Bigger Bite of Corporate Taxes Would Sting Beyond Businesses' Bottom Lines

Corporations would face more pressure to succeed and thrive if the U.S. Treasury Department increases corporate income taxes by nearly $2.8 trillion, or 56%. While the additional funding aims to improve the lives of lower earners, hiking corporate taxes could slow the economy and reduce some opportunities by burdening businesses already struggling to pay for innovation and growth initiatives. A major tax hike may impede businesses from investing in technology and equipment to improve efficiency and generate higher revenue, which could boost wages and create new jobs.

The fiscal year (FY) 2025 budget reinvigorates efforts to increase the U.S. corporate income tax rate from 21% to 28%, and includes provisions to hike the corporate alternative minimum tax (CAMT) from 15% to 21%, and to raise the corporate stock repurchase excise tax from 1% to 4%. The latter two provisions were enacted as part of the 2022 Inflation Reduction Act. Additional tax proposals would impact corporate and pass-through businesses, increase certain fuel taxes for some private planes, and deny business deductions for employee compensation over $1 million.

The U.S. corporate tax rate has oscillated wildly over time, averaging 32.18% between 1909 and 2023, moving from a low of 1% in 1910 to hitting a high of 52.8% percent in 1968, according to the Internal Revenue Service (IRS). The current rate of 21% was whittled from 35% by the 2017 Tax Cuts and Jobs Act (TCJA).

Here's a look at how much key corporate tax proposals would generate over a decade:

• $1.35 trillion over 10 years by increasing top U.S. corporate income tax rate to 28%.
• $271.8 billion over 10 years by denying business deductions for employee compensation above $1 million.
• $165.9 billion over 10 years by increasing the excise tax on certain corporate stock repurchases from 1% to 4%.
• $137.4 billion over 10 years by increasing the corporate alternative minimum tax to 21%.

Money raised from U.S. international tax rule reform proposals include:

• $373.9 billion over 10 years by revising global intangible low-taxed income (GILTI) rules, limiting inversions and making related reforms.
• $157.9 billion over 10 years by repealing the deduction for foreign-derived intangible income (FDII) - netted-out via additional support for research or experimental expenditures (R&E).
• $74.9 billion over 10 years by reforming the taxation of foreign fossil fuel income, including changes to the tax rule for dual capacity taxpayers that accounts for $71 billion of the total.
• $39.9 billion over 10 years by restricting deductions of excessive interest of members of financial reporting groups.
• $2.7 billion over 10 years by revising rules allocating Subpart F income² and GILTI.

The funding outlook from additional business tax proposals includes:

• $75.7 billion over 10 years by making permanent the excess business loss limitation for non-corporate taxpayers.
• $43.7 billion over 10 years by limiting tax avoidance through inappropriate leveraging of parties to divisive reorganizations.
• $42 billion over 10 years by updating rules related to digital assets, including the application of wash sale³ rules to digital assets, by including digital assets in the mark-to-market rules, and by addressing related-party transactions.
• $19.6 billion over 10 years by repealing deferral of gain from real estate like-kind exchanges (above certain threshold amounts).
• $15.6 billion over 10 years by repealing the use of percentage depletion with respect to oil and natural gas wells.
• $14.8 billion over 10 years by eliminating basis shifting by related parties through partnerships.
• $9.7 billion over 10 years by repealing expensing of intangible drilling costs.
• $7.2 billion over 10 years by mandating full recapture of depreciation deductions as ordinary income for certain depreciable real property.
• $7.1 billion over 10 years by expanding pro rata interest expense disallowance for business-owned life insurance.
• $6.7 billion over 10 years by conforming definition of "control" with corporate affiliation test.
• $6.6 billion over 10 years by extending statute of limitations for listed transactions and impose liability on shareholders to collect unpaid income taxes of applicable corporations.
• $3.6 billion over 10 years by raising geological and geophysical amortization period for independent producers.
• $2.4 billion over 10 years by reforming excise taxes on business aviation.
• $2 billion over 10 years by improving information reporting for reportable payments subject to backup withholding.
• $1.9 billion over 10 years by taxing corporate distributions as dividends.

Bottom Line: Corporations, along with the highest-earning taxpayers, face the biggest brunt in wide-ranging efforts to reduce the deficit and fund government programs. The outcome depends on which party controls the Congress next year, as well as the margin of control in the House and the Senate. As business leaders engage with policymakers on the impact of potential corporate tax changes, individuals should speak with their financial advisors about how these proposals may impact portfolio allocations and individual tax strategies.

¹The TCJA changed the treatment of R&E under Section 174, and taxpayers are now required to capitalize and amortize all R&E that are paid or incurred in connection with their trade or business representing experimental or laboratory costs. U.S.-based R&E activities must be amortized over five years and costs for foreign R&E activities must be amortized over 15 years, both using a midyear convention.

²Subpart F Income involves Controlled Foreign Corporations (CFCs) that accumulate certain types of income, primarily passive income.

³ A wash sale happens when an investor sells a security at a loss and then purchases the same or a substantially similar security within 30 days, before or after the transaction.

Disclaimer

Eaton Vance and Morgan Stanley do not provide legal, tax or accounting advice or services. Clients should consult with their own tax or legal advisor prior to entering into any transaction or strategy.