The latest scheme to fund Pres. Biden’s multi-trillion social spending plan is to impose a 15 percent corporate minimum tax. Taxpayers might be wondering why it matters, since former Pres. Trump already lowered the corporate tax rate to 21 percent from 35 percent in 2018.
The devil, as they say, is in the details.
The proposal, sponsored by Senate Finance Committee Chairman Ron Wyden and Senators Elizabeth Warren and Angus King, would require companies that have more than $1 billion in profits pay at least a 15 percent tax rate. To get to the 15 percent rate, the tax would be calculated using “book income,” a separate accounting method used in financial statements. “Book income” is the profit or loss that publicly traded companies report to shareholders in their quarterly earnings, and it doesn’t take into account credits and tax deductions companies claim when they file to the IRS.
The Senate legislation would preserve the tax credits for things that Congress wants to encourage, like clean energy and housing. But it would discourage what doesn’t fit in with the progressives’ agenda, including stock compensation for company employees. Progressives have long argued that executive compensation that included company stock contributes to income inequality. And much of the revenue from the 15 percent rate would come from penalizing corporations that pay employees with stock, according to the Tax Foundation, a nonpartisan Washington, D.C.-based think tank.
Garrett Watson, a senior policy analyst at the foundation, told Financial Advisor that stock compensation makes up about 30 percent of companies’ book-tax differences, and it would almost certainly lead to a cut-back in these compensation approaches if the 15 percent minimum tax is enacted. But as Watson points out, company executives aren’t the only ones who benefit from stock ownership: “78% of stock-based compensation now goes to employees below the executive suite,” according to a recent study from the National Bureau of Economic Research.
When employees own stock – from the CEO to the sales rep to the mail room worker – they all have a stake in the performance of the company. And when earnings rise and the stock price increases, employees who own company stock benefit. Stock-based compensation is also a way for a company to retain its employees. In my corporate career, I have known rank-and-file workers who used proceeds from their stock shares to pay for a down payment on a house or their kids’ college tuition bills, and after long, dedicated service, even retire as millionaires.
According to senate sponsors, the 15 percent corporate tax would likely apply to about 200 American companies. Employees of these targeted companies will also suffer in another way — according to Stephen Entin of the Tax Foundation, the studies that have attempted to measure who bears the burden from corporate taxes found “that labor bears between 50 percent and 100 percent of the burden of the corporate income tax, with 70 percent or higher the most likely outcome.”
“Since labor likely bears 70 percent of the burden from any corporate tax increase through lower wages, from a practical perspective, raising the corporate income tax violates President Biden’s promise to not raise taxes on anyone making less than $400,000 annually,” wrote PRI senior fellow Wayne Winegarden in a blog post.
The final bill has yet to hammer out the details of the business credits and deductions that would be preserved in the tax code. But if “book income” along with the 15% corporate minimum tax stays in, one of the chief means for workers to attain prosperity will be out.
Rowena Itchon is senior vice president of the Pacific Research Institute.
