President BidenJoe BidenAides, who clashed with Giuliani, deliberately gave him the wrong time to prepare for the Trump debate: Book Biden says that in the midst of the Manchin pandemic, Eid al-Adha has “special meaning” to the candidate for head of public Country to support MORE has proposed a minimum corporate tax of 15 percent. Has he forgotten that the US already has a minimum tax rate and that it is over 15 percent?
U.S. corporations are required by law to pay at least 21 percent of their taxable U.S. income in taxes, after the deduction of losses and tax credits. The federal tax rate of 21 percent has been in effect since 2018; before that, the minimum tax rate was 35 percent. The minimum tax we have today is just the normal corporate tax rate. So why all the talk of a new minimum tax when we already have one?
As it turns out, minimum taxes are really just an adjustment to the tax base – what is taxed. The amount of income tax paid by corporations is the tax base multiplied by the tax rate. The tax base or taxable income is difficult to calculate and difficult to explain. The tax rate, on the other hand, can be summarized by a single number.
While the Internal Revenue Code is about a million words long, the section that defines the tax rate for US companies is about 100 words. The important part of the section consists of just 16 words: “The amount of tax levied under paragraph (a) is 21 percent of taxable income.” Types of economic inflows and outflows. Given this complexity gap, it’s easy to see why politicians ignore the tax base and focus on the tax rate.
However, the focus on the tax rate is misleading. Most of the current criticisms of the tax code are based on concerns about the tax base, not the tax rate. A minimum tax like the one proposed by Biden implies that a minimum tax of 15 percent would be levied on a different tax base than what we are currently using.
So what would that other tax base be? Details on initial tax proposals are always fuzzy. However, Biden previously proposed a tax of at least 15 percent on general ledger revenue, an income figure that is different from taxable income for a number of reasons. Take depreciation, for example. Financial accounting, or book income, requires companies to write down investments based on actual economic depreciation because investors need to know the real net worth of the company’s assets. The tax code, on the other hand, allows for much faster depreciation as it lowers after-tax investment costs and stimulates more business investments. Taxing financial accounting revenue is a bad idea because the financial accounting and tax rules differ for a reason. A recent informal survey of accounting professors – including ourselves – across the political arena found not a single one who thought taxing financial accounting receipts was a good idea. And while Congress could use a different alternative tax base, including alternatives that are being debated at a global level, that is not a good idea either. That’s because regardless of which alternative tax base the legislature decides, any proposal for a minimum tax would require businesses to calculate taxable income twice, adding unnecessary uncertainty and complexity to the system.
And it’s not just about calculating taxable income twice. A minimum tax would undermine the very tax incentives that Congress is trying to create. Research and development activities, investments in clean energy and investments are given preferential treatment in the Tax Code. However, minimum taxes are only effective if they withdraw items that receive preferential tax treatment. A minimum tax would inevitably affect the production of public goods and thus dampen the ability of the tax code to control companies in a way that is beneficial to society.
While minimum taxes may seem like a new idea, the concept should sound very familiar. That’s because we’ve already tried minimum taxes for businesses. The widely despised Alternative Minimum Tax (AMT) for businesses was precisely this type of minimum tax. The AMT was abolished by the Tax Cuts and Jobs Act in 2017 for being so widely abused. Companies found it too cumbersome to have to calculate taxable income twice in two different systems. Let’s not reimplement something that has already failed.
Minimum taxes are a distraction. If lawmakers don’t like the tax base rules in our current system, they should just change them. Adapting the tax code directly is a far better solution than putting a separate, independent tax system on top of our current one, which would add complexity and compliance costs while undermining positive economic incentives.
Fabio B. Gaertner is Associate Professor and Cynthia and Jay Ihlenfeld Professor for Inspired Learning in Business at the University of Wisconsin-Madison.
Jeff Hoopes is an Associate Professor at the University of North Carolina and Research Director of the UNC Tax Center.