Corporate Tax

The rhetoric vs. the truth of a corporate ebook tax

summary

  • Senators King, Warren and Wyden have proposed a minimum corporate tax based on financial or “book” income.
  • This suggestion is stimulated by reports of large, profitable companies paying little or no income tax in a given year.
  • These analyzes, and thus the invigorating characteristics of the tax, are based on a number of misleading and incompatible arguments.

introduction

Democrats in Congress are debating a tax policy to offset spending commitments in the Reconciliation Act, which has slowly worked its way through the House of Representatives. Overall, the Democrats’ appetite in Congress to push through significant tax hikes is less robust than campaign rhetoric suggests. Resistance to specific tax policies such as increases in corporate and capital gains rates has pushed the tax debate into more unconventional terrain. While the House Ways and Means Committee reported a tax subtitle that was fairly traditional in its approach to increasing revenue, the Senate’s opposition to these proposals at the last minute has sparked a scramble for more esoteric tax hikes. Perhaps no tax proposal under discussion is more rooted in rhetoric and misjudgment than the proposed minimum tax on companies.[1]

This policy is based on annual lawsuits against a flowing but significant number of large corporations that, in a given year, have no tax liability even though they are profitable according to their financial statements. Politics should eliminate this phenomenon. Examination of the main claims made by proponents of the proposal reveals some discrepancy between the rhetoric and the reality of politics.

Specifically, lawmakers claim that the new tax will 1) tax a certain number of businesses that would otherwise not pay taxes, 2) get the “good” tax breaks, and 3) generate hundreds of billions in new revenue. Each of these claims is supported by misleading and somewhat irreconcilable arguments.

A solution in search of a problem

Almost every year the growing outrage is renewed by reports that a certain number of US firms faced zero or negative tax liabilities in a given year. These reports are based on highly misleading analysis from public financial statements. These analyzes credibly show the tax payments as a proportion of the annual financial statements income in order to determine the effective tax rates of the companies. The first major discrepancy between rhetoric and reality in this tax debate is that income for financial statements purposes and income reported to the Internal Revenue Service are completely different concepts. The public, including progressive think tanks, has no access to corporate tax returns. The analysis removes this inconvenience and asserts these effective tax rates – including zero and negative tax rates – as evidence that profitable companies are failing to pay the essential requirement of public finances: the elusive “fair share”.

Income reported in financial records such as annual financial statements or 10-Ks is determined by the application of generally accepted accounting principles (GAAP). For US companies, these principles are set by a private, independent board of auditors, the Financial Accounting Standards Board (FASB).

Taxable income is determined by tax laws enacted by Congress. Elected officials regularly adjust the tax base and applicable duties. Charitable Withholding, Child Tax Deduction, and Residential Mortgage Deduction are major examples of how Congress is reducing the tax base and tax liability for mandatory activities such as donations, parenting, and home ownership. It is no different with companies, for which Congress has enacted over $ 1 trillion in tax breaks over the next decade.

In fact, the reasons the “offending” firms are exempt from tax in any given year is because those firms were doing the very same activities that Congress had subsidized. In addition, otherwise healthy companies may have unprofitable years due to the business cycle or their own development cycle. Some of the most famous startups in the United States were both valuable but unprofitable in any given year. It makes sense that the tax code does not attempt to tax companies with losses. Indeed, the Corporate Income Tax Act allows companies to carry back losses. This is a deliberate tax policy in the sense of tax credits and tax deductions that subsidize supposedly desirable activities. Important examples of this are the credit for research and experiments, accelerated depreciation and the credit for “green” energy.[2]

Evaluation of the book tax policy against the claims of the supporters

Senators King, Warren, and Wyden have proposed a 15 percent minimum tax for companies that have an average net income of $ 1 billion over 3 years. According to Senator Warren, this policy would “ensure that companies reporting profits of over $ 1 billion to their shareholders pay at least a 15 percent tax rate on those gigantic profits.” Additionally, Senator Warren claims this would apply to about 200 companies, preserve the value of business loans, generate “hundreds of billions in revenue,” and “put an end to profitable companies that pay no (or less) taxes. ”

Each of these claims is tense and, to a certain extent, incompatible. Specifically, the proposal is supposedly only aimed at 200 companies. This reflects the highly misleading analysis on which this directive is based. The number of companies involved in this zero tax analysis changes every year. The analyzes are pure snapshots that reflect not only the state of US tax legislation, but also the economy and business models of the individual companies. In the next decade, the number of companies that would be ensnared by it is therefore not foreseeable. In addition, as already mentioned, the accounting policies that determine book income are set by the FASB – a private, quasi-independent body. This tax policy outsources the determination of the tax base to this company, which it will to some extent over the next decade.

One of the main reasons corporations are exempt from tax in any given year is tax breaks, which Congress enacted to subsidize activities deemed desirable. It is no coincidence that elected officials enjoy appreciating these policies and activities. A prime example is found in Senator Warren’s proposal, which claims to “preserve the value of corporate loans – including R&D, clean energy, and home tax credits – and allow credits for taxes paid abroad.” These are examples of the politics that are driving this tax debate. Companies use these credits to reduce their tax liabilities. In relation to a book-entry measure of income, these companies would be subject to lower effective tax rates than usual and potentially be caught up in that tax. The two concepts contradict each other and deny the thin reed on which the proposal is based.

After all, the proposal is expected to generate hundreds of billions of dollars in revenue. This is only possible to the extent that companies are denied the tax breaks that Congress has otherwise enacted. But the proposal already contains nine “general adjustments” away from a tax on pure book income.[3] Some of these are broader than others, but it’s telling that some activities are worth housing in the light of the sponsors. In relation to book income, taxable income is not much more, but for an alternative set of “general adjustments”. It’s easy to imagine this list of adjustments growing and becoming yet another parallel tax code that large U.S. corporations must adhere to.

diploma

Congress is looking for tax increases to fund new spending, rather than looking at more conventional approaches to increasing revenue. Rather than painfully eliminating the tax preferences that lead to the phenomenon of large corporations paying little to no federal income tax in any given year, some policy makers are considering introducing a new alternative minimum tax based on an entirely separate concept of corporate income. That way, they’ll be outsourcing corporate tax base determination to a board of accountants, while likely retaining many of the same features that drove this problem from the start. The result will be tax policies that inefficiently increase revenue without ending the “problem” that inspired them.

[1] A similar approach was briefly adopted in response to similar observations in 1986, but was eventually abandoned in favor of today’s corporate AMT: https://scholar.smu.edu/cgi/viewcontent.cgi?article=2650&context=smulr

[2] For more information on the key differences between book income and taxable income, see: https://www.jct.gov/publications/2020/jcx-4-20/

[3] SEK. 56A (c)

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