[ad_1]
The new minimum tax on income that very large corporations report to their shareholders is the revenue focus of the recently enacted Inflation Reduction Act (IRA). But the levy more than promises to raise more than $200 billion in new revenue. It also raises profound questions about the nature of corporate accounting and tax policy in an age of rapidly evolving commerce.
The new law requires companies to have at least $1 billion in annual revenue to pay as much as the regular corporate income tax, or the 15 percent minimum tax. The tax base for the minimum tax is the income the firm reports to shareholders (book income) with a number of significant adjustments. These firms must now report taxable income under two different systems, neither of which necessarily reflects economic income.
The new tax alleviates some distortions in our income tax system, but it adds to others. Although many tax experts describe this new add-on tax as the second or third best option, they cannot agree on the first best. This is a challenge for four related reasons:
- The difficulty of measuring capital income
- Tax authorities’ reliance on corporate incentives to accurately report income to shareholders
- Political incentive for Congress to provide subsidies through the tax system rather than through direct spending
- The challenges of measuring global income without resorting to book income
Capital income and profits have always been difficult to measure. For example, book depreciation is often described as economic depreciation. But, in reality, neither the book nor the taxable income adjust for the effects of inflation when measuring the diminishing value of a depreciable asset.
Fortunately for tax officials, businesses want to measure economic returns as accurately as possible. Owners want to know the return on their investment. Managers need accurate accounting to allocate resources to the most profitable activities. Financial accounting is largely designed to meet these needs and taxable income is largely built on book income.
but There is often a big gap between the two, thanks in part to choices made by elected officials. After all, lawmakers like to use the tax code to advance economic and social goals. And they support tax subsidies on spending because they seem to be shrinking the size of the government.
A large part of the recent minimum tax debate was over which subsidies to be excluded from the new levy. Among the winners were green energy credits and various special cost recovery tax breaks to encourage some capital investment.
The growth of multinational corporations further complicates tax and accounting policy. In addition to IRAs, the 2017 Tax Jobs and Cuts Act (TCJA) and the Biden Administration’s recent effort to create a global minimum corporate tax both attempt to tackle the overly complex issues of where income is earned and taxed. (Note: The IRA’s minimum tax is different from the global minimum tax.)
Both the Biden Initiative and the IRA rely on book rather than taxable income because it is measured more evenly across countries and because public companies have powerful incentives not to underreport it.
Traditional tax reform focused on eliminating tax subsidies rather than adding them to the minimum tax. Usually, this is a better approach. But in some contexts, such as trying to measure taxable income from hundreds of foreign sources, it can be administratively impossible. And eliminating these subsidies has proved a political no-no in recent decades. Actually, Congress keeps adding them.
Given those realities, how can the system be improved?
To begin with, both financial and tax accounting should treat tax credits as an outlay rather than a tax deduction. Business outlays and tax credits should be added to the government’s outlay account and to the financial and taxable income of firms, even those that are non-profit or unprofitable.
Unlike deductions, deferments, and exclusions, tax credits are not difficult to value and generally do not affect the measurement of income. Treating credit as an outlay would also explain the difference between the effective tax rate reported in both financial and tax accounting and the effective amount of subsidies provided by the government.
Over the past five years, governments here and abroad have been caught up in the growth of multinational corporations and the movement of investment from plant and equipment to invention and human capital.
The pressure on financial and tax accounting has just begun.
[ad_2]
Source link
