The Biden Administration, according to reports such as this one from The Hill, is pushing for a 15 percent minimum corporate tax rate. The G7, according to reports such as this BBC News article, has agreed “in principle to a global minimum corporate tax rate of 15% to avoid countries undercutting each other.”

The Hill report explains that Biden “has long railed against the low amount of taxes some profitable corporations have paid, vowing to close loopholes.” The White House press secretary described the proposal as a “book tax,” explaining that the tax should be “based on” corporate “bottom lines.”

According to the White House Fact Sheet on the American Jobs Plan, the so-called 15 percent minimum tax on corporations would be something other than a minimum 15 percent rate on corporate taxable income. Instead, it would be a 15 percent tax rate on “the income corporations use to report their profits to investors,” which most financial analysts, accountants, and investors described as “book income.” The fact sheet states that it would “apply only to the very largest corporations.” According to the Tax Foundation’s analysis of the plan, it would apply to corporations with more than $2 billion in net income. According to the General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals, the tax would apply to corporations with more than $2 billion of “worldwide pre-tax book income,” reduced by the corporation’s regular tax liability.

It is misleading to refer to the proposal as a “15 percent minimum corporate tax rate” because that phrase suggests that the proposal is to impose a 15 percent tax rate on taxable income. As anyone who understands tax law realizes, tax rates mean nothing when taxable income is zero. The problem is bigger than the rate. That is why the proposal focuses on a different base on which to compute the tax, specifically, income as reported for financial purposes. Since the income tax was enacted, corporations have tried to convince the Treasury that they have little or no income to be taxed while telling their shareholders and creditors that they are raking in the profits. Of course, individuals also play this game, trying to show low income to tax authorities and divorcing spouses while upping their claims when applying for loans or trying to impress others at the country club. Some of this nonsense can be attributed to the existence of foolish deductions for tax purposes, such as the allowance of a reduction for depreciation on real property that is increasing in value. Some of the nonsense is attributable to fraud and other tax evasion techniques. For corporations subject to supervision by regulatory agencies, some of the nonsense is attributable to the strange accounting rules used by many of those agencies. And yet another cause of the “high profit, no or low tax” game is the inconsistency in tax policy, taxable income computation, and tax rates among nations, a problem that the G7 appears willing to tackle, though whether its constituent members, and those belonging to the G20, where the proposal next goes, remains to be seen.

Yet it seems to me that it would make sense simply to require all businesses to report as taxable income the amount of income that they tell their owners, creditors, investors, and regulatory agencies that they are generating. By computing taxable income as equal to book income, the need for multiple computations of a tax base would be eliminated. Otherwise, as pointed out in this Tax Foundation commentary, corporations would need to add another computation layer to their tax reporting, though it is not as big a deal as the commentary suggests, because book income already is being computed by corporations.

Of course, taxation based on book income would require mechanisms to tax avoidance, such as a means to prevent corporations from computing a book income that reflects high salaries paid to top officers who are domiciled or reside in countries with no individual income tax, with low individual income tax rates, or with deductions and credits to reduce or eliminate the officers’ tax liabilities. And, of course, other reforms are necessary to deal with the tax avoidance opportunities presented by the flaws in, and abuse of, partnership taxation rules as I described in Partnerships: A Contributing Factor to the Tax Noncompliance Surge, a problem that requires more than a simple increase in the number of returns being audited.

Whenever attempts are made to reduce or eliminate tax abuse or tax avoidance techniques, those who benefit from the abuses or avoidance techniques rise up in opposition. Often, those who oppose the reform are the same interests who lobbied successfully for adding to the tax law the provisions that permit those abuses and avoidance techniques. Too often, those provisions are so complex or obscure that the typical taxpayer can easily be misled by the opponents of reform. The key to getting these reforms enacted is top-notch education of the public by those who are pressing for these reforms, in ways help typical taxpayers understand why the many will benefit from reforms that put an end to tax abuses and avoidance techniques the benefit the few.

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