Making Companies ‘Pay Their Fair Share’

By Emel Akan
Emel Akan
Emel Akan
reporter
Emel Akan is White House economic policy reporter in Washington, D.C. Previously she worked in the financial sector as an investment banker at JPMorgan and as a consultant at PwC. She graduated with a master’s degree in business administration from Georgetown University.
December 11, 2021 Updated: December 21, 2021

Dozens of big corporations, including Nike and FedEx, have paid no federal income taxes for years, which is prompting Democrats to introduce a minimum tax on earnings. While the concept is alluring to many, tax policy experts are increasingly warning of the undesirable outcomes of the proposal.

President Joe Biden’s nearly $2 trillion social and climate spending plan calls for imposing a 15 percent minimum tax on the book income of corporations that report over $1 billion in profits. The change would apply for tax years beginning after Dec. 31, 2022.

The proposal, which is in lieu of a higher statutory corporate tax rate, seeks to prevent widespread tax avoidance by large corporations. And it’s popular among voters of both parties, as many people think it’s absurd that a pro-China company such as Nike gets a free ride in America.

Companies can take advantage of a host of deductions and exemptions in the tax code, which are mainly designed to encourage investments in research and development, and innovation. Some also use tax breaks for renewable energy or for executive stock options to significantly reduce their tax liabilities.

As a result, at least 55 of the largest U.S. companies paid no federal income taxes in 2020 despite having substantial pretax profits in the United States, according to a study by the left-leaning Institute on Taxation and Economic Policy (ITEP). And a recent analysis by Sen. Elizabeth Warren (D-Mass.) and ITEP showed that 70 corporations would have collectively paid $22 billion more in taxes if the minimum tax had been in effect.

Amazon, Facebook, Google, HP, and Netflix are among the 70 corporations cited as “tax dodgers” in the report.

President Joe Biden promised that his Build Back Better plan would fix this problem.

“I’m not a socialist; I’m a capitalist,” Biden said, defending his agenda during a recent speech in Missouri.

“You should be able to make a million or a 100 million bucks if you can, but pay your fair share,” he said, doing his signature move of whispering into the microphone.

The corporate minimum tax provision is a key revenue raiser for Biden’s spending plan, generating nearly $320 billion over 10 years, according to the Joint Committee on Taxation.

While it sounds like a commonsense policy, its economic impact has come under question.

It’s “the most economically damaging provision” in the House-approved bill, according to the right-leaning Tax Foundation, with a potential to cost about 27,000 jobs.

The minimum tax would “disallow bonus or accelerated depreciation deductions that reduce the firms’ effective tax rate,” said Garrett Watson, a senior policy analyst at the Tax Foundation.

This will have a big impact on investment decisions, he said.

Denying a full deduction for investment upfront increases the cost of making capital investments for businesses. Automobile, coal, and utilities would be the three most hard-hit industries by the minimum tax proposal, the Tax Foundation says.

Critics also argue that this would undermine the Made in America movement.

Under the minimum tax regime, general business tax credits, including the ones for R&D and green energy, would be preserved. But others, such as bonus depreciation for capital investments and deduction for the fair market value of stock-based compensation, would be impacted by the change.

Senior officials at the Treasury Department have raised concerns internally about the new minimum tax, according to a recent Washington Post article. The plan will lead to “a ton of unintended consequences because you have not really spent a lot of time thinking through this,” one official anonymously told the Post.

Companies would have to prepare two parallel books—calculating their tax liabilities first under the current tax code and then determining how much they owe after adjusting for requirements of the new minimum tax regime. This would introduce more complexity for businesses.

The other risk, according to critics, is that companies could turn to more debt instead of equity for financing to increase their interest expenses and reduce their tax liabilities.

It’s unclear whether the Senate will revisit the design passed by the House. But as it stands, critics say the minimum tax will likely raise far less tax revenue than Democrats believe due to the continued tax credits for R&D or green energy and loss carryforwards. It would also make the tax system more complicated while discouraging business investments, which are key to economic growth and productivity.

Emel Akan
reporter
Emel Akan is White House economic policy reporter in Washington, D.C. Previously she worked in the financial sector as an investment banker at JPMorgan and as a consultant at PwC. She graduated with a master’s degree in business administration from Georgetown University.