Congress can crack down on corporate tax avoidance and tax evasion by the wealthy for the first time in decades with the Inflation Reduction Act, the bill that is suddenly moving through the Senate.
While the climate and health-care provisions of this bill will rightly receive a great deal of attention, the revenue-raising provisions would also be a huge accomplishment, bringing fairness to a tax system that for decades has been eroded by special breaks for the powerful and well-connected.
The bill would require that the largest corporations in the US pay a minimum of at least 15% of their “book” profits in federal corporate income taxes. Many rules in place today allow corporations to report far lower profits to the IRS for tax purposes than the book profits they report to shareholders and potential investors. This means corporations really can have their cake and eat it too—they lure investors by touting their huge profits even as they tell the IRS they have little or no income to be taxed.
On top of that, corporations use convoluted accounting gimmicks to claim that the profits they generate in the US and similar countries are really earned in tiny tax haven nations where they have almost no operations. According to the most recent IRS data, American corporations claimed to earn a total of $60 billion in profits in the Cayman Islands in 2019, which is impossible because the entire economic output of the tiny nation was just $6 billion that year.
The result of all this is widespread corporate tax avoidance. President Joe Biden has frequently cited my organization’s finding that 55 large, profitable corporations avoided paying federal corporate income taxes in 2020, at the height of the pandemic.
The 2017 tax law enacted by President Donald Trump and congressional Republicans was an opportunity to address these problems, but it failed miserably. Many companies that were profitable each year from 2018 through 2020, the first three years that the 2017 tax law was in effect, paid no federal income taxes during that time. This includes companies like T-Mobile US Inc., FedEx Corp., Salesforce.com Inc., DISH Network Corp., Archer-Daniels-Midland Co. and others.
Other corporations that were consistently profitable during this period paid an effective rate of 10% or less, including Amazon.com Inc., Bank of America Corp., Domino’s Pizza, Honeywell International Inc., Motorola Solutions Inc., Netflix Inc., Nike Inc., Verizon Communications Inc., Walt Disney Co. and many others. These are some examples of the corporations that could be required to pay more under the 15% minimum tax in the Inflation Reduction Act.
The bill would also raise revenue by reversing a decade of cuts to the IRS enforcement budget that have left the agency with fewer auditors than at any time since World War II. These have caused the agency to dramatically reduce audits of wealthy individuals and large corporations and focus instead on audits that are easier to perform—which are audits on poor people.
From 2010 through 2018, for example, audit rates for people earning between $1 million and $5 million, as well as for corporations with $20 billion or more in assets, fell by much more than audit rates for low- and moderate-income families receiving the Earned Income Tax Credit.
Reversing these cuts is a no-brainer because IRS funding more than pays for itself in increased revenue collections. Even those who oppose changing our tax laws should agree that the agency should have the resources to ensure that wealthy individuals and corporations are following the tax laws already on the books.
The bill’s 15% corporate minimum tax is projected to raise $313 billion over a decade. The IRS tax enforcement provisions are projected to raise $124 billion over a decade according to the estimating rules that the Congressional Budget Office is required to use, but the Treasury Department points out that the real revenue impact would likely be $400 billion over a decade.
Requiring corporations to pay a minimum amount of federal taxes and funding the IRS to enforce existing tax laws seem like the bare minimum lawmakers could do to maintain our tax system. But they would mark a sea change from the previous several years and the first step toward a tax system that treats Americans fairly.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Steve Wamhoff is the director of federal tax policy for the Institute on Taxation and Economic Policy and is responsible for setting the organization’s federal research and policy agenda.
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