The often decried tax hike on the verge of becoming law
Sen. Joe Manchin, in an unlikely alliance with progressives, may have the last word on tax geeks.
Their new minimum corporate tax, about to become law, was never taken very seriously by much of the Washington tax world. Lobbyists, staffers, thinkers and others tended to view it as a third-rate proposition – too convoluted and convoluted, with many unintended consequences, to make law.
Congress had tried something like this before, in the 1980s, critics noted, and scrapped the idea after just a few years.
Even some tax honchos in the Biden administration weren’t enamored with the plan.
This may have been an advantage for the supporters.
Underappreciated by Washington, the so-called income tax on the books has flown under the radar even as other tax proposals taken much more seriously have crumbled.
Policymakers have spent months debating things like the administration’s attempt to create a new global minimum tax, which now, at least as far as short-term U.S. involvement is concerned, appears dead.
(Although it looks like the minimum tax on accounting income, with the same 15% tax rate, the overall minimum tax is an entirely separate proposition.)
Now, the accounting income proposal is one of the last tax increases in effect.
After a year and a half of debate, during which Democrats considered and rejected more than 40 other possible tax hikes, only two survived: the income tax on the books and a much smaller proposal targeting so-called carried interest important to some Wall fund managers. Street.
Both are part of a deal between Manchin (DW.Va.) and Senate Majority Leader Chuck Schumer that Democrats are now pushing through.
So the accounting income proposal, which would be a major change in the way large corporations are taxed, is suddenly getting a lot more attention.
« I’ve answered probably 300 customer questions in the last 12 hours asking, ‘What is this?
It’s designed to go after companies that report big profits on Wall Street but appear to pay little or nothing to the IRS. Companies earning $1 billion would be required to pay at least 15% of the profits they report to investors.
About 150 companies will owe an additional $313 billion over the next decade because of the tax, according to the official Joint Committee on Taxation.
In 2020, about 55 large, profitable companies paid no federal income taxes, according to the liberal Institute for Taxation and Economic Policy.
« A lot of people in West Virginia couldn’t — couldn’t believe the companies aren’t paying anything, » Manchin said on NBC’s Meet the Press.
Throughout President Joe Biden’s bickering over tax and spending plans, Democrats have agreed to raise taxes on big business and the wealthy, but a tax on the books has never been their first choice.
The administration has spent much more time pushing to tax the unrealized capital gains of the wealthiest and ending a provision known as the « enhanced base at death » that allows wealthy people to pass on wealth. assets to their heirs tax-free upon their death, and to reorganize the international system. tax system.
The minimum tax was not even part of the first draft of the Democrats’ reconciliation plan.
Although the House Ways and Means Committee initially approved $2 trillion in tax increases, the minimum tax was not one of them. Democrats were more focused on things like reversing President Donald Trump’s deep corporate tax rate cut.
But Sen. Kyrsten Sinema (D-Arizona) has balked at raising tax rates, forcing Democrats to turn to a surrogate first proposed by Sen. Elizabeth Warren (D-Mass.) during her presidential campaign of 2020.
Manchin too has long favored minimum taxes, last year proposing a « patriotic tax » on the super-rich.
Of all the tax increases proposed by Democrats since Biden took office, few were more unloved among Washington tax buffs than the income tax on the books.
Many have complained that if there are tax breaks in the code lawmakers don’t like, they should remove them — not to stop companies from claiming the “good” and the “bad” tax breaks.
Worse still, they said, this minimum tax is extremely complicated.
Businesses would have to pay 15% not on income they report to the IRS, but on income they report to the Securities and Exchange Commission. These two are based on entirely different and distinct accounting systems, and bringing them together introduces many difficulties.
Even the accountants said the complexity would be too great. “The proposed minimum corporate tax violates many elements of our twelve guiding principles of good tax policy,” the American Institute of Certified Public Accountants said in a letter to lawmakers last month.
And the combination of the two accounting systems would yield surprising results.
Although lawmakers say the tax targets companies like Amazon, about half of the tax would be paid by manufacturing companies, according to JCT.
This is because companies that spend a lot of money on equipment get large deductions for those expenses, which are treated very differently in the two accounting systems.
“The impact of accelerated depreciation can be to lower your tax rate when you make new capital investments and that would reduce your regular tax liability – now that can potentially subject you to this new minimum tax,” said said PwC’s Brown.
This gives an opening to the Republicans.
« This is a national manufacturing tax, plain and simple » that risks « exacerbating supply chain disruptions, » said Sen. Mike Crapo of Idaho, the top Republican in the country. finance committee responsible for drafting taxes.
Manchin scoffed, telling reporters on Monday that manufacturers had made « massive profits » in recent years.
Democrats are taking special steps in legislation to prevent the minimum tax from clawing back some benefits, including renewable energy and research and development breaks. A new credit for semiconductor companies recently approved by Congress would also be protected.
Others see additional complications.
Since companies would be taxed on the profits they report to shareholders, some may understate their profits in order to reduce their tax bills, which could make it harder for investors to assess the financial health of companies.
Democrats acknowledge that the proposal is not particularly popular or ideal.
« If you get together a group of tax experts and have them vote on corporate reforms to raise $300 [billion]this tax on the books probably wouldn’t win the tax pundits popularity contest,” David Kamin, a former top tax adviser to Biden, wrote on Twitter.
« This minimum body tax is much better than nothing, which is the alternative. »
In an interview last month with the Tax Policy Center, former Biden tax chief Kim Clausing said the plan was « not first or second best. »
But she and others say it’s the best Democrats can do under the circumstances.
It is too difficult to fight to uproot individual tax preferences because the beneficiaries go to war to save them. It’s easier to say companies should pay 15% and not understand what that would mean for individual tax breaks.
Proponents ignore complaints that the proposal is too complicated, saying the corporations have big tax departments that can handle the complexity.
« If it’s the best thing we can get right now, it’s still pretty good, » said Steve Wamhoff, former aide to Sen. Bernie Sanders (I-Vt.), now chief policy officer. federal tax to ITEP. « This will fix some of the worst corporate avoidance we’ve documented over the years. »
And while the proposal itself may be convoluted, the message from Democrats with the plan ahead of the November election is not.
« It’s a very simple thing for lawmakers to explain and a simple thing for voters to understand, » Wamhoff said.
« They can tell people, ‘I’m going to make sure these companies pay taxes.’