The Democrats’ Lousy Corporate Tax Hikes

(Yahoo!Finance) - President Biden took office in 2021 with an aggressive agenda of new programs he hoped to enact, along with a slew of tax increases to pay for them and make the tax system “fairer.” Biden has only gotten some of the programs he wanted, but most of the tax hikes turned out to be too difficult to get through Congress.

The tax hikes that Democrats are likely to pass are lousy ones that will make the tax code more complicated and leave plenty of room for evasion. The only two meaningful tax hikes Democrats may pass at all during Biden’s four-year presidential term are contained in the Inflation Reduction Act, which the Senate passed on Aug. 8 and the House of Representatives is likely to pass soon. Biden has indicated he will sign the bill promptly.

The IRA, as it’s known, includes $390 billion for green-energy funding over a decade, $318 billion for deficit reduction, and smaller amounts for targeted health care subsidies and rebuilding the depleted Internal Revenue Service. The bill has only two tax hikes: a minimum 15% income or “book” tax on big companies that use tax breaks to pay below the 21% corporate tax rate, and a 1% excise tax on corporate stock buybacks.

If you were designing an efficient tax code from scratch, neither of those taxes would make the cut. The 15% minimum corporate tax is more of a political statement than anything else. Some big companies use tax breaks Congress passed years ago, for good reason, to whittle their income tax bills to nothing, or close to nothing. This has become controversial as income and wealth inequality have worsened in the United States, and some business founders have become unimaginably wealthy.

Amazon (AMZN), for instance, has used tax breaks to shave $5 billion off its tax bills in recent years, in some cases owing no federal income tax, even in years it turned a handsome profit. Meanwhile, its founder and former CEO, Jeff Bezos, has amassed a $166 billion fortune, mostly in Amazon stock.

Corporations get tax breaks for a reason

That might seem unfair, but it’s also true that Amazon has grown from a money-losing startup to a global retail and technology giant that employs more than 1 million people in the U.S. Amazon grew, in part, by using legal tax breaks Congress wants companies to use, to accomplish exactly what Amazon has accomplished. Companies can claim numerous tax credits meant to encourage domestic investment, innovative research, equipment purchases and many other things deemed beneficial to the U.S. economy. These tax credits exist because Congress decided during the last several decades it’s good policy to use the tax code to encourage behavior likely to make the U.S. economy more competitive and more productive.

The 15% book tax, sometimes described as a corporate alternative minimum tax, will basically negate tax credits that are supposed to encourage productive business activity.

“The book minimum tax would likely increase distortions in the corporate tax, not reduce them,” tax expert Kyle Pomerleau of the American Enterprise Institute argues. “The book tax is not good tax policy and there are a lot better ways to raise revenue.”

There are several technical reasons why a minimum tax could cause even more aggressive tax manipulation among big companies than there is now. At a more basic level, the minimum book tax would be in direct conflict with other parts of the tax code, since it would basically veto tax breaks the law encourages companies to take. Complexity makes tax enforcement harder, and the companies subject to this new minimum tax—those with more than $1 billion in annual profits—are the businesses most able to hire armies of tax experts to minimize their tax bills.

The stock-buyback tax is another politically attractive cop-out. In theory, it will discourage public companies from using excess cash to buy back their stock and reduce the number of outstanding shares, which sometimes pushes the stock price up, benefiting shareholders. Companies will supposedly use the money instead to invest in new projects that will create jobs and boost growth.

But this is a misunderstanding of how buybacks work and how companies are likely to respond to the buyback tax. Most companies only use cash to buy back stock when they don’t see a better use for that money, such as investments with a reasonable rate of return. Raising the cost of buybacks via a tax won’t do anything to make other investments more attractive. Many companies will probably raise the dividends they pay instead, and some will simply sit on the cash, perhaps aided by the recent rise in interest rates. What a buyback tax clearly won’t do is put more money in ordinary workers’ pockets or help workers develop new skills that will make them more valuable to employers.

Better ways to raise revenue from corporate taxes: First, make the tax code simpler instead of more complex. If Congress thinks come corporate tax breaks are too generous, it should either reduce or eliminate those tax breaks, instead of imposing a new tax that competes with those tax breaks. It might also be more efficient simply to raise the corporate tax rate instead of throttling existing tax breaks with a tax hike.

One big advantage of the new taxes

There is, however, at least one advantage to the convoluted new taxes Democrats are passing: They’re able to pass. This may reflect a wink-and-nod acknowledgment among some Democrats—plus the business lobby—that corporations will find workarounds and the new taxes won’t be very onerous. Arcane tax hikes that are hard to understand are also less likely to generate ardent opposition than simpler moves, such as a hike in the corporate rate of 21%.

Besides, corporate America is getting a break compared with the taxes Biden started out asking for. Raising the corporate rate from 21% to 28%, as Biden preferred, for instance, would have dinged business for about $75 billion per year. And that was just one of several new taxes on businesses and the wealthy Biden lobbied for. The 15% minimum and buyback taxes are likely to generate just $45 billion in new revenue per year, combined, and it could end up much lower than that as companies adapt. Stocks have gone up, rather than down, since Democrats surprised markets by unveiling these new tax hikes in late July, which indicates investors don’t see any meaningful impact to corporate profitability from the new taxes.

If Republicans win control of the House of Representatives in the November midterms, as most forecasters expect, they’ll be able to block any remaining elements of Biden’s agenda they want to. That means there will be no further tax hikes until 2025, at least. Biden will have made the tax code a bit messier, but not terribly more painful.

By Rick Newman · Senior Columnist


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