How New Corporate Minimum Tax Could Reshape Business Investments

How New Corporate Minimum Tax Could Reshape Business Investments

WASHINGTON – At the heart of the climate and new tax package that Democrats appear poised to pass is one of the most significant changes to the American tax code in decades: a new corporate minimum tax that could reshape how the federal government collects revenue. and changing how the nation’s most profitable companies invest in their businesses.

The proposal is one of the last remaining tax increases in the package that Democrats are likely to push through in the coming days. After months of bipartisan disagreement over whether to raise taxes on the wealthy or roll back some of the 2017 Republican tax cuts to fund their agenda, they have long settled on a political ambition to ensure that -large profitable companies pay more than $0 in federal taxes. .

To achieve this, Democrats have recreated a policy last used in the 1980s: trying to capture tax revenue from companies that report profit to shareholders on their financial statements while adding deductions to their bills. tax reduction.

The re-emerged minimum corporation tax, which would apply to the “book income” companies report on their financial statements, has sparked confusion and fierce lobbying resistance since it was announced last month.

Some initially conflated the measure with the 15 percent global minimum tax that Treasury Secretary Janet L. Yellen was pushing as part of an international tax accord. However, that is a separate proposal, which is still stalled in the United States in Congress, that would affect the foreign earnings of American multinational companies.

Republicans have also misguidedly tried to seize on the tax increase as evidence that President Biden was ready to break his campaign promises and raise taxes on middle-class workers. And manufacturers have warned that it would impose new costs in a time of rapid inflation.

In a sign of the political power of lobbyists in Washington, by Thursday afternoon the new tax had already been reduced. At the insistence of the manufacturers, Senator Kyrsten Sinema from Arizona urged her Democratic colleagues to preserve a valuable deduction, called bonus depreciation, related to the purchase of machinery and equipment.

The new 15 percent minimum tax would apply to corporations that report annual income to shareholders of more than $1 billion on their financial statements but use deductions, credits and other preferential tax treatments to reduce their effective tax rates to well below the statutory 21 percent. It was originally projected to raise $313 billion in tax revenue over ten years, although the final tally is likely to be $258 billion when the revised bill is finalized.

The new tax could also add more complexity to the tax code, creating compliance challenges if passed.

“In terms of implementation and just bandwidth to deal with the complexity, there’s no question that this regime is complex,” said Peter Richman, senior attorney advisor at the Tax Law Center at New York University’s law school. “This is a big change and the revenue is huge.”

Because of that complexity, there is considerable skepticism about the minimum corporation tax. Eliminating deductions or raising the corporate tax rate is less effective and could open the door for companies to find new ways to lower their income to reduce their tax bills.

Similar versions of the idea were floated by Mr. Biden during his presidential campaign and Senator Elizabeth Warren, Democrat of Massachusetts. They were promoted as a way to restore fairness to a tax system that allowed large corporations to drastically lower their tax bills through deductions and other accounting measures.

According to an early estimate by the non-partisan Joint Committee on Taxation, the tax would most likely apply to around 150 companies per year, the majority of which would be manufacturers. That prompted an outcry from manufacturing companies and Republicans, who have opposed any policies that reduce the tax cuts they enacted five years ago.

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

“Companies are paying base rates while reporting the highest profits to their shareholders,” Mr Wyden said.

The Treasury Department was concerned about the minimum tax idea last year because of its complexity. If enacted, the Treasury would be responsible for crafting a range of new regulations and guidance for the new law and for ensuring that the Internal Revenue Service could properly police it.

Michael J. Graetz, a professor of tax law at Columbia University, acknowledged that calculating minimum taxes was complicated and that the establishment of a new tax base would present new challenges from the point of view of tax administration, but said that he did not consider those obstacles to be disqualified. He noted that the current system created opportunities for tax shelters and allowed companies to take losses for tax purposes that do not appear on their financial statements.

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

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

“The evidence from studies of the results of the Tax Reform Act of 1986 suggests that companies responded to such a policy by changing the way they report financial accounting income – companies deferred more income to future years, ” Michelle Hanlon, professor of accounting at Sloan. School of Management at the Massachusetts Institute of Technology, the Senate Finance Committee said last year. “This behavioral response poses serious risks to financial accounting and capital markets.”

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

“The prospective politics of the FASB is likely to lead to lower quality financial accounting standards and lower quality financial accounting earnings,” wrote Ms. Hanlon and Jeffrey L. Hoopes, professor at the University of North Carolina, in a letter to members of Congress. last year over 260 accounting academics signed that.

Business groups have pushed back hard against the proposal and pressured Ms Sinema to block the tax entirely. 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 that showed a majority against the new tax.

“It’s going to be harder to hire more workers, raise wages and invest in our communities,” said Chad Moutray, the manufacturing association’s chief economist. “Arizona’s manufacturing voters are saying clearly that this tax will hurt our economy.”

Ms. Sinema opposed raising tax rates and was skeptical of a proposal to reduce the special tax treatment that hedge fund managers and private equity executives receive for “carried interest.” Democrats killed the proposal at her request.

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

“This proposal is a sensible step to ensure that highly profitable corporations – which can sometimes avoid the current corporate tax rate – pay a reasonable minimum corporate tax on their profits, just as ordinary Arizonans and Arizona businesses do,” a she said.In announcing her support for an amended version of the climate and tax bill Thursday, Sinema noted that it would protect advanced manufacturing.

That won praise from business groups on Friday.

“Taxing capital expenditure – investments in new buildings, factories, equipment, etc. — one of the most economically destructive ways you can raise taxes,” Neil Bradley, chief policy officer of the U.S. Chamber of Commerce, said in a statement. He added, “As we look forward to reviewing the proposed new bill, Senator Sinema deserves praise for recognizing this and fighting for change.”

Emily Cochrane reporting helped.

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