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

Robert D. Atkinson December 20, 2021
December 20, 2021

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In the quest for “payfors” for the Build Back Better spending package, Senate Democrats have proposed a 15 percent minimum tax on corporations in the United States with at least $1 billion in annual “book value” profits. Given the massive budget deficit and debt, it makes sense to seek payfors if Congress is going to pass a large spending bill. And it is surely politically easier to raise revenues from supposed corporate scofflaws than from companies overall or even wealth individuals. But as structured it is bad public policy not only because it risks politicizing how companies book profits under FASB rules, but also because it will reduce the value of certain tax incentives companies have been given to advance key public-interest goals.

There Is Nothing Necessarily Wrong With Companies Having an Effective Tax Rate Lower Than the Statutory Rate

Senator Elizabeth Warren (D-MA) has been a lead advocate for this provision, touting the proposal in populist terms: “The Corporate Profits Minimum Tax will end these tax-rigging schemes by requiring giant companies that report more than $1 billion in profits to their shareholders to pay a minimum 15% tax rate.” Her office released a report calling out 70 companies for opprobrium because they paid less than a 15 percent effective tax rate (ETR). The message is clear: Fat cats are using all sorts of nefarious schemes to get away with not paying their “fair share.” If that message was not clear, the cover makes it clear: an image of what looks like a fat-cat executive—dark suit and tie, white shirt, expensive watch and gaudy gold ring—pocketing a fat roll of C-notes, under a sign “Tax Avoidance.”

This anticorporate, populist framing is wrong because it blithely overlooks the fact that the reason virtually all of these 70 companies paid less than 15 percent in profit taxes is because Congress put in place tax provisions to encourage companies to invest in ways more aligned with the public interest. Indeed, despite what some free-market ideologues and anti-corporate progressives believe, the tax code is a critical tool of public policy, providing incentives for individuals, noncorporate companies, and corporations to act in ways more aligned with the public good. The reality is that for decades, Congress has seen fit to enact a variety of tax incentives to spur companies to invest in socially beneficial ways, including investing in economically disadvantaged areas, hiring workers experiencing barriers to employment, developing orphan drugs, investing in research and development, buying clean energy vehicles, sequestering carbon dioxide, providing paid leave for sick or family leave, making disaster relief and food contributions, providing day care, and investing in new capital equipment, including broadband.  

But rather than praise these companies for investing in ways Congress wants them too, progressives would rather name and shame them. The Institute on Taxation and Economic Policy, whose report Sen. Warren’s report relied on, states: “At least half a dozen companies used the federal research and experimentation (R&E) credit to reduce their income taxes in 2020.” But that is exactly what the R&E credit is designed to do. And scholarly research has clearly shown that the credit is a cost-effective tool to spur more research spending that grows the economy and boosts U.S. international competitiveness. Using data from the European Commission, calculations by ITIF have shown that the companies listed in Sen. Warren’s report employed over 16.4 million workers and invested over $120 billion in R&D in 2019—exactly what policymakers want companies to do. To publicly shame them for taking a credit that expands innovation and jobs is perverse and counter to the public good.

Likewise, the report tries to shame companies for expensing in the first year for tax purposes their investments in capital equipment, even though Congress enacted this provision to spur higher levels of capital equipment investment, which boost wages and U.S. competitiveness. Notably, the 70 companies listed invested over $97 billion in capital expenditures in 2019, and that means that their taxable income will likely be less than book income. Putting in place the minimum tax provision as structured would mean less capital equipment investment, reducing U.S. competitiveness and innovation.

For years, many progressives have criticized U.S. companies for not investing more in the building blocks of growth, like R&D and capital equipment. And yet when they do, and receive tax incentives for it, progressives attack them. It is especially ironic that Sen. Warren criticizes companies that have taken advantage of tax incentives to serve public purposes, when she herself has proposed such incentives in the past.

The report also ignores the fact that some companies lose money in a particular year and obviously in those years don’t pay taxes. In other years, companies have more deductions or credits. This is why it is not uncommon for some companies to have a high effective tax rate in most years, but to occasionally have a lower one. This makes it easy for anticorporate activists to always be able to find some companies in any particular year that paid lower taxes in that year.

Moreover, under federal tax law companies can carry forward losses to future years, reducing their tax liability in those years. In addition, companies receive tax credits for foreign taxes paid, and that can also result in a difference between the effective tax rate and book profits.

Finally, the implications of these kinds of reports are that large companies are getting away with murder compared to small companies. As one article noted, “the findings also underscore the favorable tax environment for big businesses in the wake of the 2017 Trump tax cuts.” But the tax cuts reduced rates on small and big business; C-corps and S-corps. Moreover, the corporate tax rate is lower for small corporations, and there are a host of tax incentives that only apply to small companies.

Problems With the 15 Percent Minimum Tax Proposal

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.


With regard to the supposed problem of some companies not paying enough, there are better alternatives than a 15 percent minimum tax related to book value profits:

  • If there are particular tax provisions that are a problem, the Senate should eliminate or reform them. For example, Sen. Warren appears to object to companies “getting a tax break for exorbitant executive compensation,” even though tax provisions for stock options are tied to those workers receiving the options paying taxes at the higher rate of normal income, not as capital gains.
  • If the issue is foreign profit-shifting, then the answer is to work through the OECD BEPS process that is designed to address this.
  • If the issue is companies breaking or stretching the law, then the solution is not a minimum tax but stronger IRS enforcement (although, presumably each of the 70 companies her report listed is thoroughly audited by the IRS).

Moreover, if Sen. Warren and her Democratic colleagues want to raise revenues in ways that do not harm economic growth or reduce the incentives to invest, then Congress should focus on higher-income individuals—putting in place a wealth tax, raising the top marginal rate, or taxing dividends as normal income.