Tanzina Vega: One of the biggest debates emerging around president Biden's infrastructure proposal is how to pay for it. The Biden administration wants to raise the corporate income tax from 21% to 28%. Republicans, prominent business leaders, and even some moderate Democrats say 28% is too high. According to them, the higher rate would lead US based corporations to leave the country, damaging the economy. This week, president Biden expressed some flexibility on raising the rate.

Interviewer: Are you willing to go lower than the 28% corporate tax?

President Biden: I'm willing to listen to that, I'm willing, I'm wide open to, but we've got to pay for this. We've got to pay. There's many other ways we can do it, but I'm willing to negotiate that. I've come forward with the best, most rational way in my view, the fairest way to pay for it. There are many other ways as well and I'm open.

Tanzina: Here with me to break this all down is Laura Davison, tax reporter for Bloomberg News. Welcome back to the show, Laura.

Laura: Thanks for having me.

Tanzina: Why does the Biden administration see an increased corporate income tax rate as the best, most rational, and fairest way to pay for the infrastructure plan?

Laura: There's a couple of reasons here. One is that they said since Donald Trump became president and lowered the corporate tax rate, that that rate has been far too low and corporations haven't been paying their fair share and could pay more. The second part of this is that they say, "There's all this revenue out there that's going untapped. When the corporate rate got lower, it just went to stock buybacks, it didn't go to investment in the economy. Let's capture that money and spend it on things that we need, upgrades to roads and bridges, rural broadband, healthcare, all sorts of policies that Democrats want and see a lot of room for improvement."

Tanzina: Some companies, including Amazon and Lyft, have put out statements signaling at least some support for the infrastructure proposal. Why do you think they're willing to get on board with higher corporate tax rates?

Laura: This is potentially a very smart move, both strategically, as well as politically for them. When you look at what the tax increases are funding, it's a lot of things that Lyft and Amazon would benefit from. Things like improved roads and bridges, Amazon drivers and Lyft drivers are basically spending all of their days driving on roads. If the roads were improved that could help their bottom line. Things like rural broadband that could help get more customers connected to Amazon and also connected to Lyft. They're looking at this proposal and saying, "Could we pay a little bit more in corporate taxes and get some benefits here funded by all of the corporations in America?"

They're weighing this here to see and seize from that benefit. The second thing is one, this gets them at the negotiating table if they signal, and especially if they're one of a handful of companies that are saying, "Yes, we would support higher taxes," they can then have a stronger case to go in and meet with Biden and meet with the White House and have their case heard in terms of, "Here's what we could agree to. Here's what we're concerned about, maybe stay away from this kind of tax increase." It's a smart move strategically to at least be moving in the same direction that the administration wants to go.

Tanzina: It gives them a seat at the table. What are some of the business leaders and politicians who are opposed to the higher tax rates saying? Really, the argument that you made for, say, an Amazon or a Lyft, I could see that argument really being true for just the vast majority of business in the United States that could benefit by improved infrastructure. Why are they oppossing it?

Laura: There's a couple of reasons that they say, "If the corporate tax rate does go up, if we are charged more for our profits that we earn overseas, we as American companies become targets for foreign takeovers." In other countries where taxes are relatively lower, they're more competitive, they could come in and say, "Hey, American company, you're a good deal for us to buy and we're going to take you to Ireland or to France or to China or wherever," then essentially the US would lose out on the tax revenue from that country. It's unclear exactly how big of a problem that would be under the Biden plan, but that is one argument that's being made.

Secondly, Republicans are saying, "We finally got to a place where American companies were paying tax rates that were more in line with the rest of the world. Companies are finally starting to grow, but there hasn't been enough time for this plan to really play out that was passed under Trump." It's just three, almost four years old. It needs more time to play out, to prove that it's really working. Democrats counter that and say,"You had three years, we didn't see the growth that you promised. It's time to try something new."

Tanzina: Let's talk about the politics of this. The Trump tax cuts lowered the corporate tax rate from 35% to 21%. Considering how much higher it used to be, why are some moderate Democrats now unwilling to go above 25%?

Laura: There's a couple of reasons here. One, everybody pretty much agreed that that 35% rate was too high. Even under president Obama, Democrats were pushing for a 28% tax rate. That's where you see Biden end up here and the vast majority of Democrats are behind that. However, for a handful of more moderate-- Joe Manchin of West Virginia, as a prime example here, they're looking at the politics, as well as the policy here. They're hearing some of the arguments from Republicans that 28% could be too high, 25% gets the US more in line with where the global averages for a corporate tax rate, at least for developed countries. That's where the debate is here. The issue is that's a pretty big spread when it comes to the amount of revenue that the corporate tax rate can raise, 28% to 25%.

That's a difference of a couple $100 billion. Biden has said, "If you want to lower the rate, if you want to get rid of any of these tax increases that I've proposed, we're willing to talk about that, but you need to come up with some sort of counter of how we are able to plug that revenue hole either with additional taxes elsewhere, or come with a plan that we can all agree to reduce spending on the infrastructure side of this proposal."

Tanzina: What are economists saying about the impact that the corporate tax rate raise would have on the US economy?

Laura: Economists are spread on party lines here. Democrats are saying, more or less leading economists, are saying that this would be good, this would create a more fair tax system. Right-leaning economists say that this could lead to competitiveness issues. Though it's really, really unclear that that rise to 28% would cause massive harm to the economy. There's not the evidence there. The real issue in the unknown is all of the changes that Biden has proposed to all of this off-shore taxation. This is where really the big change is. Biden is proposing a minimum tax rate of 21%, which is almost double what US corporations pay now. That would be the big issue. It would affect a lot of technology companies, pharma companies that have gotten really creative in their tax accounting in recent years and can see significantly higher rates as a result of this.

Tanzina: Laura Davidson is a tax reporter for Bloomberg News. Thanks so much for joining us Laura.

Laura: Thanks for having me.

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