A 28% Tax Rate Will Cost Companies, but Not Equally
Tax bills would rise most for U.S.-focused firms that benefited more from 2017 tax cuts, offsetting some gains from stimulus spending
Corporations had ample warning—an entire presidential campaign—that tax increases were coming. But that doesn’t take the sting out of President Biden’s proposal to raise the corporate tax rate to 28% from 21%.
A tax increase, which would take effect as early as January 2022, would cut into corporate profits as the economy recovers, and the Biden plan could reduce the earnings of companies in the S&P 500 by at least 10%, said accounting analyst Dave Zion of the Zion Research Group.
“That’s a big drop in earnings and some companies get hit harder than others,” Mr. Zion said. Those with a high proportion of domestic earnings are directly affected by the rate increase while multinationals are likely to focus more on the changes to the minimum tax on foreign income.
Stock prices already assume some kind of an increase, Mr. Zion said. Republican lawmakers have signaled they won’t support an increase and resistance from moderate Democrats might make a hike to a 25% rate more realistic than 28%, Washington policy analysts say. The U.S. corporate tax rate was 35% before the 2017 tax overhaul. Many companies pay a far lower effective rate because of various deductions and credits.
“There’s no magic behind 28%,” James Lucier, a policy analyst with Capital Alpha Partners. “It is not a number that has any significance, it’s just a way to telegraph that the corporate rate needs to be higher.”
Critics warn that raising the tax rate would hurt U.S. companies’ ability to compete globally, a core driving idea behind 2017’s corporate rate cut, and would likely slow the economy’s pandemic rebound. The rate increase, when combined with state income taxes, would push the U.S. back toward the top of the list of statutory tax rates among major economies—potentially weighing on corporate profits, share prices and Americans’ investment and retirement-savings portfolios.
“President Biden is leading America in a race to the bottom of growth and productivity,” said Rep. Kevin Brady of Texas, the top Republican on the House Ways and Means Committee. “This is sabotaging the recovery.”
Supporters say the tax increase cannot be looked at in isolation. Domestic companies and American workers stand to benefit from the Biden administration’s proposal to spend more than $2 trillion on infrastructure and other improvements, said Matt Gardner, a senior fellow at the progressive Institute on Taxation and Economic Policy.
“I don’t think you can claim with a straight face that these provisions are going to kill jobs without simultaneously thinking about what you’re building with these corporate tax revenues,” he said.
Retailers with heavily domestic income would ordinarily be likely to feel a tax rate rise the most, but they’ve already been hit hard by the pandemic as well as the broader rise of e-commerce.
“In theory, this will be bad for them, but everything’s already been bad for them,” said Stefanie Miller, fiscal-policy analyst for FiscalNote Markets. “They were going bankrupt before the pandemic.”
Whether a higher tax rate affects U.S. investment depends on more than the rate itself, said John Gimigliano, head of tax legislative services at accounting firm KPMG and a former Republican aide on the House Ways and Means Committee.
“There are so many moving pieces of the Biden proposal it’s not as simple as saying a higher tax rate in the U.S. by definition means less capital invested in the U.S.,” Mr. Gimigliano said. “For purely domestic companies, it’s more likely that a higher corporate rate reduces after-tax returns, unless offset by some other specific domestic tax incentive.”
Still, per-share earnings for the S&P 500 rose 3.8% in the fourth quarter—significantly better than analysts expected just a few weeks earlier, and results are expected to continue climbing rapidly during 2021, according to data collected by Refinitiv. And companies hardest-hit by the pandemic won’t be affected immediately by any tax increase, because businesses pay taxes only when they have profits. Companies can also carry forward their losses to offset future taxes.
Supporters of the tax increases, including Mr. Biden, say that they won’t cool the economy.
“For many, many Americans we have a long ways to go in the recovery, but corporate profits right now are not a place where there is concern,” said David Kamin, deputy director of the White House National Economic Council.
A higher tax rate would cost some companies more than others—essentially, the same firms that benefited most from 2017’s corporate-rate cut. That includes utilities, regional banks, many retailers and other companies that sell goods and services primarily in the U.S.
Large U.S. multinational companies paid an 8.8% tax rate on their world-wide income in 2018, down from 15.8% in 2017, according to data released recently by the congressional Joint Committee on Taxation.
AT&T Inc., where U.S. taxes made up about two-thirds of the company’s total tax expense in 2019, reported an effective tax rate of 18.9% in 2019, the year before the pandemic hit, almost half the 32.7% it reported in 2016. Defense contractor Lockheed Martin Corp. reported an effective income-tax rate of 14% in 2019, down from 23.2% in 2016. The tax rate at CVS Health Corp. , which is also heavily domestic, declined to 26.3% from 38.4%.
Tax-cut talks leading up to the 2017 rate reduction had included a 25% rate, before demands from then-President Donald Trump pushed it down, Ms. Miller of FiscalNote said. “Companies have shown they are able to exist in a world where the corporate rate was much higher,” she said.
The Biden plan also raises taxes on U.S. companies’ foreign income. It would create a 15% minimum tax on companies’ income as reported on financial statements—partly a response to companies that report profits to investors but use legal credits and deductions to reduce their tax bills.
That tax is likely to be scaled-back from the version Mr. Biden campaigned on; it would cover only about 200 companies and avoid clawing back the benefits of many tax credits, including those for corporate research.
For most big companies, a tax-rate rise of a few percentage points is unlikely to be dramatic. One senior tax executive at a major U.S. manufacturer said his company is more concerned about changes to U.S. taxes on international income.
“It’s far down the list in my mind—it’s costly to the company, but it’s just an obvious thing,” the senior tax executive said. Companies “won’t necessarily like it, because it decreases the bottom line,” this person added. “Other than that there isn’t a lot of anguish about it.”