Biden’s worst tax idea
Joe Biden's business plan receives solid ratings, with research firms such as Oxford Economics and Moody's Analytics predicting that if it went into effect it would modestly hurt growth and jobs.
But there's a stupid and probably unworkable idea in Biden's plan: an alternate minimum tax for businesses that use statutory tax deductions to ease their tax burden.
During a recent webinar sponsored by Yahoo Finance and the Bipartisan Policy Center, two prominent economists - Jason Furman of Harvard University and Doug Holtz-Eakin of the American Action Forum - dismissed the idea of an overlapping second tax system for businesses. Furman is a Democrat who was chairman of the Council of Economic Advisers. Holtz-Eakin is a Republican who was director of the Congressional Budget Office and chief economic advisor to John McCain during his 2008 presidential campaign.
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Biden's alternative business tax would be a new 15% tax on “book income” for companies with annual incomes greater than $ 100 million. Book income is the result that public corporations report to shareholders, and it is often higher than the income they report to the IRS. This is because public accounting revenue does not take into account the many complex tax deductions that companies often use to lower their tax burden. Reportedly, Amazon paid no taxes in 2018 despite making a profit of $ 10 billion.
Isn't it reasonable to get profitable companies to pay a minimum amount of tax? Not necessarily. "It's a terrible idea for two reasons," says Holtz-Eakin. “Number one, you shouldn't have a tax system and an alternative tax system. You should have a tax system that you believe will increase revenue in a fair and efficient manner. The second is that there is a reason there is a difference between taxable income and book income. And a lot has to do with the use of statutory tax deductions that you set up in the first. It doesn't make any sense at all. "
Democratic presidential candidate, former Vice President Joe Biden, gets into his campaign jet at New Castle Airport in New Castle, Del on Thursday, October 8, 2020, en route to Arizona. (AP Photo / Carolyn Kaster)
If the Republican economist rejects Biden's alternative business tax, the Democratic economist has to support it, right? No "Alternative minimum taxes are always an admission that your tax system has failed," says Furman. “I'd always rather fix the tax system as a whole. Better to fix the loopholes that are causing the problem in the first place. "
The most lucrative corporate tax breaks include equipment depreciation, research tax credits, and adjustments to income tax paid abroad. Congress introduced these tax breaks primarily to incentivize things that should be good for the economy as a whole, such as spending more on equipment and research that could generate innovation and boost employment. The 2017 Republican tax cuts improved some of those tax breaks while also reducing the corporate tax rate from 35% to 21%. There are also tax breaks that benefit certain industries, including many for real estate developers like Donald Trump.
Business taxes far below
Trade taxes have fallen as a source of federal income. The post-war high was in 1952, when business taxes generated 32.2% of federal revenue. Until 1980 it was 12.5%, since 2016 it has been less than 10% every year. The 2017 tax cuts reduced corporate tax revenues to just 6.1% of federal revenues in 2018 and to 6.6% in 2019.
Biden wants to increase the trade tax rate from 21% to 28%, which is plausible. But he seems to have borrowed the alternative minimum tax idea from Senator Elizabeth Warren, which she proposed during her own presidential campaign last year. Warren, like Senator Bernie Sanders, tried to create or harness outrage at thriving businesses that do not necessarily share wealth with workers. Biden has clearly embraced some liberal ideas to expand his support among the party's left.
However, if you think businesses are enjoying too much tax break, it is better to reduce or eliminate the tax break than to put a different tax regime on top of the original one to capture legally withdrawn money. Tax professionals call this "broadening the base" or maximizing the number of companies that pay taxes. Simpler tax legislation with fewer provisions is almost always better than complex one with different provisions designed to balance each other out, as high-paid tax professionals have fewer loopholes to exploit.
There is no shortage of ideas to make corporate taxes fairer, simpler and more efficient. The Congressional Budget Office periodically publishes a long list of options to cut spending and increase revenue, including several possible reforms to corporate tax laws, such as removing tax breaks for energy companies, ending a tax break related to low-income housing, and changing deductibility some business expenses. The Brookings Institution released a 352-page paper earlier this year outlining numerous shelters and tax breaks that Congress could eliminate in order to generate more corporate revenue. If Biden wins in November, he could pursue some of these and potentially avoid the need to pursue his shakiest tax idea.
Rick Newman is the author of four books, including "Rebounders: How Winners Go From Backlash To Success". Follow him on Twitter: @rickjnewman. Confidential line: firstname.lastname@example.org. Encrypted communication available. Click here to receive Rick's stories by email.
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