By Richard Rubin
WASHINGTON -- On paper, the 21% U.S. corporate tax rate was a
permanent cornerstone of the 2017 tax law, a boon to business
without the expiration date attached to other provisions. In
reality, that low rate is only as solid as Republicans' ability to
wield power in Washington.
That Republican bulwark could vanish next month, taking the
corporate rate cut with it and upending the planning companies had
done around the 21% rate. Democrats, with a chance to control the
House, Senate and White House for the first time in a decade, want
to raise the rate to 28%. President Trump says he would lower it to
20% in a second term.
The tax-rate increase, plus other policies proposed by
Democratic presidential candidate Joe Biden, would lower profits
and raise costs of operating abroad. The Biden proposal, when
combined with state taxes, would push the U.S. back toward the high
end of industrialized countries' corporate rates, after a few years
in the middle of the pack.
As the election nears, companies are closely examining Mr.
Biden's plans and modeling higher tax rates, said Rohit Kumar of
accounting firm PwC LLP.
"Only in the last couple of months have companies started
seriously thinking about what might the world look like if the
Democrats sweep," said Mr. Kumar, a former aide to Senate Majority
Leader Mitch McConnell (R., Ky.).
The possibility has always existed, but Democrats' polling leads
moved those considerations from back-burner to front of mind.
"It was always a matter of when and not so much if," said Albert
Liguori, managing director at consulting firm Alvarez & Marsal
Taxand. "Every time we make plans, we make contingency plans."
Mr. Trump argues that companies will flee the U.S. if their
taxes rise. Economists say the tax increase, in isolation, would be
a drag on economic growth, but they disagree over the size of the
effect and how the burden would be distributed among shareholders,
workers and consumers. Government estimates say the bulk of the
cost falls on owners of capital, including foreigners, retirement
plans and endowments.
Democrats and some Wall Street analysts say Mr. Biden's tax
increases, viewed in his larger agenda, won't suppress growth. That
is because the money would be spent on education, health care,
child care and infrastructure -- boosting worker productivity and
economic growth in the long run.
"You could raise a lot of money to be able to invest in things
that can make your life easier, make you change your standard of
living," Mr. Biden said during his ABC News town hall Thursday.
The 2017 reduction in the corporate rate to 21% from 35% was the
centerpiece of a plan that also lowered taxes for noncorporate
businesses, estates and individuals. The business cuts did
relatively little to boost investment, and raising the rate
wouldn't have a big impact either, said Owen Zidar, a Princeton
University economics professor.
Higher corporate taxes would make it harder for U.S. companies
to compete with rivals based in countries with lower taxes, said
James Hines, a University of Michigan economics professor. He said
the result could mean lower wages and higher prices for Americans,
though Congress could mitigate those effects with targeted
incentives to attract manufacturing deemed most likely to shift
"If you want progressive taxes, which I do, a corporate tax is a
bad way to do that," he said. "The corporate tax is a clunky, not
very effective instrument for imposing taxes on the rich."
Companies have incorporated the 21% rate into their planning and
would have to adjust as Democratic plans move through Congress.
Some investments that made sense at a 21% rate wouldn't yield
after-tax profits at higher rates or with steeper taxes on foreign
"As we look at investment choices, we're using the current lower
rate," Jacqueline Crouse, vice president for tax at biotechnology
company Amgen Inc., said at a February conference. She said Amgen
considered the rate when it decided to build a facility in Rhode
Island. A company representative didn't comment when asked if
planning had changed.
Kevin Conway, senior vice president for tax at AmerisourceBergen
Corp., a pharmaceutical wholesaler, said at the same conference
that the company uses current rates in long-range planning.
"I've made presentations to the board and talked about the
potential for rate increases, and their response is, we'll see," he
To partially offset the cost of the rate cut, Republicans
limited deductions for business interest, curbed breaks for life
insurers and scheduled tighter rules for deducting research
expenses to begin in 2022. Those changes to broaden the tax base
become more salient if the rate rises, and a 28% rate could leave
some companies worse off than they were under the 35% rate.
Life-insurance companies are already warning about the potential
effect on their customers.
The corporate rate is the biggest revenue source in the Biden
plan, generating more than $1 trillion of the $2.8 trillion net tax
increase, according to the conservative American Enterprise
Mr. Biden also proposes tax increases on the real-estate
industry and breaks for renewable energy. He would impose a minimum
tax on financial-statement income of large companies and higher
taxes on U.S. companies' foreign earnings. Final details wouldn't
be set until next year in Congress and effective dates for new
policies will be negotiated.
"Until something new is in place, it's really hard to plan,"
said Renato Zanichelli of accounting firm Grant Thornton LLP.
With narrower gaps between countries' tax rates and more
coordination to combat tax havens, companies will focus more on
rules than rates, said Mihir Desai, a Harvard Business School
"Headline rates matter less and less than ever before," he said.
"It's all in the nitty-gritty. It's all in the treatment of losses.
It's all in the depreciation. That's where the battle gets
Write to Richard Rubin at email@example.com
(END) Dow Jones Newswires
October 18, 2020 09:14 ET (13:14 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.