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The Case for Reviving the Corporate AMT

Posted on Nov. 8, 2021
Reuven S. Avi-Yonah
Reuven S. Avi-Yonah

Reuven S. Avi-Yonah is the Irwin I. Cohn Professor of Law at the University of Michigan.

In this article, Avi-Yonah examines the bill introduced by Senate Finance Committee member Elizabeth Warren, D-Mass., to revive the corporate alternative minimum tax as a 15 percent tax on corporate book income, and he argues that it is a sensible way to address some problems of the corporate tax system.

Copyright 2021 Reuven S. Avi-Yonah.
All rights reserved.

The corporate alternative minimum tax was repealed in 2017 after many years of critiques by academics and policymakers.1 Senate Finance Committee member Elizabeth Warren, D-Mass., Sen. Angus King, I-Maine, and Finance Committee Chair Ron Wyden, D-Ore., have introduced a bill to revive it as a 15 percent tax on corporate book income on corporations with more than $1 billion in average annual financial statement income over the preceding three years.2 They explain their proposal as follows:

Currently, the U.S. tax code allows large corporations to pay little or no tax because they are able to exploit a host of loopholes, deductions, and exemptions to drive down their tax liability. While these companies report billions in profits, they often pay no income tax to the IRS and leave hardworking families holding the bag. For example, Amazon reported $45 billion in profits over the last three years, including a record $20 billion last year as families struggled through the pandemic. But the effective tax rate it paid on those profits was just 4.3 percent — well below the 21 percent corporate tax rate. In fact, in 2018, Amazon didn’t pay any federal income tax at all. Amazon isn’t alone: between 2008 and 2015, 40 percent of our biggest companies paid zero or less in federal taxes in at least one year, even while they were telling their shareholders they were wildly profitable. This trend continued last year throughout the pandemic, with 55 companies that reported a cumulative total of $40 billion in pretax income receiving a net $3.5 billion back from the government in rebates.

The corporate profits minimum tax would ensure companies that report over $1 billion in profits to shareholders pay at least a 15 percent tax rate on those gigantic profits. Based on estimates for similar proposals, this proposal would generate hundreds of billions in revenue over 10 years. Establishing the corporate profits minimum tax would not only put an end to profitable corporations getting away with paying zero (or less) in taxes, it would also generate revenue needed to invest in child care, clean energy jobs, and more — investments that make American companies more competitive and our economy more resilient.

The corporate profits minimum tax would:

  • apply to roughly 200 companies that report more than $1 billion in profits;

  • create a 15 percent minimum tax on the profits that these giant companies report to shareholders;

  • preserve the value of business credits — including (research and development), clean energy, and housing tax credits — and allow credits for taxes paid to foreign countries;

  • include some flexibilities for companies to carry forward losses and claim a minimum tax credit against regular tax in future years; and

  • raise hundreds of billions in revenue over 10 years.3

This proposal is a sensible way of addressing some problems of the corporate tax system.4

I. The Case for the Corporate AMT

To make the case for the corporate AMT, it’s necessary to make three assumptions:

  1. the corporate income tax will continue to be collected;

  2. corporate tax preferences will be granted; and

  3. Congress has no way of determining in advance all the ways in which the corporate tax preferences it grants (or other departures from book income) can be abused to reduce the corporate income tax base.

The first and second assumptions represent political reality. Whatever the merits of the case, which I won’t go into here, we will continue to have a corporate income tax.5 And given the political power of specific corporate taxpayers, we also will continue to have corporate tax preferences. Some of those preferences may even be justified because of their positive externalities or for other reasons.6

The third assumption represents a real constraint on Congress and the IRS. As the corporate tax shelter saga of 1990-2006 has shown, there is almost no end to the ability of well-financed taxpayers and their advisers to find loopholes in the corporate tax. Many of these loopholes use corporate preferences, while others represent a departure from book income.

Given these assumptions, it seems reasonable for Congress to say the following: “We are going to grant corporations the preferences they wish for. However, for reasons that we cannot foresee given our limited information, some of these preferences or other departures from book income can be abused to undermine the corporate tax base. Therefore, we are going to enact a corporate AMT based on book income that will ensure that no preference we have granted will completely eliminate the tax base.”

In those cases, a balance is struck between the preferences, credits, or deductions Congress wishes to grant — frequently for good reasons — and Congress’s wish to make sure that they don’t eliminate the corporate income tax base. The corporate AMT is a reasonable way of achieving this balance, given the three assumptions stated above.

Further, the corporate AMT has other merits, which arise in the issues of fairness, investment in tax-preferred assets, tax shelters, and financial accounting.

A. Fairness

Because the likely incidence of the corporate tax (and the corporate AMT) is on owners of capital, and because taxes on capital fall more on the wealthy, the corporate AMT is progressive.7 Some may argue, however, that a more efficient way to increase progressivity would be to raise the corporate tax rate. This argument ignores the political difficulty of raising the rate without granting more preferences that offset any rate increase. Also, if the corporate AMT is necessary to prevent widespread evasion of the regular corporate tax, any argument for the corporate tax is an argument for the corporate AMT as well.

Further, although from an economic perspective, “corporations do not pay taxes, only people pay taxes,” the political reality is that the public perceives corporations as paying taxes. If highly profitable corporations don’t pay any tax, this can undermine the willingness of ordinary people to pay as well. Thus, there is an important perceived fairness element in retaining the corporate AMT.

B. Investment in Tax-Preferred Assets

The corporate AMT is needed to discourage inefficient over-investment in tax-preferred assets. In theory, it would be more efficient to curtail the preferences instead. But, as the history of the tax preferences debate from Stanley S. Surrey onward has shown, repealing preferences is politically difficult given the concentrated lobbying power behind each preference and the collective action problem of opponents of preferences. The corporate AMT may be a poor second best in this regard, but it may be the only politically feasible solution to rampant, unjustified preferences.

C. The Tax Shelters Issue

It has been argued that the corporate AMT isn’t needed to combat tax shelters because other rules do so, and if the corporate AMT is perceived as limiting shelters, Congress wouldn’t adopt other rules to combat them. However, the other rules are insufficient to combat tax shelters, as is the corporate AMT, but both help in some way. The counterargument is like telling a patient to choose between quitting smoking, eating healthy foods, and exercising. All are necessary; none alone is sufficient.

D. The Financial Accounting Issue

The corporate AMT helps improve financial disclosure because it tracks book income more closely than the regular corporate tax does. Thus, management has an incentive to not inflate financial income because it results in more AMT being paid.

II. Arguments Against the AMT

Four arguments have been made against the corporate AMT: (1) it discourages investment; (2) it misallocates resources; (3) it increases tax compliance costs and complicates tax planning; and (4) it is poor fiscal policy.8 Not one of those arguments is persuasive.

A. Does AMT Discourage Investment?

The first argument is that the corporate AMT discourages affected firms from investing in plant, equipment, and other productive activities by (1) reducing the incentives granted by Congress for that investment and (2) reducing the effective marginal tax rate so that tax-advantaged investments are made less attractive.

The first point seems incongruous, given that opponents of the corporate AMT recommend that Congress cut back on tax preferences. If tax preferences for investment are misguided, what is wrong with restricting them via the corporate AMT? Of course, one can always argue that repealing the preferences directly would be better. But, as Surrey discovered, repealing preferences is extremely difficult given that each preference has a strong lobby behind it, while the case for a broad-base, low-rate income tax suffers from collective action problems. The corporate AMT was originally introduced in 1986 as part of the one instance in recent tax history when the base was broadened and the rate reduced. Even in 1986 it was realized that restricting preferences further is difficult politically. The corporate AMT can be viewed as a backdoor way of achieving precisely what its opponents advocate, namely restricting corporate tax preferences.

The second point is even stranger — the opponents are essentially arguing that it is better to have high rates and steep preferences (that is, a narrow base) than a low rate and a broad base because the preferences are more effective in a high-rate environment. This flies in the face of the consensus of most tax and public finance experts that low rates on a broad base is better tax policy because of the reduced incentive to misallocate resources.

B. Does AMT Misallocate Resources?

The second argument against the corporate AMT is that “it changes who makes specific investments, the legal form these investments take, how they are financed, and when they occur [and] these changes are all economically wasteful.”9 Unfortunately, the opponents present no empirical evidence for their arguments. Without that evidence, it is difficult to draw policy conclusions. In fact, some of the effects they mention, such as encouraging companies to use equity rather than debt financing, counteract other well-known distortions in the tax law, so their impact may be positive. Also, all these problems can be fixed by changing the form of the corporate AMT to reflect book income, as Warren et al. have proposed.

C. Compliance Costs and Tax Planning

There is no question that the corporate AMT, like any tax, imposes costs on taxpayers. The question is whether these costs are reasonable in proportion to the revenue raised by the tax. It is important to remember that the impact of the corporate AMT may be much broader than the revenue numbers indicate because it may increase tax collections from companies that end up paying the regular corporate tax, especially if it reduces corporate tax shelters.

D. The Countercyclical Argument

The final argument made by opponents is a familiar one: The corporate AMT is countercyclical, because it increases collections during recessions and decreases them during booms. It isn’t clear that the corporate AMT can have a significant effect on the business cycle; most taxes don’t. But even if it can, the correct response is a temporary suspension during recession, not abolition.

III. Conclusion

The corporate AMT as proposed by Warren and her colleagues is a low-rate, broad-based tax on corporations based on their book income. As such, it would typically be considered preferable to the higher-rate, narrower-base regular corporate tax.

So why not just repeal the regular tax? The answer, of course, is revenue: The corporate AMT by itself wouldn’t raise the $200 billion to $300 billion raised each year by the regular corporate tax. In the foreseeable future, we will have a regular corporate tax with preferences, and Congress will be unable to prevent taxpayers from finding loopholes in it. In those second-best circumstances, reviving the corporate AMT and making it based on book income is the best solution.

FOOTNOTES

1 See, e.g., Terrence R. Chorvat and Michael S. Knoll, “The Case for Repealing the Corporate Alternative Minimum Tax,” 56 SMU L. Rev. 305 (2003); and Joint Committee on Taxation, “Study of the Overall State of the Federal Tax System and Recommendations for Simplification, Pursuant to Section 8022(3)(B) of the Internal Revenue Code of 1986,” JCS-3-01 (Apr. 2001).

3 Id.

4 The following is based in part on Reuven S. Avi-Yonah, “Comment: The Case for Retaining the Corporate AMT,” 56 SMU L. Rev. 333 (2003); see also Avi-Yonah, “On Retaining the Corporate AMT,” Tax Notes, Dec. 11, 2017, p. 1645.

5 See Avi-Yonah, “Corporations, Society, and the State: A Defense of the Corporate Tax,” 90 Va. L. Rev. 1193 (2004).

6 This is why the Warren, King, and Wyden proposal keeps some of them intact (R&D, clean energy, and housing tax credits).

7 On the incidence of the corporate tax, see Kimberly A. Clausing, “In Search of Corporate Tax Incidence,” 65 Tax L. Rev. 433 (2012); and Edward G. Fox, “Does Capital Bear the U.S. Corporate Tax After All? New Evidence From Corporate Tax Returns,” 17 J. Empirical Legal Stud. 71 (2020).

8 See, e.g., Chorvat and Knoll, supra note 1.

9 Id.

END FOOTNOTES

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