Planet Money Indicator: NPR

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SYLVIE DOUGLIS, BYLINE: NPR.

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DARIAN WOODS, HOST:

This is THE PLANET MONEY INDICATOR. I am Darian Woods.

PADDY HIRSCH, HOST:

And I’m Paddy Hirsch. The Inflation Reduction Act, currently squirming through Congress, has something for everyone.

WOODS: Well, almost everyone. So this bill is supposed to fight climate change, reduce the federal deficit, reduce drug prices for Medicare beneficiaries. And it’s intended to extend expanded health insurance subsidies under the Affordable Care Act.

HIRSCH: Win, win, win, win, win.

WOODS: That’s a lot of wins.

HIRSCH: But someone’s going to have to pay for it.

WOOD: Yeah.

HIRSCH: And it turns out they could be big companies. American companies with an average income of $1,000,000,000 a year may well be hurt by a new tax designed to curb all the tax evasion we hear about in American companies.

WOODS: So the idea is that this new so-called book tax or alternative minimum corporate tax or CAMT for short – I don’t know. He has many names. And it will bring in up to $313 billion over 10 years.

HIRSCH: Well, that was the original hope. They had to bring that number down to $222 billion. Why? Because politics got involved.

WOODS: It still does.

HIRSCH: We’ll explain everything to you after the break.

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HIRSCH: American companies are heavily criticized for not paying as much tax as it sometimes seems they should.

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UNIDENTIFIED REPORTER #1: Claims that 60 of the largest corporations in our country haven’t paid a dime in federal income tax.

UNIDENTIFIED REPORTER #2: …And in some cases they get refunds. How is it going ?

WOODS: Thornton Matheson is a senior fellow at the Urban-Brookings Tax Policy Center.

THORNTON MATHESON: Companies are extremely resourceful in reducing their tax burden. I think most of them take the form of avoidance rather than outright evasion. But some of the laws they use to minimize their tax burden were deliberately enacted by policy makers.

WOODS: One of the most famous examples of companies taking advantage of these laws might be Amazon. In 2018, the company reported $11 billion in income to its shareholders, but paid no federal income tax to the IRS. And it was all completely legal. And of course, people were crazy. Like, how could this be?

HIRSCH: Well, it turns out that every year American companies actually produce two revenue reports. The first is their report that goes to shareholders. This is called financial income. The second is the report that goes to the IRS, and we’ll call that tax income because that’s the profit they can be taxed on. And guess what?

MATHESON: Tax revenue and financial revenue are calculated very differently.

WOODS: So financial income, like shareholder income, is calculated using rules agreed upon by an independent organization called the Financial Accounting Standards Board. These rules do not change much or very often.

HIRSCH: The rules governing tax revenues for the IRS, on the other hand, are laws made by Congress, which means, of course, that they change all the time and drastically. This is because the government, A, likes to use the tax code to encourage certain types of behavior and, B, keeps changing its mind about things.

WOOD: That’s true. And the reason companies have these two reports is because shareholders don’t really care what kind of tax breaks and credits the government gives, because it can change so much from year to year. You know, it’s hard to compare.

HIRSCH: Yes. What really matters to shareholders is the performance of the company on a really basic level – like, how much money it makes versus how much it costs its business to operate without any government assistance – before the tax breaks and credits are not taken into account.

WOODS: Tax breaks and credits can and often do save companies huge amounts of money. They’re often designed to promote certain types of businesses, like green technology or semiconductor manufacturing, like in the CHIPS Act that President Biden signed this week. Politicians and economists call them incentives, but there is another word for them.

HIRSCH: What do you think of the term loopholes?

MATHESON: You know, loopholes are laws. Loopholes are laws that have been enacted by Congress. So, you know, they’re just part of the tax code.

HIRSCH: And adopted for a reason.

MATHESON: Most of them, yes. Sometimes the reason was lobbying, not so much the general public good.

HIRSCH: Now Thornton is laughing here, but a lot of people think it’s not a laughing matter at all, including much of the public and several recent presidents.

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BARACK OBAMA: We have so many loopholes that it turns out you have a whole bunch of companies that don’t pay taxes or barely pay taxes.

PRESIDENT JOE BIDEN: That’s not correct. We will reform corporate tax so that they pay their fair share and help pay for public investments that will also benefit their businesses.

WOODS: Democratic politicians would like to remove many of these incentives and close many of these so-called loopholes. But that would mean changing the law anyway.

HIRSCH: That’s a lot of laws.

WOOD: Yeah. Thornton says it’s really, really hard to do.

MATHESON: You clash with many entrenched interests. So I guess Congress found it easier to overlay this alternative minimum tax rather than do some kind of top-to-bottom cleanup of the corporate tax base.

HIRSCH: The alternative minimum tax she is referring to is the new 15% levy included in the Inflation Reduction Act. Now, right now, companies are just getting a 21% tax on the profits they report to the IRS. It’s in their tax revenue report, which includes all of these tax breaks.

WOODS: This new tax will be an additional levy on the financial income they report to shareholders, which does not include tax benefits. From now on, the IRS will have the choice between two figures: 21% of tax income or 15% of financial income. And they will just pick the bigger number.

HIRSCH: They are demons. And this is supposed to close many so-called loopholes in the tax code and potentially allow the government to collect far more taxes from corporations. Thornton says it even helps offset what’s called profit shifting, which is when companies book their profits overseas so they don’t have to pay taxes here.

MATHESON: It’s a global income tax. So not only is all foreign income lumped together, but, you know, domestic and foreign income. It is therefore possible that US multinationals that do not pay much will then face somewhat higher tax rates on their foreign income, which could potentially deter them from transferring their income abroad.

HIRSCH: And that’s great, isn’t it? – you know, more money, hopefully less trouble.

WOODS: Yeah, that’s hope.

HIRSCH: When it proposed this idea, the White House said it could bring in up to $313 billion more in corporate taxes over 10 years.

WOODS: What he didn’t say is that it could already dilute the effectiveness of some of the incentives in the tax law. Take for example the Solar Investment Tax Credit, which allows a company to deduct from its taxes 26% of the cost of any solar investment. This has reduced the cost of purchasing solar panels and the like, and has encouraged businesses to purchase more of them.

HIRSCH: Of course, this deduction does not appear in a company’s profit report, which means that the new 15% tax on financial income could erode these savings. And the end result could be that companies won’t want to buy solar panels anymore.

WOODS: As you can imagine, companies pushed back against this plan very strongly. They were particularly keen to keep the credits associated with what is called accelerated depreciation.

HIRSCH: An explanation, please.

WOOD: Alright. So, thanks to President Trump, companies are allowed to tell the IRS that some of their stuff they buy is worn out much sooner than it really is — like, right away. And this allows them to record a loss on their taxes. You know, it’s quite different from the old way.

HIRSCH: That’s a great tip.

MATHESON: This is one of the main reasons why some corporations pay very little tax under the current system.

HIRSCH: The idea around that, of course, is to reduce the tax burdens of these companies so that they can reinvest the money they save by buying more equipment or vehicles or whatever they need. to grow their business.

WOODS: And that’s where politics comes in.

HIRSCH: Ah, politics.

WOODS: You know, we mentioned politics in act one, and now we’re in act three, aka the power of lobbying.

HIRSCH: Ah, the L-word.

WOOD: That’s true. Businesses want to keep their tax breaks and they want to keep their credits because it turns out that in the business world, accelerated depreciation is such a big break, so important to businesses.

HIRSCH: Possibly the biggest of all station wagons, actually.

WOODS: That’s right. And that would explain why they convinced Senator Kyrsten Sinema of Arizona to make an exception for him in the new tax.

HIRSCH: Which means that this 15% alternative minimum corporate tax is actually not what it appears to be. It is not a complete solution to corporate tax loopholes, as it includes one of the most important of all.

WOOD: That’s true.

HIRSCH: Still, $22.2 billion a year for the next 10 years – that’s not an insignificant amount of money. But let’s not forget that’s nearly $100 billion less than what Democrats were counting on.

WOODS: Don’t say we didn’t warn you.

HIRSCH: It’s coming.

WOODS: This episode of THE INDICATOR was produced by Corey Bridges and senior producer Viet Le with engineering from Josh Newell. It has been verified by Kathryn Yang. The show was edited by Kate Concannon and is an NPR production.

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