As the Senate considers which components of the House Build Back Better Act (BBBA) to include, a key difference between the original Ways and Means Bill and the Rules Committee’s later version concerns corporate taxes. The original draft would have raised the corporate tax rate to 26.5%, while the Rules Committee’s version would leave the corporate tax rate as is and create a 15% income tax instead. accounting. Choosing between the two is like choosing your poison.
Our model reveals that the most recent version of the BBBA would have a lower negative economic impact overall due to the omission of the increase in corporate interest rates. The increase in the corporate tax rate would be a much larger tax increase, accounting for around $ 700 billion in new revenue in the original House bill, compared to around $ 200 billion in new revenue from the new tax. minimum in the most recent draft of the Chamber. Reflecting the scale of the tax increases, the rate hike would have a much larger economic impact than the tax on books – 0.6% less than long-term GDP versus 0.1% less.
Here’s the underlying economy at play: Raising the corporate tax rate reduces output by reducing the potential return on new investment, thus reducing the incentives for companies to undertake new projects. The corporate tax burden falls on shareholders in the form of lower returns and on workers in the form of lower wages. Recent research shows that the economic burden of taxing corporate income through lower wages weighs most on low-skilled workers, women and young people.
Corporate income tax also recovers returns on already existing investments, which is less damaging economically because companies cannot go back in time and undo past investments. While the corporate tax base under the current law is not optimally structured to completely exclude normal income from tax, part of the corporate income tax falls on supernormal returns, which may be less tax sensitive. Overall, however, corporate income tax is more economically damaging than other current taxes, such as those imposed on consumption or personal income.
The minimum book tax, meanwhile, ends up punishing an assortment of businesses with differentials between taxable income and minimum book tax income. The central problem with the proposal is that accounting income is a poor definition of the tax base – good reasons exist for the differences in the way accounting income and taxable income are calculated.
For example, bonus depreciation is a tax policy that encourages investment by allowing companies to immediately deduct the cost of the equipment, rather than waiting several years as would be the case with fiscal and accounting depreciation. standard. Taxing book income essentially eliminates bonus amortization, thus increasing the cost of the investment. The refusal of such deductions would have particular implications for certain industries. As our colleague Cody Kallen recently found out, the minimum book tax would increase taxes on coal, auto manufacturers, utilities and construction the most.
The tax on books as specified allows for certain general business tax credits, net operating losses and other provisions. Because lawmakers do not want to claw back all the provisions that would be denied under the accounting income rules, they choose which parts of the regular tax base to reintegrate into the minimum accounting tax base, which will force taxpayers to fall back on the tax base. comply with two distinct sets of complex rules. Our modeling does not take into account the administrative, compliance and other costs associated with the introduction of a new tax on the accounting income of a subset of companies, which will require extensive regulation, likely revisions, legal disputes and uncertainty for taxpayers as to their liability and the legal maneuvers to minimize it.
Minimum book tax has a growing list of issues that lead to problems specific to a sector or industry, imposing burdens on investments or business activities, including:
The industry-specific issues largely reflect the unintended consequences of a proposal that has not been carefully considered – and part of the reason why Treasury Department officials have raised concerns about the proposal. .
As an alternative, lawmakers could craft a minimum tax with the normal tax base as a starting point, retaining policies such as accelerated deductions for fixed investments while working to prevent companies from profiting too much. large number of actual subsidies built into the tax code. Restricting the use of these credits would have a less damaging economic effect than limiting the ability of businesses to benefit from regular deductions for investments. However, such a tax would still create additional complexity by forcing businesses to comply with an alternative tax regime. Instead, the best option would be for policymakers to tackle existing subsidies directly.
Ultimately, although the minimum book tax would be smaller than the rate increases initially proposed for corporations, it would introduce more complexity, inefficiency and problems at the industry and sector levels than it does. ‘an increase in the corporate rate would not. Neither option is an optimal way to raise new tax revenue.
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