Policymakers face a difficult balancing act this year in what is likely to be an unusual tax extenders season.
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President Biden proposed a 7-point hike in the corporate tax rate to 28 percent, a new minimum book tax on corporate profits, and higher taxes on international activity. We estimated these proposals would reduce the size of the economy (GDP) by 1.6 percent over the long run and eliminate 542,000 jobs.
In dollar terms, the industries that would account for the largest book minimum tax liabilities are manufacturing, at $73.2 billion, followed by finance, insurance, and management at $46.9 billion.
While exempting accelerated depreciation from the book minimum tax would reduce some of the economic harm of the tax, there remain many unresolved problems within the design and structure of the tax that make it a poorly chosen revenue option.
The Inflation Reduction Act may be smaller than the proposed Build Back Better legislation from 2021, but both sets of legislation propose a reintroduced corporate alternative minimum tax (AMT). The 30-year experience with a corporate AMT shows it is not a good solution.
Over the course of the last year, it has become clear that Democratic lawmakers want to change U.S. tax rules for large companies. However, as proposals have been debated in recent months, there are have been clear divides between U.S. proposals and the global minimum tax rules.
Academic research indicates foreign direct investment (FDI) is highly responsive to the corporate effective tax rate (ETRs); that is, the tax rate after accounting for all deduction and credits available to corporations.
While the bulk of the proposed tax increases and spending programs remain under debate, Democratic lawmakers have reportedly agreed on prescription drug pricing provisions as a starting point for a revived Build Back Better package.
The Biden administration has been supportive of the negotiations, but the changes should be reviewed in the context of recent policy changes in the U.S. and elsewhere, the general landscape of business taxation in the U.S., and potential challenges and risks arising from the global tax deal.
President Biden’s budget proposes several new tax increases on high-income individuals and businesses, which combined with the Build Back Better plan would give the U.S. the highest top tax rates on individual and corporate income in the developed world.