US corporate income to become the highest in the industrialised world under Biden’s tax plan. Will the US become less competitive? Prepare for a chart storm.
One of the promises made by Donald Trump before being elected President in 2016 was that his administration would lower the corporate tax. Shortly after winning the election, it did.
The idea behind Trump’s decision was that corporate America would use the lower rate and repatriate much of the profits held abroad. In part, they did, but not to the extent the administration hoped.
Fast forward more than four years, and the new administration in Washington, led by Biden’s Democrats, plans to reverse the corporate tax cut. It is only one of the many Trump decisions being reversed since Biden took office. That is especially interesting since corporate tax rates declined globally during the past decades.
United States Going Against the Trend
Most developed economies have reduced their headline corporate-income-tax rate in the last couple of decades. For instance, even France dropped it below 30%, while Britain has steadily reduced it all the way to below 20% from 30% at the start of the 2000s.
But for America, the calculation is a bit more complicated than that. On the one hand, Biden’s proposal to raise the corporate tax refers to an increase from the current 21% to 28%. Only Australia, Brazil and India will have a higher rate.
In America, the 28% rate combined with the average state corporate tax rate, would imply an actual 32.4%.
In the end, for corporations, what matters is the bottom line – how much is there to pay at the end of the year? As such, it is a question of semantics, as the burden on corporate America is much higher than just 28%. If we add the marginal tax rate on capital gains and dividends and the state tax rates on capital gains and dividends, the burden rises from 47.3% currently to 65.1%.
Will corporate America become less competitive? Perhaps. If we look at the S&P500 index performance after previous increases in the corporate tax rate, we see for the most part that the market took a hit.