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Minimum Book Tax: Flawed Revenue Source, Penalizes Pro-Growth Cost Recovery

3 min readBy: Cody Kallen, William McBride, Garrett Watson

As the U.S. Senate races to consider the Inflation Reduction Act (IRA), a centerpiece of the proposed taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. increases is the 15 percent minimum book tax on corporate income for firms earning over $1 billion, making up about 60 percent of the net revenue in the IRA. The minimum book tax puts one of the most pro-growth elements of the tax system at risk, penalizing investment right as it is needed to combat inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. and the current economic downturn.

The minimum book tax proposal has narrowed over the past two years since it was originally debated in the 2020 campaign. President Biden’s original proposal only provided exemptions for net operating losses and foreign tax credits. The IRA’s book tax proposal includes additional exemptions for items like general business tax credits and defined benefit pensions.

Accelerated depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. deductions remain a central target of the Inflation Reduction Act book minimum tax. For many investments, firms are able to deduct their costs from their taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. on a quicker timetable than under financial accounting rules. The minimum book tax would penalize applicable firms for fully deducting the cost of investment from their tax returns, discouraging further investment and reducing long-run economic growth.

One approach to mitigate the impact of the book tax on cost recoveryCost recovery is the ability of businesses to recover (deduct) the costs of their investments. It plays an important role in defining a business’ tax base and can impact investment decisions. When businesses cannot fully deduct capital expenditures, they spend less on capital, which reduces worker’s productivity and wages. would be to exclude the timing differences related to depreciation deductions from the minimum book tax. The proposal as currently written would increase corporate tax liabilities by about $266 billion from 2023 to 2032. If policymakers exempted timing differences attributable to accelerated depreciation deductions from the minimum book tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. , it would reduce corporate tax liabilities by 26 percent to about $197 billion.

Change in Corporate Tax Liabilities under the Inflation Reduction Act Minimum Book Tax Including and Excluding Accelerated Depreciation from the Tax Base, 2023 to 2032 (Billions of Dollars)
Change in Corporate Tax Liabilities 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 Total
Minimum Book Tax including accelerated depreciation $29.4 $21.8 $25.4 $15.0 $19.6 $24.5 $30.5 $31.3 $31.8 $36.6 $266.0
Minimum Book Tax excluding accelerated depreciation $22.0 $16.6 $22.0 $12.0 $14.8 $19.4 $15.1 $24.4 $18.2 $32.3 $196.8

Source: Tax Foundation Corporate Model

While exempting accelerated depreciation would reduce some of the economic harm of the tax, there remain many unresolved problems within the design and structure of the minimum tax that make it a poorly chosen revenue option. Here are just seven:

  1. The book tax has disparate impacts across industries and companies, owing not only to use of accelerated depreciation but to other items that are treated differently in book and tax accounting, including stock-based compensation and spectrum expenses.
  2. The book tax would arbitrarily penalize companies for past losses. Many companies, and very clearly many of this country’s most successful companies, incurred losses for several years before earning profits. While the regular corporate tax allows past losses to be carried forward indefinitely, the new book tax disallows carryforward of any losses incurred prior to 2020.
  3. Making companies calculate their tax liability twice, both under the minimum tax and the regular tax code, would greatly increase complexity and compliance burdens.
  4. The tax would increase administrative burdens for the IRS at a time when the agency is already struggling to keep pace.
  5. Key aspects of the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. would be outsourced to financial accountants, potentially eroding the value of financial reporting.
  6. Revenue from the tax is uncertain and may diminish over time, as it did under a similar policy repealed in 2017.
  7. By reducing long-term economic growth, the tax could worsen inflation by constraining the productive capacity of the economy.

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