How the 15% US Minimum Corporate Tax Would Work

How the 15% US Minimum Corporate Tax Would Work


The Senate Democrats’ tax, climate and energy bill includes a 15% minimum tax on the domestic profits of major US corporations. This cumbersome method of raising more money from companies, known as a minimum book tax, is critical to the deal, as it brings in more than 40% of new revenue to fund the energy investments and deficit reduction that the Democrats hope to promote in the future. midterm elections in November.

1. How would the minimum corporate tax work?

Companies with at least $1 billion in revenue should calculate their annual tax liability in two ways: one using long-term tax accounting methods, which is 21% of profits minus deductions and credits; the other by applying the 15% rate to the profit they report to shareholders in their financial statements, commonly known as book income. Whichever amount is greater is what they owe.

2. Why are there different ways to calculate income?

A company’s profits for tax purposes and for financial reporting often vary. Book income adheres more closely to generally accepted accounting principles, or GAAP, while the Internal Revenue Service code lists a slew of deductions and credits that companies can use to offset their income.

3. Why raise taxes in this way?

The appeal to the Democrats is twofold. First, the minimum tax goes to companies that many in the party say don’t pay enough taxes. 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 earning profits by GAAP standards. Second, this approach solved a political problem: It is a way for them to raise taxes on corporations without raising the general tax rate of 21%, a move that Senator Kyrsten Sinema, an Arizona Democrat whose vote is needed in the 50-50 Senate, has opposed. Senator Joe Manchin, a Democrat from West Virginia, says the minimum tax does not so much increase taxes, but closes a loophole, even if it would mean paying more to the federal government for some companies.

4. What do economists think of the idea?

In general, they are not big fans. Many say it would be much easier to raise the corporate tax rate or do away with tax breaks that many lawmakers view as too generous. Another major criticism of the bill as originally drafted was that some companies would not be able to claim all the deductions allowed under the tax law, especially tax breaks known as depreciation for equipment investments. and buildings. But a belated deal made to secure the pivotal vote of Arizona Senator Kyrsten Sinema would create an exemption from tax deductions for amortization.

5. How much money does this tax bring in?

The bill, as originally drafted, would have raised about $313 billion in a decade, according to Congressional impartial scorer the Joint Committee on Taxation, making it the largest tax increase in the bill. That number is being revised based on the changes Sinema demanded.

6. Is this related to the worldwide minimum tax of 15%?

Confusingly enough, no. The separate and clear agreement with a global minimum tax of 15%, which Treasury Secretary Janet Yellen assisted as an intermediary last year, aims to prevent multinational companies from moving their activities to low-tax havens. The European Union and other countries are making progress in implementing that agreement, but its provisions have floundered in the US Congress, raising the prospect of the plan eventually going into effect without US intervention.

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