On Wednesday, October 13th, the American Enterprise Institute (AEI), released a report titled “The Tax Burden on Corporations: A Comparison of Organisation for Economic Co-Operation and Development Countries and Proposals to Reform the US Tax System.”
The report, written by Kyle Pomerleau, a tax expert at AEI, “compares the tax burden on corporations in the United States under current law to the corporate tax burdens of 36 Organisation for Economic Co-operation and Development member nations.” It contains a number of unsurprising but dire conclusions.
In it, Mr. Pomerleau says “Current proposals to reform U.S. corporate taxation would increase the statutory and effective tax rates to well above OECD averages. The Biden proposal, which would raise the federal corporate tax rate to 28 percent, would increase the combined statutory corporate income tax rate to 32.3 percent, which would be the second highest in the OECD. The METR and AETR on new investment would also become the second highest in the OECD.”
The Biden Administration’s tax proposal would raise US business taxes above the tax rate in communist China.
Within the report, Mr. Pomperleau goes through a detailed analysis of how the adjustments to the tax code proposed within the Biden plan and the House Ways and Means Committee plan would affect investment in the American economy and finds that raising American tax rates to such a high level, one toward the upper level of those recorded in the OECD, would significantly restrict domestic investment. The high tax burden on both income and new investment would lead to that outcome.
For example, in the conclusion of his report, Mr. Pomerleau remarks that:
“The Biden administration and lawmakers in Congress are considering proposals to increase the corporate income tax. These proposals would raise the statutory corporate tax rate and increase the tax burden on investment in the United States. Under these proposals, the United States would have nearly the highest statutory corporate tax rate in the OECD. In addition, the tax burden on investment would be among the highest in the OECD, as measured by either the METR or the AETR.
Increasing the statutory corporate income tax rate and the tax burden on new investment would come with downsides. A higher corporate income tax rate would increase the incentive for corporations to shift profits into low-tax jurisdictions. Higher effective tax rates would also reduce the incentive for corporations to invest and increase the incentive to locate high-return investments overseas, where effective tax rates may be lower.”
Overall, Mr. Pomerleau finds that either of the proposed tax plans would, as Just the News reports, “make the U.S. less competitive on the world stage and could harm economic growth.”
However, Mr. Pomerleau also proposes small changes to the Biden plan that could limit the financial damage dealt to businesses and even increase investment. One such idea he discusses is “a permanent extension of 100 percent bonus depreciation.” Extending bonus depreciation would, in his words, make “the effective tax rate on new investment would be lower than under current law,
even if the federal corporate tax rate is increased to the 25–28 percent range.” So, while the income tax rate burden for companies would still be higher, they would have more of an incentive to invest in the domestic economy than they currently do, which might make the tax changes less economically probelmatic.
Mr. Biden’s proposed tax rate changes are meant to pay for his $3.5 trillion dollar spending plan. While the House Ways and Means Committee did approve a somewhat modified version of the plan, it remains to be seen what tax increases are actually approved by Congress, as support for the massive tax hike is limited. Politico reported that the ultimate tax rate increase will likely be smaller, as the reconciliation bill has shrunk from the original, $3.5 trillion proposal to either $2 trillion or the $1.5 trillion figure that Senator Manchin has said is the maximum he will vote for. Mr. Pomerleau’s report does not address what effect those more limited tax hikes might have on investment and the economy.
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