BetterUSinfrastructure, but atwhatcost? I


n March, US president Joe Biden announced to great fanfare a $2tn upgrade of the country’s crum-

bling infrastructure. The business tax hikes he has proposed to pay for the improvements have been met with somewhat less enthusiasm. The gov- ernment wants to increase the 21% corporate rate to 28%, making the US’s combined federal-state tax rate the highest in the OECD. The coun-

try’s multinationals already face the unique burden of paying taxes — a not insubstantial 10.5% — on foreign earnings. Mr Biden wants to double those contributions to 21%. These two changes,which are accompanied

by a bevy of other reforms, have drawn the ire of corporate America. Experts note that Mr Biden has tabled policies that no country has tried to enforce before.“We are in newterritory in terms of taxing the richest Americans and biggest companies,” says Gary Hufbauer, non- resident senior fellow at the Peterson Institute for International Economics. Taken as a whole, economists believe the ‘Made in America Tax Plan’ is misguided and will be accompanied by a litany of unintended consequences.

Layerednegative incentives The changes purportedly aim to make the US more competitive and targetmultinational cor- porations (MNCs) by eliminating incentives to offshore operations. But the Tax Foundation, a think tank based in Washington DC, estimates that a 28% corporate rate would cut the coun- try’s long-term economic output by 0.8% and eliminate 159,000 jobs. A higher headline rate is also tipped to hit local businesses more than those operating overseas. “Domestic business doesn’t have access to loopholes through the likes of international profit shifting. So, they would be the ones to suffer most — especially the profitable smaller andmedium-sized ones,”



says Dame DeAnne Julius, a senior adviser to ChathamHouse. What could help level the playing field, she

notes, is doubling the levy imposed on MNCs’ overseas profits. The global intangible low- taxed income, fittingly known by the abbrevia- tion Gilti, was introduced in 2017 and aims to stop firms booking profits and shifting jobs to low-tax countries. Plans to lift the surcharge to 21%has helped reignite the OECD’s stalled pro- ject to set a global minimumcorporate tax rate (see page 38), but international agreement is not guaranteed and observers believe Mr Biden is risking much by going it alone. Mr Hufbauer, a former Treasury official,

says “makingMNCs with overseas production a villain is misplaced”, pointing to research showing they create more US jobs and invest more than their homebody counterparts. Daniel Bunn, the Tax Foundation’s vice presi- dent of global projects, argues the reforms col- lectively create barriers to MNC investment at home. “The tax wedge on that investment is going to be larger, both because of the tax on the foreign earnings and the higher domestic rate,” he says. “That is layered negative incen- tives on investment.”

Head-scratching reforms Contrary to successive US governments’ goal, many argue the reforms discourage reshoring. “If you can get a foreign rate of 21% and your domestic rate would be 28%, then maybe it makes sense to leave your stuff offshore and makenewinvestments overseas,” saysMrBunn. Some are also scratching their heads over the decision to abolish today’s 13.5% reduced rate for foreign income earned from intellectual property kept within the country. “It seems to me that the big incentive [was] to conduct research and development in the US, and license use of the patent or copyright abroad,” observes Mr Hufbauer. Another change that might backfire is the

crackdown on inversions — a deal structure whereby US firms redomicile by being acquired by small businesses in low-tax jurisdictions. Mr Hufbauer argues that raising hurdles to inver- sions encourages tech start-ups to move over- seas from the outset. “That effect would not be felt during the Biden administration, but I think the Apples, Googles and Facebooks of tomorrow, early in their life, would be advised by their accountants to consider setting up headquarters someplace else,” he says. However, others insist that America’s abun- June/July 2021

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