[This piece has been published in Restoring America to highlight why a new tax proposal from Democratic senators would hurt individual businesses and the economy as a whole.]
Last week, Sen. Joe Manchin, (D-WV), and Senate Majority Leader Chuck Schumer, (D-NY), announced a budget reconciliation deal that would raise taxes on corporations and high-income households to finance increased healthcare and climate spending. The bill, titled the “Inflation Reduction Act (IRA) of 2022,” includes a 15% alternative minimum tax (AMT) on large corporations’ financial statement (“book”) income. This book minimum tax was first proposed in 2019 as part of President Joe Biden’s campaign tax plan. It has been scaled back slightly since then but remains a bad idea.
The book minimum tax proposal was designed to address a perceived unfairness: corporations reporting significant profits on their financial statements but little or no current federal tax liability. The campaign version applied to companies with net income over $100 million, allowed foreign tax credits and net operating loss deductions, but included few other details. The IRA version would only apply to corporations with a net income over $1 billion and can be offset with general business credits such as the research and development tax credit and green energy tax credits.
In a previous paper, I pointed out three fundamental issues with this type of tax.
First, taxing book income could reduce the informational quality of financial statements. It is well known that corporations face an incentive to reduce their taxable income to reduce their tax liability. Taxing book income would mean that companies would have a similar incentive to overstate expenses and understate revenue on their financial statements to avoid the tax.
Second, it would outsource a portion of the tax code to the Financial Accounting Standards Board (FASB), an unelected standard-setting body for the accounting profession. The FASB may decide to make changes to financial accounting standards without considering Congress’s fiscal goals. This is in tension with the Constitution’s grant of legislative power to Congress and could encourage members of Congress to lobby FASB for or against changes to accounting standards.
Third, the book minimum tax would likely increase distortions in the corporate tax, not reduce them. Companies will find themselves subject to the minimum tax in some years and subject to the ordinary corporate income tax in others. Companies will take deductions under one tax and realize revenue under the other, which means that assets may face a higher or lower tax burden in some years than under current law. This could encourage companies to devote resources toward planning around the minimum tax.
Although the tax has these problems, supporters argue that the proposal will ensure that large corporations pay at least 15% of their profits in tax. Sens. Bernie Sanders (I-VT) and Schumer asserted that the proposal would “end the days of billionaires and large, profitable corporations not paying a nickel in federal income taxes.” Their plan will not accomplish this. General business credits the ability to carryforward losses will still allow effective tax rates to go lower than 15%.
The book minimum tax is a significant part of the IRA. It would raise $313 billion over 10 years to help finance increased climate and healthcare spending and a reduction in the federal deficit. Unfortunately, the book tax is not good tax policy and there are a lot better ways to raise revenue.
This article originally appeared in the AEIdeas blog and is reprinted with kind permission from the American Enterprise Institute.
