The presumptive Democratic nominee says he wants to reverse crucial pieces of President Trump’s 2017 tax cuts and extract more money from corporations.
Photo: Andrew Harnik/Associated PressWASHINGTON—Profitable companies like Amazon.com Inc. could no longer use legal breaks to drive their U.S. tax bills almost to zero under Joe Biden’s proposal to increase and overhaul corporate taxes.
On top of higher tax rates, Mr. Biden would impose a 15% minimum tax on profits reported to investors, a move that would limit companies’ use of popular tax breaks. That minimum tax would raise $400 billion over a decade by the campaign’s estimate, and $166 billion according to the Tax Policy Center.
“Vice President Biden has been clear that it’s absolutely unacceptable for some of the biggest companies in America, like Amazon, to pay next to nothing in taxes,” Michael Gwin, a campaign spokesman, said. He said the additional revenue would go toward infrastructure, clean energy and other priorities.
It is one way Mr. Biden hopes to reverse President Trump’s 2017 tax cuts and extract money from corporations if he wins the presidency and Democrats take full control of Congress. The argument for higher corporate taxes resonates with many voters.
But critics say Mr. Biden’s proposal could be counterproductive, partly because it would discourage companies from using tax breaks Congress created to promote investment in some of the very things the former vice president is trying to promote, such as renewable energy, low-income housing and manufacturing.
“It would be more straightforward to decide what policy we want and enact it,” said Michelle Hanlon, an accounting professor at the Massachusetts Institute of Technology. Giving out tax breaks and then using a minimum tax to take some of them back, she said, is a “frankly kind of lazy way to do it.”
How can profitable companies manage to pay little or no tax? They often do so because of the discrepancies between two sets of books. One, reported to investors publicly, follows generally accepted accounting principles for recognizing income and expenses. The other, reported to the Internal Revenue Service privately, follows the tax code.
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The rules don’t always match, so companies can report significant profits on their financial statements while paying little or no tax. For example, accounting standards require companies to spread capital investment costs over multiple years, but tax rules let them deduct costs sooner, lowering their tax bills now.
Rules for valuing and deducting executive stock options also differ. In the long run, most differences between the two sets of books should even out. In the short run, discrepancies can be significant.
Mr. Biden would raise corporate taxes in several ways. He would set the corporate tax rate at 28%, up from 21%, and he would increase taxes on U.S. companies’ foreign income; those moves would generate the bulk of the revenue. Then his new minimum tax would kick in, using a different structure from the minimum tax Congress repealed in 2017.
If a company reported more than $100 million in net income but paid less than 15% of that in taxes, the new minimum tax would fill in the gap (with credits for foreign taxes and past operating losses). In effect, anything companies did to drive their tax rates below the 15% level would be taken back.
The result: Many tax breaks that Congress created could get clawed back. Mr. Biden’s proposed policies, together with already scheduled tax increases, would drive the average federal tax rate that companies pay up to 26.1% from 14.1%, according to Cornerstone Macro, a Washington research firm.
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Mr. Biden singled out Amazon for criticism in May during a CNBC appearance, saying the giant internet retailer should pay more taxes. The company fired back on Twitter.
“You spent 3 decades in the Senate & know that Congress wrote these tax laws to encourage companies to invest in the US economy,” it said. “Assume your complaint is w/ the tax code, not Amazon.”
In 2019, Amazon reported $14 billion in global pretax profits. Under the corporate accounting category known as “current expenses,” it listed $162 million for U.S. income taxes and $1.1 billion in foreign taxes. Those numbers don’t necessarily reflect its 2019 tax bills, but they are the best publicly available approximations. It is hard to tell how much Mr. Biden’s proposals would cost Amazon or how the company might respond.
Other companies that could be subject to the minimum tax include Intel Corp., AT&T Inc. and Berkshire Hathaway Inc., according to a Zion Research Group estimate. Budget estimators at the University of Pennsylvania’s Wharton School project that information-industry companies would pay 75% of the additional taxes.
Companies are studying Mr. Biden’s tax proposals to determine how they would be affected, said John Gimigliano, a former House Republican aide now at KPMG LLP in Washington.
“It’s one of those things that sounds great, but when you think about how it would get implemented, it’s really complicated,” he said.
Mr. Biden’s proposal could encourage companies to manage financial-statement income differently, changing the information investors use to judge business prospects.
And because the new minimum tax would be based on financial-statement income, the IRS might have to start auditing that. Alternatively, using financial-statement income to compute taxes would effectively hand some tax-code definitions to the Financial Accounting Standards Board, a private nonprofit, and to each company’s auditors.
A minimum tax like Mr. Biden’s is more about public perception than sound policy, said Steve Rosenthal, a senior fellow at the Tax Policy Center, a Washington group run by a former Obama administration official. He and other critics across the political spectrum say a better approach would address the tax provisions that give rise to low rates.
But changing each provision could be tougher because each has its defenders, sometimes with arguments that resonate with lawmakers, said Bharat Ramamurti, who helped devise a similar proposal for Sen. Elizabeth Warren’s presidential campaign.
“Simple rules tend to be better in many cases,” he said. “ ‘No company that makes $200 million should pay zero taxes’ is extremely strong political ground to be standing on.”
Write to Richard Rubin at richard.rubin@wsj.com
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