calculate the GILTI tax on a country-by-country basis, which would have the effect of subjecting more income earned abroad to tax than under the current system.
Punish American companies that are headquartered in low-tax countries
A provision of the plan known as SHIELD (Stopping Harmful Inversions and Ending Low-Tax Developments) aims to discourage American companies from moving their headquarters abroad for tax purposes, in particular through the practice known as “inversions” , where companies from different countries merge, creating a new foreign company.
Under current law, companies headquartered in Ireland can ‘strip’ some of the profits made by their subsidiaries in the United States and return them to the Irish company as payment for things like use. intellectual property and then deduct those payments from their income taxes. The SHIELD plan would ban these deductions for companies based in low-tax countries.
Pushing for a global deal to end profit shifting
The Biden administration wants other countries to increase their corporate tax rates as well.
The tax plan stresses that the Treasury Department will continue to push for global coordination on an international tax rate that would apply to multinational companies regardless of where they set up their headquarters. Such a global tax could help prevent the type of ‘race to the bottom’ underway, Treasury Secretary Janet Yellen said, referring to countries trying to outdo themselves by lowering tax rates in order to attract taxpayers. companies.
Republican critics of Biden’s tax plan have argued that the administration’s focus on a global minimum tax proves that he realizes that a unilateral increase in the corporate tax rate in the United States would make the US companies less competitive in the world.
Replace fossil fuel tax subsidies with clean energy incentives
The president’s plan would remove long-standing subsidies for oil, gas and other fossil fuels and replace them with clean energy incentives. The provisions are part of Mr. Biden’s effort to transition the United States to “100% carbon pollution-free electricity” by 2035.
The plan includes a tax incentive for long-haul transmission lines, would expand incentives for electricity storage projects, and extend other existing tax credits for clean energy.
A Treasury Department report estimated that eliminating subsidies to fossil fuel companies would increase government tax revenues by more than $ 35 billion over the next decade.
“The main impact would be on the profits of the oil and gas companies,” the report says. “Research suggests little impact on gasoline or energy prices for US consumers and little impact on our energy security.”
Eliminating fossil fuel subsidies has already been attempted, with little success given opposition from industry and Congress.
Strengthen the Internal Revenue Service
The Internal Revenue Service has been struggling with budget cuts and scarce resources for years. The Biden administration believes that better funding for the tax collection agency is an investment that will more than pay off. The plan released on Wednesday includes proposals to bolster the IRS’s budget so it can hire experts to sue large companies and make sure they pay what they owe.
The Treasury Department, which oversees the IRS, noted in its report that the agency’s operating budget has shrunk by 25% over the past decade and that it is ill-equipped to verify complex filings of companies. The agency is also unable to afford to initiate or maintain multi-year litigation over complex tax disputes, the Treasury said.
Because of these constraints, the IRS tends to focus on smaller targets while large businesses and wealthier taxpayers are able to find ways to lower their tax bills.