A Corporate Minimum Tax Would Ensure Large Corporations Begin To Pay Their Fair Share
What do Duke Energy, American Electric Power, and T-Mobile all have in common? Over the past three years—2018, 2019, and 2020—all three companies reported an average of more than $1 billion in annual profits to their shareholders yet paid no federal income tax. T-Mobile alone reported profits of $11.5 billion over the three-year period.
These are just three of the 39 corporations in the S&P 500 or Fortune 500 that paid no federal income tax in the three years since the enactment of the Tax Cuts and Jobs Act (TCJA) of 2017, according to an analysis of corporate financial statements published by the Institute on Taxation and Economic Policy. An additional 73 profitable corporations, including Amazon, Bank of America, and Netflix, paid less than half the statutory tax rate of 21 percent over the same period. Amazon alone reported $43.4 billion in profits from 2018 through 2020 while paying just 4.3 percent of those profits in federal corporate tax. Indeed, a rigged tax code, riddled with loopholes, allows many of the largest and most profitable corporations to pay little or no federal income tax, often year after year.
The Build Back Better Act, passed by the House on November 19, would fix this problem by imposing a minimum tax based on the income corporations report to their shareholders—their book or financial statement income—after certain adjustments. The roughly 200 companies that report profits of more than $1 billion per year, on average, in a three-year period would pay the new corporate profits minimum tax (CPMT), set at 15 percent or the amount a company owes under the regular corporate tax—whichever is greater. The CPMT would also preserve the value of targeted tax credits, including those for research and development, low-income housing, and clean energy. This reform would rebalance the tax code and raise an estimated $319 billion over the next decade to help pay for investments in child and health care, solutions to the climate crisis, and an extension of the child tax credit that would help millions of American families.
Corporate profits have skyrocketed, while tax collections have stagnated
Corporate profits have skyrocketed in recent decades, reaching a high point in 2021. In contrast, corporate tax collections have declined as a share of gross domestic product, from an average of 3 percent from 1962 to 1980 to 1.2 percent since the enactment of the TCJA, equivalent to a drop of approximately $400 billion in 2021 corporate tax receipts. While some of the erosion in corporate tax collections is attributable to policy and other changes—which have fueled the rise of pass-through entities—most of the drop reflects deliberate policy decisions and other changes. These policies include the massive corporate tax cuts made by the TCJA and longer-term patterns of tax avoidance such as profit shifting, whereby multinational corporations artificially report their profits in low- and no-tax havens to minimize the tax they owe. Taken together, these factors enable many of the largest corporations to report substantial profits to their shareholders while paying little or no corporate tax, year after year.
The dramatic rise in corporate profits has fueled inequality by boosting the incomes of the wealthy, who own the vast majority of corporate stock. Of the corporate stock and mutual fund shares owned by Americans, the wealthiest 1 percent own more than half, while the wealthiest 10 percent own nearly 90 percent. These flaws in the tax system also benefit foreign investors, who own roughly 40 percent of U.S. corporate stock.
A proliferation of tax loopholes allows corporations to report profits while avoiding tax
The ability of corporations to report record profits to shareholders while paying little or no tax stems from differences in the treatment of income and deductions for accounting and tax purposes. These disparities have grown over time and include:
- Businesses’ ability to write off cost of equipment and other capital costs for tax purposes over a shorter period than its useful life: The TCJA allowed businesses to immediately deduct or “expense” the full cost of many investments acquired after September 27, 2017, and before January 1, 2023, creating a major difference between book and tax income.
- The value of stock options granted to employees that provide a larger deduction for tax purposes than the cost reported to investors
- Profit shifting and the use of tax shelters and preferences that allow corporations to report profits to shareholders while reducing the amount of taxes owed
The corporate profits minimum tax would improve the tax code
Using information provided on corporate financial statements, ITEP has documented the rise of no- and low-tax corporations and estimated the potential impact of the CPMT. Its research shows that in 2020, 7 of the 8 most profitable large corporations—Microsoft, Apple, Google, Facebook, Intel, Amazon, and Verizon Communications—paid less than 15 percent of their income in corporate income taxes. Under the Build Back Better Act, these corporations would have owed an estimated $6.4 billion in corporate profits minimum tax. In addition, 20 large corporations reported profits to their shareholders in 2020 but paid no federal corporate income taxes. Under the Build Back Better Act, these corporations together would have owed an estimated total of $6.6 billion dollars in corporate profits minimum tax.
Overall, had the Build Back Better Act been in effect in 2020, 70 corporations would have paid a total of $22 billion in corporate profits minimum tax.
The corporate profits minimum tax would improve financial transparency
By reducing the incentive for corporations to maximize the income they report to investors while minimizing the income they report to the IRS, the CPMT would improve the accuracy of financial reporting. Under current rules, corporations have a strong incentive to boost profits reported to shareholders to meet earnings expectations and inflate executive compensation that is increasingly tied to share prices, all while taking advantage of preferences and tax shelters to reduce or eliminate their tax liability.
The disparity in tax and financial accounting rules also makes it difficult, if not impossible, for investors to accurately assess a firm’s true after-tax income. As Lily Batchelder, a former New York University law professor now serving as assistant secretary of the Treasury for tax policy, writes, the current system “overestimates the value of accelerated cost recovery instead by ignoring the future tax liability associated with a given item of income” and “provides investors and analysts with relatively little insight into the firm’s after-tax income—let alone its marginal after-tax return on a marginal investment.”
The proposed tax would serve to limit these disparities and balance the conflict, while also encouraging more honest financial reporting and raising revenue to support public investments in the nation’s future.
Arguments against the corporate profits minimum tax do not hold up to scrutiny
Arguments by opponents of the CPMT largely have focused on two claims: 1) that the differences in the treatment of depreciation deductions will hinder capital investment; and 2) that there is potential for political meddling in accounting rules. Neither argument holds up to close examination.
Accelerated depreciation, including the temporary ability to immediately deduct capital purchases provided by the TCJA, allows companies to delay tax payments without paying interest and, under financial accounting rules, without reducing bottom-line profits. The extent to which these deductions achieve their intended purpose—encouraging capital investment—is mixed, and a recent Congressional Research Service review examined the history of tax preferences for bonus depreciation, concluding that they have “a moderate effect at best on the level and composition of business investment.” The same study notes, “It can also be argued that much of this additional investment would have taken place in any event, and that the main effect of expensing is to accelerate the timing of those investments,” and thus, accelerated depreciation provides windfall tax benefits to profitable corporations. Recent research examining the impact of bonus depreciation on local labor markets found that “even though bonus depreciation stimulated investment, the ultimate goal of sustained job creation and wage growth proved elusive.”
Critics also argue that the CPMT would politicize financial accounting standards. This claim, too, is misplaced. The Financial Accounting Standards Board—the body charged with making the rules governing financial reporting—has long been subject to political pressure by corporate interests, as well as by Congress. The politicization of standards setting can and should be addressed separately from the consideration of the CPMT. By creating a counterweight to current corporate efforts to inflate reported earnings, the CPMT should, if anything, promote standards that provide investors with more meaningful information on a firm’s true financial position.
For decades, a number of the largest and most profitable corporations have paid little or no corporate income tax.
For decades, a number of the largest and most profitable corporations have paid little or no corporate income tax, fueling a rise in inequality and eroding resources necessary for the public investments that promote a healthy economy. The corporate profits minimum tax would strengthen the federal tax code by curbing the ability of huge corporations to report enormous profits while paying little or no tax. In addition, it would bring added transparency to financial reporting by balancing corporations’ desire to report profits to their shareholders while minimizing the taxes they owe.
This reform will take a bold step toward fixing a broken tax code and making sure large corporations begin to pay their fair share, all while raising the revenue needed to invest in America’s families and a healthy economy.
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Senior Fellow, Economic Policy