President BidenJoe BidenBiden appoints Mark Brzezinski US Ambassador to Poland 10 dead after overloaded van crash in South Texas New York State Assembly majority backs start of Cuomo impeachment process : AP PLUS proposed a minimum corporate tax of 15 percent. Did he forget that the United States already has a minimum tax rate and it is above 15%?
American businesses are required by law to pay, at a minimum, 21% of their taxable income in the United States in taxes, after adjusting for losses and tax credits. The federal rate of 21% has been in place since 2018, and before that, the minimum tax rate was 35%. The minimum tax we have today is just the standard corporate income tax rate. So why talk about a new minimum tax if we already have one?
It turns out that the minimum tax is really just an adjustment in the tax base – the thing that is imposed. The amount that corporations pay in income taxes is equal to the tax base multiplied by the tax rate. The tax base, or taxable income, is difficult to calculate and difficult to explain. The tax rate, on the other hand, can be summed up as a single number.
While the Internal Revenue Code is about a million words, the section that defines the U.S. corporate tax rate is about 100 words. The significant part of the article is only 16 words long: “The amount of tax imposed by paragraph (a) will be 21 percent of taxable income.” The majority of the Internal Revenue Code defines the tax base, dictating the relevant tax treatment for seemingly countless different types of economic entry and exit. Given this complexity gap, it’s easy to see why politicians ignore the tax base and focus on the tax rate.
However, focusing on the tax rate is misleading. Most of the current criticism of the tax code stems from concerns about the tax base, not the rate. A minimum tax like the one proposed by Biden implies that there would be a minimum tax of 15% on a different tax base than the one we currently use.
So what would this different tax base be? Details on the original tax proposals are still unclear. But Biden has previously proposed a 15% minimum tax on financial accounting income, an income figure that differs from taxable income for a variety of reasons. Take for example depreciation. Financial accounting, or book income, requires companies to depreciate fixed assets based on actual economic depreciation because investors need to know the real net worth of company assets. The tax code, on the other hand, allows for much faster depreciation because it lowers the after-tax cost of investment and boosts business investment. Taxing income from financial accounting is a bad idea because the financial and tax accounting rules differ for a reason. A recent informal survey of accounting professors – including ourselves – across the political aisle found no one who thought taxing financial accounting income was a good idea. And while Congress could use another alternative tax base, including alternatives being discussed globally, that’s not a good idea either. Indeed, regardless of what lawmakers decide on the alternative tax base, any minimum tax proposal would force businesses to double-calculate taxable income, adding unnecessary uncertainty and complexity to the system.
And it’s not just about double-counting taxable income. A minimum tax would erode the very tax incentives Congress is trying to create. Research and development activities, clean energy investments, and capital spending all receive favorable treatment in the tax code. Minimum taxes, however, are only effective if they override items that receive preferable tax treatment. Inevitably, a minimum tax would affect the production of public goods and therefore hamper the ability of the tax code to orient businesses in ways that benefit society.
While minimum taxes may sound like a new idea, the concept should sound very familiar. This is because we have already tried minimum corporate taxes. The widely disdained Alternative Business Minimum Tax (AMT) was exactly that type of minimum tax. The AMT was abolished by the Tax Cuts and Jobs Act in 2017 because it was so universally vilified. Businesses simply found it too onerous to have to calculate taxable income twice under two different systems. Let’s not re-implement something that has already failed.
Minimum taxes are a distraction. If lawmakers don’t like the rules defining the tax base in our current system, they should simply change them. Adjusting the tax code directly is a much better solution than layering a separate and independent tax system on top of our current system, which would increase the complexity and costs of compliance while undermining positive economic incentives.
Fabio B. Gaertner is Associate Professor and Cynthia and Jay Ihlenfeld Professor for Inspired Learning in Business at the University of Wisconsin-Madison.
Jeff Hoopes is Associate Professor at the University of North Carolina and Research Director of the UNC Tax Center.