Some profitable companies would still pay no taxes under the Democrats’ plan

WASHINGTON — President Biden’s talking points on corporate tax often revolve around a list of 55 profitable American companies that did not pay income taxes in 2020.

“Not a dime,” he said on September 16. “It’s not fair. And my economic plan will change that.

It seems unlikely.

The Democratic proposal approved this month by the House Ways and Means Committee would dramatically raise taxes on U.S. corporations, and business groups are working hard to defeat it. The legislation would increase the maximum corporate tax rate from 21% to 26.5% and remove many benefits of profit recognition in low-tax foreign countries. The resulting revenues – about $ 1,000 billion over a decade – would help fund Democratic political priorities, including an expanded child tax credit and a paid vacation program.

The bill, however, does not touch on the main reasons profitable companies sometimes do not pay taxes, including accelerated depreciation of investments and tax credits for activities such as research and development. The bill strengthens a minimum tax on foreign profits for U.S. companies, but it does not include the separate minimum tax Mr. Biden proposed to limit the number of zero-tax companies.

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The law also extends tax credits for clean energy and low-rental housing in a way that causes some businesses to pay little or nothing.

“Businesses that don’t pay taxes will be able to continue to pay no taxes, and in a way, they might even get a larger refund,” said Frank Clemente, executive director of Americans for Tax Fairness , a progressive group. which advocates higher taxes. “It is remarkable that it is not being talked about in Congress.”

Mr Clemente said Biden’s corporate tax speech – preventing profitable companies from paying anything – was the most popular tax policy idea in his group’s polls.

The bill passed by Congress represents an explicit choice by Democrats to tolerate certain zero-tax companies and to grant tax benefits to companies that engage in privileged activities.

“The House plan ensures that big business and high income earners pay their fair share without stifling job creation or innovation,” said Dylan Opalich, spokesperson for the Democrats on the Ways and Means Committee from the room. “It’s a balanced approach that raises corporate rates and strengthens international tax arrangements while encouraging job growth at home and increased investment in green energy.

The Democrats’ plan to fund President Biden’s $ 3.5 trillion Build Back Better initiative will need to strike the right balance to appeal to the progressives without alienating the moderates. WSJ’s Gerald F. Seib chats with tax policy reporter Richard Rubin. Photographic illustration: Todd Johnson

David Kamin, deputy director of the White House National Economic Council, said the committee’s bill marks a step towards increasing taxes on businesses that often pay little or nothing.

“These reforms, as evidenced, frankly, by the lobbying effort that multinationals have undertaken at the moment, [do] change that, ”he said.

Corporate taxes are complex, and there is no perfect, publicly available measure of what sole proprietorships actually pay to the U.S. government in each tax year. Financial statements can give rough approximations, and tax-free corporations are an easy idea for the general public to grasp.

The list of 55 companies often cited by Mr. Biden comes from the Institute on Taxation and Economic Policy, or ITEP, a progressive group that publishes a regular report on the phenomenon of zero-tax companies. This year’s list included companies such as VeriSign Inc.,

Air sealed Corp.

and DTE Energy Co.

Amazon.com Inc.,

often the political poster child for light corporate tax burdens has been included in past years.

To find companies that are tax-free, ITEP examines the annual income statements of companies to see which companies have no current US tax burden. This approach highlights low-tax and non-tax corporations, often due to discrepancies between definitions of income for accounting and tax purposes.

Companies write off investments immediately for tax purposes, but over time for financial statements. This now leads to significant tax deductions which can eliminate their current tax costs. Then, in years to come, they would deduct the expenses from their financial statement income but not from their taxes.

The numbers can be confusing and confusing. Sealed Air, which makes packaging, declared a global tax rate of 22.7% for 2020 and $ 102 million in cash tax payments globally. But its current U.S. tax charge was negative at $ 14.2 million, due in part to $ 27.8 million in tax credits and $ 59.4 million in deferred federal tax charges. The higher tax rate proposed by the Democrats could increase the company’s tax rate, but that would not guarantee that it pays anything in the United States.

“This is still the way the Democratic Party’s tax policy works,” said Kyle Pomerleau, senior researcher at the conservative American Enterprise Institute. “The corporate tax rate can go up, but there are aspects of the tax base that can go down. “

ITEP’s analyzes have prompted some Democrats, including Mr Biden, to call for a minimum income tax as shown in the financial statements. Many tax experts have warned that this would effectively hand over the definition of the Congressional tax base to the Financial Accounting Standards Board, which establishes the generally accepted accounting principles in the United States used for public reporting by companies. The Ways and Means Committee chose not to adopt it.

Matt Gardner, senior researcher at ITEP, said the report has always been intended to provide high-profile examples of low corporate tax payments that highlight broader trends in the corporate tax burden. Eliminating zero-tax companies should not be the primary goal of the policy, he said.

“Is there anything in this bill that would prevent businesses from paying zero? I don’t think so, ”said Gardner, who praised the international tax provisions of the Ways and Means Bill. “But I don’t think that was ever the real problem. The real problem is the much wider range of companies paying low but positive tax rates. “

Senator Elizabeth Warren (D., Mass.), Who supports a 7% minimum tax on large profitable companies, said the House bill did not go far enough. Ms Warren said her plan could raise $ 700 billion and she was still pushing to include a version of the idea as the House, Senate and White House work out the details.

“The fact that it would raise so much money shows you how flawed our current tax system is,” she said.

The $ 3.5 trillion budget bill

Write to Richard Rubin at [email protected]

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