President Joe Biden has rolled out a more than $2-trillion American Jobs Plan that asks Congress to make significant new spending commitments to not only Washington’s traditional idea of infrastructure - highways, roads, and bridges - but also transit, housing, manufacturing, workforce development, caregiving, water, broadband, and more. Biden proposes to pay for his plan with more than $2 trillion in tax hikes over the next 15 years, most on the corporate or business side of the U.S. tax code.
American taxpayers should be significantly concerned about this proposal as currently written. The tax hikes outlined by President Biden will be framed as “profitable” and “multinational” corporations “pay[ing] their fair share in taxes,” but ignores both the portion of corporate taxes borne by workers and consumers and America’s global position in competing for the jobs, high wages, and economic growth that multinational companies offer. The new spending, meanwhile, often comes with few data-driven justifications for the amounts proposed and would build on $6.6 trillion of federal government spending in fiscal year (FY) 2020 and trillions more already spent in FY 2021.
Below, National Taxpayers Union reviews the Biden plan, and why taxpayers should be concerned about the proposed tax hikes and spending hikes in the President’s $2-trillion blueprint.
Reviewing the “Made in America” Tax Plan
Though it takes up only a small portion of the lengthy fact sheet on the American Jobs Plan, President Biden proposes to almost fully pay for enormous amounts of new spending in the plan with $2 trillion or more in tax hikes over the next 15 years. One concern here, as some budget experts have pointed out, is that Biden is proposing to spend $2 trillion or more over eight years and pay for it over 15 years. That’s not typically how budgeting is done in Washington, notwithstanding all the existing gimmicks in Congress’s arsenal to more or less fudge the numbers on spending proposals. If the President is to propose spending $2 trillion in eight years -- a nearly 15-percent increase over what the federal government is currently projected to commit to discretionary spending over the same window -- he should propose paying for it in eight years or less.
What’s worse, though, is that Biden’s proposed pay-fors -- tax hikes, in this case -- will hit American businesses, workers, consumers, and investors. The tax increases will also make America a much less competitive place for multinational companies to invest than many of America’s economic peers, with no guarantees (despite Biden’s assurances) that the U.S. will succeed in convincing other highly developed countries in Europe and Asia to also increase their corporate tax rates.
Here’s a quick review of Biden’s proposed tax hikes, and why most if not all of them are bad for American businesses and workers:
1. Increasing the corporate tax rate by a third: President Biden proposes raising the corporate tax rate from 21 percent to 28 percent, the largest tax hike in this plan that may raise more than $1 trillion over the next 15 years. One important principle policymakers should keep in mind is that any corporate tax hike is, in part, a tax on workers. Studies suggest that, at minimum, workers bear between 20 percent and 25 percent of the corporate tax rate, though that figure could be as high as 50 percent or even 70 percent. Put another way, President Biden’s proposal raises taxes on workers anywhere from more than $200 billion over 15 years to more than $700 billion over 15 years. Even if one ignores the impact of corporate tax hikes on workers, consumers and investors also bear significant portions of the corporate tax rate, so a corporate tax hike is a tax on consumption and investment as well. A higher corporate tax rate also makes the U.S. among the least competitive nations in the highly developed world for a multinational company to locate jobs and profits. As NTU has pointed out before, a “28 percent corporate rate would give the U.S. the third-highest rate in the OECD (along with New Zealand), but an average state corporate tax rate of 6.03 percent would actually bump the U.S. above France for the highest combined corporate tax rate (national and sub-national) among highly developed economies.”
2. Doubling the taxes multinational companies pay on global profits: President Biden also proposes effectively doubling the rate multinational companies based in the U.S. pay on their global profits, from 10.5 percent to 21 percent. This tax on global intangible low-taxed income (GILTI) was included in the 2017 tax law as an effort to prevent international subsidiaries controlled by U.S. companies from moving their high-value intangible assets (such as intellectual property) and, consequently, profits to lower-tax countries. GILTI accomplishes this aim by ensuring that U.S.-based multinational companies that have intangible assets located in a country with a foreign tax rate of less than 13.125 percent pay a residual U.S. tax on profits derived from those intangible assets. How businesses calculate their income subject to the GILTI tax is complicated, but President Biden proposes three major changes to the GILTI tax regime: 1) doubling the tax rate on GILTI, 2) applying on a country-by-country basis rather than a global basis, and 3) eliminating a rule that allows companies to exempt (from income subject to GILTI) a 10-percent return on their tangible assets located abroad. We agreed with Sen. Chuck Grassey (R-IA) earlier this year when he wrote that “[a]n increase in the GILTI rate to 21 percent would make U.S. companies far less competitive with their foreign counterparts because most foreign countries do not subject a company’s foreign earnings to the same level of tax as domestic earnings.”
Unfortunately, President Biden has proposed major tax hikes on GILTI that Don Schneider, a former chief economist from the House Ways and Means Committee, estimates could cost businesses $788 billion over the next 15 years. A separate estimate from the Tax Foundation, accounting for the dynamic effects of President Biden’s proposed tax hikes, found the GILTI changes would raise $290 billion over 10 years (as opposed to Schneider’s estimate of $495 billion over that time). The GILTI changes, then, seem like a lose-lose for the Biden administration: either they raise taxes on American businesses by $800 billion (on top of $1 trillion from the corporate tax hike), harming workers, consumers, and investors in the process, or the GILTI changes raise less than expected because companies take profits out of the U.S., harming workers, consumers, investors, and the deficit.
3. Repealing a tax incentive for multinational companies to locate in the U.S.: In the White House’s fact sheet on the American Jobs Plan, President Biden frames a provision of the 2017 tax law, a deduction for Foreign Derived Intangible Income (FDII), as “a tax break for [corporations] shifting assets abroad.” That’s not how the nonpartisan Joint Committee on Taxation (JCT) described FDII just a few weeks ago:
In the U.S. context, part of the policy motivation for enacting the deduction for FDII, along with the parallel deduction for GILTI, is to encourage the location of more intangible income, and potentially some of the activity giving rise to that intangible income, in the United States, and make the U.S. tax system more neutral with respect to where U.S. MNEs locate intangible property and income (under the view that the United States was a less favorable location under prior law).
FDII was enacted, along with GILTI and the Base Erosion and Anti-Abuse Tax (BEAT) from the 2017 tax law, in recognition that plenty of countries have lower tax rates on corporate profits than the U.S. and still do, notwithstanding the 2017 law’s significant reduction of the U.S. corporate rate (from 35 percent to 21 percent). FDII, GILTI, and BEAT all encourage multinational companies to continue to operate in the U.S. while ensuring they cannot park profits in countries with lower tax rates solely to avoid U.S. taxation. While the rules here are complicated and policymakers could explore reforming or adjusting them in the years ahead, doubling the GILTI tax rate and repealing the FDII deduction could hurt American businesses, workers, and investors while simply encouraging some multinational companies to vote with their feet and move U.S. operations and profits elsewhere.
4. Establishing a minimum tax on “book income”: President Biden also wants to establish a minimum 15-percent tax on “book income” as a “backstop” to the corporate tax changes outlined above, which the White House claims will “ensure that large, profitable corporations cannot exploit loopholes in the tax code to get by without paying U.S. corporate taxes.”
Former NTU Foundation Vice President Nicole Kaeding explained in January 2020 why there are important differences between “book income” and taxable income and, why, consequently, some companies that report profits on book income end up not paying little or nothing in taxes for a given year:
Taxable income and book income vary for good reason. Taxable income allows companies to deduct their capital investments and carry forward their previous losses to better align their taxable profits with their economic profits. Taxable income isn’t perfect—expensing, for example, should be made permanent and expanded to all assets—but it serves as a better tax base than book income.
To use an oversimplified example, a company that experiences a $100 million net operating loss in one year but a $10 million net operating profit over each of the next 10 years may ultimately pay nothing in corporate income tax under current law. Under Biden’s plan, though, not only would that company have $0 in net profit over 11 years but they would pay an additional $15 million in minimum “book income” taxes over that period, reducing their net profits over the 11-year period to below zero.
5. Auditing every large U.S. corporation: President Biden seems to hint at auditing every single large U.S. corporation’s tax returns every year in his new plan:
A decade ago, essentially all large corporations were audited annually by the IRS; today, audit rates are less than 50 percent. This plan will reverse these trends, and make sure that the Internal Revenue Service has the resources it needs to effectively enforce the tax laws against corporations. This will be paired with a broader enforcement initiative to be announced in the coming weeks that will address tax evasion among corporations and high-income Americans.
Auditing 100 percent of any large group of taxpayers would significantly increase taxpayer compliance burdens and costs, making the IRS audit process less like scanning a representative sample of taxpayers (for underreported or misreported taxable income and tax liabilities) and more like an invasive fishing expedition that requires every American business to add human and financial resources for the purpose of complying with reams of IRS paperwork and correspondence.
NTU President Pete Sepp has previously testified to the Senate Finance Committee on the many problematic aspects of IRS audits and enforcement, which must be worked out in full before the President proposes a significant and permanent expansion of annual IRS audits on every American corporation.
Reviewing Biden’s Spending Plans
6. $100 billion for “future proof” broadband: President Biden’s broadband infrastructure plan has a $100 billion price tag, which is likely far more than is needed considering Congress has already spent heavily in this area. In the December 2020 stimulus package, $7 billion was allocated by Congress to fund broadband infrastructure and connectivity, and as part of the $350 billion allocated to state and local governments in the American Rescue Plan, broadband was listed as a primary use of these funds. There is a serious risk of subsidized overbuilding of broadband infrastructure if $100 billion is added, which could disincentivize private sector investment.
While light on the specifics, Biden’s plan calls for “future proof” broadband infrastructure. If this includes dramatically changing the definition of high-speed broadband from the current 25/3 Mbps to 100/100 Mbps, as some lawmakers have called for, this would be highly problematic. Congress should focus its efforts on unserved and underserved areas, and a radical increase in the definition of high-speed broadband is not only unnecessary, but would expand the focus to connectivity for Americans who already have adequate access to broadband. As former Federal Communications Commission Commissioner Michael O’Rielly pointed out, even with extensive video uses during the pandemic, unless Americans are performing tele-surgery at home, there is no need for symmetrical upload and download speeds. Similarly, if the goal is to give every American access to affordable broadband, the Biden administration should not prioritize funding for government-owned and non-profit broadband networks. Private sector investment and innovation has been instrumental in keeping Americans connected and has held up remarkably well during a global pandemic. The government choosing winners and losers while ignoring market incentives could ultimately harm smaller service providers and consumers.
Biden’s plan also states that subsidies are short term solutions and Congress needs to “find a solution to reduce internet prices for all Americans.” In the context of Biden’s broadband plan which downplays profit incentives and emphasizes networks owned, operated, or affiliated with the government, one interpretation of this could be a call for price controls on broadband services. This would be a major concern and clarification is necessary from the administration on what this means. Some investments in broadband may be needed, but the current proposal is excessive and could carry unintended consequences for consumers.
7. $174 billion for electric vehicles (EVs): The Biden administration is proposing to spend $174 billion in taxpayer dollars to “win” the electric vehicle (EV) market. According to the fact sheet, this money would be used to spur the development and adoption of electric vehicles by retooling factories and boosting domestic supply of materials, expanded tax incentives for EV buyers, and grant and incentive programs for nationwide charging stations. The federal government should not be in the business of tilting the scales of the free market in favor of specific segments of the automotive industry over others. The free market should dictate which cars automakers produce, not the heavy hand of the government. Additionally, a major problem with expanding the EV credit is that it primarily benefits wealthy consumers, even though EVs have become more affordable in recent years. According to the Congressional Research Service, almost 80 percent of EV credits have been claimed by taxpayers with an average income of over $100,000.
8. $80 billion for Amtrak: The Biden plan also invests $80 billion into the failing government-owned rail company, Amtrak, which hasn’t had a profitable year since it began serving passengers fifty years ago. This is a no-strings attached bailout with no substantial reforms to get Amtrak on the track to profitability. While the plan would address some backlog that exists, the vast majority of this funding would likely be used to finance the construction of new routes to connect new markets that are likely to be unprofitable. Though the Biden plan is scarce on details for exactly which purposes this spending would be used, Congress must address the structural mismanagement of this broken agency. Tens of billions of taxpayer dollars will be spent without any assurance that Amtrak won’t simply use these funds to pursue even more wasteful and unnecessary boondoggles. Amtrak must be reformed and held to account, not be showered with more money on a failed subsidy scheme.
9. $100 billion for schools: The Biden plan proposes $100 billion in funding to upgrade public schools with new technology labs, retrofit existing building infrastructure to address climate change, and new ventilation and piping systems, among others. Half of this money ($50 billion) would come from bonded debt and the other $50 billion directly from federal grant programs. This level of funding comes at a time when Congress allocated hundreds of billions of dollars over the past year for schools during the COVID-19 crisis. As it stands, schools are sitting on more than $200 billion in unspent funding thanks to Congress’s previous COVID relief packages.
10. $28 billion for federal buildings: The Biden plan proposes $28 billion in funding to retrofit existing federal buildings and construct new buildings, such as Veterans Administration hospitals, courthouses, office buildings, and other buildings. Additionally, a good chunk of this funding would be used to “purchase low carbon materials for construction and clean power for these newly constructed VA hospitals and federal buildings. A more cost-effective solution to restoring this infrastructure would be to pass the Public Buildings Renewal Act, which smartly and carefully expands the availability of Private Activity Bonds to help underwrite more Public-Private Partnerships. Studies indicate this type of financing has shaved as much as 25 percent of the total lifetime cost of a project to help save money.
11. $115 billion for roads and bridges. While the Biden “infrastructure” plan totals $2.25 trillion, only about 5 percent of that funding would actually be dedicated to traditional infrastructure projects like roads, bridges, and tunnels. According to the fact sheet, this portion of the plan totals $115 billion and The White House estimates 20,000 miles of roadways would be repaired, while economically significant bridges and 10,000 smaller bridges would get fixed. Given the limited level of funding for the magnitude of a project as large as the White House proposes, it is unlikely $115 billion would come anywhere near the actual total cost to repair or replace these structures. Additionally, this funding should be paired with aggressive procurement, labor, and regulatory reforms to maximize each taxpayer dollar spent.
12. Inclusion of the Protecting the Right to Organize (PRO) Act. The Biden plan calls for the inclusion of the PRO Act, a radical proposal that would fundamentally alter American labor laws for the benefit of labor unions. On its face, the PRO Act is a Frankenstein's monster of bad policies that would increase the coercive power of big labor unions under the guise of being pro-worker. Specifically, the PRO Act nullifies Right to Work laws across the country, which prohibit employers from forcing their employees to join a union as a condition of employment. Additionally, it imposes California's disastrous independent contractor test, undermines worker freedom and privacy during unionization drives, and threatens an employer’s ability to end worker strikes. Rep. Virginia Foxx (R-NC), Ranking Member of the Education and Labor Committee summarized the PRO Act perfectly: the legislation “redraws the playing field to favor union bosses sends a clear message: House Democrats’ allegiance is with Big Labor, not workers or small businesses.”
13. $50 billion for “monitoring domestic industrial capacity” and other Buy America efforts: Nearly one-fifth ($50 billion) of President Biden’s proposed spending on manufacturing initiatives would go to establishing a new office at the Department of Commerce for “monitoring domestic industrial capacity and funding investments.” As economists organized by NTU have pointed out to policymakers before, Buy American policies and initiatives lead to fiscal and economic troubles for American taxpayers and consumers:
The variety, supply, and price of goods available to Americans will suffer under a broad Buy America regime. Taxpayers and patients will pay more for drugs and medical supplies ... we can expect our trading partners to adopt retaliatory “Don’t Buy American” barriers targeting U.S. exports as this type of retaliation is already occurring between other countries.
Similarly, as NTU Foundation’s Bryan Riley has explained before, U.S. industrial policy tends to create more waste and inefficiency for the American economy than value and efficiency. U.S. consumers and taxpayers benefit from global supply chains, free trade, and the ability to procure goods and services from around the world. While limited, domestic public-private partnerships may make sense for particular goods and services, such as active pharmaceutical ingredients for essential medical countermeasures and technology for national security needs, a widespread, $50-billion national industrial policy will turn into plenty of waste for American taxpayers.