By Kyle Pomerleau

Last week, Senator Joe Manchin (D-WV) and Senate Majority Leader Chuck Schumer (D-NY) announced a budget reconciliation deal that would raise taxes on corporations and high-income households to finance increased healthcare and climate spending. The bill, titled the “Inflation Reduction Act (IRA) of 2022,” includes a 15 percent alternative minimum tax (AMT) on large corporations’ financial statement (“book”) income. This book minimum tax was first proposed in 2019 as part of President Joe Biden’s campaign tax plan. It has been scaled back slightly since then but remains a bad idea.

The book minimum tax proposal was designed to address a perceived
unfairness: corporations reporting significant profits on their financial
statements but little or no current federal tax liability. The campaign version
applied to companies with net income over $100 million, allowed foreign tax
credits and net operating loss deductions, but included few other details. The
IRA version would only apply to corporations with a net income over $1 billion
and can be offset with general business credits such as the research and
development tax credit and green energy tax credits.

In a previous paper, I pointed out three fundamental issues with this type of tax.

First, taxing book income could reduce the informational
quality of financial statements. It is well known that corporations face an
incentive to reduce their taxable income to reduce their tax liability. Taxing
book income would mean that companies would have a similar incentive to overstate
expenses and understate revenue on their financial statements to avoid the tax.

Second, it would outsource a portion of the tax code to the
Financial Accounting Standards Board (FASB), an unelected standard-setting body
for the accounting profession. The FASB may decide to make changes to financial
accounting standards without considering Congress’s fiscal goals. This is in
tension with the Constitution’s grant of legislative power to Congress and could
encourage members of Congress to lobby FASB for or against changes to
accounting standards.

Third, the book minimum tax would likely increase distortions in the corporate tax, not reduce them. Companies will find themselves subject to the minimum tax in some years and subject to the ordinary corporate income tax in others. Companies will take deductions under one tax and realize revenue under the other, which means that assets may face a higher or lower tax burden in some years than under current law. This could encourage companies to devote resources toward planning around the minimum tax.

Although the tax has these problems, supporters argue that the proposal will ensure that large corporations pay at least 15 percent of their profits in tax. Senators Sanders (I-VT) and Schumer asserted that the proposal would “end the days of billionaires and large, profitable corporations not paying a nickel in federal income taxes.” Their plan will not accomplish this. General business credits the ability to carryforward losses will still allow effective tax rates to go lower than 15 percent.

The book minimum tax is a significant part of the IRA. It would
raise $313 billion over 10 years to help finance increased climate and
healthcare spending and a reduction in the federal deficit. Unfortunately, the
book tax is not good tax policy and there are a lot better ways to raise
revenue.

The post The Book Minimum Tax Is Still a Bad Idea appeared first on American Enterprise Institute – AEI.