The proposed increase to the corporate tax rate in President Joe Biden’s landmark infrastructure plan will not lead to a significant reduction in business investment, according to a new study from the Wharton School of the University of Pennsylvania.
Of great interest to Wall Street is Biden’s plan to raise the corporate tax rate from 21% to 28%, which would amount to a partial reversal of former President Donald Trump’s 2017 tax cuts.
Wharton estimates that raising the corporate rate to 28% would generate an additional $ 891.6 billion from 2022 to 2031 and, perhaps surprisingly, have little impact on business investment in the short term.
The school explained that this is because corporations with significant capital investments may choose to defer a tax incentive known as additional depreciation until years when the Biden increases can take effect.
Bonus depreciation allows companies to immediately deduct a large portion of the purchase price of certain assets, such as capital goods, rather than reducing their value over several years. Trump’s 2017 tax cuts doubled the additional depreciation deduction to 100% from 50% for qualifying property.
“The increase in the statutory corporate tax rate is expected to increase corporate investment in the short term,” the Wharton researchers wrote. “With the current law accelerated depreciation regime, the effective marginal tax rates on business investment are low regardless of the overall rate. As a result, the increase in the corporate tax rate does not significantly affect the normal return on investment. , but taxes the income and income of the existing capital “.
Neither the White House nor the Treasury Department immediately responded to CNBC’s request for comment.
However, Wharton found that the positive or insignificant impact of an increase in corporate rates would be offset if Congress passes the American Job Plan’s minimum tax on countable income, reducing the value of depreciation deductions.
The infrastructure plan marks Biden’s first in-depth tax proposal since taking office earlier this year. The gigantic plan is expected to undergo significant changes as it progresses through Congress, where Republicans are united in their opposition to the tax increases.
The Democrats, if they choose to pursue the infrastructure plan through budget reconciliation, will need the near unanimous backing of their group to pass it without the support of the Republican Party. But even Democratic support remains in doubt after Sen. Joe Manchin, DW.Va., made it clear earlier this week that he doesn’t like raising the corporate rate to 28%.
Biden’s plan would reduce federal debt
The school’s latest research, released Wednesday morning, also found that the administration’s American Employment 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% in 2050 relative to current law.
“Initially, the federal debt will increase by 1.7 percent by 2031, as new expenditures in the [American Jobs Plan] exceeds new revenue raised, “the researchers wrote.” After AJP’s new spending ends in 2029, however, its tax increases persist; as a result, federal debt ends 6.4 percent lower by 2050, relative to the current law baseline. “
The relatively modest reduction in economic growth by 2050 is due in large part to the fact that infrastructure improvements will allow Americans to be more productive in the years to come, the school said.
Repairing transportation infrastructure, for example, can help boost long-term productivity if American workers spend less time stuck in traffic or traveling around a bridge in distress.
“Public investments include new spending on transit infrastructure, research and development, and domestic manufacturing supply chains,” the researchers wrote. “These are seen as investments in ‘public capital’ that improve 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 corporate accounting earnings, an increase in the tax rate on foreign earnings, and the elimination of tax benefits. for fossil fuels.