January 17, 2022 - Douglas Myser

A better tax plan for Congress. After rejecting corporate income tax rate increases to help pay for President Biden's Build Back Better plan, House Democrats passed a 15 percent aleternative minimum tax on the income very large corporations report to their shareholders. This tax on book income would raise about $300 billion over 10 years. But it creates a mess of policy and administrative problems. Here is one way that is much better: Allow firms to take only say 80% of the value of their deductions and credits. THe idea, which MIT accounting professor Michelle Hanlon suggested on the TPC's podcast "The Prescription", has multiple benefits over the bookvalue method. It's not perfect, but it would prevent firms from using tax preferences to pay ittle or no tax while avoiding many of the pitfalls of the book tax. A better tax plan for Congress.

It would certainly be administratively easier to deal with. It would leave the definition of "book income" to the Independent Financial Accounting Standards Board and not Congress. It would certainly prevent firms from manipulating statement earnings to avoid the book tax. And it would discourage new tax dodges. It would raise more revenue by broadening the corporate tax base without Congress having to take the politically difficult step of explicitly repealing tax preferences. This might force some companies to to pay tax and look for Tax Resolution Services. You could apply it to all businesses, not the very large ones only.

The book tax could put Congress in the business of defining financial statement income. That could politicize disclosure and perhaps make corprate finances less transparent to shareholders.This wouldn't be a problem if COngress instead limits the benefits of the existing tax base. Another likely consequence would be Corporations would likely avoid the minimum tax by undersating or deferring income. That happened the last time Congress enacted a book tax years ago. The time seems right for this, given the government's need for additional revenue.