“You have 51 or 52 corporations of the Fortune 500 [that] haven’t paid a single penny in taxes for three years,” President Biden told reporters last week. “Come on, man. Let’s get real.”
Under Biden’s plan, corporations would pay at least $2 trillion more in taxes than they do now. But tax experts are not sure whether Biden’s plan would in fact substantially reduce the number of large corporations paying zero dollars in federal income taxes.
That is because Biden’s plan would still allow virtually all corporations to use federal tax credits and deductions to reduce their existing tax obligations — one key reason some large firms pay nothing. Biden’s $2 trillion jobs and infrastructure plan includes a significant expansion in these kinds of credits, such as for clean energy investments, that corporations use to zero out what they owe the Internal Revenue Service. Additionally, the Biden administration dramatically narrowed its proposal to ensure large firms pay at least some federal taxes, muting its impact by having it only apply to a sliver of firms.
“Biden’s proposals won’t eliminate the phenomenon of large firms paying $0,” said Kyle Pomerleau, a tax expert at the American Enterprise Institute, a conservative-leaning think tank. “I am skeptical this plan will put a big dent in the number of companies paying nothing.”
White House officials did not deny that some large firms under their plan could still pay no federal taxes, but said far fewer would compared with current law. They stressed that Biden’s plan would raise far more money from corporate America — as much as $2.5 trillion over a 15-year period — than is now the case.
Under Biden’s plan, corporations would face a significantly higher domestic tax rate of 28 percent and a far steeper tax rate on earnings overseas. The plan also includes aggressive measures to prevent multinational corporations from artificially reducing their U.S. tax base by shifting profits overseas. Administration officials said their plans would end international tax avoidance by multinational firms and create a much fairer tax system overall.
“We know directionally that this is going to significantly increase tax liabilities of the largest firms,” said David Kamin, deputy director of the White House National Economic Council.
Chye-Ching Huang, a tax expert at the Tax Law Center at New York University, also said many of the corporations not paying taxes in the Fortune 500 would face higher tax burdens due to the proposal’s tax increases on overseas earnings.
“There are some temporary provisions that will protect a number of companies. But certainly over time the international proposals will ensure the multinationals that show up in the top 55 will pay much more in federal tax,” she said.
Still, some experts said there appears to be a disconnect between senior administration officials’ rhetoric about the practice of large corporations paying nothing and the plans they have put forward.
Biden is seeking about $400 billion in expanded clean energy credits aimed at speeding up the transition of the U.S. economy away from fossil fuels. The American Jobs Plan also calls for $180 billion of new spending on research and development, although it is unclear how much of that would be used for tax credits rather than direct spending. The plan calls for tax credits to spur housing construction and to encourage firms to build on-site child-care facilities. Those tax credits would probably reduce many firms’ overall liabilities to the IRS.
Tax experts also said it was unclear if curbing international tax avoidance would solve the issue of large corporations paying nothing in taxes. About a dozen of them, for instance, are utility companies that tend not to have overseas operations. The principal driver of corporations paying $0 in federal taxes appear to be provisions allowing firms to deduct capital expenses, executive compensation, and losses from prior years against their liabilities, according to Steve Rosenthal, a tax expert at the nonpartisan Tax Policy Center think tank. These provisions are not addressed in Biden’s plan.
“I don’t know, and am skeptical, addressing profit-shifting will cause the 55 corporations to start paying taxes. It seems unlikely to me,” Rosenthal said.
“If you don’t like the law, change it. But Biden is in some ways going in the opposite direction. He’s adding clean energy credits and the like, so there may even be more companies paying $0 in taxes.”
Complicating matters are the limits surrounding Treasury’s proposals aimed at large firms paying $0 in taxes. The goal of the administration’s “book tax” plan is in part to act as a safeguard against those firms paying nothing, using accounting guidelines to determine taxable income.
“Under the regime, highly profitable multinational corporations would no longer be able to report significant profits to shareholders while avoiding federal income taxation entirely,” Treasury said in a report on its tax proposals.
As written by the Biden administration, however, this provision may not put a substantial dent in the number of large corporations paying no federal income taxes. Treasury’s proposal states this tax would only apply to the nearly 200 companies in America with more than $2 billion in net income annually — less than 0.01 percent of all U.S. corporations.
Of the 55 corporations that did not pay federal income taxes in 2020, only five had more than $2 billion in net income, according to the report by the Institute for Taxation and Economic Policy, a left-leaning think tank. That means the overwhelming majority of them would not be subject to the book tax.
Matt Gardner, author of the ITEP report, praised the Biden plan for substantially increasing the amount of taxes paid by major corporations. However, he said it was unclear how many Fortune 500 firms would be paying $0 under the plan. If the Biden administration wanted to eliminate that problem, he said, it could drop the threshold for the book tax to ensure it hits more firms.
“We just can’t tell if this would meaningfully reduce the number of corporations paying $0,” Gardner said. “The 15 percent minimum tax on book income would surely play a role in reducing tax avoidance as well. This doesn’t mean that the minimum tax, or the plan as a whole, would guarantee the end of the zero-tax corporation. But it would make zero-tax corporations less likely.”
Some tax academics, including Pomerleau and Rosenthal, are broadly skeptical about the importance of ensuring large firms pay some amount in federal taxes, especially if companies are instead putting that funding toward research and development or other social goals sought by policymakers.
But the politics of large firms not paying have long been a potent driver of reform. Even tax cutters such as President Ronald Reagan railed against large corporations who did not pay. In 1985, Reagan promised that his proposals would lower the overall corporate tax rate while “making sure that every profitable corporation pays some tax.” “From now on they shall pay a minimum tax. The free rides are over,” Reagan told PBS.
Biden is also personally exercised by the lack of payment from major corporations, according to two policy advisers to the president, who spoke on the condition of anonymity to reveal internal conversations.
“A new, independent study put out last week found that at least 55 of our largest corporations … pay zero federal tax,” Biden said in the Oval Office last week. “It’s just not fair. It’s not fair to the rest of the American taxpayers.”
Biden’s administration, however, is filled with tax experts who hail from academic circles where the issue is more likely to be seen as a symbol of deeper problems.
Dan Shaviro, a tax expert at New York University, said Biden’s tax plans would ensure corporate America generally pays its fair share, which would in turn diminish the importance of some individual firms zeroing out their liability.
“One reason the public gets so mad about these stories [about large firms paying nothing] is because they know it’s standing in for an underlying reality that companies are getting away with a lot,” Shaviro said. “If there was still the occasional company that did it, but the public realized corporations were paying a lot more, those stories would be less significant.”
Shaviro added: “If the Biden administration was more centrally focused on eliminating these particular stories, rather than on improving the system as a whole, they would have to re-expand the book income tax.”
Some tax experts said it is possible Biden’s plan does curb the number of firms paying $0, depending on the final details. Treasury has so far only released a rough outline of its tax plans, not specific legislation. Based on what has been released so far, however, some tax experts said they believe the United States would continue to see many corporations zero out their liabilities.
“The administration is posing this as a big and serious problem,” said Mindy Herzfeld, a tax expert at the University of Florida. “Tax experts question whether it is, and it’s also unclear from what they’ve put out whether their plans would address it.”