President Joe Biden has proposed a number of changes to the personal income tax rates including changes to the capital gains tax rate and increasing the top marginal income tax rate for individuals.
Biden also wants to raise the corporate tax rate. While he proposed the increase to help pay for an infrastructure package, it was not included in a $579 billion infrastructure deal reached Thursday by Biden and a bipartisan group of senators. Yet a source told The Washington Post that Biden still intends to seek a corporate tax rate hike.
Here is a look at Biden's proposed corporate tax changes and what they could mean to investors, business owners and others.
History of the Corporate Tax Rate
The first corporate taxes were levied in 1909 at a rate of 1%. The rate reached 12% in 1918 for corporate income over $2,000. The all-time high was just under 53% in 1968, and it stood at 35% beginning in 1993 until it dropped to 21% in 2018 as part of the Tax Cuts and Jobs Act. These are the top rates; there are lower rates for corporations earning lower levels of income.
Biden's Proposed Changes to the Corporate Tax Rate
Biden's proposed changes to the corporate tax rate are largely contained in The American Jobs Plan legislation. Part of this multifaceted legislation includes several changes to the corporate income tax rates:
- Increase the corporate tax rate to 28%.
- Increase the minimum corporate tax rate to 21% for all U.S. corporations including income from countries that have been tax havens for multinationals.
- A minimum tax on corporate "book income" — the income corporations report to their shareholders — of 15%.
- Encouraging other countries to join the U.S. in enforcing a minimum global corporate tax on corporations.
- Making it more difficult for U.S. corporations to claim residency in tax-haven countries to avoid U.S. taxes.
- Deny deductions for jobs moved offshore.
- Eliminating the loophole in the current law that encourages offshoring jobs in exchange for expanding more effective R&D incentives.
- Eliminating tax preferences for fossil fuels.
- Ramping up tax enforcement against corporations.
What Do Republicans Think About Biden's Corporate Tax Change?
As you might expect, many Republicans are not enthusiastic about the plans to raise corporate taxes as well as proposed increases to personal taxes proposed by Biden. Both Senate Minority Leader Mitch McConnell and House Minority Leader Kevin McCarthy have expressed their opposition to these proposed tax hikes recently and consistently.
The president has indicated a willingness to revisit some of these proposed corporate tax increases, including potentially leaving the top corporate tax rate at 21% if the Republicans would agree to a minimum corporate tax rate of 15% and agree to at least $1 billion in additional infrastructure spending.
Criticism of Biden's Corporate Tax From the Left
Some Democrats are concerned that the president's plans to increase corporate tax rates might prove unpopular with some voters. The fear is that Democrats facing a tough reelection battle in the 2022 midterms for both House and Senate seats might alienate some voters by supporting these corporate tax hikes as well as some of the personal tax hikes in the Biden tax plan.
How Does the Biden Administration Plan to Spend the Extra Tax Dollars?
While the tax hike was cut from the recent infrastructure deal, it is not yet clear how that package would be paid for. It is possible that the proposal could be reintroduced if that deal collapses, or brought up outside of the infrastructure plan.
According to the American Jobs Plan, Biden's corporate tax proposals could raise more than $2 trillion over the next 15 years.
What Does Biden's Corporate Tax Plan Mean for Investors?
It's hard to predict what impact an increase in the corporate tax rate would have, along with the Biden plan to close a number of loopholes for U.S. multinationals. There has been much speculation on this, however.
Some analysts fear that these higher corporate rates would hurt growth companies in areas like technology and communications. This is in part because the corporate tax rate increase would reverse the effective tax rate declines that many of these companies saw under the Trump administration's tax reforms.
The higher rates, combined with the closing of a number of tax loopholes for corporations, may cause investors to reevaluate their earnings estimates for some growth stocks and those of some U.S. multinationals. Ideally this would be done on a company-by-company basis, but negative evaluations of some companies by analysts could affect other stocks within the same industry or market sector.
