The proposed increase in the corporate tax rate in President Joe Biden’s historic infrastructure plan will not significantly reduce business investment, according to a new study from the University of Pennsylvania’s Wharton School.
Of utmost importance to Wall Street is Biden’s plan to increase the corporate tax rate from 21% to 28%, which would amount to a partial rollback of former President Donald Trump’s 2017 tax cuts.
Wharton estimates that raising the corporate rate to 28% between 2022 and 2031 would bring in an additional $ 891.6 billion and, perhaps surprisingly, have little impact on business investment in the short term.
The school explained that this is because companies with significant capital investment can choose to defer a tax break, known as bonus write-off, until years when the Biden increases can take effect.
With bonus depreciation, companies can immediately deduct a large portion of the purchase price of certain assets, such as capital goods, instead of decreasing their value over several years. Trump’s tax cuts in 2017 doubled the bonus write-off deduction to 100% from 50% for qualified real estate.
“Raising the statutory corporate tax rate is expected to increase business investment in the short term,” the Wharton researchers wrote. Under the current legal regime of accelerated depreciation, the marginal effective tax rates on business investment are low regardless of the nominal rate. As a result, raising the corporate tax rate does not meaningfully affect the normal return on investment, but tax rents and returns. from existing capital. “
Neither the White House nor the Treasury Department immediately responded to CNBC’s request for comment.
Still, Wharton found that the negligible to positive impact of a corporate rate increase would be offset if Congress approved the American Job Plan’s minimum tax on book revenue, which would lower the value of the deductions.
The infrastructure plan is Biden’s first in-depth tax proposal since taking office earlier this year. The giant plan is expected to undergo significant changes as it moves through Congress, where Republicans are united in their opposition to the tax increases.
Democrats, if they choose to continue the infrastructure plan through budget reconciliation, will need almost unanimous support from their caucus to get through it without support from the GOP. But even Democratic support remains in question after Senator Joe Manchin, DW.Va., made it clear earlier this week that he is not a fan of raising the corporate rate to 28%.
The Biden Plan would reduce federal debt
The school’s latest survey, released Wednesday morning, also found that the government’s American Jobs Plan will generate $ 2.1 trillion in tax revenue and spend $ 2.7 trillion between 2021 and 2030.
By 2050, proposed tax increases and repairs to US infrastructure will reduce US debt by 6.4% and GDP by 0.8% by 2050 against current legislation.
Initially, federal debt will increase by 1.7 percent by 2031, as new spending increases [American Jobs Plan] exceeds new revenues, “the researchers wrote. However, after the AJP’s new spending ends in 2029, the tax increases will persist – as a result, federal debt will be 6.4 percent below the current baseline of the law by 2050. “
The relatively modest decline in economic growth by 2050 is largely due to the fact that improvements in infrastructure will allow Americans to be more productive in the coming years, the school said.
For example, repairing transportation infrastructure can help increase long-term productivity if U.S. workers spend less time in traffic or commuting around an endangered bridge.
“Government investment includes new spending on transit infrastructure, research and development, and domestic production chains,” the researchers wrote. “These are seen as investments in ‘public capital’ that increase the productivity of private capital and labor.”
On the revenue side, the Wharton School found that the American Jobs Plan would be funded by a combined increase in the corporate tax rate, a minimum tax on the company’s book profits, an increase in the tax rate on foreign profits, and the elimination of tax breaks. for fossil fuels.