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.
The potential impact of the proposed increase in the corporate rate, combined with the Biden proposal to increase the capital gains tax rates for high-income taxpayers, was initially expected to have a “double whammy” impact on stocks. First the increase in the corporate tax rates could drive the profits of some companies lower, depressing their earnings in the short term and perhaps the longer term.
Over time, having to take additional pretax earnings to pay taxes instead of reinvesting that money back into the business could take a toll on the ability of some companies to finance growth without having to increase their corporate borrowing or having to issue additional shares of stock, potentially diluting their share price.
The potential impact of an increase in the capital gains tax rate to drive down stock prices, at least in the near term, may have been mitigated by the administration’s announcement that any increase in this rate would be retroactive to the date it was announced, either April or May of this year depending upon the final definition of the announcement date.
The impact of a capital gains tax increase might also be mitigated since the percentage of stocks held in taxable accounts has declined over the past few decades, with more stocks held in tax advantaged accounts like IRAs and others.
Beyond this, the stock market has not always reacted badly to tax increases. There are generally other factors in play that combine to impact the direction of stocks.
What Impact Would Raising the Corporate Tax Rate Have on The Economy?
When corporations are hit with higher tax rates, there is the potential for lower profits and cash flow. At least a portion of this is passed through to shareholders or owners of the corporation in the form of lower earnings and any impact that might have.
When they can, corporations will pass the impact of these higher taxes onto customers in the form of higher prices for the goods or services they supply. This could result in added inflation to an economy where this is already a fear as we emerge from the pandemic.
If they have the leverage to do so, they may also squeeze vendors and suppliers to lower prices that the corporation pays for goods or services they use in their business.
Though perhaps not as likely in today’s current environment, companies may try to pass these added costs onto workers in the form of lower wages or at least lower rates of wage increases. Again with the reports of worker shortages in many industries this doesn’t seem likely in the near term but could happen down the road if this shortage were to subside. This type of scenario could ripple through other parts of the economy if wages start to stagnate, and many people have less money to spend on discretionary items.
There are many considerations when analyzing a potential hike in the corporate tax rate and the potential impact on both the economy as a whole and on the financial markets. There may also be adjustments to the proposed legislation as the president looks for ways to strike a compromise with those who are opposed to the plan, all or in part. In short, don’t be surprised if this legislation evolves over time.