The tax, climate and energy proposal by Senate Democrats includes a 15% minimum tax on the domestic profits of large American companies. This roundabout method to collect more money from corporations, known as a minimum book tax, is critical to the deal, since it provides more than 40% of the new revenue to fund the energy investments and deficit reduction that Democrats are hoping to tout in the midterm elections this November.
1. How would the corporate minimum tax work?
Companies with at least $1 billion in income would be required to calculate their annual tax liability two ways: one using longstanding tax accounting methods, which is 21% of profits less deductions and credits; the other by applying the 15% rate to the earnings they report to shareholders on their financial statements, commonly known as book income. Whichever amount is greater would be what they owe.
2. Why are there different ways to calculate income?
A corporation’s profits for tax purposes and for financial reporting often vary. Book income sticks more closely to generally accepted accounting principles, or GAAP, while the Internal Revenue Service code includes a slew of deductions and credits that companies can use to offset their income.
3. Why raise taxes this way?
The appeal for Democrats is two-fold. First, the minimum tax goes after corporations that many in the party say don’t pay enough in taxes. President Joe Biden cited a report in his State of the Union address this year that found that 55 companies paid no federal income taxes in 2020, despite earning profits under the standards of GAAP. Second, this approach solved a political problem: It’s a way for them to raise taxes on corporations without increasing the 21% headline tax rate, a move that Senator Kyrsten Sinema, an Arizona Democrat whose vote is needed in the 50-50 Senate, has opposed. Senator Joe Manchin, a West Virginia Democrat, says the minimum tax doesn’t so much raise taxes as close a loophole -- even though it would mean that some corporations have to pay more to the federal government.
4. What do economists think of the idea?
In general, they’re not big fans. Many say that it would be much simpler to raise the corporate tax rate or eliminate tax breaks that many lawmakers consider too generous. Another major critique is that the bill would mean that some companies wouldn’t be able to claim all the deductions allowed under the tax code, notably tax benefits known as depreciation for investments in equipment and buildings. Many of those tax benefits have bipartisan support, though some are favored more by Republicans because they are part of President Donald Trump’s 2017 tax cut law.
5. How much money does this tax raise?
It would raise about $313 billion over a decade, according to Congress’s non-partisan scorekeeper, the Joint Committee on Taxation. It’s the biggest tax increase in the bill, which in total has $739 billion of revenue offsets, including new taxes and savings from a prescription drug pricing proposal.
6. Which companies would pay more?
The manufacturing industry, which includes some technology and pharmaceutical companies, will bear the brunt of the additional tax burden from this levy, according to the Joint Committee on Taxation. Manufacturers would pay nearly half of the additional taxes owed. That’s led Republicans to call it a tax on domestic manufacturing and have said that it could lead to more outsourcing and job losses. In total, about 150 companies would owe the tax in any given year, according to the committee’s estimates.
7. Is this related to the 15% global minimum tax?
Confusingly enough, no. The separate and distinct 15% worldwide minimum levy deal that Treasury Secretary Janet Yellen helped broker last year is meant to stop multinational companies from moving operations to low-tax havens. The European Union and other countries are making progress in implementing that deal, but its provisions have foundered in the US Congress, raising the prospect of the plan eventually taking effect without US involvement.
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