Business groups are warning that US President Joe Biden’s proposal to lift the US corporate tax rate from 21% to 28% would hit investment levels and reshoring, but opinion is divided over whether it would ultimately hurt the world’s biggest economy’s attractiveness to foreign investors.

President Biden proposed the tax hike on March 7 during his State of the Union address and included it in his 2025 budget released four days later. It is part of his plan to cut the US budget deficit by $3tn over the next decade, and help fund tax cuts and expand social services for the working and middle class. It would reverse his predecessor Donald Trump’s pro-business tax overhaul in 2017 which slashed the headline corporate rate from 35% to 21%. 

The budget has to be approved by Congress, including the Republican-controlled house of representatives, making it more a symbol of Mr Biden’s fiscal policy than a guaranteed reform. But it has led the US business community to question the incumbent’s stance on investment heading into this year’s presidential election. 

Cutting the corporate tax rate to 21% “has been a key driver in reshoring and attracting FDI to the US,” said Nancy McLernon, president and CEO of the Global Business Alliance. Data from fDi Markets shows that, based on three-year averages, annual inbound FDI under the current levy has increased from $86.7bn to $133.9bn. “The Biden-Harris administration has publicly stated support for global investment … and America’s allies have responded to that commitment. Implementing a tax hike now could reduce the desire of our allies to invest in the US,” she added. 

The Trump administration billed the 21% tax rate as a way to encourage US firms to bring back manufacturing that they had moved to lower cost jurisdictions. Harry Moser, president of the Reshoring Initiative, says this is a key driver behind the number of US jobs created by reshoring and FDI hitting a record 364,904 in 2022 (the latest available data). 

However, after including state-level taxes, companies today pay an average 25.8% in US corporate tax. That compares to 21.3% in Europe and 19.8% in Asia, according to think tank the Tax Foundation. “Raising the US tax rate to be effectively 10 percentage points higher than most competitors would cut reshoring and FDI as much as the 2017 rate reduction increased them, perhaps [by] 30 to 40%,” said Mr Moser.

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The Republican-leaning US Chamber of Commerce also warned in a statement that a 28% rate would hit investment levels, resulting in “lower economic growth, fewer new business starts [and] less job creation”. 

Alan Cole, a senior economist at the independent Tax Foundation, said: “We’d expect a higher rate to reduce investment in commercial and industrial facilities.” That contrasts with equipment and research and development, which are more likely to benefit from accelerated depreciation.

However others in the US are sanguine, noting that Mr Biden is not seeking a return to a 35% rate, which was the highest within the OECD. “Tax incentives … tend to be most effective in location-agnostic investments,” said Ian Hunter, US market director of consultancy OCO Global. “Somewhere like the US, with the largest consumer market globally, has its own pull far beyond just tax.” 

The effect of any tax hike would also be offset by the Biden administration’s incentive programmes such as the $369bn Inflation Reduction Act which, Mr Hunter said, “is still the key attractiveness driver for companies” looking at the US. 

The proposal coincides with the rollout of the 15% global corporate minimum tax which aims to curtail harmful tax competition. Congress has yet to implement this, but the Biden administration supports the measure. A White House fact sheet from March states it is “committed to reversing the massive tax giveaway to big corporations that Republicans enacted in 2017”. Investors in the US have been put on notice: Democrat control of the White House and Congress from 2025 would mean higher taxes.

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