TAX TAKE: Impact of a Potential Compromise on the Corporate Rate

Tax Alert

In a recent speech, President Biden indicated a willingness to compromise from his initial proposal to increase the corporate rate to 28 percent, noting he was open to a rate of "between 25 and 28" percent. This new marker in the continuing negotiations over how to fund the pending infrastructure bill is viewed as a major development, particularly given the fact that the 25 percent corporate rate has already been endorsed by Senator Joe Manchin (D-WV), whose vote will be crucial if the bill moves through budget reconciliation as expected.

While a compromise on the corporate rate impacts the overall fate of the bill, it will also have significant impact on the bill's composition. Any compromise on the corporate rate will significantly reduce the revenue raised by any increase - using the rule of thumb that a one percent increase in the corporate rate raises $100 billion, a compromise that reduces the increase in the corporate rate from 28 percent to 25 percent would create an estimated $300 billion shortfall that would require the use of deficit spending or the consideration of additional revenue raisers to finance the bill.

Furthermore, it is anticipated that a compromise of the corporate rate would have corollary impacts on other provisions of the bill. For example, the proposed increase in the global intangible low-taxed income (GILTI) rate to 21 percent was based on a presumption that it would be 75 percent of the proposed 28 percent corporate rate. Presumably, a reduction in the corporate rate increase to 25 percent would result in a new proposed increase in the GILTI rate to 18.75 percent. Similarly, the proposed 15 percent minimum tax on book income would presumably receive a similar proportionate reduction.

It will be interesting to see if the potential compromise on the corporate rate, as well as its impact on these other provisions, is reflected in the pending Treasury Department Greenbook, which is now scheduled for release on May 27, 2021. #TaxTake

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