Andrew Harnik/AP Photo
Sen. Ron Wyden (D-OR) speaks at a Senate Finance Committee hearing on trade, June 17, 2020, on Capitol Hill.
Last week, the Biden administration unveiled its “Made in America Tax Plan” to fund investment in infrastructure. The Biden Plan is a bold, ambitious, and innovative proposal to reform U.S. corporate and international tax rules and undo the damage caused by the Trump tax law of 2017. This week, Sen. Ron Wyden, the Democratic chair of the Finance Committee, released his own international tax reform proposal. Unfortunately, the Wyden Plan relies heavily on ideas the GOP enacted in 2004, and represents a step backward even from some elements of the Trump tax law.
The Biden Plan has six major elements:
- Raise the corporate tax rate from 21 percent to 28 percent;
- Eliminate the exemption for dividends from foreign subsidiaries of U.S. multinationals, which encourages job offshoring;
- Raise the minimum tax rate on foreign profits to 21 percent and apply it separately to each foreign country;
- Strengthen the rules against corporate expatriations, which occur when a U.S. corporation nominally moves its headquarters abroad to save taxes;
- Replace an ineffective tax on profit-shifting out of the U.S. with an effective one, which applies to countries that do not adopt a similar minimum tax on their multinationals; and
- Repeal the unjustified and illegal export subsidy in the 2017 Trump tax law.
Each of these elements is fully justified. Raising the corporate tax is long overdue when 91 Fortune 500 companies paid $0 in federal corporate taxes on U.S. income in 2018. In fact, according to recent analysis by the Joint Committee on Taxation, the 2017 Trump tax law cut the average rate that corporations paid in half from 16 percent to less than 8 percent in 2018.
The Trump tax law also created an incentive to migrate jobs overseas by exempting from U.S. tax altogether the first 10 percent earned by foreign subsidiaries of U.S. multinationals on real investment (such as factories). The Biden Plan repeals this unjustified subsidy.
The Trump tax law enacted a weak minimum tax provision on income U.S. multinationals earn through foreign subsidiaries at half the U.S. corporate tax rate, and allowed averaging between high- and low-tax countries, which encourages profit-shifting to low-tax countries. The Biden Plan raises the minimum tax rate to 75 percent of the U.S. rate and eliminates averaging.
The Trump tax law did nothing about corporate expatriations. The Biden Plan treats any corporation whose headquarters are in the U.S. or over half of whose shareholders are American as a domestic U.S. corporation, regardless of where it is incorporated. This rule will eliminate expatriations to avoid the minimum tax.
The Trump tax law included a weak and ineffective minimum tax against shifting profits from U.S. subsidiaries of foreign multinationals to their foreign parents. This rule was further eviscerated by regulations adopted by the Trump Treasury. The Biden Plan replaces this provision with a strong minimum tax, and makes it inapplicable to foreign multinationals from countries that adopt a minimum tax on their own multinationals. This creates a strong incentive for foreign countries to match the 21 percent U.S. minimum tax, thereby reducing the race to the bottom that has characterized international taxation since the Reagan administration.
Finally, the Biden Plan repeals the Trump tax law export subsidy, which has just been a windfall for U.S. multinationals while doing nothing to attract foreign investment into the U.S., and is illegal under WTO rules and therefore makes the U.S. vulnerable to trade sanctions.
Unfortunately, the Wyden Plan is much weaker on all of these dimensions except the corporate tax rate (but this may need to be lowered anyway, to meet Sen. Manchin’s demands), and on eliminating the offshoring incentive (where it is identical to Biden’s).
On the minimum tax on foreign subsidiaries, the Wyden Plan suggests a lower rate than 21 percent, and applies it not per country but just to all low-tax jurisdictions together. This creates an incentive to avoid the U.S. minimum tax on profits shifted to a tax haven (e.g., the Cayman Islands at 0 percent) by averaging it with a higher-tax foreign country whose taxes are still below the U.S. minimum tax rate (e.g., Ireland at 12.5 percent). This in turn creates an incentive to shift profits from the U.S. to lower-tax countries in order to reduce the minimum tax. The idea is taken from the Republican tax law of 2004, which was essentially written by corporate lobbyists.
On corporate expatriations, like the Trump tax law, the Wyden Plan is silent. This invites a recurrence of the expatriations that bedeviled the Obama administrations.
On the minimum tax on foreign multinationals shifting profits from the U.S., the Wyden Plan is much weaker than the Biden Plan. For example, it allows the tax to be fully offset with domestic tax credits, which are frequently unjustified subsidies to activities the multinationals would have undertaken anyway.
Finally, the Wyden Plan does eliminate the Trump export subsidy, but it replaces it with an “innovation subsidy” that rewards large corporations for research and development activities they would have undertaken anyway. The Wyden Plan also adds a further subsidy for R&D and for U.S. management expenses, which is also an idea taken from the 2004 GOP law, but was repealed as ineffective in 2017. Such expenses are a major reason companies like Amazon pay very little tax on domestic income while making tens of billions in domestic profits. While the Biden Plan also incentivizes domestic research, it also contains a minimum tax of 15 percent on U.S. multinationals’ financial income, which would ensure that Amazon and its ilk do not pay zero tax while reporting immense gains to shareholders like Jeff Bezos.
In sum, the Biden Plan is truly progressive tax reform, while the Wyden Plan is mostly centrist (i.e., corporatist) reform masquerading as progressive. The Biden plan puts forward the optimal policy, with the understanding that it will require compromise to get through Congress. The Wyden plan sets forth the compromise before negotiations even start, which is always a mistake. One would hope that true progressives like Sen. Warren and Sen. Whitehouse, both of whom are on the Finance Committee, see it for what it is.
