(Real Clear Markets) - As Democrats scramble to find ways to pay for a gargantuan $3.5 trillion budget, they have begun throwing outlandish proposals at the wall in the hope that something sticks. The latest is a revival of Sen. Elizabeth Warren’s proposal for a “minimum book tax” targeted at large corporations.
Despite receiving the label of a “minimum” tax, the latest proposal out of Warren’s mad scientist factory of bad tax policy would apply to all businesses with over $100 million in revenue, regardless of their traditional corporate income tax liability. Each affected corporation would be required to pay a 7 percent tax on revenue over $100 million, calculated by so-called “book value.” Book value refers to the earnings businesses report to their shareholders, which can differ from the amount on which they pay corporate tax.
Taxing book profits is a popular idea in progressive circles. They claim that corporations use one form of accounting to report earnings to the Internal Revenue Service (IRS), and another to report to shareholders, allowing them to show large profits to shareholders but no taxable income to the IRS.
That claim would charitably merit a fact-check rating of “half true,” at best. It’s true that corporations often report different book income than taxable income, but it’s not nefarious and the IRS isn’t getting fooled. Rather, it’s because accounting for the benefit of shareholders and accounting for reporting taxable income serve different purposes.
“Book income” is reported to shareholders to showcase the fiscal health of a company. It’s meant to give shareholders a sense of how the business is performing, and what its outlook is. Taxable income, on the other hand, is a corporation’s income after various deductions, credits, and exemptions purposefully included in the tax code have been factored in. Any differences between the two are a reflection of policy choices, not deception on the part of a company.
The corporate tax code does not simply extract a proportionate amount of money from each corporation based solely on its revenue. Instead, it accounts for costs like wages paid to workers, allows for smoothing of losses over time, and contains credits and deductions by which policymakers seek to encourage certain forms of productive economic activity, from investment in equipment to research.
The federal tax code is far from perfect, but these provisions exist for good reason: if they didn’t, companies could end up paying tax on more than their actual net profits. Whatever one’s view of the fairness of a particular rate or provision, nearly everyone can agree that companies shouldn’t pay taxes on more than they actually earned.
Even Warren’s fellow Democrats have conceded to the existence of some credits to encourage certain activities. When President Biden proposed a “minimum tax” earlier this year, it still included credits for research and development and for renewable energy.
That’s because while Democrats may claim to hate when businesses use deductions and credits in the tax code to reduce their tax liability, they generally can find little fault with the deductions and credits themselves. It’s far more politically advantageous to use the rhetorical sleight of hand of calling for a “minimum tax” than to actually eliminate deductions and credits that they claim are bad policy.
Taxpayers shouldn’t let Democrats get away with these rhetorical tricks. A minimum tax on book income is at odds with decades of bipartisan agreement on proper tax policy and Congress would be smart to do with it what they’ve done with most of Warren’s other wacky ideas: nothing.
By Andrew Wilford
Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government.
