After Sen. Joe Manchin (D-W.Va.) announced the Inflation Reduction Act last week, some Republicans reflexively jumped in to criticize its corporate alternative minimum tax. They used one of the typical methods of attacking any revenue increases from corporate tax changes, citing the corporate tax incidence. But they overlooked that the proposed tax rule would fix an unfair tax status quo encumbering domestic corporations. Foreign interests should pay their corporate tax share.
For too long, Washington has ignored the effective tax rate between domestic corporations and global enterprises. The corporate alternative minimum tax can partially fix this issue.
The proposed legislation requires the largest companies to pay a minimum of 15% of the corporation’s income as reported to shareholders. This rate is much closer to what domestic corporations are obligated to pay, and it only affects companies that exceed $1 billion in annual profits averaged over three years.
The recent Joint Committee on Taxation analysis breaks down the idea of corporate tax incidence to allocate increases indirectly to individual American tax brackets. It’s no secret that someone pays corporate taxes. Many economists believe that shareholders, labor, and consumers pay corporate taxes indirectly; other economists believe shareholder self-interest forces these costs only onto labor and consumers. The real world is far more nuanced. But from the perspective of domestic companies, it doesn’t matter whether shareholders pay very little of these taxes.
The JCT report fails to address the salient point: Will fixing our tax system finally end the benefits that foreign labor and shareholders enjoy over domestic US workers and producers?
The American public knows large global corporations have been able to pay far less in effective tax rates than domestic businesses. According to a Coalition for a Prosperous America study, global multinational companies paid an effective tax rate of 8.7% in 2019. In comparison, domestic corporations pay much closer to the nominal 21% corporate tax rate.
Giant multinational corporations are more likely to have foreign investors and foreign production. Investing in public companies is more accessible, and American production has been offshored for 30 years. These multinationals continue to enjoy lower effective tax rates while maintaining foreign production and higher rates of foreign investment.
When the Joint Committee on Taxation studied the Manchin-Schumer proposal, it wasn’t asked to consider that multinationals continue to use foreign production facilities—or compare offshore production with domestic American production. In other words, if labor bears a significant share of the corporate tax burden, the amount of multinational corporate offshoring will affect their foreign labor that “pays the corporate tax.”
For those who believe shareholders carry a significant amount of the corporate tax burden, foreign shareholders in vast global companies pay the corporate tax indirectly. By default, they have a better indirect effective tax rate than domestic corporation owners.
American labor and shareholders can reclaim American customers when they don’t have to compete with a system that benefits foreign competition. Better options may be proposed in a future bipartisan Congress, but right now, US domestic corporations (and those responsible for their taxes) need this corporate alternative minimum tax. Why should foreign interests continue to avoid paying their share?
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.
David Morse is tax policy director at the Coalition for a Prosperous America Education Fund. Follow him on Twitter @CentristinIdaho.
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