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Corporate Tax Rate Hike Becoming Focal Point of Biden Infrastructure Plan; How Would It Affect Small Businesses?

  • President Joe Biden proposing to increase corporate tax rate from 21 percent to 28 percent to fund an approximately $2 trillion infrastructure proposal
  • Several business groups have proposed this strategy, with one saying that a disproportionate number of C corporations have fewer than 20 employees
  • Other tax reforms could potentially impact pass-through entities like sole proprietorships, partnerships, LLCs, and S corporations

Summary by Dirk Langeveld

A debate over the corporate tax rate is becoming a key issue in the debate over President Joe Biden’s approximately $2 trillion infrastructure proposal. While Biden has proposed raising this tax rate and making over tax reforms to have large corporations contribute more to public improvements, the changes could also have an impact on smaller companies as well.

Biden has called for raising the corporate tax rate from 21 percent to 28 percent, a partial rollback of a reduction in the tax rate approved in 2017. In the Tax Cuts and Jobs Act, the corporate tax rate was lowered from 35 percent to its current level.

Biden said Monday that there is “no evidence” that increasing the corporate tax rate by seven points will drive businesses to leave the United States. He also said there are more than 50 Fortune 500 companies that have not paid any taxes in the past three years, and that infrastructure improvements are necessary for the U.S. to remain competitive on the global stage.

“Everybody around the world is investing billions and billions of dollars in infrastructure, and we’re going to do it here,” said Biden.

Several business groups have expressed wariness about increasing the corporate tax rate. The National Federation of Independent Business said it would withhold comment until Congress crafts legislation based on Biden’s proposal, but that it would “remain steadfast in opposing any tax hikes that could hurt the efforts of small businesses to keep their doors open and their employees on payroll.” The U.S. Chamber of Commerce agreed that there is a need for infrastructure improvements in the U.S., but called Biden’s proposal “dangerously misguided” and suggested that the plan would slow economic recovery and make the nation less competitive.

The Small Business & Entrepreneurship Council cautioned that while raising taxes on large companies might be a popular appeal, an increase in the corporate tax rate would disproportionately affect smaller companies since nearly 85 percent of C corporations have fewer than 20 employees. The organization also voiced the concern that higher taxes on large corporations could ultimately affect smaller subcontractors and suppliers.

Conversely, the group Small Business For America’s Future applauded both the infrastructure plan and its proposed method of funding. The group previously opposed the Tax Cuts and Jobs Act, describing it as “pandering to larger business under the guise of economic growth and job creation,” and said increasing the corporate tax rate to 28 percent would amount to a “right sizing.”

“By providing the support they need to grow after COVID-19 and leveling the playing field on corporate taxes, the American Jobs Plan will help small businesses strengthen the long-term competitiveness of our  economy,” the group said in a statement.

Treasury Secretary Janet Yellen recently criticized international competition over corporate tax rates as a “race to the bottom,” and said the administration is working with G-20 nations to establish a minimum corporate tax rate. She said such a standard would ensure a more level playing field and inspire more growth and innovation among companies.

The Biden administration is also looking to other tax reforms to raise taxes on larger corporations or discourage offshoring. These have included doubling the offshore profit tax rate to 21 percent, a 10 percent offshoring surtax, and a minimum tax of 15 percent on earnings to prevent companies from using various credits and deductions to whittle down their taxable income.

Some of these proposals have the potential to affect pass-through entities such as sole proprietorships, partnerships, limited liability companies, and S corporations. These include resetting the top individual tax bracket from 37 percent to 39.6 percent for individuals with incomes above $400,000 and phasing out a popular business income deduction allowing certain businesses to deduct up to 20 percent of qualified business income.

Republicans have criticized Biden’s plan, saying it could jeopardize the U.S. economic recovery and make the nation a less favorable place for companies to start up. GOP lawmakers have said they could support smaller infrastructure proposals, but that they would oppose any changes to the 2017 tax cuts.

If the corporate tax rate is unchanged, Congress could potentially authorize more borrowing or raising other levies, such as the gasoline tax. Some Democrats have signaled support for these alternatives.

Senator Joe Manchin of West Virginia said he would not support the proposal as it currently stands, creating further complications for Democrats as a “no” vote from Manchin would sink any attempt to pass an infrastructure bill by reconciliation. Manchin said he supports some tax reforms and raising the corporate tax rate to 25 percent, describing this as the global average, and suggested that some other Democratic lawmakers are also wary of Biden’s current proposal.

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