Corporate Tax

This Week In Bidenomics: Observe Company Earnings

President Biden needs a lot of money for his infrastructure and social plans. Big companies have a lot of money. So the race is on for Uncle Sam to get more of this.

The key element of Biden’s “Made in America” tax plan is an increase in the corporate tax rate from 21% to 28%. But Biden actually pulled out of yet another tax hike that was part of his platform as a candidate. Biden called for a minimum tax of 15% for companies making $ 100 million or more and paying less than 15 percent by taking advantage of tax breaks to ease their tax burdens. But Biden’s formal plan raises the income threshold to $ 2 billion and essentially applies the tax only to the largest U.S. corporations.

This is certainly a relief for many companies who would be subject to minimum tax under the old plan but not under the new one. I used data from S&P Capital IQ to figure out how many companies would receive redress under Biden’s milder plan. Among the companies in the S&P 500 index, 411 have made more than $ 100 million in the past 12 months. Only 124 companies made more than $ 2 billion. So 287 companies that would have been subject to a minimum tax under Candidate Biden’s plan are not covered by President Biden’s plan.

Which companies would? Some are obvious, like tech giants Apple, Microsoft and Facebook, banks like JP Morgan and Bank of America, and giant retailers like Amazon, Walmart and Home Depot. But there are other names you might not guess, like Norfolk Southern Railroad, manufacturer Illinois Tool Works, and retailer Dollar General. Here is a list of all the companies that have reached the $ 2 billion net income threshold:

There may not be solid economic reasons for going arbitrarily at breakeven and imposing a new tax above, but not below, on companies. However, there is a political rationale. The most profitable companies, by definition, thrive. It’s an easy populist argument to say that they should share a little more of the wealth. These companies have sufficient resources to defend themselves. So it’s not like ruthless federal agents abusing a mom and pop operation.

The story goes on

You have a lot of money too. The annual profits of these 124 companies are $ 898 billion. If they all paid 15% of their net income in taxes, that would be $ 134 billion, which is 63% of all corporate taxes the government levied in 2020. That would come from a fraction of 1% of the 33 million businesses in the country.

Of course, this is nowhere near as easy, which is why Biden and his Democrats are looking for new ways to generate more corporate revenue. Biden and Treasury Secretary Janet Yellen are right that corporate taxes as part of federal revenues have shrunk dramatically while taxes on regular income have increased slightly. The catch is that businesses – multinational corporations in particular – have many options for lowering their tax burdens while most ordinary taxpayers don’t.

For example, not all of the $ 898 billion in profit these 124 companies made came from the United States. And some of the profit made from US sales does not stay in the US. Biden and Yellen propose new ways to reduce corporate profit shifting from country to country, but most advanced nations would have to agree to the same rules, which seems unlikely.

WASHINGTON, DC – MARCH 5: Treasury Secretary Janet Yellen listens during a meeting with President Joe Biden in the Roosevelt Room of the White House on March 5, 2021 in Washington, DC. Yellen recently commented that Bitcoin is an “extremely inefficient” way to conduct monetary transactions. (Photo by Al Drago-Pool / Getty Images)

Hit the $ 2 billion mark

Business profitability review suggests other issues with a 15% minimum tax for large businesses. There are 10 companies whose earnings were 10% above the threshold of $ 2 billion or less (see pages 8 and 9 of the graph above). Businesses can reduce profitability in a number of ways, and any business would be prudent to lowering bottom line if it meant falling below the surcharge threshold. If Biden’s minimum tax came into effect, we would almost certainly have fewer companies above the $ 2 billion threshold, or whatever the threshold turned out to be. Some companies could even split into smaller companies if that means significant tax savings for shareholders.

Since the tax is on profits rather than revenue, there are some very large companies that would not have to pay it. For example, AmerisourceBergen, McKesson, Exxon Mobil, AT&T and Ford are missing from the list of companies with earnings of more than $ 2 billion. It makes sense that money-losing companies should be exempt from paying income taxes. However, when basing taxes on book profits, ask yourself how companies could influence their reporting to lower their tax burden.

The signage is pictured in a Walmart store in Oklahoma City on Tuesday, August 4, 2020.  (AP Photo / Sue Ogrocki)

The signage is pictured in a Walmart store in Oklahoma City on Tuesday, August 4, 2020. (AP Photo / Sue Ogrocki)

Proponents of a minimum corporate income tax point out that publicly owned companies often tell very different stories in the financial reports they publish for shareholders and in filings with the IRS. We don’t know for sure as tax returns are confidential. However, different rules apply to each type of submission. Public reports largely measure operational performance, and CEOs have an incentive to maximize the profit they claim, which usually increases the share price. The incentive is completely different for tax returns, where the aim is to minimize taxable income.

If companies began to owe taxes based on “book revenue” reported to shareholders, it would create a new incentive to minimize book revenue and could create a new measure of operational performance. Corporate America excels at financial innovation, especially the sneaky nature, and it’s not hard to imagine CEOs finding yet another way to evade the helmsman.

Congress could not pass Biden’s minimum corporate income tax. It adds complexity by counteracting other tax breaks designed to encourage investment and innovation. Companies are singled out for their success and there may still be loopholes for tax attorneys to exploit. If it ever happens, expect many companies to suddenly become less profitable.

Rick Newman is the author of four books, including “Rebounder: How winners move from setback to success.Follow him on Twitter: @rickjnewman. You can also Send confidential tipsand click here to Receive Rick’s stories by email.

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