Who can disagree with the proposition that all profitable corporations should pay at least 15 percent minimum tax? Some tax theorists favor a minimum tax on the grounds that everyone should pay some tax. Some even delude themselves into believing that a broad-based minimum tax would some day replace the regular corporation tax, with all its distortions. And so the administration's proposal for just such a tax has much political appeal. It may well be the politician's answer to the charge that last year's tax bill went too far in providing tax benefits for business.
Yet on examination, the tax proposed by the administration would undermine and often nullify the basic investment incentives provided by the Economic Recovery Tax Act, and further complicate business decision-making. It is bad economic policy and bad tax policy.
Specifically, the president has proposed to repeal the current minimum tax for corporations and to replace it with an alternative minimum tax. Corporations would be required to pay the greater of their regular income tax or an alternative tax equal to 15 percent of their alternative tax base in excess of $50,000. This alternative tax base would consist of regular taxable income, before the net operating loss deduction, plus certain tax preferences. No tax credits other than the foreign tax credit would be allowed against the alternative tax. The excess of the alternative tax over the regular tax would be carried over as a credit against the regular tax in future years.
Companies would be subject to the proposed minimum tax even if over a period of years they have had no economic profits and thus owe no regular tax, because no net operating loss deduction would be allowed. For example, if Chrysler turns around and becomes profitable, it will have to pay the 15 percent minimum tax even though over the next five to 10 years it probably would pay no regular tax since the losses in recent years would be carried forward to offset current taxable income.
Under the administration's proposal, this would be mitigated somewhat if at some future time Chrysler earned sufficient profits to be subject to the regular tax. In this event, the minimum tax would be allowed as a credit against the regular tax. The minimum tax then becomes an advanced payment of the regular tax. But why should Chrysler, coming out of a period of poor years, have to prepay its regular tax?
By not allowing the investment tax credit against alternative minimum tax liability, the administration's proposal would reduce the allowable credit, for the often less profitable or capital-intensive companies that fall within the minimum tax. Steel and auto companies would also be hit as the economy improves.
While it would blunt the effects of the tax investment incentives, the alternative minimum tax would also require businesses to place a high priority on tax planning. One result would inevitably be to encourage tax-induced mergers and takeovers. Companies chronically subject to the minimum tax would seek out merger partners with sufficient regular tax so that the new combined company could escape the tax. These marriages would not be made in heaven but in the Internal Revenue Code.
Ironically, the negative impact of the minimum tax is clearly greatest on marginal investment decisions, just where the supply-side economic theories endorsed by the president stress that incentives are needed. For a company subject to the minimum tax, the tax savings from an additional dollar of depreciation (or wages) would be only 15 cents. In contrast, for a corporation under the regular tax, the tax savings may be 46 cents on the dollar. The reduction in tax savings at the margin will discourage increased investment (or increased employment).
The administration has proposed its minimum tax, which is projected to raise a total of $19.1 billion over the next five years, primarily to obtain additional revenues. A far better approach would be to review the many tax preferences in the Internal Revenue Code and to repeal or curtail those that no longer are of a high national priority or are wasteful and ineffective.