The White House Fact Sheet estimates that the proposed tax increases, which are expected to raise more than $2 trillion, would take 15 years to fully offset the cost of the spending programs.
According to the White House Press Release, under the Made in America Tax Plan, corporate income taxes would be increased as follows:
- Set the Corporate Income Tax Rate at 28 percent. As part of the 2017 Tax Cuts and Jobs Act (TCJA), Congress reduced the corporate income tax rate from 35 percent to 21 percent. The Made in America Tax Plan would increase the corporate income tax rate to 28 percent.
- Discourage Offshoring of US Corporate Operations. Currently, some US corporations reduce their corporate income tax liability by shifting certain operations overseas. President Biden aims to discourage offshoring these operations by increasing the global minimum tax. The Made in America Tax Plan would do so by: (i) increasing the global intangible low-taxed income (GILTI) tax rate to 21 percent; (ii) applying GILTI on a per-country basis to hit profits in tax havens; and (iii) eliminating the 10 percent deduction for qualified business asset investment (QBAI). The GILTI regime imposes a tax on foreign earnings and subjects US shareholders of controlled foreign corporations (CFCs) to taxation on most income earned through a CFC in excess of a 10 percent return on certain tangible assets. Currently, US corporations receive a 50 percent deduction on their GILTI tax rate, resulting in an effective tax rate of 10.5 percent (that is, 50 percent of the US corporate tax rate of 21 percent). Biden’s proposal would double the effective GILTI tax rate from 10.5 percent to 21 percent. Additionally, GILTI is currently calculated through an aggregation method, whereby US shareholders can offset the foreign income earned by multiple CFCs. The Made in America Tax Plan’s implementation of a country-by-country basis calculation method would attempt to eliminate the benefit of offsetting high and low-taxed income.
- Encourage Other Countries to Adopt Higher Minimum Taxes on Corporations. Additionally, President Biden hopes to lessen the prevalence of offshoring by replacing the base erosion and anti-abuse tax (commonly known as BEAT) that was instituted through the TCJA for this same purpose with a provision President Biden believes will be more effective. In part, the proposal in part would target payments made to companies headquartered in countries without a corporate minimum tax on foreign earnings. The White House Press Release states that this reform may encourage these other countries to participate in a global initiative to set a strong corporate minimum tax.
- Prevent Inverting or Claiming Tax Haven Residences. In another effort to reduce the occurrence of offshoring, President Biden seeks to make it harder for US corporations to acquire or merge with a foreign company to avoid US taxes (i.e., by “inverting” or claiming a tax haven as a residence). The White House Press Release did not provide any details on how this would be achieved.
- Deny Deductions for Offshoring. The Made in America Tax Plan would deny deductions related to offshoring jobs and provide a tax credit for “on-shoring” jobs. The White House Press Release did not specify which deductions would be targeted by the Made in America Tax Plan or provide details on the tax credit.
- Repeal the Foreign Derived Intangible Income (FDII) Deduction. As part of the TCJA, Congress effectively lowered the tax rate on US corporations’ FDII with an FDII deduction. FDII is the portion of a US corporation’s intangible income that is derived from serving foreign markets and is determined on a formulaic basis. The rules applying to FDII operate in tandem with GILTI rules. The Made in America Tax Plan seeks to eliminate the FDII deduction and use the resulting revenue to expand alternative research and development incentives that the administration believes will be more effective in creating US jobs.
- Enact a 15% Minimum Tax on Large Corporations’ Book Income. The President’s tax reform would also include a 15 percent minimum tax on each large corporation’s book income. Book income is the amount of income corporations publicly report on their financial statements to shareholders. For private companies, book income would likely include the amount of income reported on their audited financial reports or financial reports supplied to banks. The White House Press Release clarifies that this reform is meant to act as a backstop to the Made in America Tax Plan’s other tax reforms to ensure that the largest corporations pay US corporate taxes.
- Eliminate Tax Preferences for Fossil Fuels and Reinstate Superfund Taxes. The Made in America Tax Plan seeks to (i) eliminate certain subsidies, foreign tax credits, and other tax preferences targeting the fossil fuel industry, and (ii) reinstate a defunct polluter tax that used to fund the Environmental Protection Agency’s Superfund program. The Superfund program helps pay for the cleanup of polluted sites. Presently, the program is funded through the Superfund Trust Fund, but prior to 1995, when Congress allowed the authority to lapse, the Superfund program was funded not only through the trust but also through polluter taxes. President Biden seeks to increase funding for the Superfund program with the reinstatement of these polluter taxes.
- Expand Enforcement Against Corporations. The Made in America Tax Plan intends to expand tax-compliance enforcement measures aimed at large corporations and high-income Americans by increasing the Internal Revenue Service’s funding. The White House Press Release stated further that a broader enforcement initiative will be announced in the coming weeks.
The Made in America Tax Plan only proposed increasing corporate taxes. A White House Press Briefing, however, indicated that additional tax increases will be announced in the coming weeks affecting high-income individuals.
“The Biden Administration tax proposals folded into their infrastructure plan is a predictable menu of corporate tax increases that will have traction in the legislative process, even though they have little correlation to the ‘user pays’ approach traditionally applied to infrastructure investment,” said former Congressman Phil English of Arent Fox. “Taken together, these massive corporate levies will roll back some of the changes adopted in the Tax Cuts and Jobs Act and leave the United States with the highest corporate tax burden in the OECD. Higher rates and a minimum tax imposed on book income will create new pressures for offshoring, for which this proposal offers unclear remedies. Corporate tax increases, international tax shifts, and energy industry tax penalties are going to stimulate a fierce debate as Congress hunts for revenue to fund new initiatives during a pandemic recovery, in the face of fiscal challenges.”
The Made in Tax America Plan is likely only the opening salvo in a battle for infrastructure spending and tax increases to pay for the spending. Given the sharply divided Congress, any infrastructure and tax bill faces significant hurdles. Already several Congressional Democrats from New York and New Jersey are insisting that they would not vote for a tax bill unless it included lifting the cap on the deduction for state and local taxes that were imposed by the TJCA.