By James Pethokoukis and Kyle Pomerleau

Congressional Democrats have considered a number of tax plans to pay for their Build Back Better bill, including a 15 percent minimum tax on large companies’ book earnings, and a mark-to-market tax on billionaires’ unrealized capital asset appreciations. Kyle Pomerleau joined a recent episode of “Political Economy” to explain how these proposals would work.

Kyle is a senior fellow at the American Enterprise Institute, where he studies federal tax policy.

Below is an abbreviated transcript of our conversation. You can read our full discussion here. You can also subscribe to my podcast on Apple Podcasts or Stitcher, or download the podcast on Ricochet.

Pethokoukis: Democrats are talking about paying for President Biden’s Build Back Better bill with a minimum book tax for companies. How would that work?

Pomerleau: This proposal would enact a 15 percent minimum book tax on the largest corporations, or corporations that earn $1 billion or more in annual profits. Under the system, large enough companies would be subject to two parallel tax systems. So companies would pay the greater of either their ordinary corporate tax liability, under the current rules with the 21 percent tax rate, or 15 percent of their book income with some adjustments.

They would still get the research and development credit. They’d still get other general business tax credits. They’d be able to use loss carryforwards. And they’d also generate tax credits for paying the book tax that they could then carry forward into future years. 

So the idea here is that, without really going after specific proposals in the tax code, this is the back doorway to reduce the value of those provisions and raise anywhere between $100 billion and $300 billion over a decade.

Broadly, how does the US corporate tax code compare to other rich countries?

It depends on what statistic you’re looking at. So if you’re looking at just statutory tax rates, we’re right about average. In terms of effective tax rates, interestingly, we are slightly above average. One of the favorite statistics of the administration is to compare corporate tax revenue collected as a percent of GDP in the United States versus other countries. And if you look at that statistic, the US is near the bottom of the list.

But I don’t think that this is a very good metric for evaluating the US tax burden on corporations, relative to other countries, because the corporate sector in different countries varies quite a bit. We actually have a relatively small corporate sector and corporate profits relative to other developed countries. And this is because we have businesses that are taxed through the individual income tax — partnerships, S corporations — to a much larger degree than other countries.

So I think that statistic is misleading. I did some research and found that after you make adjustments, the US is closer to the top quarter of countries rather than the very bottom.

Is this meant to get at these super billionaires whose wealth is based on their ownership of these companies? I’ve heard some people call this a “corporate billionaire tax.”

I understand where the talking point’s coming from, and it’s based on that $1 billion-in-profit threshold. So in a way, yes. Raising taxes on corporations does impact the amount of taxes that the owners of these corporations pay. So if I’m Jeff Bezos and I have a huge stake in Amazon, raising the tax burden on Amazon is going to raise my tax burden as the owner.

Now, I’d be a little bit careful about conflating taxes on corporations with taxes on billionaires, however, because corporations’ owners are not just billionaires. If you’re a multinational corporation, you have owners that can range from a billionaire that owns a huge stake in your company, all the way down to the retiree that’s earning $30,000 a year in dividends off of your company.

So raising taxes on corporations is not a very targeted way to get at billionaires, although it does, I think, disproportionately impact billionaires at the end of the day.

There is another proposal that is very directly targeted at billionaires, which would tax them on financial assets, not when they sell them, but every year based on their appreciation on paper. How would that work?

Under current law, capital gains are taxed based on the realization principle. So when you sell a capital asset, you then need to take the market price, subtract the basis. That’s your capital gain. And you pay tax on that. Under their proposal, billionaires would have to pay tax on capital gains, not when realized, but when those gains accrue. Now, this is also called a mark-to-market tax on capital gains. So these billionaires would face capital gains tax each and every year at the statutory tax rate, 23.8 percent — which is the 20 percent federal rate plus the 3.8 percent net investment income tax.

The proposal makes a distinction between publicly traded assets and assets that are not publicly traded. And it comes down to administrability. With publicly traded assets, you can tell at any time of day what the value of those assets are, and it’s not very hard to track. For other assets that aren’t publicly traded, it’s harder to get a market value at any given time. So what they’ve proposed to do for those assets, is to maintain the realization principle. So you’re only going to be taxed on gains when you sell, but they’re going to change the tax burden and charge taxpayers interest for deferring that tax.

Do we have a long-term sustainable tax system if all we’re talking about is taxing a slice of the richest people or companies?

It is not sustainable. I think one of the biggest issues with the current tax debate is President Biden’s pledge to not raise taxes on individuals making less than $400,000 a year. It’s really restrained what they’re able to do in tax policy. One issue is that it reduces the potential tax base and it takes a lot of really good taxes off the table. A carbon tax is one of them. A value-added tax is another.

But it also encourages additional complexity in the tax code: Lawmakers will add complexity into the system in order to avoid raising taxes on people earning below $400,000. I think broader taxes, more efficient taxes, are a better way to go in the future.

The political concern is always going to be raising the burden on low-income households. But I think any sort of tax reform that is going to propose a VAT or a carbon tax is going to do something to make whole those households that might lose some purchasing power because of the higher broad-based taxes.

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