Senate Democrats Lay Plans for Higher Corporate Taxes

By Richard Rubin

WASHINGTON -- Democrats in Congress began building the policy case for sharp corporate-tax increases, arguing that Republicans went too far with their 2017 tax cuts.

Sen. Ron Wyden (D., Ore.), chairman of the Senate Finance Committee, said he and Sens. Sherrod Brown (D., Ohio) and Mark Warner (D., Va.) will soon release a more detailed framework for how multinational corporations should be taxed.

Sen. Bernie Sanders of Vermont, the Budget Committee chairman, released a plan Thursday that would raise $1 trillion over a decade. Sen. Elizabeth Warren (D., Mass.) said she is writing legislation to impose a minimum tax on profitable companies. Versions of some of those ideas are expected to appear in the tax-and-spending agenda that President Biden will unveil next week, and Congress is poised to act on them this year to help pay for infrastructure spending.

In all, Democrats are planning significant reversals of the 2017 tax law signed by then-President Donald Trump, though they aren't calling for returning to the previous status quo. They are particularly eyeing features of the law that they say give companies incentives to move activity outside the U.S.

"There's a lot of clarity today on some of these areas where the Trump law sold out the workers and in fact made us less competitive in the world," Mr. Wyden said as he concluded a hearing.

There are countervailing incentives in the law, and it is far from clear that companies have actually moved production outside the U.S. for tax reasons in the past three years. Some companies have brought intellectual property to the U.S., and corporate choices often have nontax purposes.

If Democrats can maneuver their changes through Congress using their slim majorities, U.S.-based companies would likely pay more on their overseas operations and on their domestic profits.

Republicans, pointing to wage growth and low unemployment before the coronavirus pandemic hit, say their tax law contributed to that growth.

"Do we really think that it's all just a big coincidence?" said Sen. Pat Toomey (R., Pa.)

The promised gain in business investment was, however, modest in the law's early years.

"It's no surprise that the investment boom that Republicans talked about turned out to be more of an investment whisper," Mr. Wyden said.

Before 2017, the U.S. had the highest statutory corporate tax rate among major economies at 35% plus state taxes, and there was a bipartisan consensus for lowering that. In addition, the prior international tax system encouraged companies to book profits abroad and leave them there.

The 2017 law lowered that rate to 21% and rewrote the international tax rules. Now, companies operating in low-tax foreign jurisdictions must pay a minimum tax to the U.S.

Democrats contend that the structure of that minimum tax encourages U.S. companies to invest abroad instead of at home. Companies calculate their tangible foreign property -- including factories -- and can exempt an amount equal to 10% from their minimum tax calculations.

Sen. Rob Portman (R., Ohio), who helped write the international tax provisions in 2017, said companies operate abroad to serve foreign markets. He said the 10% exemption was designed to help them compete with foreign companies and to focus the minimum tax on the kinds of profits from intangible assets -- patents, trademarks and technology -- that are easier to shift across borders into low-tax countries.

Currently, that minimum tax is calculated on a world-wide basis, so companies look at their overall foreign tax rates. Democrats, including Mr. Biden, have called for a country-by-country calculation.

The current rules let companies be like a "master distiller," blending profits from operations in high-tax countries with profits in tax havens, Kimberly Clausing, deputy assistant secretary for tax analysis at the Treasury Department, said during Thursday's hearing. That, she said, creates a general bias toward foreign profits over higher-taxed domestic profits.

The share of U.S. companies' profits booked in low-tax jurisdictions such as Singapore, Bermuda and the Cayman Islands was little changed between 2017 and 2018, according to a recent Joint Committee on Taxation analysis. In her testimony, Ms. Clausing said this lack of change suggested that the 2017 law changed little about how companies use low-tax jurisdictions.

Ms. Clausing offered a different version of the competitiveness argument, contending that it isn't just about helping U.S.-based companies compete with foreign companies. Instead, previewing Mr. Biden's arguments for his agenda, she said that improving U.S. infrastructure and education are part of what can help U.S. workers and companies compete.

Ms. Clausing also argued for raising the corporate tax rate and imposing tougher minimum taxes. She said that countries can work together to prevent a "race to the bottom" in which countries compete with each other to offer the lowest tax rates. Mr. Biden calls for a 28% tax rate, though moderate Democrats may back a smaller increase.

If the U.S. went back to 28%, it would once again have the highest corporate tax rate among major economies after including state taxes, said Pam Olson, who was the top Treasury Department tax official under President George W. Bush.

"That's a place that I don't think we want to occupy," she said.

Write to Richard Rubin at [e-mail]

(END) Dow Jones Newswires

03-25-21 1453ET