Some large corporations that report profits to shareholders pay little to no federal corporate income tax.¹ For some, this raises questions of fairness. Is a tax system that allows large corporations with substantial assets, revenues, and financial profits to have a zero tax liability fair? Large, profitable corporations that pay little to no federal income tax are generally believed to be complying with federal tax law, which includes numerous provisions and preferences that result, in some cases, in zero tax liability.

Minimum taxes are a policy tool that could help ensure all taxpayers contribute a certain amount of tax revenue. Minimum taxes could be used in a range of policy contexts to address a variety of policy concerns. For example, minimum taxes are one policy option to limit multinational firms' ability to avoid taxes by shifting profits into low-tax jurisdictions. For both multinational and domestic firms, minimum taxes might be designed to serve as a backstop to the corporate tax system, ensuring that firms are not able to reduce tax liability to zero by claiming tax benefits or through tax planning. If a comprehensive reform of existing corporate tax law is not feasible, a more targeted minimum tax might be an option for policymakers seeking to make sure all firms pay some amount in tax.²

While minimum taxes might address some policy concerns, they could create others. One concern that has been raised regarding minimum taxes generally is that they could offset the tax system's automatic stabilizer effects, or limit the scope for using tax-related fiscal stimulus to respond to economic downturns. There are also concerns that a minimum tax that carves back investment incentives could weaken the effectiveness of such policies and negatively affect corporate investment.³

Minimum taxes of various forms appear in current policy debates. The Biden Administration has proposed a 15% minimum tax on worldwide book (financial statement) income for corporations with income above $2 billion.⁴ The November 3, 2021, House Rules Committee Print 117-18 modification to the Build Back Better Act (H.R. 5376) also proposes this type of minimum tax for firms with income above $1 billion. Senator Elizabeth Warren has proposed a 7% minimum tax on large corporations with book income over $100 million (H.R. 2680).⁵ The Group of Seven countries (G7) have also agreed to a tax policy framework that would establish a 15% global minimum tax on a country-by-country basis.⁶ As of November 4, 2021, this framework had been agreed to by 137 countries and subnational jurisdictions.⁷ While the 2017 tax revision (commonly referred to as the "Tax Cuts and Jobs Act" [TCJA: P.L. 115-97]) repealed the corporate alternative minimum tax (AMT), it created two new minimum taxes. The base and anti-abuse tax (BEAT) is an alternative minimum tax that applies to large, multinational corporations making substantial payments to foreign affiliates. The 10.5% minimum tax on global intangible low tax income (GILTI) was enacted with a goal of taxing income from foreign intangible assets. There is active debate about whether these relatively new tax provisions should be modified.

This report provides an overview of minimum taxes on business income to help inform policy debates about a range of minimum tax policy options. The report begins with an overview of the tax system as it applies to U.S. corporations. A key challenge in designing a tax system is defining income. The next section discusses income concepts, followed by estimates of effective tax rates using various income concepts. The final sections discuss minimum taxes on business income that have previously been a part of the U.S. tax code, as well as current policy options and proposals.

Taxing Business Income

The Corporate Income Tax

The corporate income tax is largely designed as a tax on corporate profits (also known as net income). Broadly defined, corporate profit is total income minus the cost associated with generating that income. Business expenses that may be deducted from income include employee compensation; the decline in value of machines, equipment, and structures (i.e., depreciation); general supplies and materials; advertising; and interest payments. The corporate income tax also allows for a number of other special deductions, credits, and tax preferences. These provisions are often intended to promote specific policy goals.

A corporation's tax liability can be calculated as

Taxes = [Taxable Income × Tax Rate] – Tax Credits.

The corporate tax rate is currently a flat 21%. This rate is applied to taxable income, as determined for tax purposes.⁸ Tax credits provide a dollar-for-dollar reduction in tax liability. The corporate tax system becomes increasingly complex as the details of specific provisions are examined. Various features of the corporate tax system contribute to average effective tax rates (i.e., taxes paid divided by income) that are less than the 21% statutory rate.

One alternative to taxing corporate or business profits is a cash-flow tax. This type of tax can be viewed as a consumption tax for business income.⁹ With a cash-flow tax, businesses would expense, or immediately deduct, all capital investments. Interest deductions would be disallowed.¹⁰ Certain changes enacted as part of the 2017 tax revision, including bonus depreciation and limitations on interest deductions, move the corporate tax away from a true income tax, shifting it toward a cash-flow tax.¹¹ In June 2016, House Speaker Paul Ryan proposed a destination-based cash flow tax (DBCFT) as part of the "A Better Way" tax reform blueprint.¹²

Corporate Tax Expenditures

The corporate tax system contains various provisions to support certain businesses and economic sectors and incentives designed to encourage certain behaviors. These provisions and incentives are known as tax expenditures. Corporate tax expenditures include special credits, deductions, exemptions, exclusions, and tax rates that reduce corporate income tax collections.

The Congressional Budget Office (CBO) projected the corporate income tax would generate $151.1 billion in revenues for the federal government in FY2020.¹³ Using this baseline, the Joint Committee on Taxation (JCT) estimated that the two largest corporate tax expenditures—the reduced tax rate on active income of controlled foreign corporations (CFCs) and accelerated depreciation—would reduce federal tax by $45.4 billion and $43.2 billion, respectively, in FY2020 (Table 1). The amount of forgone revenue associated with these provisions is substantial, relative to total corporate tax revenues. These large tax expenditure provisions, as well as other tax expenditures listed in Table 1, are why corporate taxes paid are often less than 21% of income. Since actual corporate revenue in FY2020 was larger than projected ($212 billion), these tax expenditure amounts may also be larger.¹⁴

Tax expenditures might be designed to advance certain policy objectives. For example, the reduced tax rate on active income of CFCs and the deduction for foreign-derived intangible income are features of the U.S. international tax system (discussed below, at "Taxing Multinationals"). Bonus depreciation, captured in the tax expenditure for depreciation in excess of the alternative depreciation system, reduces effective tax rates on capital investment and, as noted above, is intended to encourage investment. Tax credits for research and development (R&D) are intended to support innovation, which in turn supports economic growth.¹⁵ Other major corporate tax expenditures are designed to support policy objectives related to affordable housing (the credit for low-income housing) and renewable energy (the energy credit and the credit for electricity produced from renewable resources).

Net Operating Losses (NOLs)

Another feature of business taxation is the treatment of net operating losses (NOLs).¹⁶ When a business's taxable income is negative, the business has a NOL. Allowing losses to be carried forward (or carried back) and deducted from taxable income in a future (or past) tax year can help smooth taxable income over time and throughout the business cycle.

Current permanent law allows NOLs to be carried forward indefinitely. NOLs carried forward can reduce up to 80% of taxable income each year. Temporary changes, enacted in response to the Coronavirus Disease 2019 (COVID-19) pandemic, allow 2018, 2019, or 2020 losses to be carried back up to five years.¹⁷ NOLs carried back can offset 100% of taxable income—an increase from the 80% offset under permanent law. Loss carrybacks can, and often do, result in an immediate tax refund for businesses.

Related Corporations

Large corporations often have subsidiaries (or tiers of subsidiaries). That is, they hold shares in these subsidiary corporations and receive dividends from them. Some subsidiaries are incorporated in the United States and some are incorporated abroad. Many subsidiaries are wholly owned by the parent corporation, and some are partially owned, in some cases with a majority (controlling) share and in some cases with a minority share.

For tax purposes, corporate parents and their 80% owned domestic subsidiaries may elect to file a single consolidated tax return.¹⁸ With this election, each subsidiary computes its own tax liability but tax and incomes are combined. Intercorporate dividends are eliminated and profit on intercompany sales is deferred until final goods are sold or depreciation occurs. Tax credits, NOLs, and deductions (including those for charitable contributions) are computed on a consolidated basis. Income is measured before foreign (largely, as there is an option to take a deduction rather than a credit for foreign taxes) and U.S. income taxes, but net of state and local taxes. Firms are allowed credits against foreign taxes paid. For example, if a firm has $100 million in income and pays taxes of 21%, but $10 million is subject to foreign taxes of 15% ($1.5 million), the $21 million tax is reduced by $1.5 million, so that combined taxes ($19.5 million on domestic income and $1.5 million on foreign income) sum to $21 million. However, if foreign taxes are 30% ($3 million), the credit on the $10 million is limited to the U.S. tax paid ($2.1 million), so there is a residual tax of $0.9 million, and foreign and domestic taxes combined are $21.9 million.

For firms not filing a consolidated tax return, dividends are subject to an intercorporate dividend deduction. Deduction amounts for domestic dividends are 100% of dividends from an 80% owned subsidiary, 65% from a 20% to 80% owned subsidiary, and 50% of other dividends. (The 65% and 50% amounts were 80% and 70%, respectively, before the 2017 tax revision [TCJA]).

Consolidation rules for financial reporting purposes differ depending on the level of control. Income of firms that are more than 50% controlled is consolidated worldwide, whereas shares of income from firms that are 20% to 50% owned is reported, and otherwise dividends are included.

Taxing Multinationals

The current U.S. international tax system, enacted in 2017 as part of the TCJA, is a hybrid between a territorial tax and worldwide tax system. With a territorial system, foreign profits of U.S. firms are not taxed. With a worldwide system, foreign profits are taxed, but a credit is allowed against U.S. tax for foreign taxes paid. Pre-TCJA, dividends paid by foreign firms were taxed but income retained abroad was not. Current law exempts dividends paid to corporations that hold 10% ownership, while imposing a minimum tax on income earned by CFCs, whether paid as dividends or retained abroad. CFCs are firms with 50% U.S. ownership by U.S. shareholders each owning at least 10%. Many CFCs are subsidiaries entirely owned by a U.S. parent corporation.¹⁹

Taxed income of CFCs includes Subpart F income that is easily shifted between businesses in different countries, including passive income (such as interest and royalties) and certain income earned in countries where goods and services are neither produced nor consumed. Since firms are related, they can easily, for example, have intercompany loans that shift deductions to a high-tax country and income to a low-taxed country. Or they can introduce intermediary subsidiaries in low-tax countries that capture some of the income of the combined firm in that jurisdiction.²⁰ Tax on this type of income is common in most countries to prevent abuse, and was a feature of pre-TCJA U.S. tax law.

In addition, current law imposes a tax on some of the remaining profits of CFCs under the tax on global intangible low-taxed income (GILTI), which is imposed after exclusion of a deemed return on tangible assets and a deduction from the remainder. Foreign oil and gas extraction income is also excluded from GILTI. Foreign branch income of U.S. firms is also taxed. Foreign taxes are added back to this income (termed a gross up) to measure income before foreign taxes.

U.S. owners are allowed a credit for foreign taxes paid, although the credit for GILTI is limited to 80% of foreign taxes. Foreign tax credits are limited to U.S. taxes due, on an overall basis (so that higher taxes in one country can offset U.S. tax on income earned in low-tax jurisdictions). This overall limit is applied separately to passive income, active income outside of GILTI, and GILTI income.

The tax on GILTI is sometimes characterized as a minimum tax on foreign income; this might be appropriate from the baseline of a territorial tax. From the perspective of a worldwide tax, it would be characterized as a tax subsidy (because income is being taxed at less than the normal statutory rate). It is treated as a tax expenditure in the Joint Tax Committee's tax expenditure list.²¹ Regardless of the perspective, the exemptions and deductions for GILTI income are a reason that many U.S. multinationals have low effective tax rates.

In transitioning from a tax on income from foreign corporations triggered by dividend payments (except for Subpart F) to a system that excluded dividends and imposed lower tax on GILTI regardless of dividends, the 2017 tax revision (TCJA) also included a tax on accumulated unrepatriated income, which can be paid in installments and will increase tax rates temporarily for the next several years.

There is a minimum tax embedded in the current international tax system—the Base Erosion and Anti-Abuse Tax (BEAT). To determine whether firms are required to pay BEAT, firms add back some payments to related parties abroad and make some other changes, then apply a lower rate. Firms pay the higher of the BEAT or regular tax.

Another feature of the international tax system that can affect effective tax rates is the deduction for foreign derived intangible income (FDII), which is designed to provide a similar benefit for the domestic holding of intangible assets as occurs for foreign-source income under GILTI.

Pass-Through Businesses

Pass-through businesses are not subject to the corporate tax; rather, income and expenses flow through to the owners to be taxed under the individual income tax.²² Pass-throughs may be sole proprietors, with one owner; partnerships, with multiple owners; Subchapter S corporations, organized as corporations but electing to be taxed as a pass-through if the number of shareholders is 100 or less; or limited liability corporations, which are organized as corporations but have characteristics that allow them to be taxed as pass-throughs. Pass-through firms can be small or relatively large.

Pass-through firms are eligible for many of the same subsidies and tax benefits as corporations, but some are also eligible for a pass-through deduction of 20% of taxable income.²³ This deduction is phased out for personal service firms and limited for some other businesses that do not meet certain conditions.

While the corporate AMT was repealed by the 2017 tax revision (TCJA), the individual AMT was retained, albeit with larger exemptions.²⁴ Some of the tax benefits, such as accelerated depreciation, are added back to the base, but not the pass-through deduction or most of the provisions listed in Table 1.

Measuring Income

Conceptually, income is computed by subtracting (deducting) the costs of doing business from gross receipts. In practice, it can be difficult to determine what expenses should be deducted as business costs, and the timing of those deductions. A similar timing issue can occur with respect to when receipts should be recorded.²⁵

U.S. businesses report income differently for different purposes. One set of rules applies when companies report financial or "book" profits to the public, in compliance with financial securities laws. A primary purpose of these reports is to provide potential investors information about the risks associated with investing in a firm. Another set of rules applies when companies report taxable income to the Internal Revenue Service (IRS), in compliance with tax law. Tax accounting rules are intended to produce a verifiable tax base using rules that can be implemented and enforced.

Under this dual reporting system, businesses may have an incentive to maximize their reported financial (book) income and minimize their reported taxable income. Another complicating factor is that the reporting entity for the purposes of a financial statement is not necessarily the same as the entity filing a tax return. When this is the case, differences in consolidation rules make it so that income prepared for financial statements cannot be directly compared to income for tax purposes. The following sections discuss different measures of income and issues in reconciling the different measures.

Economic Income

A standard definition for economic income is consumption plus changes in net worth.²⁶ This definition is generally applied to individuals (where it can also be defined as consumption plus savings plus unrealized capital gains). Since corporations are a collection of individual shareholders, the concept can be applied to corporations as well. A corporation's income can be defined as dividends plus changes in net worth (or retained earnings). Individuals in the aggregate either consume or invest dividends and will realize increases in the value of stock due to retained earnings and any other gains in value through capital gains.

For businesses (including corporations), profits are receipts minus expenses, with both measured on a real (inflation-adjusted) accrual basis.²⁷ Measuring revenues and expenses on an accrual basis means that these items are recorded when they are earned or transactions occur, as opposed to when final payments are made.²⁸ For example, when an item from inventory is sold, income is accrued at the time of sale, even though payment may be deferred. The income of subsidiaries is also income of the parent corporations, whether it is received as dividends or increases in the value of shares. Economic income is a concept. In practice, it may be very difficult to measure true economic income.

To measure economic income, an adjustment must be made for the decline in the value of assets over time. For physical capital, depreciation reflects the decline in asset values as capital is used in the production process. For natural resource or mineral assets, depletion reflects the decline in the value of reserves as they are extracted and sold. The value of intangible assets (such as drug formulas, advertising, and human capital investment) declines as patents expire, new competition reduces the prices of goods produced with intangible assets, advertising's effects fade in consumers' minds, and trained workers retire. Economic income also should reflect the decline in value in current prices. Thus, depreciation, depletion, and deductions of investments resulting in intangible assets should reflect the increase in the nominal value of assets due to inflation as well as the economic decline in value that would occur in the absence of inflation.²⁹

Two other assets where adjustments for inflation should be made in calculating economic income are inventories and net debt. When goods are sold out of inventory, the cost should be based on the original cost increased by inflation. Similarly, net debt acquired in the past becomes a smaller liability as inflation erodes its current value, so that debt is repaid in cheaper dollars.³⁰

National Income and Product Accounts (NIPA) Earnings

The U.S. Bureau of Economic Analysis (BEA) produces measures of aggregate corporate profits (National Income and Product Accounts [NIPA] earnings).³¹ NIPA's corporate profits measure "represents the portion of total income earned from current production that is accounted for by U.S. corporations."³² NIPA earnings, by design, measure profits from current production.

NIPA's profits from current production are computed as profits before tax, sometimes referred to as book profits, adjusted for (1) an inventory valuation adjustment; and (2) a capital consumption adjustment. BEA relies primarily on tax return information to determine profits before taxes.³³ The two adjustments are made to achieve the objective of measuring profits from current production.

The inventory valuation adjustment (IVA) is made to reflect changes in profits that arise from capital gain or capital loss, such as changes in the value of inventory holdings. Changes in prices of goods held in inventory can result in businesses having book profits or losses, but these changes are not from current production. The IVA adjustment is applied to inventory withdrawals such that these withdrawals are valued at current cost.³⁴

The capital consumption adjustment (CCAdj) is made so that profits from current production reflect economic depreciation and have a value that reflects current replacement costs. When computing income, NIPA earnings allow for consumption of fixed capital using economic depreciation. Economic depreciation is the decline in the value of the stock of capital assets due to physical deterioration, normal obsolescence, and accidental damage that occurs in the routine course of use.³⁵

The tax code specifies depreciation schedules that are generally more accelerated than economic depreciation. Further, since 2001, the tax code has generally allowed for some amount of bonus depreciation, with the bonus depreciation amount deducted in the first year.³⁶ With bonus depreciation or when tax depreciation is accelerated relative to economic depreciation, depreciation deductions are larger in the early years, offset by smaller deductions in the later years, over the lifetime of a particular capital asset. With bonus or accelerated depreciation, income or profits are understated initially, and later overstated. The CCAdj is made so that depreciation reflects economic depreciation in NIPA's measure of profits from current production. The CCAdj also adjusts measures of depreciation such that they are valued at current cost.³⁷

NIPA's profits from current production excludes dividend income, capital gains and losses, and certain other financial flows and adjustments, such as deductions for "bad debt."³⁸ NIPA's profits from current production comes close to measuring economic income, but is not a true measure of economic income because it does not account for unrealized capital gains or the ability to repay debt in cheaper dollars.

Other elements of NIPA's profits before tax make it an imperfect proxy for examining "book income" as a tax base. Specifically, NIPA's profits before tax include income from organizations that do not file corporate tax returns (e.g., Federal Reserve banks) or do not pay corporate taxes (e.g., Subchapter S Corporations).

NIPA's measures of corporate profits include domestic and national measures. Domestic corporate profits covers activities that take place within U.S. geographic borders. This measure excludes income from branches and subsidiaries earned from foreign sources. Because the U.S. tax system is not strictly territorial, focusing only on domestic earnings may not fully capture economic incomes that might potentially be part of the corporate tax base.

National corporate profits cover activities attributable to U.S. residents. This measure includes income of domestic corporations received from abroad as well as the income (dividends) received by individuals, net of payments. This definition does not correspond to worldwide income of U.S. corporations because it does not capture income retained abroad by foreign-incorporated firms and nets out payments.

In 2017, NIPA's domestic corporate profits (or profits from current production) were $1,630.0 billion.³⁹ For 2018, 2019, and 2020 these figures were $1,783.3 billion, $1,854.4 billion, and $1,789.0 billion, respectively. NIPA's corporate profits (or profits from current production) for all U.S. firms in 2017 were $2,194.8 billion.⁴⁰ For 2018 this figure was $2,259.0 billion; for 2019, $2,254.6 billion; and for 2020, $2,184.1 billion.

Taxable Income

For corporations, income subject to tax is generally total business receipts less total deductions, with adjustments.⁴¹ One adjustment, for example, is to remove state and local government bond interest, which is not subject to tax, from income before determining income subject to tax. Deductions can include regular deductions for the cost of goods sold and ordinary and necessary business expenses, but can also include deductions that are tax expenditures, or special preference items. Net income (receipts minus deductions) includes NOLs, dividends received, and deductions for dividends paid—items that are also subtracted in determining taxable income.⁴² There are also limits on certain deductions for tax purposes, like limits on deductions for interest paid and executive compensation. These limits make taxable income higher than it would be otherwise.

Income as measured for tax purposes—taxable income—differs from economic income, and NIPA's measure of profits before tax, in several ways.⁴³ The tax code contains numerous provisions allowing for accelerated cost recovery through expensing, depreciation, or depletion. Accelerated cost recovery means that initially, in the early years of the lifetime of a capital asset, amounts deducted from income for tax purposes exceed the actual decline in the asset's value. The NIPA measure of profits before tax makes several adjustments to tax data, adding back amounts that were deducted for items that are more appropriately characterized as capital formation (e.g., expensing of intangible drilling costs and research and development).

In reconciling NIPA profits before tax and taxable income, not all adjustments, nor even all timing adjustments, add to taxable income. For example, the tax code does not allow certain deductions (e.g., fines) that are subtracted for the purposes of determining NIPA's profits before tax. NIPA profits before tax also treats the cost of trading or issuing securities as a current expense, whereas the tax code treats this as a reduction in future capital gains income.

In 2017, $1,002.3 billion in income was subject to the corporate tax. Total receipts less total deductions as reported on tax returns in 2017 were $1,577.8 billion. Income that is subject to the corporate tax is less than receipts less deductions for a number of reasons, including taxpayers' ability to deduct NOLs and part of dividends received, as well as certain forms of income and certain entities (primarily smaller Subchapter S corporations that elect to be taxed as pass-throughs under the individual income tax) not being subject to the corporate tax. As was noted above, in 2017, NIPA's corporate profits before tax (or profits from current production) were $2,194.8 billion.

The 2017 tax revision (TCJA) created incentives for taxpayers to reduce taxable income reported in the 2017 tax year (the statutory corporate tax rate was permanently reduced from a top rate of 35% in 2017 to a flat rate of 21% beginning in 2018). Taxpayer responses to the 2017 tax revision (TCJA) may have resulted in a higher than normal difference between financial (book) income and income for tax purposes, or book-tax gap, for 2017.

Income subject to tax in 2018 was $1,956.7 billion, which was substantially higher than the $1,002.3 billion in income subject to the corporate tax in 2017.⁴⁴ Total receipts less total deductions were also higher in 2018 at $2,329.3 billion compared to $1,577.8 billion, respectively.⁴⁵ NIPA's corporate profits in 2018 were $2,259.0 billion (compared to $2,194.8 billion for 2017). Thus, while measures of income for tax purposes differed substantially between 2017 and 2018, NIPA's measure of corporate profits was more stable. Table B-1 reconciles total receipts less total deductions from IRS data with NIPA's measure of corporate profits for 2018.

Book Income

Book income is reported on a company's income statements. Public companies are required to disclose information on their financial performance on an ongoing basis.⁴⁶ Financial disclosures are filed with the Securities and Exchange Commission (SEC).⁴⁷ Public companies follow Generally Accepted Accounting Principles (GAAP), as set by the Financial Accounting Standards Board, when reporting financial information. Publicly disclosed Form 10-Ks are annual reports that describe a company's financial conditions and contain audited financial statements. The primary purpose of financial reporting is to provide information to investors and creditors.⁴⁸ Managers have some discretion when reporting earnings on financial statements. Flexibility in how certain expenses and assets are valued across industries is intended to allow managers to provide relevant information regarding their firms' economic position.⁴⁹

Book income is generally determined by recognizing expenses in the period that revenue stemming from those expenses is received.⁵⁰ Book income includes certain revenues that are excluded from tax income, such as interest from municipal bonds and foreign-source income of U.S. corporations (tax income does not include all foreign-source income). Under GAAP, investments in capital assets are capitalized and generally depreciated over their useful life, consistent with the goal of recognizing expenses in the period in which those expenses result in revenue. For the purposes of financial statements, equity-based awards or stock options as compensation are recognized at fair value when granted. In contrast, for tax purposes, the deduction is taken when the stock option is exercised (that is, when the stock is purchased by the employee at the lower option price).

Large corporations—those with assets of at least $10 million—are required to file Schedule M-3 with their corporate tax returns. The Schedule M-3 collects information on firms' financial statement income and reconciles financial statement (book) income to tax income. Schedule M-3 reconciles book income to taxable income before net operating loss deduction and special deductions, which are then subtracted to determine taxable income (or the amount of income that is subject to the corporate tax). The first step in reconciling financial statement income to tax income is to address differences in consolidation rules.⁵¹ Different consolidation rules under U.S. GAAP and the IRC make it such that the reporting entity for the purposes of a financial statement is not necessarily the same as the entity filing a tax return.

Schedule M-3s filed by corporations in 2017 reported $1,408.7 billion in worldwide consolidated financial statement net income. Financial statement net income for entities included on U.S. tax returns was $1,324.1 billion in 2017.⁵² The tax income of these corporations in 2017 was $661.9 billion. In 2018, worldwide consolidated financial statement income reported on Schedule M-3s was $1,649.6 billion, financial statement net income for entities on U.S. tax returns was $2,265.5 billion, and tax income of these corporations was $2,220.1 billion.⁵³ Applying tax consolidation rules to all entities allows for an apples-to-apples (same entity) comparison of financial (book) and tax measures of income.

Although the relationship between book and tax income can change for a number of reasons, one possible explanation for the lower tax income in 2017 and the larger tax income in 2018 is that firms shifted tax income in response to changes in the 2017 tax revision (TCJA). Tax rates were lowered in 2018 and dividends received from foreign subsidiaries were no longer taxed.

Primary Causes of Book-Tax Differences

Differences between book and tax income reflect both differences in income items and differences in deductions. Income items can be larger or smaller for book and tax purposes, and can vary over time. For example, book foreign-source income reflects distributions out of current and previously taxed income, whereas, prior to 2018, tax foreign-source income reflected dividends not already taxed, as well as certain income, called Subpart F, that is taxed whether it is distributed or not because it is easily shifted between countries. In 2018 and later, tax income reflects inclusions such as GILTI, Subpart F, and (for 2018) accumulated untaxed income. As discussed above, interest income is larger for book income since interest on state and local bonds is included in book income, but excluded from taxable income (i.e., tax-exempt). Capital gains are often larger for tax purposes because capital losses are not fully deductible from taxable income.

Similarly, some deductions can be larger or smaller for book or tax purposes, and these differences can vary over time. Deductions for depreciation and for stock options and other forms of equity-based compensation are generally larger for tax purposes. Special rules that allow bonus depreciation or accelerated depreciation for tax purposes, which are often motivated by a desire to encourage investment, are a major factor in explaining book-tax differences.

Some book-tax differences, including those due to depreciation deductions, are temporary. The costs associated with capital investment will be recovered for both book and tax purposes, but there is a timing difference. With bonus depreciation for tax purposes, deductions are taken when investments are made. For book purposes, these costs will be recovered over time. Other differences are permanent. For example, tax-exempt interest payments are included in book income.

The 2017 tax revision (TCJA) may explain the significant book-tax difference in 2017, the year before many of the law's changes went into effect. Firms may have recognized commitments to larger dividend payments from foreign affiliates for book purposes but delayed paying those dividends until 2018, when dividends became exempt.

Differences in Measures of Corporate Income over Time

The following sections compare NIPA's measure of corporate profits to aggregate measures of income subject to tax (taxable income), and, separately, book income to tax income, over time. As discussed further below, income subject to the corporate income tax tends to be smoother over time, as compared to other measures of corporate income. Smoothing income over time for tax purposes is a feature of the corporate income tax system.

NIPA Versus Taxable Income

As discussed above, NIPA's corporate profits before tax (sometimes referred to as "book profits," although they differ from the book profit firms report on financial statements) are a broad measure of corporate income (but not a complete measure of corporate economic income). Figure 1 compares NIPA's profits before tax and profits from current production to IRS data on net income (total receipts less total deductions) and income subject to the corporate tax (taxable income).

As illustrated in Figure 1, NIPA's corporate profits track fairly closely NIPA's corporate profits from current production (corporate profits with IVA and CCAdj). Since the 1990s, corporate profits in the NIPA data have generally exceeded the amount of income subject to the corporate tax. The size of the difference, however, has generally grown over time, relative to the size of the economy, with 2018 being an exception. Total receipts less total deductions are more variable over time than income subject to tax; NOLs, which smooth tax income over the business cycle, are one reason for this. Income subject to corporate tax is generally lower than receipts minus deductions because of entities (e.g., Subchapter S corporations) not subject to the tax. The trends in NIPA corporate profits and income subject to the corporate tax suggest that, over time, a smaller share of corporate income has been subject to the corporate tax (although higher amounts of income being subject to tax in 2018 resulted in a deviation from this longer-term trend).

Figure 1. Corporate Profits and Corporate Income as a Share of GDP 1994-2018

Source: CRS figure using data from BEA and IRS. Notes: Income subject to the corporate tax is the same as taxable income. Total receipts less total deductions a as reported in the IRS Statistics of Income.

Book-Tax Differences

As stated previously, large corporations—those with assets of at least $10 million—are required to file Schedule M-3 with their corporate tax returns. Schedule M-3 reconciles book income to tax income before adjusting for NOLs and other special deductions. When deductions exceed receipts, income is negative, and the negative amount is a NOL. Income subject to tax—the measure of income to which tax rates are applied—cannot be less than zero, and includes NOLs. In economic downturns, income subject to tax tends to be higher than tax income (the tax income measure reported on Schedule M-3s), because weak economic conditions limit taxpayers' ability to claim losses in the current tax year. At full employment, income subject to tax is often lower than reported tax income as NOL carryforwards reduce income subject to tax. Ultimately, because of NOLs, income subject to tax is smoother over time than tax income.

Figure 2 compares aggregate pretax financial (book) income to tax income for corporations filing Schedule M-3, after differences due to consolidation have been removed (other analysis of book-tax differences also uses pretax book income).⁵⁴ Since 2009, corporations filing Schedule M-3, in aggregate, have reported more in financial (book) income than tax income.

Figure 2. Aggregate Book Income and Tax Income for Large Corporations 2004-2018

Source: CRS calculations using data from IRS Schedule M-3. Notes: Pretax book income is financial statement income of corporations filing tax returns that were required to file Schedule M-3 plus U.S. tax expenses. Large corporations are those with assets of $10 million or more filing Form 1120 U.S. corporate income tax returns. Schedule M-3 reconciles book income to taxable income before net operating loss deduction and special deductions ("tax income" in the figure).

Figure 3 plots aggregate book-tax differences from 2004 through 2018. The relationship between book and tax income is affected by the business cycle (including the COVID-19 recession and recovery) and the government's fiscal policy response. During the Great Recession, in 2007 and 2008, aggregate tax income was larger than aggregate book income, leading to negative book-tax differences (Figure 2 and Figure 3). One factor that may partially explain why book-tax differences decline during economic downturns is the treatment of bad debt, which may be recorded on financial statements before being claimed for tax purposes. As noted above, changes made in the 2017 tax revision (TCJA) created incentives to minimize taxable income in 2017, because the statutory corporate tax rate was reduced starting in 2018. This, and other elements of TCJA, might explain the larger book-tax difference in 2017.

Figure 3. Aggregate Book-Tax Difference for Large Corporations 2004-2018

Source: CRS calculations using data from IRS Schedule M-3. Notes: Aggregate book-tax difference is aggregate pretax book income less aggregate tax income. Large corporations are those with assets of $10 million or more filing Form 1120 U.S. corporate income tax returns.

Measuring Tax Burden: Effective Tax Rates

Effective tax rates and how they are affected by different features of income or tax measurement can be estimated from several data sources. The first section below estimates average tax rates based on NIPA data, adjusting for certain inclusions and exclusions to bring the measure closer to both tax income and economic income. The effect of other modifications to the income and tax base are also estimated, including adjustments for foreign taxes and foreign-source income. The second section uses IRS data in the M-1 and M-3 reconciliation schedules to show effective tax rates as successive adjustments are made, showing the source of differences between the effective and statutory tax rates. The final section reviews studies of effective tax rates using financial data.

Effective Tax Rate Using Aggregate NIPA Data

One source of an aggregate and current estimate of the effective tax rate on corporate profits is the National Income and Product Accounts (NIPA), a measure that, as discussed above, largely reflects economic income.

Table 2 shows effective corporate tax rates based on measures of corporate profits from the NIPA, which measures output (based on sales of goods and services) net of costs.⁵⁵ This measure is for domestic profits and does not include profits of U.S. firms earned abroad. Profits are adjusted, excluding payments from the Federal Reserve banks and other government credit agencies that do not file corporate tax returns. There are two additional adjustments needed to measure profits. The first is that the corporate profits include profits from Subchapter S corporations and a less important amount from real estate investment trusts (REITs) that are treated as pass-throughs and not subject to corporate tax. The second is that the NIPA measure does not include capital gains. The effective tax rates in Table 2 adjust for these Subchapter S corporations and capital gains. Based on tax data from the IRS Statistics line counts (discussed subsequently), the share of profits attributable to Subchapter S corporations was 30% of the total in each year available (2016-2017).⁵⁶ This adjustment reduced profits. Capital gains reported on C corporation returns (firms subject to the corporate tax) increased corporate profits by 18%, 23%, and 22% for 2016-2018.⁵⁷ The first row of Table 2 shows corporate federal taxes as a percentage of domestic profits for 2016 through 2020, covering tax rates before the 2017 tax revision (TCJA) (i.e., 2016 and 2017), when the corporate statutory rate was 35%, and after (2018, 2019, and 2020), when the statutory rate was 21%. Since there may have been incentives to shift income from 2017 to 2018, the rates for 2016 and 2019 and 2020 might more accurately reflect these effective tax rates. In both cases, they were about 70% of the statutory rate.

An adjustment that might be considered is to measure the effective tax rate with a deduction for state and local taxes. It raises the effective tax rate by up to two percentage points. The decline in rates between 2016 and 2018 appears to largely reflect the reduction in the statutory corporate tax from a top rate of 35% to a flat rate of 21%, a 40% reduction.

As discussed above, the NIPA data make adjustments for depreciation and inventories to measure economic profits more closely, and these measures include an adjustment for inflation (measuring the basis of assets and inventories in current dollars).⁵⁸

The remaining issue with the NIPA data is the treatment of foreign-source income. All of the measures in Table 2 include total U.S. tax, including the residual U.S. tax on foreign-source income, but do not include foreign-source income. Thus, the effective tax rates reported are higher than they would be if foreign-source income were included.

Data to make adjustments for foreign-source income and taxes are only available for 2016 and 2017. Table 3, for 2016, reports three different ways to address this issue. The first column repeats the tax rates from Table 2 (the first column of numbers). The second column eliminates the U.S. residual tax paid on foreign-source income, yielding a measure of domestic effective rates on domestic income.⁵⁹ This adjustment lowers the tax rate by a small amount, typically a percentage point or less, reflecting the small size of the U.S. residual tax on foreign-source income. The third column retains the full U.S. tax but includes foreign-source income (by adding back income from U.S. controlled foreign corporations and branch income). It provides a rough estimate of the U.S. tax on worldwide income; this adjustment increases profits prior to debt and state and local adjustments (by 95% in 2016 and 114% in 2017).⁶⁰ This measure is similar in concept to the type of measure that might be found from financial statements, suggesting an effective tax rate of approximately 12%.⁶¹ The final column adds foreign taxes to the total; because this measure does not capture all foreign taxes paid, it likely understates the true effective tax rate.⁶² The adjustments for foreign taxes are imperfect because not all firms have a tax year corresponding to the calendar year, so some of the foreign income and tax reflects 2017 levels.

Table 4 provides the same estimates for 2017. As noted, these rates may be affected by incentives to shift taxable income between 2017 and 2018.

It is difficult to know how these measures are affected in future years by the 2017 tax revision (TCJA) changes—which lowered the U.S. effective tax rate by any measure and changed the international system—because not all data sources are available. Data are not available to estimate the U.S. domestic tax on domestic income. For the remaining measures, a rough projection can be made by assuming branch income (which is small) bears the same proportion to foreign income of affiliates as in 2017 and that taxes on foreign-source income (without considering the effects of the 2017 changes) would be about the same as in 2017.⁶³

Tax Rates from IRS Statistics of Income

IRS data include reconciliation of tax and book income, although these data are subject to a lag and are currently only available through 2019.⁶⁴ Tax returns and book income are not on a calendar-year basis, so the rates cannot be easily compared to tax rates using the NIPA data. In the IRS data, for example, some of the data for 2016 come from calendar year 2017, and some of the data for 2017 include income from calendar year 2018. In concept, however, these rates are similar to the rates for NIPA-based profits in Table 2.

Table 6 reports several measures of income from the IRS data. The first measure is worldwide financial income (row 1), which most closely corresponds to income on financial reports. Since financial income is measured after taxes, federal income taxes must be added back to the base to provide a pretax measure comparable to income measured for tax purposes. This measure is reported on Schedule M-3 only for firms with $10 million or more in assets and differs from a related measure, book income, to reflect different consolidation rules. For example, financial reports include income of majority-owned foreign affiliates, whereas the book income measure includes dividends of foreign affiliates as well as certain other minority-owned foreign income shares. Schedule M-1, reflecting smaller firms with less than $10 million of assets, only reports book income; however, these smaller firms presumably do not have major differences due to consolidation, so the same value is reported in Table 6 for these firms as financial income in reporting totals in the second row. Corporations with less than $250,000 of income and assets are not required to complete Schedule M-1.

Worldwide financial income before taxes (row 1) is similar to book income in 2016 and 2017 (row 2). The large increase in book income in 2018 appears to be due to the inclusion of the deemed repatriation of income from abroad. The fourth row is larger than the third because it includes taxable income of corporations not filing the M-1 or M-3.

Comparing book income with taxable income for firms filing M-1 and M-3 forms shows the book-tax difference after controlling for consolidation. Some of the major differences include foreign income, the degree to which intercorporate domestic dividends are captured, and capital gains. Differences in expenses reflect differences in depreciation, travel and entertainment, and compensation (including stock options). Both measures are before federal income tax to achieve a pretax measure of income. Comparing these two measures provides a direct comparison of income measured on a book versus tax basis. Note that the tax rates for these measures do not capture all income (although most of that income is probably associated with nontaxed entities that are more likely to be small, such as Subchapter S firms). Also, measuring tax rates in row 1 using income tax expenses as reported on financial statements rather than actual tax paid does not result in very much change in rates, leading to a 10% rate in 2016, and 8% in 2017 and 2018. This measure would be U.S. tax on worldwide income based on financial reports. These rates are not very different from the rates using the same concept based on NIPA data (13% in 2016 and 2017 and 9% in 2018).

The fourth measure is taxable income as reported on the corporate tax form before net operating losses and special deductions. The fifth measure deducts special deductions (which generally relate to domestic intercorporate dividend deductions), and the sixth measure also deducts net operating losses. In general, the special deductions are small, but they were much larger for 2018 because they captured the deduction for deemed unrepatriated income abroad. This measure (row 5) is a rough measure of current taxable income measured on a tax basis. It is likely to be smaller when the economy is at full employment because of carryovers of net operating losses from previous years (including the recession that began in 2008, which was characterized by a slow recovery). The final measure, income subject to tax, eliminates nontaxable firms that are reported in the 1120 series, most notably Subchapter S corporations.

The difference between the statutory tax rate (a top rate of 35% in 2016 and 2017 and a flat 21% in 2018) and the tax on income subject to tax is due to tax credits and is significant (10 percentage points in 2016, 9 in 2017, and 5 in 2018). However, most of that lower rate is due to the foreign tax credit, which offsets income taxes paid by foreign entities. Adding back foreign tax credits ($89 billion in 2016 and $60 billion in 2017) would increase the effective rate to 32% (data are not available for 2018). The remaining difference is due to other business credits—especially the research credit, although other credits, such as energy credits and the low-income housing credits, are significant as well.

Effective Corporate Tax Rates Using Financial Data

Financial (SEC 10-K) data are frequently used by researchers to estimate tax rates because of their public availability for individual companies, whereas tax data are only available in the aggregate due to confidentiality rules. The following sections present selected research that has drawn on financial data, which is constructed under financial accounting rules (as opposed to tax accounting rules).

Financial data include three measures of taxes: taxes accrued, current taxes, and cash taxes. Accrued taxes reflect tax effects that are triggered by current-year events (such as depreciation deductions reflecting write-off periods, losses, or, in prior law, earnings abroad that were expected to be repatriated and create a future liability). Current taxes are taxes paid on current income, which reflect tax depreciation rules, loss carryovers, and limitations on losses and taxes currently due on foreign-source income. Cash taxes are similar to current taxes and reflect the actual tax paid in a period, which may not reflect tax liabilities associated with current income because of filing delays. Cash taxes are not generally divided into federal, state and local, and foreign taxes.

Financial data can also differ from NIPA data because not all firms have calendar reporting years.

Damodaran Data: Worldwide Taxes Accrued and Cash Taxes on Worldwide Income

Professor Aswath Damodaran of the Stern School at New York University reports a range of data, including measures of effective tax rates.⁶⁵ Damodaran's data do not cover the total corporate population but do cover 7,000 large firms. These data measure total income taxes on total income and therefore reflect worldwide taxes on worldwide income, similar in concept to the first row, last column, of Table 4 and Table 5, but they also include state and local income taxes, which are not included in this row. Damodaran reports both an aggregate tax rate (aggregate taxes paid divided by aggregate income) and the average of the firms' effective tax rates, the latter for both all firms and profitable firms. Damodaran reports both taxes accrued and cash taxes. Data for the aggregate measure and for average tax rates for firms with profit, for cash and accrual taxes, are shown in Table 7. The cash measure is not reported for 2016.

State and local taxes only explain part of the difference between the cash tax rates in Table 7 and in Table 4 and Table 5. For 2017, the cash flow rate is 22%, but if state and local taxes are added to the rate in Table 4, the comparable tax rate is 16%; for 2018, the cash flow rate is 19% and the comparable tax rate (with state and local taxes added) is 14%. These higher rates may reflect a subset that includes more profitable companies that are less likely to experience losses. The 2020 cash rates may have been especially affected by losses.

These data show tax rates below the statutory rate for 2017 but in some cases above that rate in 2018, which may reflect the influence of foreign and state and local taxes. Industries with the lowest cash tax rates for 2019 were air transport, broadcasting, power, shoe manufacturing, and utilities (both general and water). Utilities and power companies have particularly large benefits from accelerated depreciation. The aggregate tax rate in 2020 on all firms presumably reflects the effects of the COVID-19 recession (which led to more firms with losses) and the limitation of taxes rates to zero. The losses offset the incomes of moneymaking firms, but their taxes are not reduced because taxes cannot be negative, leading to a higher aggregate tax rate. These conditions are less representative of normal times.

Institute for Taxation and Economic Policy: Current Taxes on Domestic Income

The Institute on Taxation and Economic Policy (ITEP) estimates federal income taxes as a percentage of domestic income, and thus corresponds, in concept, to the numbers in Table 2.⁶⁶ This study estimates the effective tax rate for 2018 at 11%, which is similar to those measures. It covers the Fortune 500 and identifies 379 firms that are profitable and have sufficient data to calculate tax rates. The study reports 91 companies that paid no taxes; the firms with the largest profits among the 91 were Amazon, Delta, Starbucks, Chevron, and General Motors.

Martin Sullivan, Tax Notes Federal

Economist Martin Sullivan has examined the largest 100 corporations, based on an average of data in 2018 and 2019 (i.e., after the 2017 tax revision [TCJA]), and estimated that 33 of the firms would pay the minimum tax proposed by President Biden (imposed at a 15% rate and allowing NOLs and foreign tax credits).⁶⁷ Sullivan estimated four firms would pay more than $1 billion under the Biden proposal: AT&T, Berkshire Hathaway, Bank of America, and JPMorgan Chase. Eight additional firms were estimated to pay more than $500 million each: Duke Energy, NextEra Energy, T-Mobile, Lockheed Martin, United Parcel Service, U.S. Bancorp, Amazon, and Intel. According to Sullivan, the overall effective tax rate would be 16.7%. Because foreign taxes would be creditable against the minimum tax under the Biden proposal, Sullivan reports federal and foreign income taxes on worldwide income, similar in concept to the last column of Table 5. His estimates indicate that the effective tax rate would rise by two percentage points, to 18.7% with application of the Biden minimum tax.

Minimum Taxes on Business Income

The tax code has, at various points in time, included different types of minimum taxes on business income. The corporate AMT was in place from 1987 through 2017. Current minimum taxes include GILTI and BEAT. The following sections discuss these taxes, as well as other policy options for imposing minimum taxes on business income.

Corporate AMT

A corporate minimum tax was first introduced into the U.S. tax code in 1969. The original minimum tax was an add-on tax imposed on preference items in excess of an exemption amount and tax liability.⁶⁸ The tax was significantly modified as part of the Tax Reform Act of 1986 (P.L. 99-514).⁶⁹ At that time, the policy goal was "to ensure that no taxpayer with substantial economic income can avoid significant tax liability by using exclusions, deductions, and credits."⁷⁰ The corporate AMT was repealed as part of the 2017 tax revision (TCJA). At that time, repeal of the corporate AMT was estimated to reduce federal tax revenues by $40.3 billion from 2018 through 2027.⁷¹ The corporate AMT was complex, a factor that led to its repeal in TCJA.⁷² It had also become much less effective in raising corporate taxes as AMT depreciation—originally a major factor in the increase in the AMT tax base compared to the regular base—was conformed more closely to regular depreciation.

The corporate AMT required corporations to calculate their tax liability under two sets of rules, those of the regular tax system and tax that would be owed under the alternative system.⁷³ Taxpayers would then pay the higher amount. The AMT also served to smooth tax liability over time. Taxpayers with AMT liability would receive a credit for the amount that AMT exceeded regular tax liability. That amount could be claimed against future regular tax liability.

Taxpayers were required to compute alternative minimum taxable income (AMTI) to determine whether they owed tax under the AMT. AMTI was taxable income, increased by certain preference items (effectively disallowing deductions for those items), and adjusted according to different rules related to timing and deferrals. Adjustment items modified cost recovery under the AMT.⁷⁴ One preference item was tax-exempt interest income, meaning the amount of tax-exempt interest income was added to taxable income as part of determining AMTI. Another limit provided that a NOL carryover could not reduce AMT liability by more than 90% of AMTI (as determined without the NOL deduction).

A corporation's tentative minimum tax was computed as 20% of AMTI in excess of a $40,000 exemption amount. The exemption amount phased out once AMTI exceeded $150,000. Many nonrefundable business credits, including the tax credit for research and experimentation (R&E), could not be claimed against the AMT.

Minimum Tax on Book Income

A minimum tax on financial statement or book income was included as part of the corporate AMT modifications in the Tax Reform Act of 1986 (P.L. 99-514). This policy was pursued in an effort to "achieve both real and apparent fairness," by adopting a system that generally required that "whenever a company publicly reports significant earnings, that company will pay some tax for the year."⁷⁵ When enacted, the minimum tax on book income was intended to be temporary. For years after 1989, a broad-based tax system defined by the Internal Revenue Code, one that relied on "income tax principles," was to replace the book income tax.⁷⁶

The book-income AMT adjustment was a catch-all adjustment designed to ensure that any items not captured in the AMT base but reported as income would be subject to tax. Specifically, the book-income adjustment required taxpayers to include in taxable income one-half of any positive difference between book income and taxable income included in the AMT.

The book-income adjustment only applied to the 1987, 1988, and 1989 tax years.⁷⁷ One concern about using book income to compute tax liability is that book income is defined outside of the tax code. There was concern that corporations would act to reduce book income in response to the book-income adjustment.⁷⁸ Empirical research has found that taxpayers did manage their earnings, adjusting book income to reduce taxes owed.⁷⁹

The Biden Administration has proposed a 15% minimum tax, based on the book income of certain large corporations. Only corporations with worldwide book income in excess of $2 billion would be subject to the minimum. In support of this proposal, the Administration claims that in a typical year there are approximately 120 companies that report at least $2 billion in earnings on financial statements, with a "significant share" of these companies paying no income tax.⁸⁰ The policy seeks "to ensure that the most aggressive corporate tax avoiders bear meaningful federal income tax liabilities" and make it so that "highly profitable multinational corporations would no longer be able to report significant profits to shareholders while avoiding federal income taxation entirely."⁸¹

The tentative minimum tax would be computed as 15% of worldwide pretax book income, calculated after subtracting book net operating losses. General business credits—such as credits for R&D, clean energy, and housing—and foreign tax credits would be allowed. Taxpayers would owe additional taxes under this provision if the tentative minimum tax amount exceeded taxes paid under the regular income tax. Taxpayers owing taxes under the provision would be allowed a book tax credit, which could offset regular income tax liability in future years (but not below the minimum tax amount). The Department of the Treasury has estimated this tax would generate $148.3 billion in additional revenue between FY2022 and FY2031.⁸²

The November 3, 2021, House Rules Committee Print 117-18 modification to the Build Back Better Act (H.R. 5376) contained a minimum tax similar to the Biden Administration's proposal, but with a lower threshold of $1 billion in financial statement earnings. A fact sheet reported that the tax would potentially apply to 200 companies.⁸³ Other analysis, which examined 25 companies (accounting for about one-half of the profits of profitable billion-dollar companies) over a three-year period and found that 12 were estimated to pay the new minimum tax for any one year and 8 would pay it on a sustained basis, suggests that fewer companies could be liable.⁸⁴ The Joint Committee on Taxation has estimated that the minimum tax provision would generate an additional $318.9 billion in revenue from FY2022 through FY2031.⁸⁵

For U.S. subsidiaries of foreign parents, the tax would apply only to income earned in the United States of $100 million or more (and apply when the international financial reporting group has income of $1 billion or more). It would apply to a new corporation in existence for less than three years based on the earnings in the years of existence. The provision would exclude Subchapter S corporations, regulated investment companies (RICs), and real estate investment trusts (REITs). Firms that file consolidated returns would include income allocable to the firm from related firms including controlled foreign corporations (and any disregarded entities); for other related firms, dividends would be included. The provision would allow special deductions for cooperatives and Alaska native corporations.

The additional tax would equal the amount of the minimum tax in excess of the regular income tax plus the additional tax from the base erosion and anti-abuse tax (BEAT). Income would be increased by federal and foreign income taxes to place income on a pretax basis. Losses would be allowed in the same manner as with the regular tax, with loss carryovers limited to 80% of taxable income. Domestic credits under the general business tax (such as the R&D credit) would be allowed to offset up to 75% of the combined regular and minimum tax. Foreign tax credits would be allowed based on the allowance for foreign taxes paid in a corporation's financial statement.

Senator Elizabeth Warren has proposed a minimum tax of 7% on the book income of corporations above $100 million (S. 2860).⁸⁶ Since the tax would apply only to book income in excess of the $100 million amount, there is effectively a deduction so that firms just above the threshold would be subject to a small tax that would rise as book profits increased. Firms would be allowed a credit against the tax for one-third of corporate taxes paid. The credit against the tax of one-third of corporate taxes would offset the tax for some firms that pay the regular income tax. Since the corporate rate is 21%, the credit allows an offset at a rate of 7% of taxable income, reduced by one-third of credits. Thus, the tax base is increased by a third of the foreign tax credit (and other credits). The credit also makes this tax an alternative minimum tax rather than an add-on surtax.⁸⁷

Concerns about current proposals to impose a minimum tax on book income are similar to those expressed about the policy in the late 1980s. In a public finance context, researchers continue to question how much taxpayers will change their behavior to avoid the tax. If a tax on book income causes taxpayers to engage in profit shifting or other forms or tax avoidance, or if the tax reduces real economic activity, then there is an efficiency cost associated with imposing the tax.⁸⁸ From an accounting perspective, there are concerns that manipulation of book income in response to a book income tax could reduce the quality of information in financial reporting statements.⁸⁹ There are also concerns that a tax on book income could subject the Financial Accounting Standards Board to political pressure or weaken its ability to independently establish financial accounting rules.⁹⁰

As discussed above, many of the factors that create differences between book income and tax income are intentional policy choices. Congress chose to provide accelerated depreciation allowances, for example. While a corporate minimum tax based on book income could serve as a backstop, by increasing tax liability for certain corporations, it could also offset or diminish the effects of tax incentives intended to encourage investment or economic activities if the incentives are recaptured by a minimum tax.

Proposals to impose a minimum tax on firms with worldwide book income in excess of $1 billion or $2 billion also could raise some policy questions. The size threshold could raise horizontal equity concerns (where taxpayers in similar economic circumstances are treated differently for tax purposes). Some may ask whether there is a reason that a firm with $1.9 billion in worldwide book income (or income just below the chosen threshold amount) is less likely to engage in tax avoidance strategies than a firm with $2.1 billion in worldwide book income (or income just above the threshold amount). Providing a firm size threshold, however, could limit the tax's administrative burden, as relatively few firms would be subject to the tax. If "the most aggressive corporate tax avoiders" are firms with more than $1 billion or $2 billion in worldwide book income, as opposed to firms outside this group, then there may be a rationale for imposing the tax on this group.

Corporate Surtax or Add-On Tax

Another option is to impose a surtax or an add-on tax. From 1987 through 1995, an "environmental tax" of 0.12% was imposed on modified alternative minimum taxable income (modified AMTI) of corporations above $2 million.⁹¹ This tax was imposed to raise revenue for the Superfund Trust Fund. For the purposes of this tax, modified AMTI was a corporation's AMTI determined without regard to NOL deductions and without a deduction for the corporate environmental tax itself. The corporate environmental tax was a flat tax, applied on the corporation's modified AMTI, regardless of whether the corporation was otherwise subject to AMT. This tax was criticized for creating complexity. Many taxpayers subject to the tax did not pay the corporate AMT, but were required to compute AMTI to determine the amount of corporate environmental tax owed.⁹²

An add-on or surtax approach could avoid some of the complexity that might be associated with a minimum tax based on book income. For example, presumably an add-on tax would not allow for amounts paid to be credited against regular tax liability in future years, which is a typical but complicating feature of the AMT. Additionally, an add-on tax might also be imposed without allowing a foreign tax credit (foreign tax credits would still be allowed against the regular corporate income tax). For example, the base erosion and anti-abuse tax (BEAT) does not allow a foreign tax credit. General concerns similar to those discussed above (in "Minimum Tax on Book Income") with regard to using book or financial income as a base for tax purposes would still apply in the add-on tax context.

GILTI, BEAT, and Proposed Changes

GILTI is often referred to as a minimum tax, although under a worldwide tax system with full taxation of foreign-source income (with a foreign tax credit) GILTI deductions may be viewed as tax subsidies.⁹³ The GILTI tax, even if considered a minimum tax, is different from the prior corporate AMT because it is added to tax liability. There is no difficulty in integrating GILTI with a typical minimum tax because it is part of the regular tax system. The Biden Administration has proposed modifying GILTI and increasing revenues by disallowing the deduction for tangible assets, applying a 21% rate, and imposing the foreign tax credit limit on a country-by-country basis.⁹⁴ (The proposal would raise the ordinary corporate tax rate to 28%, so the GILTI rate would still be below the ordinary rate.) Congress has also considered proposals to modify GILTI in a similar way.⁹⁵ The Build Back Better Act would reduce the tangible assets deduction from 10% to 5% and lower the deduction from the remainder to 28.5% (producing an effective rate of 15.015%). This tax rate is in line with the international GloBE tax rate discussed below. It would also impose a per country foreign tax credit limit.

In contrast, BEAT is an alternative minimum tax that adds back certain payments between U.S. firms and their related affiliates and disallows some credits, notably the foreign tax credit. The likely method of integrating a new minimum tax with the BEAT minimum tax is to have the firms pay the highest of the three taxes: regular, BEAT, and the minimum tax. The Administration has proposed replacing BEAT with a provision to disallow deductions for payments to tax havens, which it terms Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD).⁹⁶ The Build Back Better Act would retain BEAT while increasing the rate to 10% in 2022, 12.5% in 2023, 15% in 2024, and 18% after 2024. Tax credits would be allowed. The base would also include payments to foreign related parties for inventory that is required to be capitalized (such as inventory to produce tangible property) and payments for inventory in excess of cost.

GloBE: An International Tax Proposal

The Organisation for Economic Co-operation and Development (OECD) and the G20 have been developing a proposal for a Global Anti-Base Erosion (GloBE) minimum tax that has an income inclusion rule similar to GILTI that all member nations would adopt.⁹⁷ This proposal was endorsed by the G7 on June 5, 2021, at a 15% rate; by the G20 on July 9-10, 2021; and by 137 countries and subnational jurisdictions as of November 4, 2021.⁹⁸ It would require broad agreement on details among countries.

GloBE would be based on financial income using the International Financial Reporting Standards (IFRS, used by many foreign countries) or other acceptable accounting methods (presumably including GAAP). A deduction would be allowed for a percentage of payroll and of assets (as yet unspecified), and then the residual would be subject to taxation to bring the effective tax rate up to 15%. GloBE also has an undertaxed payments rule, fulfilling a function somewhat similar to BEAT. (This undertaxed payments rule is also similar to the SHIELD proposal made by the Administration, which would replace the BEAT alternative minimum tax with the disallowance of deductions for payments to tax havens.) The undertaxed payments rule would impose a tax on payments to low-tax countries that are not subject to the income inclusion rule.

The proposal also addresses the coordination of GloBE with GILTI and BEAT. Although the preexisting GILTI rules could be maintained as a substitute in the United States (barring measures that substantially weaken GILTI), there would be issues when the U.S.-parented subsidiary is in turn in a country that applies the minimum tax to its own subsidiaries. The proposal also suggests that BEAT not apply to payments for entities subject to the undertaxed payments rule.

Minimum Taxes on Noncorporate Business Income

Imposing a minimum tax on noncorporate (pass-through) income could prove difficult for several reasons if the base is financial income. First, noncorporate firms' book income is not subject to the rules applicable to public corporations that must report their financial income to shareholders. Additionally, there is flexibility in book income measures, and some firms may not keep a full set of financial books. (A similar problem would arise with private corporations, many of which are small and owned by one person; even large corporations can be owned by one family.) If the minimum tax were limited to large firms, most pass-throughs would be excluded. Some limited partnerships and limited liability corporations can be very large, however. A minimum tax would also need to be coordinated with the existing individual alternative minimum tax, which includes pass-through businesses. One option is to require all firms of a certain size, however organized, to be taxed under the corporate tax.

A minimum tax based on adding back items to the tax base would be feasible for firms of any size, but it might be easier to add any additional preference items to the existing individual minimum tax for pass-throughs. Policymakers would have to consider treatment of the 20% pass-through deduction.

A third option is to exclude pass-through businesses from a minimum tax and limit the change to corporations of a certain size. This could encourage some firms, on the margin, not to incorporate to avoid the minimum tax.

Concluding Remarks

There is evidence that corporations pay taxes on profits at lower rates, on average, than the statutory rates. Some firms may pay little or no corporate income tax. In part, effective corporate tax rates are lower than statutory rates due to policy choices where the tax code is used to create various incentives. Firms can also reduce their taxable income through tax planning, including shifting income abroad, given the current rules for taxing foreign-source income. A minimum tax is one policy option for ensuring that all corporations or businesses pay some amount in taxes. An alternative to imposing a minimum tax is to reconsider the tax preferences and rules that allow taxes to fall below the statutory rate (such as lower taxes on foreign-source income and accelerated depreciation). If some tax preferences are deemed desirable to encourage an activity, then lower taxes are in part a consequence of heavy usage of those tax preferences.

In the past, an AMT was used in an attempt to ensure that all taxpayers with income contributed to tax revenues. The AMT system was complex. That complexity, combined with questions about its efficacy (although its effectiveness was reduced by policies that scaled back depreciation preferences) and the concern that minimum taxes may reduce the effectiveness of tax policy incentives or limit tax policy options for responding to economic downturns, led to its repeal after 2017. One option for imposing a minimum tax could be to reinstate some form of an AMT.

Corporations reporting high profits to shareholders while sometimes paying very little in corporate income taxes has led to interest in taxing book income. A minimum tax based on worldwide financial income could ensure that firms pay at least some minimum level of tax. Given current tax reporting requirements, large firms are already reporting data on their book-tax differences that could ease complying with a minimum tax.

Minimum taxes based on financial profits present a number of issues. In addition to the general policy concerns potentially associated with an AMT, an AMT that relies on book income could encourage firms to manipulate their financial accounts to reduce taxes, reducing the quality of information reported to shareholders. Structuring a book tax as an add-on minimum tax could avoid some of the traditional AMT complexities, namely those created when credits for AMT payments are carried over to offset future regular income tax liability. However, in the case of an add-on tax, general concerns that some have raised about using book income as a base for determining tax liability would remain.

As debates about minimum taxes continue, policymakers may consider a number of issues. For example, how will pass-through businesses be treated? What about multinational businesses? Is the tax consistent with the GloBE framework? These types of questions, and others, could present a number of conceptual and administrative challenges.

Appendix A. Glossary

Appendix B. Comparing NIPA's Corporate Profits Before Tax and Corporate Taxable Income

Table B-1 uses information from the IRS and BEA to compare income subject to the corporate income tax to NIPA's profits before tax. This comparison highlights some items that are excluded from taxable income that appear in the NIPA income measure, which is sometimes referred to as "book profits."