Biden Couldn't Care Less About the Global Competitiveness of American Companies

Johns Hopkins economist Steve Hanke observes:

The newest Joe Biden whammy will increase the Gliti tax. That’s the tax on income earned abroad by US-controlled foreign corporations. This is just more evidence that Biden could care less about the global competitiveness of American companies.

From The Wall Street Journal editorial board:

As the debate begins over President Biden’s corporate tax increases, the temptation will be to focus on the headline tax rates. Those rates are bad enough, but worse lurks in the details. For one important example, dive into Mr. Biden’s plan for taxing U.S. companies’ global profits.

We’re talking about the tax on global intangible low-tax income, known as Gilti, which was created by the 2017 tax reform. American multinationals were previously charged the full U.S. corporate tax rate on their global profits, but only when they repatriated their foreign earnings. That created a strong incentive to park foreign profits overseas. Gilti taxes many foreign profits as they arise, but at half the top domestic rate. That less punitive approach allowed more companies to return overseas cash to the U.S.

Gilti was flawed from the start and needs fine-tuning, but Mr. Biden would make it worse in every respect. Start with the rate. The 2017 tax law set the statutory Gilti rate at half the regular corporate rate, so Gilti now is 10.5%. Mr. Biden would increase that to 21%, three-quarters of the 28% rate he proposes for companies overall.

That’s the statutory rate, though, and the effective rate companies actually pay is higher. This is because Gilti embedded double taxation in the tax code. Before the 2017 reform, companies could claim a credit of 100% of foreign tax paid against their U.S. tax bill, and also could carry losses forward or back. Gilti allows a credit of only 80% of foreign taxes, with no carry-forwards or carry-backs.

This means today’s effective Gilti rate is at least 13.125%, so any U.S. company paying less than that percentage of profits in foreign taxes will owe Treasury a Gilti payment. Raising the statutory rate to 21% increases that effective rate to 26.25%. This new Biden effective minimum tax would be higher than the statutory tax rates in most countries even in Western Europe, and that’s before those countries apply deductions and exemptions.

The Biden plan would further increase the effective Gilti rate by expanding the tax base on which it’s paid. Gilti now exempts the first 10% of a company’s returns on tangible foreign investments such as factories. Congress created this exemption because Gilti was supposed to apply only to big tech and pharma companies and their ilk, which allegedly gamed global tax rules to book the profits from patents in low-tax jurisdictions.

The Biden Administration wants to eliminate this exemption on the theory that it “rewards U.S. multinational corporations that shift profits and jobs overseas.” But the companies operating on thinner profit margins that benefit most from this exemption often have invested abroad to better serve local customers or due to labor costs or other factors. Bumping up their Gilti bill won’t encourage them to re-shore jobs and would limit the investments they are profitably able to make.

-RW