But the proposed minimum could conflict with a hallmark of corporate taxes in America: deductions and credits ratified by Congress.
Tax credits and deductions are purposefully designed as tools to incentivize certain behaviors. But because they reduce companies’ tax bills, they stand to chip away at the effectiveness of a minimum tax. Companies could still use credits for research, child care, clean energy and other categories to lower their tax bills, potentially below the minimum rate.
Democrats’ marquee climate proposal similarly comes in the form of tax breaks — which are expected to be exempted from the corporate minimum tax rate.
In 2020, 55 profitable corporations paid no federal income tax, according to an analysis by the Institute on Taxation and Economic Policy, a progressive think tank. President Biden noted the statistic when first announcing his budget plan, saying “If they report big profits to their shareholders, they should be paying taxes. It’s that simple.”
The talking point sidesteps that companies often pay different amounts in taxes year-to-year. But it points to a truism that Democrats aims to fix: Over the long run, many companies pay less than the current standard corporate tax rate of 21 percent.
The minimum tax proposal would raise nearly $320 billion over 10 years, according to the Joint Committee on Taxation, a nonpartisan congressional body that analyzes tax bills. The minimum tax rate would apply to companies that reported to shareholders an annual average of $1 billion in annual profit over three years. Last year 241 companies in the S&P 500 reported more than $1 billion in pretax income, according to a Washington Post analysis of Bloomberg data. Three in 10 paid less than 15 percent in income tax globally.
Some corporations avoid federal income taxes by redirecting revenue to countries where they operate with lower tax rates. Until the end of 2019, Google’s parent company, Alphabet, licensed its own intellectual property from Bermuda — an offshore tax haven. Alphabet reported its global effective tax rate in 2018 and 2019 was lowered by billions because “substantially all” of its foreign income was earned by its Irish subsidiary, according to a securities filing.
Ireland’s 12.5 percent corporate tax rate has long attracted large U.S. firms, but a new global minimum tax aims to halt such tax avoidance. Under the House bill, companies would be charged a separate 15 percent minimum tax per country on foreign earnings.
Corporations also lower their taxes through deductions and credits. Amazon has shaved $3 billion off its tax bills from 2018-2020 through its use of stock-based compensation and another $1.5 billion for other tax credits including one for research and development, according to securities filings. The company reported federal tax expenses of $1.9 billion for those years on $44.7 billion in pretax U.S. profit — an effective rate of less than 5 percent. (Amazon founder Jeff Bezos owns The Washington Post.)
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This analysis relied on data from Bloomberg and information culled directly from company filings to the SEC. The chart uses the Institute on Taxation and Economic Policy’s method of calculating an effective federal tax rate by dividing money the company set aside for federal taxes by the amount it reported earning in the U.S. pretax (minus state and local taxes). For companies that only report combined federal, state and local numbers, the combined numbers were used. The chart includes the 20 most profitable companies in recent years that disclosed enough numbers to make the calculation.