How a new corporate minimum tax could reshape business investment

WASHINGTON — At the heart of the new climate and tax package that Democrats seem to be on the verge of passing is one of the most significant changes to America’s tax code in decades: a new corporate minimum tax that allows the federal government to collect revenue. That may change the way and change the way the country’s most profitable companies invest in their businesses.

The proposal is one of the last remaining tax increases in the package that Democrats are aiming to pass along party lines in the coming days. After months of intertwined disagreements about raising taxes on the wealthy or withdrawing some of the 2017 Republican tax cuts to fund their agenda, they have settled on a longstanding political ambition to ensure that Large and profitable companies pay more than $0 in federal taxes. ,

To accomplish this, Democrats have reworked a policy that was last employed in the 1980s: trying to capture tax revenue from companies that report profits to shareholders on their financial statements. while bulking up on deductions to reduce their tax bills.

The re-emergence of the corporate minimum tax, known as “book income” that companies report on their financial statements, has prompted confusion and fierce lobbying resistance since it was announced last month.

Some initially combined the measure with a 15 percent global minimum tax, which Treasury Secretary Janet L. Yellen is pushing forward as part of an international tax deal. However, it is a separate proposal, stalled in Congress in the United States, that would apply to foreign earnings of US multinationals.

Republicans have also deceptively tried to seize the tax increase as evidence that President Biden was ready to break his campaign promises and raise taxes on middle-class workers. And manufacturers warn it will incur new costs in times of rapid inflation.

The new tax had already been reduced as of Thursday evening, in a sign of the political power of lobbyists in Washington. At the urging of producers, Senator Kirsten Cinemas of Arizona persuaded her Democratic colleagues to preserve a valuable deduction, known as bonus depreciation, associated with purchases of machinery and equipment.

The new 15 percent minimum tax will apply to corporations that report annual income of more than $1 billion to shareholders on their financial statements, but to reduce their effective tax rates below the statutory 21 percent for deductions, credits and other preferential tax treatment. It was originally projected to raise $313 billion in tax revenue over a decade, although the final tally is expected to be $258 billion once the revised bill is finalized.

The new tax could add even more complexity to the tax code, posing challenges to the law enforcement if passed.

“In terms of implementation and just the bandwidth to deal with, there’s no doubt that this arrangement is complex,” said Peter Richman, a senior attorney adviser in the Tax Law Center at New York University’s Law School. “It’s a big change and the revenue numbers are big.”

Because of that complexity, the corporate minimum tax has faced considerable skepticism. This is less efficient than simply eliminating deductions or raising the corporate tax rate and could open the door for companies to find new ways to underreport their income to lower their tax bills.

Similar versions of this view have been issued by Mr Biden during his presidential campaign and by Senator Elizabeth Warren, a Democrat from Massachusetts. They have been promoted as a way to restore fairness to a tax system that has allowed major corporations to dramatically reduce their tax bills through deductions and other accounting measures.

According to a preliminary estimate of the non-partisan Joint Committee on Taxation, the tax is likely to apply to approx. 150 companies annually, and most of them will be manufacturers. This sparked outrage from construction companies and Republicans, who are opposed to any policies that curtail the tax cuts implemented five years ago.

Although many Democrats acknowledge that the corporate minimum tax was not their first choice for a tax increase, they have embraced it as a political winner. Oregon Senator Ron Wyden, chairman of the Senate Finance Committee, shared the Joint Committee on Taxation data Thursday, indicating that in 2019, about 100 to 125 corporations reported financial statement income in excess of $1 billion, yet their Effective tax rates were less than 5 percent. The median income reported on the financial statements to shareholders was approximately $9 billion, but they only paid an average effective tax rate of 1.1 percent.

“Companies are paying rock-bottom rates to their shareholders while reporting record profits,” said Mr. Widen.

The Treasury Department had objections about the minimum tax idea last year because of its complexity. If enacted, the Treasury would be responsible for new regulations and guidance for the new legislation and for ensuring that the Internal Revenue Service can police it properly.

Professor of Tax Law at Columbia University Michael J. Gretz acknowledged that calculating minimum taxes was complicated and that introducing a new tax base would add new challenges from a tax administration perspective, but said he did not see those constraints as disqualifications. He said the current system has created opportunities for tax shelters and allowed companies to incur losses for tax purposes that do not appear in their financial statements.

“If the problem Congress is tackling is that companies are reporting high book profits and low taxes, then the only way to align those two is to base taxes on book profits to some degree,” Mr. Gretz, a former deputy assistant secretary for tax policy at the Treasury Department, said.

A similar version of the tax was included in the 1986 tax overhaul and allowed to expire three years later. Skeptics of revisiting such a measure have warned that it could create new problems and opportunities for companies to avoid the minimum tax.

“Evidence from a study of outcomes surrounding the Tax Reform Act of 1986 suggests that companies responded to such a policy by changing the way financial accounting income is reported – companies deferring more earnings to future years ,” Michelle Hanlon, an accounting professor at the Sloan School of Management at the Massachusetts Institute of Technology, told the Senate Finance Committee last year, “This behavioral response poses serious risks to financial accounting and capital markets.”

Other opponents of the new tax have expressed concern that it would give the Financial Accounting Standards Board more control over the US tax base, an independent organization that sets accounting rules.

“Potential politicization of the FASB will likely result in lower-quality financial accounting standards and lower-quality financial accounting income,” said Ms Hanlon and University of North Carolina professor Jeffrey L. Hoops wrote in a letter to members of Congress. last year which was signed by Over 260 Accounting Academics,

Trade groups took a strong stand against the proposal and pressured Ms. Cinema to block the tax altogether. The National Association of Manufacturers and the Arizona Chamber of Commerce and Industry released a poll of manufacturing workers, managers and advocates in the state on Wednesday that showed a majority opposed the new tax.

“This will make it harder to hire more workers, raise wages, and invest in our communities,” Chad Moutre said. chief economist of manufacturing union, “Arizona’s manufacturing voters are clearly saying this tax will hurt our economy.”

Ms. Cinema has expressed opposition to the increase in tax rates and objected to the proposal to reduce the special tax treatment that hedge fund managers and private equity executives receive for “interest carried”. Democrats rejected the proposal at his insistence.

When an earlier version of the corporate minimum tax was proposed last October, Ms. issued an approval statement,

“This proposal represents a common-sense step toward ensuring that highly profitable corporations – which can sometimes avoid the current corporate tax rate – pay the appropriate minimum corporate tax on their profits, as do every Everyday Arizonans and Arizona do small businesses,” she said. In announcing that she would support a revised version of the climate and tax bill on Thursday, Ms. Cinema said it would “protect advanced manufacturing.”

It garnered praise from business groups on Friday.

“Capital spending – investment in new buildings, factories, equipment, etc. – is one of the most economically disastrous ways to raise taxes,” Neil Bradley, chief policy officer of the US Chamber of Commerce, said in a statement. “While we look forward to reviewing the newly proposed bill, Senator Cinema deserves credit for recognizing it and fighting for the changes.”

Emily Cochran Contributed to reporting.

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