Minimum tax on books is always a bad idea


[This piece has been published in Restoring America to highlight why a new tax proposal from Democratic senators would hurt individual businesses and the economy as a whole.]

Last week, Sen. Joe Manchin, (D-WV), and Senate Majority Leader Chuck Schumer, (D-NY), announced a fiscal reconciliation deal that would raise taxes on businesses and households. high-income earners to fund increased health and climate spending. . The bill, titled “
Inflation Reduction Act (IRA) of 2022
includes a 15% alternative minimum tax (AMT) on large corporation financial statement (“book”) income. This minimum tax on books was first proposed in 2019 as part of President Joe Biden’s campaign
tax system
. It’s been scaled back slightly since but still a bad idea.

The minimum book tax proposal was designed to address a perceived injustice: corporations reporting large profits on their financial statements, but little or no current federal tax owing. The campaign version applied to companies with net income over $100 million, allowed foreign tax credits and the deduction of net operating losses, but included few other details. The IRA version would only apply to corporations with net income over $1 billion and can be offset by general trade credits such as the research and development tax credit and business tax credits. ‘green energy.

In a previous
I have highlighted three fundamental problems with this type of tax.

First, taxing accounting income could reduce the informational quality of financial statements. It is well known that corporations have an incentive to reduce their taxable income to reduce their tax payable. Taxing accounting income would mean that companies would have a similar incentive to overstate expenses and understate income in their financial statements to avoid tax.

Second, it would outsource part of the tax code to the Financial Accounting Standards Board (FASB), an unelected standards body for the accounting profession. The FASB may decide to make changes to financial accounting standards without considering Congressional budget goals. This is in tension with the Constitution’s grant of legislative power to Congress and could encourage members of Congress to lobby the FASB for or against changes in accounting standards.

Third, the minimum tax on books would probably be
increase distortions
in corporation tax, not to reduce them. Companies will find themselves subject to the minimum tax in some years and subject to the ordinary corporation tax in other years. Businesses will benefit from deductions under one tax and earn income under the other, meaning that assets may be subject to a higher or lower tax burden in some years than under current legislation . This could encourage businesses to devote resources to planning around the minimum tax.

Although the tax presents these problems, proponents argue that the proposal will ensure that large corporations pay at least 15% of their profits in tax. Meaning. Bernie Sanders (I-VT) and Schumer
that the proposal “would end the era of billionaires and profitable big corporations that don’t pay a dime in federal income tax.” Their diet
won’t accomplish this
. General business credits, the ability to carry forward losses, will still allow effective tax rates to drop below 15%.

The minimum book tax is an important part of the IRA. It would raise $313 billion over 10 years to help fund increased climate and health spending and a reduction in the federal deficit. Unfortunately, the book tax is not good tax policy and there are much better ways to generate revenue.

This article originally appeared in the AEIideas blog and is reproduced with the kind permission of the American Enterprise Institute.


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