Episode 84: Biden's Global Tax Proposal with Daniel Bunn 

Description:

Joe Biden promises to raise taxes. Today, with the Vice President of Global Projects at the Tax Foundation, Daniel Bunn, you will discover how a proposed global tax on corporations would impact economic growth.

Looking for more on Daniel Bunn?

Website: https://taxfoundation.org/staff/danie…

Twitter: https://twitter.com/danieldbunn

SHOW NOTES:

03:54 – Is The Current Global Corporate Tax Structure A “Race To The Bottom?”

06:08 – How Do Corporate Taxes Impact Investors And Small Business Owners?

09:07 – Will Corporations Return To Inversions?

10:28 – Is Biden Proposing Protectionism?

14:45 – How Will A Minimum Rate On Foreign Companies Operating In The U.S. Impact The Economy?

16:56 – Are The New Global Tax Plans Similar To State Plans?

19:04 – How Will Oil & Gas Be Impacted By Biden’s Tax Proposals?

Transcript
Announcer:
This is The WealthAbility® Show with Tom Wheelwright. Way more money, way less taxes.

 

Tom Wheelwright:

Welcome to the WealthAbility show, where we're always discovering how to make way more money and pay way less taxes. Hi, this is Tom Wheelwright, your host, founder and CEO of WealthAbility.

 

President Joe Biden is on the war path when it comes to corporate taxes right now. We'll get individual taxes later, I'm sure we'll get those in the next few months, but right now it's corporate taxes. There's this big question, are we in a race to the bottom? What's the impact of corporate taxes on global growth? What's the impact of taxes on US growth? What's the impact of corporate taxes on the average American? That's another big question we have.

 

We have … I'm very, very excited to have Daniel Bunn who's vice-president for global projects at the Tax Foundation, my favorite thinktank when it comes to taxes. Daniel, great to have you. You're welcome.

 

Daniel Bunn:

Thank you so much for having me. It's great to be here.

 

Tom Wheelwright:

Thank you. Tell us just a little bit about your background and yourself and why we should be listening?

 

Daniel Bunn:

Sure, absolutely. Tom, as you said, I'm vice president of global projects at the Tax Foundation. I work on all our international projects. A lot of those international projects have things connected to the US tax rules, whether those are cross border rules or domestic rate things. I've been with the Tax Foundation for a few years. Prior to that, I worked on Capitol Hill. I worked on the Senate side for a few different members, including Senator Mike Lee from Utah and Senator Tim Scott from South Carolina. I also got to work on the joint economic committee and. On the Hill, tax policy was a lot of fun especially when we got around to tax reform, there was a lot of exciting things going on.

 

Then since being at Tax Foundation, it's just been an exciting time since then, because there's been this global conversation, as I'm sure we'll get into, about tax reform. Now the president has a lot of things in mind that he would like to change and we'll see what actually gets enacted.

 

Tom Wheelwright:

Thank you. Thanks, Daniel. Let's start with this idea of a race to the bottom. Now we know that prior to 2018, we had a 35% corporate tax rate and that's, by the way, just to remind everybody, that's on top of the dividend rate which is up to 24% and on top of the state rate, which now New York's just raised theirs to 16%. We were at a serious disadvantage, clearly serious disadvantage. Plus, we don't have a added tax and the other countries do so I think that contributes to that disadvantage. There were a lot of inversions going on, meaning that people were relocating, legally relocating their headquarters so that they could take advantage of Ireland and other low tax rate countries. Plus we got this new, what we call guilty regime, which allows foreign money basically to be repatriated to the US at a fairly low tax rate. So as I understand it from looking at your materials on taxfoundation.org, about $1.6 trillion has been repatriated. We do know that that's been working to bring money back over. I know with my own clients that it's been working because we do pay attention to these things. So this whole idea of a race to the bottom, I don't think we're even close to the bottom. What do you think of all that, Daniel?

 

Daniel Bunn:

There's two things. One, I'm not sure what the bottom is. If the bottom is zero, I disagree completely that there's a race to the bottom. There's been a reduction, certainly in the US and around the world, of corporate tax rates over recent decades. The trends that we look at show that corporate tax rates, average corporate tax rates have settled in the mid to low 20s. So the US isn't so far out of line there, including state rates, but as you mentioned, you've got to think about dividend rates as well. But also, if the bottom is the mid-20s, then we're there. What's the issue?

 

But also, there's been this weird distinction that has arisen. It's not really weird, there's some motivations behind it between taxing certain types of corporate income versus other. A lot of countries has adopted these things called patent boxes that provide low rates on profits from intellectual property and software and things like that, and sometimes these rates are in the single digits. There's justifiable reasons for that. I'm not a huge fan of them, but they're [inaudible 00:05:02] justifiable reasons for those policies. But I really don't agree with this kind of general race to the bottom. I think corporate rates have stabilized in recent years in the low to mid-20s and I think that's fine. A lot of countries have changed the way their corporate tax base work, and we haven't seen a huge drop-off in corporate tax revenue. Certainly with the US reform the transition to the new system, there's going to be a drop-off in corporate revenue but I don't think that's going to be a longterm consequence.

 

Tom Wheelwright:

So basically, what I'm hearing is that there are really two things going on. One is broadening the base. In other words, what's taxable? Then the question is at what rate it's taxable? But the real question is why should the average person care? I mean, if you're talking about the entrepreneur or the investor, typically they've got pass through entities and so forth, why … isn't this just on rich people? I mean, that's kind of how it's being promoted by the Democrats. How does this affect the average person, and there will be?

 

Daniel Bunn:

I think that's a great question and this has been debated by economists for decades. This is the incidence question. When you tax something, where does the economic harm occur? We know that taxes are distortive, high marginal tax rates create dead weight loss, that's the way economists talk about it. The dead weight loss, who bears that burden? Is it rich shareholders, is it the executives of the corporation, or is it the workers? Generally speaking economists have kind of agreed to disagree in some senses and say maybe it's a 50-50 split. Maybe half the share is on workers, half the share is on shareholders.

Then there's the question of, well if that's the case, then why are we looking at corporate taxes in a context of the economic context we're in right now, where we want to get people back to work, we want the economy to reopen, and we want businesses to invest. Why high taxes now when we know at least some portion of the corporate tax is going to fall on workers?

In our model, our Tax Foundation macroeconomic model, we look at the effects of a tax hike from 21% to 28%. That tax hike alone, we know that's not the only thing in Joe Biden's plan, but that tax hike alone, that's going to impact 159,000 jobs and shave off a full percentage point from economic growth over the longterm, the level of GDP over the longterm. I think those are things that people are just ignoring at this moment.

 

Tom Wheelwright:

The other thing of course that we know is that most people have their savings in their 401k. Those 401ks are almost a hundred percent invested in the stock market, which is corporate taxes. So to me, it seems a little disingenuous to say, well, this doesn't affect … you know, it just affects the corporation when corporations aren't people, right? So either the shareholders pay the tax, the workers pay the tax, or the executives, like you say, the executives pay the tax. I don't think any of us would complain a whole lot if the executives making $20 million a year made a little bit of less. I think we'd be okay with that. The challenge is that they're making the decisions tends not to come off the top. That's another challenge of course, with hiking corporate tax rate is who really is making the decision?

Then let's talk about this next question, which when we had high corporate rates prior, we found a lot of companies, particularly high-tech companies or pharmaceutical companies, that would basically do these inversions which is effectively is a fancy name for saying, “We're just going to relocate our company overseas and have our headquarters be overseas even though we do business in the US.” Do you think that going to a 28% rate on top of the change to the guilty tax regime, which is this a tax on foreign earnings, do you think that's going to have an impact on that situation? Are we going to get corporations going back to doing inversions?

 

Daniel Bunn:

I think that would be the case if those were the only two things that were happening, hiking the corporate rate and increasing the guilty rate. The administration announced another policy that would hurt inbound companies, foreign companies that would be investing in the US, denial of deductions unless their country had a similar minimum tax. What this means, there is an effect not only on US companies when they're doing business abroad, a higher tax on their foreign earnings, but a higher tax on the earnings of foreign companies when they're doing business in the US. So if you are multinational and you have the US as part of your business plan, either because your customers are here or there's a manufacturing facility here for customers elsewhere, this plan is going to impact you whether you're a US company that has the US as part of your supply chain or whether you're a foreign company as part of the supply chain. I think it's going to be a real, real impact on businesses that would be otherwise thinking of doing business in the US.

 

Tom Wheelwright:

Do you think that's just going to impact higher prices or we just won't get them doing business in the US? I mean, is it bad to … I mean, we've had some talk, I mean really some action over the last several years, a little protectionism. Is this more, just more protectionism for the US?

 

Daniel Bunn:

I think that's a good name for it. Protectionism in the sense of … these aren't your old school capital controls. We're not saying if you invest in the US we're not going to let you get your money out of the US, but we are saying that if you have the US as part of your multinational supply chain, you're going to have a pretty big tax burden on doing business in the US. There's still free movement of capital but a pretty high tax burden on the investment in the U S. I don't think that you're going to get full on capital flight where people are going to avoid the US completely. We're still going to have pretty significant markets for people to sell into and things like that. But I think on the margin, if you're a company and you're thinking, “Oh, we need north America in our supply chain. Are we going to be in Canada, the US or Mexico?” The US is going to look pretty unattractive in that scenario.

 

Tom Wheelwright:

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Let's talk about this minimum tax, because I want to be really clear if we can … because this has been a very difficult thing for people to understand. There's really two different terms. One is a minimum tax rate and the other is a minimum tax. Part of the proposal, as I understand it from President Biden, is that there's a minimum tax on basically about 50 con companies, a minimum tax on companies that have financial income but don't have taxable income because of course, tax defines income, the tax code defines income differently than the accountants define income. I'm just going nuts over this idea that we're going to let the accountants — and I'm an accountant — we're going to let the accountants decide what our tax laws are going to be. That mixture doesn't sit well with me, but are we talking about a minimum … is it the minimum tax? I think what you're talking about though, is the minimum tax rate, right? So that every country that does business in the US, you're saying that what they want is they want to make sure they have a minimum tax rate right now, they're saying 15%. Right?

 

Daniel Bunn:

Well, so let's divide these things because I get muddled with them as well.

 

Tom Wheelwright:

Please.

 

Daniel Bunn:

Before we get into them, I mean, how many minimum taxes do you need? Let's just design the real tax the right way so you don't need these other minimums. All right, so there's the minimum tax on financial profits that you're talking about. They've talked about that as a 15% rate to essentially create a tax base that's, I mean, driven by timing differences. Like you talked about the difference between financial profits defined by the accountants and taxable profits defined by the IRS and the Congress, then the difference between those is often about timing, when you're able to account for profit for tax reasons or accounting reasons. Essentially this minimum tax, I don't think it's great, but it moves those over and gives you credits for one year or the other and essentially-

 

Tom Wheelwright:

This isn't new, right? We basically had corporate minimum tax for as long as I can remember and I can remember a very long time. We've had corporate minimum tax before and we've done it within the tax side, it seems like we don't really need to do it and compare it to financial accounting. So let's kind of toss that away because that's just a horrible idea. Let's talk about this minimum tax rate for the countries that are selling or doing business in the US.

 

Daniel Bunn:

Right. The Biden administration has proposed a 21% global minimum tax rate. So for US companies, if you're doing business abroad, they're going to calculate this on a country by country basis to make sure you're paying up to a 21% rate. If you're paying below that, let's say you're in Ireland and you're paying that 12 and a half percent rate, well the US is going to tax the difference between 21 and 12 and a half.

In fact, it's not just about US companies doing business abroad. I already mentioned that it's about foreign companies doing business here. The Biden administration is proposing that if another country doesn't have a similar global minimum tax, that if that … let's say a German company, let's say BMW is doing business in South Carolina, where I'm from, and Germany doesn't have a minimum tax on its companies doing business abroad, then the US would say that company in, BMW in South Carolina say, “Hey, we're going to exclude some deductions. We're going to wipe out some of your deductions. We're going to make sure that you are taxed more heavily than you otherwise would be unless Germany adopts this minimum tax.” The example breaks down a little bit because Germany does have a relatively high combined corporate rate, but that's kind of the example.

 

Tom Wheelwright:

Well, so, but Ireland, that's a really good example of Ireland.

 

Daniel Bunn:

Oh exactly [crosstalk 00:16:10].

 

Tom Wheelwright:

Because they have, they're traditionally a tax haven, 12 and a half percent. We have this famous case, or infamous case, if you will, with the EU trying to put extra tax on Apple that, their $14 billion assessment, because Apple will only pay two and a half percent rate and they're saying, “Well no, that's too low for the EU.” So there's this whole thing going on, but isn't this minimum tax, isn't that really the same effect that we have in the states where you're taxed in your home state, for example? Basically if you have two states with different tax rates, where you earn the income versus where you live, you're going to pay the higher of the two rates, right? How is this different than that?

 

Daniel Bunn:

That's a great question. Within the states, these, I think they're the throwback or throw out rules that you're talking about. It's not too different from that, except that, and this is something … within the states, we don't have trade barriers. We don't have the borders that you have to check your goods at the border and customs duties and all of those things. We're a really integrated market. That's a pretty powerful strength for the United States, for businesses operating within the United States.

When you're talking at the international level, you're talking about this minimum tax, this cross border minimum tax, in addition to other trade barriers, other customs duties, other registration and business location decisions that I think eventually puts multinationals at a disadvantage on the global scale relative to maybe at the end of the day, a multinational company says, “Who cares about doing business in all these different countries? I'm going to do business here and we're just going to contract out separately to these different countries.”

 

Tom Wheelwright:

Let me ask one final question that has nothing to do with global per se, but it's in this tax bill, this new bill, the infrastructure bill, and that is the proposed elimination of tax incentives for oil and gas. Now, historically oil and gas has received huge development incentives from a national defense, national security point of view that we want to be producing our oil, we don't want to be rely on Iraq and Iran and Saudi Arabia, et cetera, for oil and so we want to produce our own. In this bill, just like his … President Obama tried to do this for eight years, he tried to get rid of the oil and gas incentives. In this bill, this bill would get rid of the oil and gas incentives. Any thoughts on that? I have my own thoughts, but any thoughts on what that would do as far as our competitiveness goes with the rest of the world?

 

Daniel Bunn:

I think it would certainly increase the tax burden on doing oil and gas exploration and extraction here in the US. That's pretty clear. One thing with something like oil and gas, the natural resources sector, is those businesses kind of have to go where the resources are. So even though you're raising taxes on them here in the US, that doesn't mean that the resources aren't there still in the ground for them to extract. It's a competitiveness issue because we're not the only place in the world where you can get the oil out of the ground, but the resources are still there. What I think when I see this in the bill and I, or in the proposal, I think two things generally about the proposal is that while it seems, and I think President Biden would feel this way, that he's being very bold and very strong and proposing new and innovative policies or whatever and really pushing an agenda, is that he's kind of missing the point from a tax policy standpoint. There's wide disagreement on whether these things would actually be sellable in a US political environment.

Secretary Yellen speech the other day talked about the corporate tax in the context of a stable and sustainable tax base for the US. Corporate profits are volatile. Everybody knows this. Different business cycles, they're going to go up and down and all around and you're going to have run into sustainable revenue issues regardless of where you are in the world because corporate taxes are volatile. If they wanted a stable and sustainable revenue base, why not propose a federal value added tax? If you wanted really strong environmental effects or something like that, why not propose a carbon tax? To me, again, I think there's real political challenges there but they're trying to be bold in one sense and missing the point kind of completely. It's kind of surprising to me that they're talking about these things in the way that they are as if they're going to have the effects that they want, when in fact other tax tools would have those effects and lets, you know, they're kind of avoiding that kind of difficult conversation.

 

Tom Wheelwright:

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All right, well this has been a lot to get out there and to get on the table. I encourage everybody, watch this, listen to it over and over again because there's a lot in here to basically un-package.

Let me ask you one last question. We're very, our people are very practical, right? Our listeners, they're investors, they are business owners. What do you do? I mean, when you got this, and my issue with all these corporate tax proposals, this actually destabilizes our situation because no corporation believes that they can rely on whatever the tax system is, it's going to be the same from year to year to year to year. I think that's a, personally, I think that's an enormous challenge vis-a-vis the rest of the world because people invest in a country where the laws and the government is stable. If our laws aren't stable because we whipsaw and like this last, we just recently, right, they passed this new rule in the Senate where they can amend the budget reconciliation as many times they want. So basically they've eliminated the filibuster when it comes to taxes, at least that's my take on it. What does the average person do? What does the average investor, the average business owner do given what's going on?

 

Daniel Bunn:

I don't have great advice. If I had the answer to that question, I'd be making money like you do, Tom. But the thing is, I think the important thing is to be able to have scenario planning. This is a challenge for everybody, it's almost as challenge as simple compliance with the existing law, but being able to plan out for various scenarios … having worked in Congress and seeing bills go from presidential proposal to enact into law, there's a lot of variance between those two. We've already seen different members of Congress come out and say, “Yeah, I don't know if the rate's going to go quite that high or if I'm comfortable with that.” Being able to come … with whatever investment decision, to have scenarios planned out. You know, global minimum rate at 21%, global minimum rate at 15%, something like that. Or be able to say corporate rate at 28 or 25. There are other pieces of the law that are, like you were talking about, unstable. Will expensing for planting equipment continue? Will the treatment of R & D continue as it is? A lot of questions, and I think scenario planning is the best advice I have.

 

Tom Wheelwright:

I appreciate that. Yeah, not real stable right now, but there is planning to do and I think the most important thing we can do, frankly, is to continue to listen to people like you. Go to the tax foundation.org, because frankly, I think it's, you guys just have an enormous amount of information there so that we can constantly follow this.

Of course, the other thing to remember is, is that this is phase one. Okay? And there's at least one more phase coming, which is individual tax rates. I'm sure we'll have somebody from the Tax Foundation back when that proposal comes out, because my guess is I thought that one of the reasons, one of the benefits they think they're going to get out of raising the corporate tax rate is the ability to raise the individual rate, particularly for small businesses where we might lose the 20% deduction, at least if you make over the magic $400,000 a year. So let's just continue to watch this, let's pay attention, let's plan accordingly the best we can, but like Daniel's saying, the more scenarios we can … because I expect we're going to get an increase in corporate tax rates. Is that fair, Daniel? We're going to get an increase in corporate tax rates.

 

Daniel Bunn:

I think so. I think so.

 

Tom Wheelwright:

Yeah. So 25%, Joe Manchin has already said, West Virginia said, he's okay with 25%. There's going to be some changes to all the international rules. Those who don't work internationally aren't going to be affected directly in their business by that, just the indirect effects, of course, of increase in prices and a decrease in dividends, et cetera. But with that, once we get those different scenarios when we plan on a 25%, maybe a reduction in that 20% deduction, then we can do some real tax planning. When we do real tax planning, life gets a lot better because we pay a lot less tax. Daniel, any final words?

 

Daniel Bunn:

No. Thank you so much, Tom. This has been really great discussion. Thanks for having me on.

 

Tom Wheelwright:

Thank you, Daniel. Taxfoundation.org is where to find Daniel and his entire team of tax professionals and big thinktankers. It's just a tremendous resource I'm just a big, big proponent of what you guys do there. Thank you so much for being on.

Remember everyone, when we get educated and we start planning scenarios like Daniel says, and we'd get this and we're we get ahead of the game, we're always going to make way more money and pay way less tax. See you next time.

 

Announer:

You've been listening to The WealthAbility Show with Tom Wheelwright, way more money, way less taxes. To learn more, go to WealthAbility.com.