ON THE FACE many things, it seems both absurd and unfair that big American corporations routinely cut their tax bills, taking advantage of every loophole offered. A study found that at least 55 large companies paid no federal taxes on their profits in 2020. A proposal being discussed as The Economist has gone to press, and while the Democratic Party has rushed to fund its social spending program, seems to offer a popular solution: a minimum tax on corporate profits as reported to shareholders, rather than massed when they are reported to tax collectors.
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The structure of the minimum tax seems fairly straightforward. Companies that report more than $ 1 billion in profits to shareholders would pay a tax of at least 15% on those profits. The tax would be explicitly targeted at companies like Amazon, which had an effective federal tax rate of just 4.3% from 2018 to 2020, well below the statutory rate of 21%, according to the Institute on Taxation and Economic Policy, a left-wing think tank. In total, the new tax would apply to some 200 large companies.
Politically, the corporate minimum tax has many advantages. Angus King, an independent senator who is the architect of the proposal, estimates it could raise $ 400 billion over ten years. This would help fund the bill that is the cornerstone of President Joe Biden’s “Build Better” program, with around $ 2 billion in spending over the next decade (equivalent to less than 1% of GDP during this time). The corporate minimum is also less controversial than another new levy Democrats were rowing on, a tax on unrealized capital gains that would target 700 billionaires.
The Democrats had initially hoped to rely on a general increase in the corporate tax rate to increase their income. But Kyrsten Sinema, a Democratic senator from Arizona whose support is needed for the bill to pass, opposed a larger increase and instead supported the minimum tax as “common sense.” The idea also has the approval of Joe Manchin, a Democratic senator from West Virginia, whose vote could prove to be decisive.
The economic rationale is more uncertain, however. Despite its seemingly simple structure, it would introduce more complexity into an already bloated tax code. Companies would face two parallel systems, calculating their obligations first according to the ordinary tax rules, then according to the minimum tax regime. An earlier version of a minimum corporate tax, repealed under President Donald Trump in 2017, was so onerous that in some years the costs of compliance exceeded tax revenues.
The gap between taxable income and accounting income reported to shareholders exists for a reason. When, for example, a company builds a factory, financial rules require it to spread the cost over many years based on depreciation, allowing investors to know the value of its assets. Tax rules, however, allow businesses to report costs when they are incurred. This lowers the tax bill when investments are made and further encourages spending.
Calculating the minimum tax based on accounting income rather than taxable income would lead to two perverse results. First, fiscal powers would, in effect, be granted to the Financial Accounting Standards Board, an unelected body that governs the way businesses report their income. Changes in its standards would lead to changes in taxation.
Second, companies would have less opportunity to deduct their capital expenditures and therefore could reduce their capital expenditures. Mr Biden, however, doesn’t want that to happen, so the proposal maintains several deductions, including for clean energy and research and development spending, one of the provisions that may have allowed Amazon to cut back. his taxes.
Businesses, for their part, will adapt. By turning more to debt instead of the stock markets for funding, for example, they could increase their interest costs, which would eat into both accounting and taxable income. The bottom line is that the corporate minimum tax can end up generating much less revenue than its proponents realize, while skewing investment incentives and further complicating a messy tax code. â
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This article appeared in the Finance & economics section of the print edition under the title “A tale of two profits”