What’s Wrong With the Senate’s Proposed 15 Percent Minimum Corporate Tax

By Robert D. Atkinson. Atkinson holds a Ph.D. in city and regional planning from the University of North Carolina. He is President Information Technology and Innovation Foundation. Excerpt:

"Besides the problems with attacking companies for investing in the building blocks of growth, and taking the tax benefits Congress entitled them to take, there are a number of problems with the actual BBB minimum-tax proposal.

Book income and taxable income naturally differ: The proposal wrongly assumes that book income (what corporations report to auditors and investors) should be the same as the companies’ taxable income and that any difference is a result of chicanery. As The Tax Foundation notes, “lawmakers have enacted specific policies that mean tax laws differ from accounting standards.” Likewise, a letter to Congress from 264 accounting and tax economists stated:

Financial accounting and tax reporting are intended for two different purposes. Financial accounting is meant to provide stakeholders of a company with information about the performance of the company and its managers. This is quite different than the purpose of taxable income, which as you know, is meant to raise revenue for public finance and includes rules to provide incentives and disincentives for certain behaviors (e.g., investment). Thus, it is not surprising that the two income numbers can be very different from each other. The Financial Accounting Standards Board (FASB) is set apart from the government in order to be free from lobbying and ideally arrive at the most appropriate financial accounting standards.

It’s unfair to target large corporations: A second problem with the bill is that it unfairly targets large corporations with more than $1 billion in reported profits. If the issue is really raising more money or preventing a divergence of book income from taxable income, then there is no rationale for targeting large companies, other than purely a populist motivation to demonize large corporations. If it is immoral for “giant” corporations to have an ETR of less than 15 percent, then why is not also immoral for small companies to do the same? This is especially germane given the reality that on average large corporations produce significantly superior societal benefits than small ones, including higher wages, better benefits, and greater compliance with regulations.

It hurts the utilization of tax incentives: Finally, many companies would no longer be able to utilize capital equipment expensing—because it might result in an ETR of less than 15 percent—and this would mean less investment, and lower productivity and wage growth.

Related to this are the effects on wireless broadband companies. When companies win an FCC auction for spectrum for tax purposes they can amortize the cost over 15 years. But because FASB classifies spectrum licenses for accounting purposes as indefinite-lived assets, the companies must book the expenditure in the year it was made. This means that companies winning spectrum bids would likely be reporting higher book income than tax income (because they would be allowed to depreciate this intangible investment over 15 years). If the bill were enacted as written, it would not only impose a retroactive tax (companies did not expect to be taxed on this spectrum when they bid for it), it would increase the after-tax cost of spectrum, reducing current investment in 5G networks and reducing the value of future spectrum bids in FCC auctions. Both would mean slower 5G deployment in the United States."