Corporate Tax Policy in Build Back Better

Eakinomics: Corporate Tax Policy in Build Back Better Shortly after the election, AAF took a close look at the Build Back Better agenda and concluded that the negative economic impact of raising trillions of dollars in taxes would not be outweighed by even a disciplined program of productive (traditional and social) infrastructure investments. Naturally, Eakinomics assumed the issue was settled and the effort would cease. Alas, the House committees have reported their portions of the reconciliation bill, although neither the Congressional Budget Office nor the Joint Committee on Taxation has reported a comprehensive set of scores of the committee legislation. So, at this point one does not know if the committees successfully met the budget resolution instructions or how much the whole effort raises spending, taxes, and debt. In short, the budgetary implications are a black box. But the economic implications continue to be fleshed out, especially on the tax front. Among the key changes proposed in the House bill is to raise the corporation income tax from 21 percent to 26.5 percent. In addition, it would increase the tax on Foreign-Derived Intangible Income (FDII) – roughly the overseas earnings of U.S.-located intangible assets – and Global Intangible Low-Taxed Income (GILTI) – intended as a minimum tax on earnings from assets located abroad. Viewed from the perspective of the 2017 Tax Cuts and Jobs Act (TCJA), it is hard to not worry about those changes. Prior to TCJA, the loss of corporate headquarters was a chronic event and the source of considerable discord. Since TCJA, not a single company has moved abroad. Raising the rate to the third highest in the OECD is an invitation to return to the bad old days. Now there are two new studies from the folks at the Penn Wharton Budget Model that look at the FDII and GILTI provisions and their impact on U.S. multinationals. The first study concluded: The Ways and Means bill “would more than triple the U.S. tax rate on multinationals’ foreign income and produce a higher rate than a proposed global agreement currently being negotiated through the OECD.”  That’s right. This is not a modest increase in taxation; it is a tripling of the tax on overseas income by successful U.S. firms, undercutting their ability to compete. And the effective rate is higher than the administration’s proposal to have a common, global minimum tax of 15 percent for all countries. The second study follows directly from the first. That study concluded the bill would increase shifting intangible investments because it would raise the rate on FDII relative to the effective rate on GILTI. This makes sense. If the income from the same intangible asset is taxed less heavily if the asset is located overseas (GILTI) than at home (FDII), then it is simply goodbye Des Moines and hello Dublin. It is hard to be enthusiastic about a bill that is a budget disaster of unknown proportions but a clearly defined economic threat.