BY KYLE POMERLEAU
Last week, Democratic challengers Raphael Warnock and Jon Ossoff won their Senate races in Georgia. Joe Biden will enter the White House on January 20 with a large Democratic majority in the House and a 50-member Democratic majority in the Senate. With Vice President Kamala Harris as a tie-breaking vote in the Senate, President Biden will have a solid chance to enact the corporate tax increases he proposed during the campaign. If Biden does push for corporate tax changes, he should think about improving his proposals.
During his campaign, Joe Biden proposed several corporate tax changes with the goal of raising additional federal revenue, broadening the tax base, and encouraging domestic manufacturing. His plan calls for increasing the corporate income tax rate from 21 percent to 28 percent and enacting a minimum book tax. As part of his “made in America” plan, Biden would increase the tax burden on foreign profits by raising the tax rate on foreign profits, enacting a country-by-country minimum tax, and introducing a surtax on importing US firms. Lastly, he would raise taxes on the real estate industry and fossil fuel companies.
Biden’s plan would ultimately raise more than $1 trillion in additional revenue from corporations, but the plan would also worsen at least three problems with the corporate income tax. First, his proposal to raise the corporate income tax rate would increase the overall effective tax rate on new investment and would reduce the incentive to invest in the United States. Second, the higher tax rate paired with his special credits for manufacturing would increase tax distortion across different assets. Some assets would face much lower tax burdens than others. Third, the higher corporate tax rate would also increase bias in the corporate income tax in favor of debt-financing.
Biden should rethink his plan and consider addressing these problems. One such approach was outlined by Jason Furman — a professor at Harvard University, a senior fellow at the Peterson Institute for International Economics, and a former chair of the Council of Economic Advisers under the Obama administration. He proposed a reform that would shift the corporate tax from a tax on corporate profits to a tax on corporate cash flow. The proposal would allow companies to fully deduct the cost of investment in the year new investments are put into service. It would also eliminate the deduction for net interest expense (the deduction for interest expense in excess of any interest income).
Furman’s proposal would address all three downsides to Biden’s corporate tax proposal and would accomplish the goal of encouraging domestic investment. Under a cash flow tax, the effective tax rate on new investment, regardless of the type of investment, would be zero. As a result, the corporate tax would no longer reduce the incentive to invest in new capital, nor would it encourage companies to invest in certain types of assets over others. And because net interest expense would no longer be deductible, the corporate tax would no longer encourage firms to finance investments through borrowing.
The corporate income tax still requires reform, and Joe Biden and Congress will have an opportunity to improve it.