(Bloomberg) -- Congressional Democrats debating revenue measures to pay for an expansion in social spending have dozens of options to increase the taxes collected from companies -- though nearly all of them are more complicated and politically risky than just increasing the top-line rate.
Lawmakers are trying to cobble together alternatives to raising the 21% corporate tax rate -- part of President Donald Trump’s signature tax law -- after opposition from Arizona Senator Kyrsten Sinema, a crucial swing vote for Democrats.
The back-door corporate tax-hike options have the potential to raise hundreds of billions of dollars, but that would require Democrats to rely on a series of tax-code changes, ideas about which have yet to be fully developed.
Reversing Trump’s tax cuts -- which never gained broad support from voters -- has been the center of President Joe Biden’s tax plan, both symbolically and from a policy perspective. For some Democrats, it’s almost laughable that they wouldn’t increase the corporate tax rate.
“Boy oh boy -- that would be a great irony if a Democratic president, House and Senate embraced the Trump tax cuts,” Senator Mark Warner, a Virginia Democrat, told reporters Thursday.
Changing course to fill the $540 billion gap that would result if the corporate rate isn’t raised -- roughly one quarter of the social-spending package’s total cost-- would require Democrats to get creative about how to achieve their goal of coming up with enough money to fund the climate, health care and early childhood programs central to their economic agenda.
Here are some of the ways lawmakers could go after those corporate tax dollars:
Instead of increasing the rate, Democrats could instead set a minimum that companies must meet -- regardless of tax credits and deductions that would otherwise allow them to pay less.
The tax code used to have this function, something called the corporate alternative minimum tax, but it was eliminated in the 2017 Republican tax law because of high compliance costs, and it was increasingly out of sync with the rest of the tax code. Democrats could consider bringing this back, or they could mull another approach proposed by Biden that would require corporations to pay at least a 15% tax rate on the profits they report to shareholders on their financial statements.
This idea, known as a minimum “book tax,” would mean that companies that can avail themselves of lots of credits and deductions would still pay a base level to the Internal Revenue Service. The idea has been popularized by some Democrats, including Senator Elizabeth Warren, amid concerns that some companies, such as Amazon.com Inc., Nike Inc. and Netflix Inc., have been able to avoid paying any federal income taxes in recent years because they had so many tax breaks to offset their liabilities.
While the Treasury Department estimates a book tax could raise $148.3 billion over a decade, the idea has some downsides. It can blunt the effectiveness of some tax preferences that Democrats are also pursuing, including incentives for domestic manufacturing and credits for renewable energy. If companies have to pay a minimum rate, they can be boxed out of claiming some or all of those tax breaks, reducing the intended policy outcomes.
House and Senate Democrats are largely unified in wanting to strengthen the tax rules on U.S. companies operating abroad, both by collecting more tax on profits they earn offshore and increasing penalties on firms that shift revenue and operations overseas. The two chambers have competing proposals, though they address the same issues with minor technical differences.
However, Democrats would need to take a much more aggressive approach if they want to raise revenue to cover some of the gap from a company, according to Steve Wamhoff, the director of federal policy at the Institute on Taxation and Economic Policy, a left-leaning think tank.
For example, Biden has floated a 21% minimum rate on overseas earnings, while the House version of the bill scaled that back to 16.56%. In total, the House bill raises about $388.7 billion from increasing taxes on multinational corporations, compared with the $533.5 billion in Biden’s initial plan -- a $164.8 billion difference.
However, it could be difficult to get moderate Democrats to agree to such substantial changes.
Stock Buyback Tax
Democrats are also thinking about implementing a stock buyback tax, a new levy that would equalize the tax treatment for companies when the buy back their own shares and when they issue dividends to stockholders. A plan, authored by Senate Finance Committee Chairman Ron Wyden and Senate Banking Chair Sherrod Brown, would apply a 2% excise tax on those purchases.
Brown’s office said the tax could raise more than $100 billion over a decade, but the idea, which is one of the more novel and untested among those under consideration, is causing some uneasiness.
“Any time you get into something that’s not proven in the tax code it gets a bit dangerous,” Senator Jon Tester, a Montana Democrat, said.
Another area Democrats could target is the high pay for chief executive officers. House Democrats in their bill put limits on how much firms can write-off for the compensation of their top executives.
The House provision raises about $16.9 billion over a decade. Even if Democrats were to expand that proposal, it could only generate a small fraction of the revenue needed to cover the corporate-tax gap.
Restrict Current Breaks
One of the most revenue-rich maneuvers would be to dial back the long list of tax preferences already embedded in the tax code, including write-offs for buildings and equipment, deductions for employee stock compensation and tax credits for research and development. Eliminating those tax breaks could easily cover the $540 billion corporate-tax hole, but are so ingrained in the U.S. tax system it would be a political non-starter.
Even paring back some of the benefits creates some problems, said Marc Gerson, a former House tax aide who now chairs the tax department at law firm Miller & Chevalier. Curbing them picks winners and losers based on industry, whereas an across-the-board corporate-rate increase is a more evenly distributed tax hike, he said.
“There’s the potential for uneven results and it’s really challenging,” Gerson said.
For example, restricting the R&D credit would greatly harm manufacturers, but have little effect on financial services, which generally don’t qualify for the break on the same scale.
Democrats should also be cognizant that drafting nuanced tax policy quickly can lead to problems, said Garrett Watson, a senior policy analyst at the Tax Foundation, a right-leaning think tank. Republicans learned this in 2017 as they wrote their tax-cut bill facing a similar deadline crunch -- and later found mistakes once the bill was already law.
“There’s the risk things look good now” but then lawmakers “in a few months realize there’s drafting error or an unintended consequence,” Watson said. “That’s a possibility with new and complicated policies.”
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