Biden is wrong about his own new corporate minimum tax
Erica York
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Since its early days, the Biden administration has rested its argument for higher corporate taxes on a series of misleading claims. The administration’s efforts culminated in the Inflation Reduction Act’s economically damaging minimum tax on corporate book income. The tax has now taken effect, and with the new year comes new misleading rhetoric about it.
Last year, President Joe Biden falsely claimed the minimum tax would “put an end” to corporations paying zero in federal taxes, earning him an additional context label on Twitter. This year, Biden has a similar message: “It’s 2023. That means the largest, most profitable corporations will have to start paying a 15% minimum tax. The days of the wealthiest companies not paying taxes are over.”
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The trouble begins with the administration’s misdiagnosis of a problem: that corporations can report financial profits to shareholders while owing zero in federal taxes. At first glance, it seems nefarious, or at the very least unfair, but it’s not.
Lawmakers have enacted provisions in the tax code that differ from the rules governing financial reporting to shareholders, creating two different measures of a company’s profits, known as book income and taxable income. Book income rules are designed to give shareholders information about a company’s financial performance. Taxable income rules are designed to measure earnings for the purpose of raising government revenue and promoting (or discouraging) certain activities.
For instance, because lawmakers want to promote investment in machinery and equipment, tax rules allow faster depreciation deductions than accounting rules do. This results in larger tax write-offs up front. Lawmakers have also created tax credits for specific activities like Research and Development and green energy investments. Other provisions smooth tax liability over time to avoid penalizing companies for experiencing volatility.
The deductions, exemptions, and differences in rules explain how a corporation can indeed end up with zero taxable income while at the same time reporting book income to its shareholders for a given year — or vice versa.
If the Biden administration believes the tax code gave write-offs or credits that were too generous, it could have simply curbed them directly. Instead, it proposed a minimum tax of 15% on book income for corporations with profits over $1 billion. The approach was rife with red flags and went against the advice of prominent accountants.
Throughout the legislative process, lawmakers added several exemptions to the minimum tax, including for foreign tax credits, net operating loss deductions, general business tax credits, defined benefit pensions, and faster write-offs for capital investment. In other words, lawmakers added back in many of the tax rules that create differences between book income and taxable income in the first place, kneecapping the ability of the minimum tax to address the perceived problem.
From an economic perspective, the exemptions at least lessen the economic bite of the tax. Even so, the book minimum tax is still the most economically damaging provision in the Inflation Reduction Act. Tax Foundation estimates it will reduce gross domestic product by 0.1% and eliminate 20,000 jobs while raising just $182 billion over 10 years. Further, it will inevitably lead to complex administrative problems for the IRS and taxpayers and could dampen the usefulness of financial reporting for shareholders.
From a political perspective, the exemptions highlight how disingenuous the saga has been. First, claim it’s a problem when businesses follow the tax rules to lower their tax bills; second, propose an ill-advised minimum tax to layer on top; and third, add back many of the disallowed tax rules and say you’ve solved the so-called problem.
Biden is correct that the start of 2023 means the tax is now in effect. But he’s wrong that his new tax will end instances of corporations paying zero federal taxes in a given year, and he’s also wrong that such an occurrence is a problem in the first place.
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Erica York is a senior economist and research manager at the Tax Foundation.