MEMO: The Corporate Profits Minimum Tax and Why We Need It

Marc Stier |

Democrats are set to introduce a 15% corporate minimum tax as a funding mechanism for the Build Back Better plan.

The Corporate Profits Minimum Tax legislation would ensure that roughly 200 corporations that report more than $1 billion in profits to shareholders pay at least a 15% tax rate on those gigantic profits. It would stop giant, profitable corporations, such as Amazon, Bank of America, FedEx, General Motors, Netflix, and Nike, from escaping all federal taxes.

These corporations and others like them make huge profits that they report to their stockholders in filings required by the federal government. But they take advantage of multiple tax loopholes to avoid paying federal corporate income taxes.

This new tax would raise roughly $200 billion to $300 billion dollars over ten years. These revenues would enable the federal government to make new investments in helping families with children, health care, child care, elder care, paid family leave, and new programs to limit climate change.

Raising revenue to fund the Build Back Better program is not the only reason we should enact a corporate profits minimum tax law. Basic fairness demands it as well.

At a time when the wages of most Americans have been stagnant, corporate profits have been growing. After-tax corporate profits averaged 5.4% of GDP between 1980 and 2000 but increased to 9.7% of GDP between 2005 and 2019.

Economic policies tilted to benefit capital rather than labor—including low minimum wages and labor laws that make union organizing difficult—account for part of the growth of after-tax corporate profits. But reductions in corporate tax rates and huge loopholes in the corporate tax play a large role as well.

The Institute on Taxation and Economic Policy found that at least 55 large U.S. corporations paid no federal income taxes in 2020, including FedEx, Nike, and Zoom. Twenty-six U.S. corporations paid no federal income taxes in the years 2018 to 2020. And the contribution that corporate income tax revenues make to the federal budget has fallen by almost half from 2% of GDP in 2000 to about 1.1% in 2019, costing the government $200 billion in revenues every year.

Declining corporate tax revenues mostly benefit foreigners and the richest Americans. Foreign investors own 40% of U.S. corporate stock. Stock ownership is increasingly concentrated among the ultra-wealthy. Of the 55% of equities owned by U.S. households, the share held by the wealthiest 0.1% has grown from 13% to 19% since the 1980s while the share held by the wealthiest 1% of households has grown from 39% to 50% during the same period, according to Goldman Sachs senior economist Daan Struyven. The gap between the top 10% of households and the bottom 50% is already striking— the top 10% owns, on average, $1.7 million of stock directly or indirectly and the bottom 50% an average of about $11,000. The gap between average Americans and the top 1% is simply out of sight.

How do U.S. corporations pay so little tax? Declining corporate rates—and especially the rate reduction during the Trump administration—accounts for some of the decline in corporate tax revenues. But when so many corporations pay no tax at all, despite a top corporate tax rate of 25%, then loopholes in the tax law are clearly the culprit. It is these loopholes that the minimum corporate tax proposal is designed to limit.

Corporate tax loopholes come in many varieties. Many corporations shelter their profits by moving their corporate headquarters in the physical world or on paper to foreign tax havens such as the Bahamas or Cayman Islands. They then use creative accounting to shift profits from the U.S. to those foreign entities—it’s the international version of the “Delaware loophole” which undermines the Pennsylvania state corporate income tax.

U.S. corporations also avoid paying taxes to the federal government by taking advantage of rules that allow them to depreciate the value of their capital investments much faster than the assets actually wear out.

A third major tax loophole allows corporations to deduct the value of the options they give their executives to buy the company’s stock at a favorable price in the future in a way that far overstates the actual cost of those stock options to businesses.

None of these loopholes contribute to economic growth. Neither profits abroad nor overstating the costs of stock options changes how corporations operate. And a Congressional Research Service review of the evidence for the impact of accelerated depreciation found that it “is a relatively ineffective tool for stimulating the economy.”[1]

Indeed, low corporate tax rates themselves have not been found to encourage economic growth. GDP grew in 2018, the first year Trump tax cuts were in effect by 2.9%, the same as in 2015. In 2019, the second year the law was in effect, GDP growth was even lower, 2.2%. The Trump tax cuts did not increase business investment or lead to higher wages.[2]

It would be ideal to attack corporate tax loopholes directly. But given the political power of American corporations, that is a very heavy lift. So, a sensible policy right now is to limit their impact by requiring U.S. corporations to pay at least 15% of the profits they report to their stockholders in taxes.

While this minimum corporate tax proposal will limit the impact of corporate tax loopholes that have no redeeming economic value, it has been designed not to limit the impact of tax credits that do serve a public purpose. The legislation would preserve the value of business credits for research and development, clean energy, and investments in housing. And it treats companies fairly by allowing them to carry forward losses, utilize foreign tax credits, and claim a minimum tax credit against regular tax in future years.

Reforms that limit the drain on federal revenues of corporate tax loopholes is long overdue. It’s time to make American corporations pay their fair share and use the hundreds of billions in revenues that a 15% minimum corporate income tax would generate to fund the critical public investments that are part of President Biden’s Build Back Better plan.

[1] Gary Guenther, “Section 179 and Bonus Depreciation Expensing Allowances: Current Law, Legislative Proposals in the 112th Congress, and Economic Effects,” Congressional Research Service, September 10, 2012.

[2] It might seem counterintuitive to hold that corporate taxes have no impact on investment and thus economic growth. And it is true that in a perfectly competitive economy, a tax on corporate profits would lead to reduced investment. But the United States is very far from having a competitive economy. Every sector of our economy is dominated by a relatively small number of corporations. This enables them to raise prices above those they could secure in a perfectly competitive economy. And since together they face a large number of potential employees, they can hold wages below what they might earn in a perfectly competitive economy. Thus, major U.S. corporations earn profits far above that which they would receive in a perfectly competitive economy. As long as a new proposal to raise revenue from corporations mainly taxes these super-profits—the economic rents that they would not receive in a perfectly competitive economy—there will be no impact on corporate investment decisions and thus on economic growth. For a good overview of this issue, see Steve Rosenthal and Theo Burke’s “Who’s Left to Tax? US Taxation of Corporations and Their Shareholders.”