Joe Biden's Corporate Tax Plan Is a Solution to a Problem That Doesn't Exist
Former Vice President Joe Biden has released a new plan to tax corporations that includes $1.5 trillion in new corporate taxes. Though he touts his plan as an antidote to corporate tax avoidance, it would in truth be economically damaging, eliminating Congress’s hard work to move us to a better structured corporate tax framework.
Biden’s proposal comes in response to a recurring narrative (pushed by just about every other candidate) throughout the Democratic primary process that large corporations like Amazon and Netflix get away with murder through the tax code. That’s not really the case. Amazon and Netflix’s zero tax bills came from using common, widely-supported deductions like the research and development (R&D) credit and carrying forward net operating losses from previous years. Cherry-picking single years of corporate tax data without context is rarely instructive — the source behind the Amazon tax claim also suggests that Amazon paid a 92 percent tax rate in 2014, but no one was panicking about Amazon paying tax rates that were far too high.
Yet the absence of a problem has never stopped a candidate from promising to solve it anyway. The thrust of the corporate side of Biden’s tax plan is to implement a 10 percent corporate minimum tax, double the so-called “GILTI” tax on foreign profits from 10.5 percent to 21 percent, and raise the corporate tax rate from 21 percent to 28 percent. Biden also proposes to raise $200 billion in additional revenue from sanctioning countries that “facilitate illegal corporate tax avoidance” (whatever that means).
A corporate minimum tax would effectively weaken the credits and deductions laid out in the tax code by making them less effective. Deductions and credits can be effective in creating a better-structured tax code, but they become irrelevant if they are trumped by a minimum tax rate.
A minimum tax is a lazy solution to the perceived problem of too-low corporate tax payments. After all, if Biden truly believes Amazon is taking advantage of an overly-generous tax code, shouldn’t the solution be to target the deductions that they used to reduce their burdens? Biden’s decision to turn to a minimum tax rate suggests that his gripe isn’t really with these provisions. After all, the Obama-Biden administration was strongly supportive of the R&D credit that Amazon made such effective use of.
Biden isn’t the only candidate with this idea. Elizabeth Warren also proposed a far more damaging “real corporate profits tax” that would essentially impose a 7 percent surtax on corporate profits. The Tax Foundation estimated that Warren’s proposal would cost over 450,000 jobs, shrink GDP by nearly 2 percent, and reduce wages by 1.5 percent in the long run.
Biden’s other ideas would be equally damaging. Raising the corporate tax rate, even if below the pre-tax reform rate of 35 percent, would put American businesses at a disadvantage. European Union countries have an average corporate rate of just above 21 percent. Raising our corporate tax rate to 28 percent (not even factoring in state and local taxes) would therefore take American businesses from a corporate rate that is just on par with European countries to one that is significantly more punitive. Not only that, but workers end up bearing most of the cost of the corporate tax in any case — labor bears roughly 70 percent of the burden of the corporate tax rate in the form of lower wages.
Combining a much higher corporate tax rate with a doubling of GILTI taxes (essentially corporate taxes on foreign income for U.S. multinationals), meanwhile, would encourage American companies to “invert” by moving their headquarters overseas. Biden walks much of the recent tax reform bill’s advances in this regard back by doubling down on a proposal that would weaken U.S. competitiveness.
Biden’s last corporate tax proposal, to sanction countries that help corporations engage in “illegal corporate tax avoidance,” is too vague to truly analyze. However, depending on how it is structured, it could easily result in retaliation from the targeted countries. Instead of attempting to punish countries for having lower corporate tax rates, we should be striving to establish more competitive rates.
The former Vice President’s plan to make certain Amazon pays taxes is a solution to a problem that doesn’t exist. And like many such solutions to misdiagnoses, the cure is worse than the perceived disease.