How the 15% minimum corporate tax would work in the United States
1. How would the minimum corporate tax work?
Companies with at least $1 billion in revenue would be required to calculate their annual tax liability in two ways: one using long-standing tax accounting methods of 21% of profits minus deductions and credits; the other by applying the 15% rate to the profits they report to shareholders in their financial statements, commonly referred to as accounting income. The higher amount would be what they owe.
2. Why are there different ways of calculating income?
A company’s earnings for tax and financial reporting purposes often vary. Accounting income sticks more closely to generally accepted accounting principles, or GAAP, while the Internal Revenue Service code includes a host of deductions and credits that businesses can use to offset their income.
3. Why increase taxes in this way?
The appeal to the Democrats is twofold. First, the minimum tax goes after corporations, which many party members say don’t pay enough tax. President Joe Biden cited a report in his State of the Union address this year that found 55 companies paid no federal income taxes in 2020, despite making profits under GAAP standards. Second, this approach solved a political problem: it’s a way for them to raise corporate taxes without raising the headline tax rate to 21%, a decision that Senator Kyrsten Sinema, a Democrat from Arizona, whose vote is needed in the Senate 50-50, opposed. Sen. Joe Manchin, a Democrat from West Virginia, says the minimum tax doesn’t so much raise taxes as it closes a loophole, even if that would mean some businesses would have to pay more to the federal government.
4. What do economists think of the idea?
In general, they are not big fans. Many say it would be much simpler to raise the corporate tax rate or eliminate tax breaks that many lawmakers consider too generous. Another major criticism is that the bill would mean that some businesses would not be able to claim all the deductions allowed by the tax code, including the tax benefits known as depreciation for investments in equipment and buildings. Many of these tax benefits enjoy bipartisan support, although some are favored more by Republicans as part of President Donald Trump’s 2017 tax cut bill.
5. How much money does this tax bring in?
That would bring in about $313 billion over a decade, according to nonpartisan Congressional marker, the Joint Committee on Taxation. It is the largest tax increase in the bill, which totals $739 billion in 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 resulting from this levy, according to the Joint Committee on Taxation. Manufacturers would pay almost half of the additional taxes due. This has led Republicans to call it a domestic manufacturing tax and say it could lead to more outsourcing and job losses. In total, about 150 companies would be liable for tax in a given year, according to the committee’s estimates.
7. Is it related to the global minimum tax of 15%?
Quite confusing, no. The separate and distinct 15% global minimum levy agreement that Treasury Secretary Janet Yellen helped negotiate last year aims to prevent multinational companies from moving their operations to low-tax tax havens. The European Union and other countries are making progress in implementing the agreement, but its provisions have failed in the US Congress, raising the possibility that the plan may eventually enter into force without US participation.
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