What Biden’s and Trump’s tax policies mean for Australian businesses

Tax policy under a Biden presidency may facilitate more US investment into Australia than a Trump presidency, according to the United States Studies Centre.

Biden has proposed raising the corporate tax rate from 21 per cent to 28 per cent, raising personal income tax for the top individual earners from 37 per cent to 39.6 per cent and raising CGT.

Trump is likely to maintain the corporate tax rate and cut income tax.

Both nominees’ proposed changes will affect how US companies invest and trade overseas, but also Australian investments in the US.

“Aussie investors are in for a big couple of days in early November,” wrote CommSec in their October analysis.

“Uncertainties over the virus ‘second wave’, a potential vaccine, fiscal stimulus and the US election outcome are likely to introduce bouts of extreme volatility to financial markets over the coming months.”

As Americans flood to voting booths in record early voting turnout, we examine how the proposed tax plans under a Biden administration or Trump administration will impact Australian business and investment.

Corporate tax rate

Biden seeks to raise the corporate tax rate from 21 per cent to 28 per cent.

He also hopes to introduce a 15 per cent minimum tax on companies with profits above US$100 mn and double imputed tax on earnings from low tax jurisdictions to 21 per cent.

The USSC predicts that this may benefit Australia politically.

“The company tax changes promised by the Biden campaign would remove some of the pressure on Australia to lower its company tax rate,” said David Uren, a non-resident fellow at the USSC.

However the higher tax rate will still slow investment overall.

“Higher US company taxes may, however, slow the US recovery from the pandemic and dampen the appetite of US business for investment more generally,” said Mr Uren.

Nevertheless, September economic forecasting by Moody’s found that Biden’s spending will still cause US GDP to rise 1 percentage point faster over four years than under Trump’s expenditure plans.

This is tied into Biden’s redistributive economic agenda.

Biden would inject an additional US$5.4 tn in spending over a decade, buoyed by US$3.4 tn in additional taxes from top income earners and corporations.

In comparison, Trump is likely to retain the current 21 per cent corporate tax rate, lowered from 35 per cent under the Tax Cuts and Jobs Act of 2017.

Lower business taxes and liberal use of tariffs have been key tactics of the Trump administration to drive domestic US investment.

This saw almost US$800 bn return to the US from multinationals that had accumulated cash offshore to avoid the previous tax rate.

However this means Australia may receive less US investment under a Trump presidency.

“[Trump’s] emphasis on encouraging the repatriation of supply lines globally and on focusing fresh investment in the US rather than abroad is likely to intensify and result in a further pull-back in US investment abroad, including Australia,” said Mr Uren.

Therefore under a second Trump term, Australia would face pressures to cut its corporate tax rate otherwise risk being “uncompetitive in attracting fresh US investment.”

“US investment in Australia is likely to weaken, possibly significantly, as a result of the gap that has opened between the US and Australian corporate tax rates,” said Mr Uren.

“US investment in Australia slowed modestly in 2018 and 2019 in the wake of the Trump tax cuts. The Australian Government may need to consider reviving planned corporate tax cuts if US investment is to be sustained.”

Capital gains tax

Biden has proposed raising tax on long-term capital gains to 39.6 per cent for individuals making more than US$1 mn.

Whilst Trump has not been clear on CGT, at a 10 August press conference he indicated he would “seriously” consider a CGT cut.

However both sides’ CGT policies do not appear to have as profound an impact as their divergent positions on the corporate tax rate.

“It’s a question as to whether CGT will be part of the calculus when people consider making an investment. It will affect how Australians view, for example, real estate, but it is unlikely to significantly alter investment logic for most people,” said Mr Uren.

Tax incentives for local investment

Despite these differences, both nominees are essentially trying to achieve a similar overall goal – redirect foreign investment back to US businesses.

“Both sides are proposing tax incentives for US companies to repatriate supply lines, particularly from China,” said Mr Uren.

“Biden is proposing a penalty tax on US companies that shift manufacturing offshore with a view to sending their goods back to the US, so that potentially could affect Australian businesses with investments in the US.

“Trump hasn’t released much detail on what he’s proposing but he’s been talking about penalty taxes on companies with operations in China and also tax incentives for companies that bring back production from China.

“It’s essentially the same on both sides.”

Success ultimately determined by Senate

However Democrats will have to sweep the White House, the Senate and maintain the House of Representatives for Biden’s tax plans to become law in the near future.

A Republican-controlled Senate under a Biden presidency may result in gridlock for at least two years, according to CommSec. However, CommSec also emphasised that the election and any foreign investment implications are ultimately subject to the same pervasive uncertainty that has underpinned 2020.

“Given the uniqueness of the pandemic presidential election anything seems possible in the lead up to November 3 and beyond.”


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