House Dems' proposed tax plan could increase offshore avoidance, shift burden onto small businesses

The bevy of tax hikes on corporations and wealthy Americans unveiled by House Democrats on Monday could actually increase businesses' use of offshore havens – while shifting the burden of higher rates to small businesses, according to a new analysis.

The House Ways and Means Committee released a plan to pay for President Biden's $3.5 trillion climate change and family plan, including by raising the corporate tax rate to 26.5% for businesses earning more than $5 million in income. 

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The corporate rate would be lowered to 18% for small businesses earning less than $400,000; all other businesses would continue to pay the current rate of 21%. 

But the Financial Accountability and Corporate Transparency (FACT) Coalition, a nonpartisan group of 100 organizations dedicated to establishing a fair tax system, urged the tax-writing Ways and Means Committee to reconsider the proposals and make "critical revisions" in order to "help curb tax-haven abuse, protect American jobs and begin to meet the challenge set by the Biden administration to end the international race to the bottom in corporate tax collections."

"At present, the plan does not remove – and may actually worsen – incentives from the 2017 Tax Cuts and Jobs Act to offshore investment, related jobs, and profits," the group said.

Instead, it called on Democrats to raise the global intangible low-taxed income (GILTI) rate – a minimum tax on foreign profits that was reduced to 10.5% as part of Republicans' 2017 tax overhaul – to 21%, one of Biden's campaign promises. Democrats proposed raising the GILTI rate to 16.5%.

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It also warned that multinational corporations should continue to be limited in using 80% of foreign tax credits based on the significant amounts of foreign income that are deducted under Democrats' GILTI approach. The so-called QBAI exemption under GILTI, which exempts foreign income from U.S. taxation for investing in assets offshore, is still maintained in the newest proposal – though at a rate of 5% rather than 10%.

"This encourages off-shore asset investment, and with it, offshoring of jobs," the group said. "It should also be removed entirely, in line with the President’s plan and the Senate Finance framework. Equalization of tax rates on foreign and domestic profits is critical tax policy to attract investment in the United States and create American jobs."

The tax provisions included in Monday's proposal also fall far short of what Biden was pushing for – a 28% corporate tax rate, a 39.6% capital gains tax rate and the elimination of the so-called "step-up" in basis, which allows heirs to inherit appreciated assets without paying taxes on those gains. Democrats left the step-up in basis completely untouched in their proposal.

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The preliminary outline comes amid a brewing fight among Democratic lawmakers over the passage of the $3.5 trillion spending package after both chambers of Congress approved the blueprint for the bill last month and the Senate-passed, bipartisan infrastructure bill.

At the heart of the division is a fight for control over the size and scope of the spending package. Progressives say that $3.5 trillion is the bare minimum needed to vastly expand the social safety net and combat climate change. Centrist Democrats, however, are wary of another multitrillion-dollar bill – funded by a bevy of new taxes, no less – after the coronavirus pandemic pushed the U.S. deficit to a record high. 

With their incredibly slim congressional majorities, Democrats face a delicate balancing act in pursuing their so-called "two-track" agenda – approving both a bipartisan deal and a reconciliation package that could cost several trillion dollars – or they risk losing the support of either moderate or progressive members.