Joe Biden’s economic plan is getting solid reviews, with research firms such as Oxford Economics and Moody’s Analytics predicting it would modestly booth growth and employment, if enacted.
But there’s one silly and probably unworkable idea in Biden’s plan: an alternative minimum tax on companies that use legal tax deductions to reduce their tax burden.
During a recent webinar sponsored by Yahoo Finance and the Bipartisan Policy Center, two prominent economists—Jason Furman of Harvard University and Doug Holtz-Eakin of the American Action Forum—both trashed the idea of an overlapping second tax system for businesses. Furman is a Democrat who was chair of the Council of Economic Advisers. Holtz-Eakin is a Republican who was director of the Congressional Budget Office and chief economic adviser to John McCain during his 2008 presidential campaign.
Biden’s alternative business tax would be a new 15% tax on “book income” for companies with more than $100 million in annual income. Book income is the profit or loss public companies report to shareholders, and it’s often higher than the income they report to the IRS. That’s because public book income doesn’t take into account the many complex tax deductions companies often use to lower their tax bill. Amazon, for instance, reportedly paid no tax in 2018, even though it turned a $10 billion profit.
Isn’t it reasonable to make profitable companies pay some minimum amount of tax? Not necessarily. “It's a terrible idea, for two reasons,” Holtz-Eakin says. “Number one, you shouldn't have a tax system and an alternative tax system. You should have one tax system that you believe raises revenue in a fair and efficient fashion. The second is, there's a reason there's a difference between taxable income and book income. And a lot of it has to do with the use of legal tax deductions you set up in the first one. It makes no sense whatsoever.”
If the Republican economist opposes Biden’t alternative business tax, the Democratic economist must support it, right? Nope. “Alternative minimum taxes are always an admission that your tax system has failed,” Furman says. “I'd always rather fix the tax system as a whole. Better would be, get rid of the loopholes that give rise to the problem in the in the first place.”
The most lucrative tax breaks for businesses include depreciation of equipment, tax credits for research and adjustments for income tax paid overseas. Congress established these tax breaks mainly to incentivize things that ought to be good for the economy overall, such as higher spending on equipment and on research that could generate innovation and boost job growth. The 2017 Republican tax cuts enhanced some of these tax breaks, while also cutting the corporate tax rate from 35% to 21%. There are also tax breaks that benefit specific industries, including many for real-estate developers like Donald Trump.