Debate over who actually pays corporate tax continues

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House Democrats have released their plan to raise $ 2.1 trillion in taxes to partially offset the cost of their $ 3.5 trillion “human infrastructure” plan.

As expected, the plan increases the corporate tax rate. The new rate would be 26.5% instead of the current rate of 21%. This is less than the 28% rate favored by President Biden but still below the 35% rate that prevailed in 2017.

The impetus behind the 21% rate was to make the United States competitive with the rest of the world. American companies were fleeing the country through “reversals” or mergers with a foreign company. In both cases, the company “emigrated” taking its head office, jobs and other functions elsewhere.

The lower rate also brought money back to the United States that had been hidden abroad. The tax code allowed overseas profits not to be taxed by the United States unless and until they are repatriated. The 35% tax was a huge reason for leaving money overseas. At 21%, repatriation has become much more attractive.

Eventually to remove the 26.5% rate as a renewed temptation, the minimum tax on foreign income would drop from 10.5% to 16.6%.

There will be the usual debate about who actually pays corporate taxes. Companies are intermediary entities. Taxes are borne by a combination of customers with higher prices, workers with lower wages, and shareholders with lower profits. To the extent that customers and workers pay, it flies in the face of the promise that no one earning less than $ 400,000 a year will be affected by tax increases.

The maximum capital gains tax rate would be reduced from 20% to 25%. This is much less than the 39.6% rate proposed by President Biden.

Personal income tax will increase by increasing the maximum rate from 37% to 39.6%. This is also a return to pre-2017 rates. The lower rate in 2017 was designed to compensate for the loss of full deductibility for itemized deductions such as state and local taxes.

To the dismay of lawmakers where state and local taxes are a big deal, the so-called “SALT” deduction has not been reinstated. With the thinnest of the Democratic majorities, it will be interesting to see how this is resolved.

An additional 3% surtax will apply to individuals with income over $ 5 million. It was not part of Biden’s proposal.

While legislation targets income, it hardly targets wealth. There is no wealth tax. There is no tax on the growth of assets until the assets are sold. There is no change in the increase in the death cost base.

So billionaires like Warren Buffett and Jeff Bezos can pay themselves tiny salaries and see the value of their shares skyrocket tax-free. On death, there will be no capital gains tax payable.

The big wealth change was to reduce the inheritance tax exemption from around $ 12 million per person to $ 6 million per person now rather than in 2025.

Jeffrey Scharf is the founder of Act Two Investors LLC, a registered investment advisor. Contact him at [email protected]


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