The proposed increase in the corporate tax rate in President Joe Biden’s landmark infrastructure plan will not significantly reduce corporate investment, according to a new study by the University of Pennsylvania’s Wharton School.
Of greatest interest to Wall Street is Biden’s plan to increase the corporate tax rate from 21% to 28%, which would amount to partially reversing former President Donald Trump’s 2017 tax cuts.
Wharton estimates that increasing corporate rates to 28% from 2022 to 2031 would generate an additional $ 891.6 billion and, possibly surprisingly, would have little impact on corporate investment in the short term.
The school said this is because companies with significant capital investments may postpone a tax incentive called bonus write-offs until years when the Biden increases could take effect.
The bonus write-off enables companies to save a large portion of the purchase price of certain assets, such as For example, capital goods should be deducted immediately instead of noting their value over several years. Trump’s tax cuts for 2017 doubled the bonus write-off deduction from 50% for qualifying properties to 100%.
“The increase in the statutory corporate tax rate is expected to increase corporate investment in the short term,” the Wharton researchers wrote. “Under the current accelerated depreciation regime, the marginal effective tax rates on corporate investments are low regardless of the key interest rate. As a result, an increase in the corporate tax rate does not have a material impact on the normal return on investment, but tax rents and returns on 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 rate hike on businesses would be offset if Congress approved the minimum tax on book income under the US job plan, which would reduce the value of depreciation allowances.
The infrastructure plan marks Biden’s first detailed tax proposal since taking office earlier this year. The mammoth plan is expected to see significant changes on its way through Congress, where Republicans agree in their opposition to the tax hike.
Democrats who choose to pursue the infrastructure plan via a budget vote will need almost unanimous support from their caucus to pass it without GOP support. But Democratic support also remains in question after Senator Joe Manchin, DW.Va., made it clear earlier this week that he’s not a fan of increasing the corporate rate to 28%.
Biden plan would reduce the federal debt
The school’s most recent study, released Wednesday morning, also found that the American government’s employment plan will generate $ 2.1 trillion in tax revenue and spend $ 2.7 trillion in spending between 2021 and 2030.
By 2050, the proposed tax increases and repairs to American infrastructure will reduce US debt by 6.4% and GDP by 0.8% in 2050 compared to current law.
“First of all, the federal debt will rise by 1.7 percent by 2031, because of new expenditures in the [American Jobs Plan] exceeds the new revenue generated, “the researchers wrote. However, after the AJP’s new editions end in 2029, their tax increases will persist. As a result, the federal debt will decrease by 6.4 percent by 2050 compared to the current legal basis. “
The relatively modest decline in economic growth through 2050 is in large part due to the fact that infrastructure improvements will allow Americans to be more productive in the years to come, the school said.
Repairing transportation infrastructures can, for example, help increase productivity in the long term if US workers spend less time in traffic or commuting around a vulnerable bridge.
“Public investments include new spending on transit infrastructure, research and development, and supply chains for domestic manufacturing,” 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 noted that the American employment plan would be funded through a combined corporate income tax increase, a minimum tax on corporate book income, an increase in the tax rate on foreign profits, and the elimination of tax breaks for fossil fuels.