Washington Policy Research – December 16, 2021

The legislative process has continued to lead to modifications to President Biden’s spending plan.

Last month we wrote about how political pressure forced changes to planned tax increases on high-net worth individuals, but important changes have also been made on corporate taxes. In September, the House of Representatives proposed raising the corporate tax rate to 26.5% from 21.0%, raising taxes on US multinationals’ overseas income to 15.0%, and implementing a handful of other tax increases that would go into effect at the start of 2022.  However, a revised plan passed by the House in November removes the corporate tax rate increase entirely, pushes the tax on US multinationals out to 2023, creates a new 15.0% tax on US companies (also effective in 2023), and imposes a new 1.0% tax on share buybacks.

Corporate tax changes would lower the S&P 500 earnings hit to less than 1% (from 4%).

The biggest change on the corporate side is replacing an increase in the corporate tax rate with a 15.0% minimum tax on companies with book profits over $1 million. Congress tried something similar in 1986 but repealed the change just three years later. A minimum tax punishes firms for making pension contributions and/or capital expenditures. The latest Senate draft has removed the taxation of pensions and delays implementation until 2023 to work out the quirks. In addition, taxes on US multinationals are being delayed until 2023 so that other countries can bring their tax codes into compliance with the OECD global tax negotiations. The net effect of these changes nearly wipes out the previously estimated 4.0% hit to 2022 S&P 500 earnings, and also reduces the hit in 2023 and 2024.

Small businesses will still face a 3.8% tax starting in 2022.

Corporate taxpayers will mostly be spared tax increases in 2022, but small businesses that pay the individual income tax could face a new 3.8% tax for those with taxable income over $400k single and $500k married. Starting in 2013, a new 3.8% tax was applied on capital gains and dividend income for Medicare as part of President Obama’s Affordable Care Act (ACA). The House-passed bill and the Senate proposal both apply that new 3.8% tax to small business income with an effective date of January 1, 2022. Congress is struggling to get the legislation passed before the end of this year, but this change could be enacted early next year and be applied retroactively to January 1, 2022.      

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