As the Biden administration rolls out its proposed broad-based $2.25 trillion plan for infrastructure over the coming months, how to pay for it will be a key focus of negotiations. Among the financing methods being discussed are government borrowing, tax increases and public-private initiatives. With interest rates and borrowing costs low, we expect borrowing to be a key component but additional revenue raisers will be necessary. Included is a proposal to raise the corporate tax rate from 21% to 28% and the global minimum tax rate from 10.5% to 21%. Large companies would be subject to a 15% minimum tax. The Biden proposal estimates that raising the corporate tax rate could raise as much as $2 trillion over 15 years. Some business groups have argued against business tax hikes in that they will hurt business profits, reduce investment in the US, slow growth and hurt shareholders. Unsurprisingly, congressional Republicans oppose any tax increases.
However, there are a number practical and socioeconomic arguments for increasing the corporate tax rate to fund US infrastructure.
First, raising the corporate rate to 28% would be in line with historical rates seen in the US prior to 2017. Corporate tax rates prior to 2017 exceeded 30%, so the Biden proposal would just align rates with where they have been historically. Businesses would continue to benefit from investment incentives such as accelerated depreciation.
Second, the current tax structure encourages a “race to the bottom” for tax rates globally and incentivizes US companies to pay little or no tax while relocating to even lower taxed regions. This includes tax inversions especially favored by large pharmaceutical companies. Parallel to the Biden proposal, Treasury Secretary Yellen has made the case for a harmonized or standardized corporate tax rate across major economies which would address these disparities.
Third, whether or not one considers corporations to be “persons”, there is a public cost/benefit aspect to this. Looking strictly at the private side, an increase in tax rates may reduce profits in the short term. However, the benefits of a strong infrastructure are expected to benefit companies over the longer term through higher revenues and sustainable economic growth. Looking at it this way, the social (private plus public) benefit of paying for infrastructure via a corporate tax increase exceeds the cost to any one person or corporation.
Fourth, there is the possibility that under a revised corporate tax structure, cash will be directed away from debt-financed corporate buybacks which have pushed up stock prices to record levels but at the expense of people who don’t hold stocks as well as at the expense of longer term investments in labor and technology.
Fifth, we expect costs and benefits will be easier to align for businesses over time as they will be key
producers and consumers as well as beneficiaries of a solid infrastructure.
In addition, economists such as Lawrence Summers, who has disagreed with some aspects of the Biden stimulus package, has endorsed the Biden corporate tax proposal.
While some small measure of cooperation could help fine-tune policymaking and needed reforms, it
currently looks as though, again, reconciliation will be the means to pass the infrastructure initiative.