According to a new study from the University of Pennsylvania’s Wharton School, the proposed increase in the corporate tax rate on President Joe Biden’s infrastructure plan will not lead to a significant reduction in business investment.
The biggest interest for Wall Street is Biden’s plan to increase the corporate tax rate to 28% from 21%, which would amount to a partial recovery of former President Donald’s tax cuts. Trump in 2017.
Wharton estimates that raising the corporate rate to 28% would generate an additional $ 891.6 billion from 2022 to 2031 and, perhaps surprisingly, will have little impact on short-term business investment.
The school explained that companies with significant capital investments may choose to defer a tax incentive known as bonus depreciation to years in which Biden increases can have an effect.
The depreciation of the bonus allows companies to immediately deduct a large portion of the purchase price of certain assets, such as capital equipment, instead of reducing their value for several years. Trump’s 2017 tax cuts doubled the bonus depreciation deduction to 100% from 50% for qualified properties.
“Increasing the legal corporate tax rate is expected to increase short-term corporate investment,” the Wharton researchers wrote. “Under the current accelerated depreciation regime, marginal effective tax rates on corporate investment are low regardless of the main rate. As a result, raising the corporate tax rate does not significantly affect the normal return on investment, in instead of taxing income and returns. of existing capital “.
Neither the White House nor the Treasury Department responded immediately to CNBC’s request for comment.
Still, Wharton found that the negligible and positive impact of a corporate tax hike would be offset by Congress approving the American Job Plan minimum tax on accounting income, which would reduce the value of deductions by depreciation.
The infrastructure plan marks Biden’s first in-depth tax proposal since he took office earlier this year. The gigantic plan is expected to undergo significant changes as it moves through Congress, where Republicans are united in their opposition to the tax increase.
Democrats, if they choose to follow the infrastructure plan through budget conciliation, will need almost unanimous support from their group to approve it without Republican Party support. But even Democratic support remains questioned after Sen. Joe Manchin, DW.Va., made it clear earlier this week that he is not a fan of raising the corporate rate to 28%.
The Biden plan would reduce federal debt
The school’s latest research, released Wednesday morning, also found that the administration’s American Jobs Plan would generate $ 2.1 trillion in tax revenue and spend $ 2.7 trillion between 2021 and 2030.
By 2050, proposed tax increases and repairs to U.S. infrastructure will reduce U.S. debt by 6.4% and GDP by 0.8% in 2050 relative to current legislation.
“Initially, federal debt will increase by 1.7 percent in 2031 as new spending in the EU [American Jobs Plan] “They exceed the new revenue collected,” the researchers wrote. “After the new AJP spending ends in 2029, however, its tax increases persist; as a result, federal debt ends up 6.4 percent by 2050, relative to the current baseline.”
The relatively modest reduction in economic growth in 2050 is largely due to improvements in infrastructure that will allow Americans to be more productive in the coming years, the school said.
Repairing transportation infrastructure, for example, can help increase long-term productivity if U.S. workers spend less time stuck in traffic or moving around a bridge in jeopardy.
“Public investment includes new spending on transit, research and development infrastructure and domestic manufacturing supply chains,” the researchers wrote. “Investments in ‘public capital’ are considered to increase the productivity of private capital and labor.”
In terms of revenue, the Wharton School found that the American Jobs Plan would be funded through a combined increase in the corporate tax rate, a minimum corporate book profit tax, and an increase in the income tax rate. foreigners and the elimination of tax benefits. for fossil fuels.