One of the provisions buried in the Build Back Better bill is the implementation of a 15% minimum corporate tax rate. Senator Elizabeth Warren has been the disposition’s most vocal champion and chief cheerleader. Given that 55 top profitable companies paid no tax in the last fiscal year, the idea of ââapplying a minimum tax is seen as a way to correct a tax result that many consider unfair.
Equity, of course, is in the eye of the beholder. Some argue that any corporate income tax is unfair because the same profits are taxed a second time when distributed to shareholders. Thus, the imposition of corporation tax primarily allows double taxation. Others argue that corporate income taxes have engendered an exaggerated evolution of lobbying by special interests that have detrimental effects disproportionate to the relatively small contribution that corporate taxes make to total federal taxes collected. (Corporate taxes represent about 7% of total federal tax revenue.)
However, these two views seem to be shared by the minority. Most people agree with the idea of ââtaxing corporations. The main debate seems to be how these tax obligations should be determined.
How did it get to the point where profitable businesses manage to avoid paying taxes? To answer this question, we need to focus on the differences in responsibilities between two key regulatory institutions: the Financial Accounting Standards Board (FASB) and the Internal Revenue Service (IRS). The FASB is an independent agency, authorized by the Securities and Exchange Commission (SEC) to establish generally accepted accounting principles (GAAP) that public companies in the United States must follow in reporting their financial results. The IRS is an office of the Treasury Department responsible for enforcing the rules relating to the collection of tax revenue. These rules are set out in laws passed by Congress.
The FASB rules require that public companies produce income statements, which report net income (profit) during the prescribed accounting period. In contrast, the IRS bases its tax calculations not on GAAP net income, but on taxable income as defined by Congress. This is the reason why some profitable businesses have been able to operate without any federal tax liability.
The laws governing the taxation of corporate profits allow dozens of deductions, well beyond the expenses allowed under GAAP. Many of these deductions benefit specific industries or businesses. At the same time, the laws also exclude certain forms of income that businesses earn. As a result, the value of a company’s taxable income may be far removed from its GAAP net income.
Both in theory and in practice, companies can have a positive net profit but zero or negative value for taxable income, putting these entities in Elizabeth Warren’s crosshairs.
The separation of the two authorities has so far served to isolate the FASB from pressures that could move it away from its position of independence. If the FASB’s net income measure were to become more relevant in determining corporate tax, the agency could face pressure from Congress and special interests seeking to influence how income and expenditure are. measured and reported in accordance with GAAP.
A minimum corporate tax is not the only option to more closely reconcile the taxable and reported income of corporations. Congress clearly had, and could still have, an alternative, which would do more to protect the independence of the FASB. In other words, he could reassess the IRS definition of taxable income. To the extent that the current definition inappropriately exaggerates expenses or excludes income, these choices could and should be adjusted. Many of these provisions serve the narrow interests of a minority of businesses to the detriment of the rest of us. Unfortunately, Congress has not shown the will or the ability to change these kinds of rules, no matter how unfair they may seem.
The proposal to apply a minimum tax rate of 15 percent to reported GAAP net income seems to me to be the second best alternative. If we are to have an income-based corporate tax, replacing the current definition of taxable income with GAAP net income seems like a reasonable adjustment, which deserves bipartisan support.
Ira kawaller is the principal and founder of Derivatives Litigation Services. He holds a doctorate. in Economics from Purdue University, and derivatives have been a constant area of ââinterest for most of his career. Kawaller frequently posts blog posts on topics related to politics and economics at igkawaller.medium.com.