Curtis Dubay Curtis Dubay
Chief Economist, U.S Chamber of Commerce


November 05, 2021


Congress is currently considering, at the last moment, a corporate profits minimum tax to help pay for a portion of the reconciliation bill. The name of the tax sounds innocuous, but it would be a terribly complicated law that will have numerous unforeseen consequences that will slow the economy and hurt workers.

What Is It?

The plan would enact a 15% minimum tax on the “adjusted financial statement income” of businesses that report over $1 billion in profits to shareholders. A short-hand way to say it is it would apply to the “book income” of a business. Right now, businesses pay tax on their taxable income. The Biden administration anticipates it would raise $150 billion over 10 years.

Financial accounting of book income and tax accounting are two entirely different concepts, and they should not be conflated. The purpose of financial accounting is for businesses to report their profit and loss to investors in a uniform and standard manner. That way investors can assess a business' prospects and compare it to other businesses in its industry and across industries. The reports are fully public.

Businesses prepare tax accounting for the express purpose of complying with the tax law. Tax accounting is not concerned with profitability the way financial accounting is. Instead, its sole purpose is to arrive at a business’ taxable income as defined by Congress. Tax returns are fully private (or at least they are supposed to be).

What's the Problem?

Combining financial accounting with our federal tax laws simply does not work–like mixing apples and oranges. Mixing them together will not only result in an unworkable framework but also sets a dangerous precedent.

It is dangerous because it would cede Congress’ authority over a portion of the tax code to unelected officials at the agencies that set financial accounting rules. Accounting standards are based on general “principles” set by groups like the Financial Industry Regulatory Authority (FINRA), the Financial Accounting Standards Board (FASB), and the Securities and Exchange Commission (SEC) to name just a few. The officials at these groups are unelected and unaccountable to voters. FINRA and FASB are independent, non-government organizations. Yet the decisions they make on accounting standards would impact the tax code. The Constitution is clear that Congress sets tax law, not outside agencies. Ceding that power would be a dangerous precedent.

A tax policy that crosses financial and tax accounting would be unworkable because it would be too complex for businesses to comply. Without further details of the policy, here are a few complications the accounting firm PwC has identified, all of which could prove major:

  • Determining how and if a business qualifies for the tax.
  • Timing issues between financial statement year and tax year.
  • How to handle substantial differences between tax and book accounting, such as depreciation for spectrum licenses.
  • Issues for businesses not part of a consolidated group and complications of dividends received.
  • How to account for Controlled Foreign Corporation income, disregarded entities, and foreign tax credits.
  • The treatment of carryforwards and net operating losses.
  • The effect of mortgage servicing rights.
  • The impact of exposing defined benefit plan sponsors to taxation, which would discourage funding – completely contrary to past Congressional intent or sound retirement policy.

These are just a few of the potential problems. As PwC states, “The proposed [book minimum tax] would add significantly to the complexity of corporate tax compliance and administration. As drafted, the provision introduces several new concepts and raises significant questions regarding their interpretation.”

Should congress pass the tax, these issues and more will arise.

More Problems

A book tax is also likely to have very negative consequences, including for those who are not subject to the tax. One major difference between book income and taxable income, is the expensing/accelerated depreciation of capital investments like machinery. Expensing/accelerated depreciation reduces the immediate after-tax cost of the investment. A tax on book income would claw back that reduction for some companies, making the immediate cost of a capital investment higher.

To understand how this works, our friends at the Tax Foundation provided this helpful example: A company with $100 million in gross revenue and $65 million in operating expenses wants to acquire $30 million of new equipment that could be immediately expensed. Under current law, their first-year taxable income is $5 million.  But because under accounting rules, the equipment depreciates over 5 years, their taxable income under the book tax is $29 million.

As a result, the company may spend less acquiring new equipment. The supplier of that equipment ends up bearing part of the economic cost.

In addition to being a dangerous and unworkable policy, it is ridiculous that Congress is considering the idea at all at such a late date. It is doing so because it needs revenue offsets for all the spending in the reconciliation bill now that it is clear there are not the votes for increasing taxes other ways, like raising the corporate income tax rate. Those policies died because there is broad acceptance that the economic damage from them would be immense. There will be countless unintended consequences if Congress rushes the book minimum tax into law that would be brought to light in a normal legislative process, with hearings and public input. In this mad dash, none of this work has been done. So the chances for major problems arising from the tax, in addition to those listed above, are greatly increased.

Congress has been down the book minimum tax route before with the Business Untaxed Reported Profits adjustment, or BURP (no joking), which it passed in 1986 and quickly repealed. That tax was similar to the one under consideration now. It proved unworkable, which is why Congress repealed it.

Rather than go down that same futile road again, Congress should scrap the book minimum tax altogether now. If it proceeds, it will be responsible for countless headaches to come.

About the authors

Curtis Dubay

Curtis Dubay

Curtis Dubay is Chief Economist, Economic Policy Division at the U.S. Chamber of Commerce. He heads the Chamber’s research on the U.S. and global economies.

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