The “minimum booked tax” on reported earnings would be a tax incentive to produce realistic earnings reports. Wall Street will fight it.
By Wolf Richter to WOLF STREET.
I was not a fan of printing money following Fed chairman Janet Yellen, though she raised interest rates and started the Fed’s balance sheet reduction. But she’s now getting huge brownie points as finance minister for trying to deal with the disastrous corporate tax code by including something I’ve been blabbering on about since 2012:
Large companies – and there are only a few dozen to which this will apply under the proposal – have to pay income tax on the inflated and puffed income they report to their shareholders under our glorious GAAP accounting principles, rather than paying any tax or even get paid tax benefits on the losses they report separately to the IRS under the tax code.
Small businesses, such as My WOLF STREET media mogul empire, uses the same accounting principles for earnings and tax, or vice versa, and we have no illusions and there is no reason to spread income.
But Nike reported 4.1
Yellen’s approach is not as radical as mine would have been. Since 2012, I have been arguing for throwing out the entire corporate tax code and replacing it with a tax on the inflated and puffed income that companies report to shareholders under GAAP.
Yellen does not go there. But she proposed introducing a minimum tax of 15% on “book income” – namely the inflated puffed income that companies report to their shareholders. This measure will apply to “large companies that report high profits but have low taxable income.” The proposal calls it “minimum book tax.”
“This minimum recorded tax is a targeted approach to ensure that the most aggressive tax evaders are forced to carry meaningful tax liabilities,” it said.
This was post # 4 in the 7-point Make-Corporate-Taxes-Great-Again plan … no, just a joke I mean in the “Made in America Tax Plan” that came with this chart that we’ve seen a million times, showing how the share of federal taxes paid by labor has risen to 85%, and how the share of federal taxes paid by companies has collapsed in single digits:
Yellen’s proposal further explains:
In a typical year, around 200 companies report a net income of DKK 2 billion. $ Or more. Of these, a significant proportion pay zero or negative federal income tax, despite having reported hundreds of billions of dollars in profits to shareholders overall. This is because significant gaps in current tax law as well as the presence of offshoring incentives provide large and profitable companies with many ways to reduce their taxable profits – in many cases to zero. ”
Back in 2012, I introduced my article on our corporate tax evasion code this way – and the issues have been the same:
Between 2002 and 2011, Boeing reported to its investors that they earned $ 31.8 billion. But it reported something completely different than the IRS and did not pay income tax. Instead, it received tax benefits of $ 2.06 billion, an effective tax rate of -6.5%. Other companies were similarly agile. Bailed-out GE earned $ 10.5 billion, paid zero tax and received $ 4.7 billion. In tax benefits….
These companies are probably not doing anything illegal; they just use GAAP to show huge profits to their shareholders and they use the tax code to show huge losses to the IRS. The tax code encourages them to do so.
Yellen’s proposal continues to complain (what I regretted in my obscure corner almost a decade ago):
Businesses have two types of reporting rules (book and tax reporting) that allow for a range of supplements that protect them from meaningful tax bills.
At the same time, companies are able to signal large profits to shareholders and reward executives with these returns, while claiming to the IRS that income is at such a low level that they must be exempt from any federal tax liability.
The proposal explained how it would work in relation to the general tax liability:
Large corporations that report soaring profits to shareholders should be required to pay at least a minimum of tax on such excessive returns. Under this proposal, there would be a minimum tax of 15 percent on book income, the profits that such companies generally report to investors. Companies would make an additional payment to the IRS for the excess of up to 15 percent of their book income compared to their normal tax liability.
And the proposal put a number on it: “In recent years, about 45 companies would have paid a minimum of tax liability under the president’s proposal.” And “the average company facing this tax will see an increased minimum tax liability of about $ 300 million each year.”
Secondary benefit: more honest earnings reports.
And this is where the fun begins: If large companies have to pay 15% minimum tax on their profits as reported under GAAP, it may lead to some honesty and reality in financial reports, because below 15% minimum tax on book income, companies, who inflated and inflated their income had to pay 15% tax on the inflated and puffed income. This would be an expensive deterrent to inflating and inflating income.
It would make CFOs think twice. In theory, GAAP accounts could be more honest and be subject to the threat of having to pay 15% in tax on puffed income. And it can be a game changer – when suddenly there are tax incentives to be realistic with financial reporting. And that’s why Wall Street will fight furiously to sink this thing.
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