Update 401 — Revenue Solutions for 2020;
You CAMT Get Any from Firms Owing None
In the 2017 fiscal year, FedEx owed more than $1.5 billion in taxes. The next year, it owed nothing. “FedEx takes great pride in being a good corporate citizen — here and abroad — at all times.” Except April 15 perhaps. Corporate America’s share of the federal tax load has fallen from close to a third to more like a tenth of the total in the last two generations. And trust in big corporations to be good citizens has eroded correlatively.
The federal government is starved for revenue and suffering from an austerity mentality that has slowed the recovery and needed modernization. Applying the familiar AMT to corporate America, a corporate AMT (CAMT) so that every profitable big company pays something in taxes, can help. It can’t hurt with citizenship either.
Help how much? Below we examine the CAMT’s potential, its history, why the GOP got rid of it, and how a post-TCJA CAMT might work should Democrats take back control of Congress and the White House in 2020 and re-enact it. As we note, it’s getting play on the campaign trail too.
Good weekends, all…
Last year, over 60 of the nation’s largest companies paid nothing in income tax. These companies — all in the Fortune 500, including Chevron, Delta Airlines, Eli Lilly, Netflix, Amazon… and FedEx — collectively reported about $80 billion in annual profit. Instead of paying the $16.4 billion in corporate income tax that they would owe otherwise, they received $4.3 billion from the Treasury in tax rebates. Until recently, the Corporate Alternative Minimum Tax (CAMT) limited the ways companies could avoid paying taxes, but the 2017 Republican Tax Law (TCJA) eliminated it.
The CAMT, which was in place since 1969, had problems that warranted reform. But its elimination, paired with other corporate-friendly changes made in TCJA, accelerates an alarming problem: corporations are not paying their fair share in taxes. The Treasury reported that corporate tax collections declined 31 percent from 2017 to 2018 following TCJA enactment. This is mainly due to the drop in the statutory rate from 35 to 21 percent, but new business tax breaks like full expensing are also responsible for the decline in revenue.
For all its faults, the CAMT effectively addressed the issue of corporations using overlapping tax preferences to avoid tax liabilities, or in some cases receive rebates. CAMT was a winner on equity. In terms of addressing tax avoidance, CAMT is absolutely necessary, though insufficient on its own.
With the Sixteenth Amendment’s enactment in 1909, the federal government was allowed to collect excise taxes on corporations based on income. The first corporate income tax was a universal rate of 1 percent for all business income above $5,000. It reached its peak at 52.8 percent in 1969.
Abuse of tax preferences prompted members of Congress to develop a separate method of determining tax liability for corporations. As a result, the Tax Reform Act of 1986 established the CAMT to run “parallel” to a regular corporate income tax. Corporations would have to calculate their tax burdens under both rules, then pay whichever was higher. From 1987 to 2017, the top corporate tax rate fell from 40 percent, for firms with taxable income over $1.4 million, to the flat rate of 21 percent in TCJA. The CAMT was permanently repealed in the 2017 TCJA.
Evaluation and Fiscal Impact
In the absence of a CAMT, Congress could simply restrict or eliminate some of the existing tax preferences for corporations. The popularity of certain provisions, like the ability to deduct stock options or depreciation-related tax breaks, as well as the challenge of keeping up with corporate tax avoidance schemes, render the CAMT a key tool to ensure corporations pay.
Revenue generated would depend on the rate. If the CAMT rate is set too close to the income tax rate, most companies would be forced into paying CAMT as the de facto corporate income tax, not the goal of CAMT. If a CAMT were reinstated at 18.6 percent (based on the 2012 effective corporate tax rate) and disallowed tax preferences, it could collect over $400 billion annually, $4 trillion over ten years.
A CAMT should aim to bring in revenue by reversing the trend of large corporations shirking their taxpaying obligations. In the 1950s, corporate income tax accounted for over 30 percent of total federal tax revenues; today, that number has shrunk to below seven percent. The CAMT rate should be set to capture companies avoiding taxation, while still allowing for tax credits like R&D, to incentivize companies to make long-term, sustainable business decisions.
Additionally, a new CAMT should alter the tax burden, be flexible in the event of economic downturns, and must reinforce (rather than work at cross purposes with) post-TCJA tax structures.
- Accounting Changes: In designing a new CAMT, we should avoid past pitfalls. In 1990, businesses changed how they calculated CAMT, from “book earning” statements to “adjusted current earnings” (ACE). The minor change resulted not only in leakage, but it also warped CEOs’ incentives in terms of reporting strong book earnings and downplaying ACE.
- Business Cycle: Proponents of the CAMT repeal pointed out that CAMT collections increase during recessions, when businesses declare losses and defer tax liability. But an automatic suspension of CAMT during economic downturns would be an easy, technocratic solution to the problem.
- Modernization: CAMT 2.0 should be structured around tax law as it exists post-TCJA reforms. TCJA enacted new rules that move the U.S. toward territorial taxation, and the law includes a form of minimum tax on the foreign earnings of multinational companies — the Global Intangible Low-Taxed Income, or GILTI, tax. A new CAMT might need to clarify its interaction with the GILTI, in order to minimize compliance costs and tax planning.
The Next Big Pay-For
Corporate taxes have been a primary focus in the 2020 presidential race. On Wednesday, former Vice President and presidential candidate Joe Biden released a $1 trillion corporate tax plan, including raising the corporate tax rate to 28 percent. Biden also includes a narrow version of a CAMT, one which focuses on a corporation’s book profits, or the profits reported to investors, that would raise $40 billion annually. He would use his plan as a pay-for for healthcare, education, and climate policy proposals.
Sen. Elizabeth Warren has also proposed significant corporate tax reform, including a seven percent surcharge on corporate revenue over $100 million that is predicted to raise at least $1 trillion over a decade. It would increase projected corporate tax receipts by about 30 percent.
The purpose of a CAMT is to recognize that corporations benefit from government services — such as an educated workforce, public transportation infrastructure, the judicial system — and must pay their fair share. Since the Republican tax law cut the corporate income tax to its lowest rate in decades, we need a tax floor for corporations now more than ever.