How a New Corporate Minimum Tax Could Reshape Business Investments

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 American tax law in decades. A new corporate minimum tax that could reshape how the federal government collects revenue. And change the way the nation’s most profitable companies invest in their businesses.

The proposal is one of the final tax increases in a package that Democrats are aiming to pass party policy in the next few days. After months of disagreements within the party over whether to raise taxes on the wealthy or withdraw some of the Republicans’ 2017 tax cuts to fund the agenda, they are on a large scale. It put an end to a long-standing political ambition to ensure profitable companies pay $0 or more in federal taxes. .

To accomplish this, Democrats have recreated policies last adopted in the 1980s. That is, it seeks to capture tax revenue from companies that report profits to shareholders in their financial statements, while increasing deductions to reduce the tax burden.

The re-emergence of a minimum corporate tax that applies to what companies report in their financial statements, known as “book earnings,” has sparked confusion and fierce lobbying resistance since it was announced last month.

Some initially confused the measure with the 15% global minimum tax rate that Treasury Secretary Janet L. Yellen has been pushing as part of international tax treaties. However, it is a separate proposal that remains stalled in Congress in the United States and applies to the foreign earnings of US multinational corporations.

Republicans are also misleadingly trying to use tax increases as evidence that President Biden was breaking his campaign promises and preparing to raise taxes on middle-class workers. Manufacturers also warn of new costs in a period of rapid inflation.

By Thursday night, the new tax had already been watered down, as a sign of the political power of the Washington lobbyists. At the manufacturer’s request, Sen. Kirsten Cinema of Arizona persuaded her Democratic colleagues to keep a valuable deduction known as bonus depreciation associated with the purchase of machinery and equipment.

The new minimum tax rate of 15% reports annual income to shareholders of $1 billion or more in financial statements, but takes advantage of deductions, deductions, and other tax incentives to reduce the effective tax rate significantly below the statutory 21% Applies to companies. Originally projected to bring in $313 billion in tax revenue over the decade, the final tally could bring him up to $258 billion once the revised bill is finalized.

New taxes can also make tax laws more complex, which could create challenges in enforcing the laws if they are passed.

“There is no question that the regime is complex in terms of implementation and bandwidth to deal with complexity,” said Peter Richman, senior legal adviser to the Center for Tax Law at New York University Law School. . “This is a big change and the revenue numbers are big.”

Because of its complexity, the corporate minimum tax rate faces a fair amount of skepticism. Less efficient than simply eliminating deductions or raising corporate tax rates, businesses may find new ways to make incomes look lower and pay less tax.

A similar idea was put forward by Mr. Biden during the presidential campaign and by Senator Elizabeth Warren of the Massachusetts Democratic Party. They have been promoted as a way to restore equity to the tax system that allowed large corporations to dramatically reduce their tax bills through deductions and other accounting measures.

According to early estimates from the Joint Commission on Bipartisan Taxation, the tax would most likely apply to about 150 companies per year, and most of them will be manufacturers. This has sparked protests from manufacturers and Republicans who have opposed any policy that would reduce the tax cuts enacted five years ago.

Many Democrats admit that the minimum corporate tax was never the first option to raise taxes, but embrace it as a political winner.Ron Wyden of Oregon, Chairman of the Senate Finance Committee Senators shared data from the Joint Taxation Committee on Thursday, noting that about 100 to 125 businesses reported more than $1 billion in financial statement revenue in 2019, but had an effective tax rate of less than $5. Indicated. percent. The average revenue reported to shareholders in the financial statements was about $9 billion, but the average effective tax rate was only 1.1%.

“Companies are reporting record profits to shareholders while paying the lowest interest rates,” Wyden said.

The Treasury Department had reservations about the minimum tax proposal last year because of its complexity. If enacted, the Treasury Department will be responsible for creating many new regulations and guidance for the new law so that the Internal Revenue Service can properly enforce it.

Michael J. Graetz, a professor of tax law at Columbia University, acknowledged that calculating the minimum tax is complex and that introducing a new tax base adds new challenges from a tax administration perspective, but those He said he does not consider disability a disqualification. He pointed out that the current system creates tax shelter opportunities, allowing companies to incur losses for tax purposes that do not appear on their financial statements.

“If the problem Congress is grappling with is companies reporting high book profits and low taxes, the only way to reconcile the two is to tax the book profits. .Treasury tax policy, said.

A similar version of the tax was included in the 1986 tax reform and allowed to expire after three years. Skeptics warn that revisiting such measures could create new problems and opportunities for businesses to avoid the minimum tax.

“Evidence from a study of the results of the Tax Reform Act of 1986 suggests that companies responded to such policies by changing the way they reported earnings in their financial accounts. , we deferred more revenue to future years,” said Michelle Hanlon, professor of accounting at Sloan University. Massachusetts Institute of Technology School of Business, 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, the independent body that sets accounting rules, more control over the U.S. tax base.

In a letter to members of Congress, Hanlon and University of North Carolina Professor Jeffrey L. is high,” he said.last year signed by 260+ accountants.

Business groups strongly opposed the proposal and have pressured Mr. Cinema to block the tax entirely. The National Association of Manufacturers and the Arizona Chamber of Commerce released a poll of manufacturing workers, managers and advocates in the state on Wednesday, showing a majority opposed the new tax.

“It makes it harder to hire more workers, raise wages and invest in our communities,” said Chad Moutley. Chief Economist, Association of Manufacturers“Arizona’s manufacturing voters have clearly said this tax is going to hurt our economy.”

Cinema has voiced his opposition to higher tax rates and has reserved suggestions for reducing the special tax treatment hedge fund managers and private equity executives receive for their “carried interests.” At her request, the Democrats scrapped her proposal.

When the previous version of the corporate minimum tax was proposed last October, Cinema said: issued a statement of approval.

“This proposal would allow highly profitable companies, who may be able to avoid current corporate tax rates, to pay a reasonable minimum corporate tax on their profits, as Arizona and small businesses in Arizona routinely do. It represents a common-sense step to ensure that the “Protecting the

It won accolades from business groups on Friday.

Neil Bradley, chief policy officer of the U.S. Chamber of Commerce, said in a statement, “Taxing capital expenditure, which is investment in new buildings, factories, equipment, etc., is the most economically destructive way to increase taxes. It’s one of the.” “We look forward to considering the newly proposed bill, but the Cinema Senators deserve credit for recognizing this and fighting for change.”

Emily Cochrane contributed to the report.