The corporate minimum tax we already have

President Biden has proposed a 15 percent corporate minimum tax. Has he forgotten that the U.S. already has a minimum tax rate and that it’s higher than 15 percent?

U.S. companies are obligated by law to pay, at a minimum, 21 percent of their U.S. taxable income in taxes, after adjusting for losses and tax credits. The 21 percent federal rate has been in place since 2018, and before that, the minimum tax rate was 35 percent. The minimum tax we have today is just the normal corporate income tax rate. So why all the talk of a new minimum tax if we already have one? 

As it turns out, minimum taxes are really just an adjustment to the tax base — the thing that is being taxed. The amount corporations pay in income taxes is equal to the tax base multiplied by the tax rate. The tax base, or taxable income, is hard to compute and difficult to explain. The tax rate, on the other hand, can be summarized by a single number.

While the Internal Revenue Code is about a million words long, the section that defines the tax rate for U.S. corporations comes in at about 100 words. The important part of the section is only 16 words: “The amount of the tax imposed by subsection (a) shall be 21 percent of taxable income.” The majority of the Internal Revenue Code defines the tax base, dictating the relevant tax treatment for seemingly countless different types of economic inflows and outflows. Given this gap in complexity, it’s easy to see why politicians ignore the tax base and focus on the tax rate.

Focusing on the tax rate, however, is misleading. Most of the current criticisms of the tax code stem from concerns over the tax base, not the rate. A minimum tax like the one Biden has proposed implies there would be a 15 percent minimum tax on some different tax base than the one we currently use. 

So, what would this different tax base be? Details on initial tax proposals are always fuzzy. But, Biden has previously proposed a minimum 15 percent tax on financial accounting income, an income number that differs from taxable income for a variety of reasons. Take for example depreciation. Financial accounting, or book income, requires firms to depreciate capital assets based on actual economic depreciation because investors need to know the actual net value of the assets of the firm. The tax code, on the other hand, allows much faster depreciation, because doing so lowers the after-tax cost of investment, and spurs more corporate investment. Taxing financial accounting income is a bad idea since financial accounting and tax rules differ for a reason. A recent informal poll of accounting professors — including ourselves — across the political aisle didn’t find a single one who thought taxing financial accounting income was a good idea. And while Congress could use some other alternative tax base, including alternatives being discussed on a global level, that’s not a good idea either. That’s because regardless of what alternate tax base lawmakers decide on, any proposal for a minimum tax would require firms to compute taxable income twice, adding unnecessary uncertainty and complexity to the system. 

And it’s not just an issue of computing taxable income twice. A minimum tax would erode the very tax incentives Congress is trying to create. Research and development activity, clean energy investments and capital expenditures all receive favorable treatment in the tax code. Minimum taxes, however, are only effective if they back out items that receive preferable tax treatment. Inevitably a minimum tax would affect the production of public goods and therefore dampen the tax code’s ability to steer corporations in ways that are beneficial to society.

While minimum taxes might seem to be a new idea, the concept should sound very familiar. That’s because we already tried minimum taxes for corporations. The widely disdained corporate Alternative Minimum Tax (AMT) was exactly this type of minimum tax. The AMT was eliminated by the Tax Cuts and Jobs Act in 2017 because it was so universally reviled. Companies simply found it too onerous to have to compute taxable income twice under two different systems. Let’s not reimplement something that has already failed.

Minimum taxes are a distraction. If lawmakers don’t like the rules defining the tax base under our current system, they should just change them. Adjusting the tax code directly is a far better solution than layering a separate, independent tax system on top of our current one, which would increase complexity and compliance costs while undermining positive economic incentives. 

Fabio B. Gaertner is an associate professor and the Cynthia and Jay Ihlenfeld Professor for Inspired Learning in Business at the University of Wisconsin-Madison. 

Jeff Hoopes is an associate professor at the University of North Carolina and the research director of the UNC Tax Center.