In recent years, it has become fashionable to profess outrage at reports of businesses with book profits that nevertheless owe zero taxes. Popularized by left-wing advocacy groups such as the Institute for Taxation and Economic Policy, these reports are intended to drum up public anger against a tax system supposedly “rigged” in favor of corporations. Ironically, recent attempts to solve this “problem” demonstrate how bogus this narrative is better than any op-ed ever could.
Since his time on the campaign trail, President Biden has been supportive of proposals pushed by Senator Elizabeth Warren to tax corporations based on book income rather than taxable income. According to them, a book tax would prevent them from the “loopholes” and “carveouts” (or whatever other scary word you prefer) in the tax code to zero out their income tax liability.
No matter how well this may play politically, this sort of proposal is the kind that truly reveals its shortcomings when put into action. After all, progressives may claim frustration with businesses using credits and deductions, but which of these do they actually propose to get rid of? Vague appeals to an “unfair tax code” are far easier than concrete policy proposals.
In the past, most actual progressive policy prescriptions for this supposed issue have centered on net operating loss (NOL) deductions, which help address the fact that businesses’ cash flow doesn’t neatly match the tax calendar. When the Coronavirus Aid, Relief, and Economic Security (CARES) Act expanded the use of NOL carrybacks and carryforwards, undoing a change made just less than three years prior, Democrats belatedly cried foul after many had already voted for the legislation.
The objection was always unserious, betraying either ignorance or indifference to businesses losing money due to the pandemic being allowed to reflect those losses on their tax returns. But what made the progressive angst about NOLs doubly frustrating was the fact that, when House Democrats drafted subsequent legislation, it contained much the same language expanding NOLs that the CARES Act had used.
Now, history repeats itself. Fresh off bemoaning the loopholes in the tax code, President Biden is pushing a minimum tax, which would essentially subject certain businesses to a secondary set of tax rules should they prove too successful at reducing their tax liability.
The proposal purportedly aims to prevent excessive utilization of tax credits and deductions, but Biden’s proposal for a secondary minimum tax still allows for the use of several of the very tax credits that allow many businesses to reduce their liabilities in the first place — namely, research and development, renewable energy, and housing. Amazon, one of the most high-profile examples of a large business with book profits but low tax bills, makessignificant use of credits for research and development to reduce its tax liability.
When even Biden’s plan to eliminate corporate tax avoidance still contains many of the same tax provisions that facilitate lower corporate tax bills, Americans should begin to wonder how serious this all is. How many layers of the tax code will eventually be necessary to keep those pesky corporations from responding to the incentives the tax code provides?
All this focus on corporate tax avoidance through the tax code is ultimately a red herring. Higher corporate taxes are not something to root for — ultimately, they are paid in large part by labor through lower wages. And when it comes to provisions in the tax code that are there for good reason such as NOLs or full expensing, a minimum tax, no matter how watered down, would reduce these policies’ efficacy at encouraging investments as Congress intended.
It’s unfortunate that President Biden is pandering to his base with misleading narratives about corporate taxes. It’s even more unfortunate that even the President does not appear to believe in his own arguments.
