TIPP Insights: Taxing corporate revenues better than an alternate minimum tax

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TIPPINSIGHTS EDITORIAL BOARD, TIPP Insights

After Krysten Sinema, the last holdout among Senate Democrats, agreed to support the Manchin-Schumer tax and climate legislation, the Left is crowing about a hard-fought victory.

A central piece of the proposal is the so-called corporate alternate minimum tax. On paper, the proposal sounds simple. Impose a tax on companies with at least $1 billion in profits on their shareholder income as a base and not their taxable income reported to the IRS.

Public companies report two kinds of income each year: one for shareholders, called book income, which is designed to measure the financial health of a business, and another for the IRS, called taxable income. The two incomes are rarely the same, by design.

When companies report taxable income, they can deduct capital investments and carry forward prior-year losses, thus lowering their taxable income. Companies hire skilled tax accountants and lawyers to reduce the taxable income so much that many do not pay an income tax at all.

Senate Finance Committee Chair Ron Wyden, D-Ore, points out that in 2019, many corporations had financial statement income of greater than $1 billion but paid very little tax. “Up to 125 billion-dollar companies are paying an average 1.1 percent effective tax rate, while nurses and firefighters are paying far higher rates. That’s not right, and the American people are with us here. When you talk to working Americans, nothing makes their blood boil like the most profitable mega-corporations paying little to no taxes. We’re going to put a stop to it with our 15 percent minimum tax.”

While the idea that everyone has to pay their fair share of taxes is not controversial, there are several issues with the alternate minimum tax proposal. It limits the capture to the relatively small number of companies – about 150 – with over $1 billion in book income. It appears to exempt large family-held and private companies that do not report income to shareholders.

The enforcement is likely to be complex. “In terms of implementation and just bandwidth to deal with the complexity, there’s no doubt that this regime is complex,” Peter Richman, a senior attorney adviser at the Tax Law Center at New York University’s law school, told the New York Times.

There’s a more straightforward way to address all these shortcomings. Impose a “Gross Receipts” tax on all revenue, not income. For tax purposes, corporate income should be redefined as a company’s gross revenue, a number that is easy to obtain and not subject to debate or interpretation, or gimmickry.

Under current tax law, we allow companies to deduct the cost of materials and direct labor from their revenues and every imaginable expense, including those generally required for operations such as indirect labor, rent, utilities, travel expenses, information technology, advertising, and legal costs. Imagine if individuals were permitted to deduct all costs of running their households and pay a tax only on the income left! Not only would this be absurd, but the government’s already low tax collections would plummet even further.

All companies benefit from roads, bridges, and ports and are served by various government departments, such as Commerce, Energy, or Justice. Logic dictates that companies should pay for these services whether they make a profit or not. The cost of consuming government services should be treated as no different from other operational costs. Paying taxes to the government ought to be a cost of doing business.

We let corporations spend billions of otherwise productive hours each year, devising ingenious ways to legally pay the smallest tax possible. Tax strategies dictate corporate behavior — such as where and when to invest. The country’s best minds in accounting and law firms are dedicated not to innovation, product development, or logistics but to exploiting tax loopholes.

The flat revenue tax could be minimal, as little as 3 percent of total revenue. Such a tax would eliminate the need for corporate tax departments, tax lawyers, lobbyists, and special interest agencies, all in one simple stroke.

“Gross Receipts” taxes are simple, effective, transparent, fair, and efficient. South Africa and Ireland assess a small “Turnover Tax” on all businesses. A tax on corporate revenue is imposed in seven states here (Delaware, Nevada, Ohio, Oregon, Tennessee, Texas, and Washington).

Republicans should propose a Gross Receipts tax. Doing so would simplify our tax code, make it fairer, and generate much-needed revenue.

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