Taxes

The Political Power Of Book Minimum Taxes

Robert Goulder of Tax Notes and professor David Kamin of the New York University School of Law discuss the purpose and political importance of book minimum taxes, particularly the global anti-base-erosion agreement.

This transcript has been edited for length and clarity.

Robert Goulder: Hello and welcome to the latest edition of In the Pages. I’m your host, Bob Goulder, contributing editor with Tax Notes.

We have two featured articles this month, and they examine the new book minimum tax, enacted as part of the Inflation Reduction Act of 2022 (P.L. 117-169). The first piece is titled “Why Book Minimum Taxes? Taking Politics Seriously.” The follow-up article is titled “The Ambition and Limits of the Global Minimum Tax.”

The author is David Kamin, a professor of law at New York University. Professor, welcome to In the Pages.

David Kamin: Thank you. It’s great to be here.

Robert Goulder: I love this one passage in your article. You reference the economist, Marty Sullivan, who I’m lucky enough to work with. I’m paraphrasing him here, but he says, “The existence of any AMT is basically a sign that your tax code isn’t working properly.”

I get where he’s coming from, but does that mean we shouldn’t all be cheerleaders for this new AMT that was recently passed?

David Kamin: I think Marty has a really good point: If you got a bunch of tax experts in a room and you asked them to design a tax system from scratch, without any limitations in terms of politics or other goals, including, for instance, different countries having their own sovereignty, the tax experts probably wouldn’t come up with a minimum tax.

They would say, “It’s a backstop. We should design the tax system using a single set of rules that appropriately targets.” In general, that would probably be the conclusion.

There’s some logic to that. There’s some good reason to have just a single set of rules and no backstop. But we don’t live in a world without constraints. We have many constraints, and obviously political constraints are ones that you can push and pull and prod. There are different things that are possible across time.

But once you take seriously the challenge internationally of coordinating 100-plus countries in trying to stop certain types of tax competition with one another and the challenge within Congress of coordinating 50 senators on a pure party-line vote — since only one party right now is willing to raise taxes, and coordinating with them how to do that when it comes to the largest corporations — then minimum taxes can help solve for some of those real political challenges we have.

On the international scene, I think there are actually a few other tools right now that seem to be available that can solve the problem.

There’s probably a greater area of plausible other ways that Congress could raise revenue, but obviously we tried many paths when it came to the Inflation Reduction Act, and this was the tool that could actually manage to coordinate Congress.

In part because it was sparse and allowed them, to some degree, delegate decision making and adopt a book income tax space. That allowed 50 senators to come together with a broad goal of raising taxes on large corporations.

Robert Goulder: In that sense, it makes perfect sense. It’s just very practical. Now, it is possible to design a corporate AMT that does not rely on financial statements.

Let’s get this on the table here. Book income: Why are we doing that? Is that a mistake? I don’t know. It seems like those numbers exist for a different purpose than determining tax liability, and yet we’ve got it with the book minimum tax that the United States just passed. You even have aspects of that in the whole OECD, the two-pillar solution.

You sometimes hear people, like Wall Street people, saying that we’re going to spoil something and ruin the integrity of book income. Do you buy that, sir?

David Kamin: I think this will put pressure on financial accounting, and then a key question is: Is that pressure worth it?

First, when it comes to the pressure on financial accounting, there are a set of different arguments that people go back and forth on, where I don’t think it’s clear the way it resolves.

Some will say financial accounting standards are already under pressure, in the sense that corporate managers have an incentive to overstate or at least manage corporate earnings in order to try to prop up stock prices.

Pressure going the other direction, to manage down potentially corporate earnings to reduce tax liability, could mean that you’ve got two forces that potentially offset and has the potential to improve the financial statements, whether or not they are an accurate representation of the company.

Others say that this would in fact reduce the quality of financial statements and also push companies to move some of their accounting off of their official books towards non-GAAP measures.

I don’t think that debate is resolved. It’s an empirical question. You could see it going different directions. I think the key question is even if you think this would, to some degree, create pressure on the financial regulators and on the companies to manage earnings in ways that would reduce the quality of financial statement income, what’s the payoff?

Definitely on the international arena, there is a very significant payoff for using financial statement income as a way to coordinate across countries. Financial statement income is the basis for the pillar 2 agreement, obviously a form of book minimum tax. Other bases were considered.

But it’s challenging. Just as it is challenging to get countries to agree on any aspect of a tax system, having them define not just a rate, which was obviously agreed to at 15 percent, but the tax base becomes very difficult. Having them write a full set of rules to define that tax base would’ve been very, very challenging.

Negotiators ended up seeing financial statement income, which, while not uniform across the world, is relatively uniform on the scale of these things, as a convenient way of saying, “We’re going to use financial statement income as a base in order to try to get relative uniformity.”

Obviously when it came to Congress and the new minimum tax that was just enacted, it’s a somewhat different dynamic. There, I think, there are obviously, as I said, arguments for and against, but the thing that became decisive was the fact that effectively Congress was able to, in a very spare provision, raise significant amounts of money from some large corporations.

In order to get agreement among 50 senators, the fact that it could be so spare by basically adopting this alternative tax base rather than going provision by provision trying to target specific incentives became the way that Congress could reach agreement.

Robert Goulder: I think that one of the places where your article really shines is where you use a military analogy. You’re talking about base closures. I’ve lived in the Beltway for a long time. There’s nothing that politicians are more obsessive about than not having the military base in their district close. Yet sometimes it has to happen.

You have this analogy likening military base closure commissions to the minimum tax. Can you work through that for the benefit of our audience?

David Kamin: Yeah. I think it’s helpful, especially because one of the criticisms of the book minimum tax as adopted by Congress was the fact that it involved Congress to some degree delegating revenue raising to financial accounting and the ways in which financial accounting differ from tax accounting.

While you could imagine, and maybe you could come up with good reasons why it could have been better for Congress to address it directly, by directly changing the system or adopting the international minimum tax, I think what happened with base closures helps illustrate why Congress, in order to accomplish the basic goal here of revenue raising, uses that as a tool.

Just as you were saying, back in the ’80s and ’90s, Congress had a broad goal of wanting to close military bases in order to save resources and put them toward better use.

But because of the basic dynamic where even though the benefits of that were going to outweigh the costs, where you have really concentrated costs in districts where bases would close and those are able to really organize well once they know, Congress recognized that they themselves could not be the ones to choose which bases to close. They could set up a process, but not be the ones to choose because they would fail to actually choose bases.

That led to Congress delegating to the base realignment enclosure commissions. There were several of them choosing bases to close. They set the broad goal but then set it off for others to decide.

Here when it came to the book minimum tax, Congress had the broad goal of raising some significant revenue from large corporations. Congress was unable, given the dynamic of a 50-50 Senate.

The Republican Party right now is not willing to agree on tax increases, so you need total unanimity in the Democratic Party. They were not able to agree on specific measures and so took on a tool that allowed them, to some degree, to delegate to financial regulators and Treasury exactly how the revenue would be raised.

That helps accomplish the broad goal, which is still worth doing when there’s no good alternative, but has Congress acting in that way to help coordinate and get the job done.

Robert Goulder: Now before we leave your first paper, I did want to ask you about the title. This really goes to the central thesis of your piece, and it’s about taking politics seriously.

A lot of people, myself included, get very cynical when we hear that political influences are even partially driving a project forward. For me, it seems to lower the expectation that you’re going to have a good or efficient or suitable result and think, “Oh, politics are involved; the outcome’s going to be lousy.”

You’re making a very subtle point here and it’s worth thinking about. You’re saying, “Hold on, let’s not be so dismissive. Politics might be getting us to the right point.”

Can you explain this central thesis about why we need to take the politics seriously?

David Kamin: Sure. I should say, off the bat, some of my article is informed by my experience. I’ve been a professor. I was also in government as a number of these elements were negotiated, working at the White House. So I recognize that then leads me to naturally try to take some of these politics more seriously.

The thing I want to be clear on is I don’t think taking politics seriously means that anything Congress produces, or the White House produces, or a multilateral negotiation produces, you say, “Well that’s what’s possible, so it is what it is.”

I don’t think that’s the right approach to looking at tax policy or policy generally. But I do think it’s important to take seriously the structural and political forces, the interest group politics that affect Congress, and the politics and political institutions that define multilateral negotiations.

And then to ask, within that context, what are the best tools we have that can solve some of the real challenges when it comes to interest group politics and multilateral negotiation? What leaves us in a better place than we were before and which takes those barriers seriously?

Just to pull it back to the global negotiation, where obviously a minimum tax has been negotiated: We’ll see if it ends up getting implemented. I don’t think anyone would take seriously the idea of having a single tax system around the world.

Though a single tax system around the world with a single set of rules and a single rate would definitely solve a whole bunch of tax problems. But everyone would say, “That’s silly. We of course have many different countries that are going to have some of their own rules and some of their own preferences about the ways they structure their system.”

It then becomes a question: How do you manage to coordinate to accomplish a certain goal — in this case, reducing profit shifting, taxing the very largest profits, while giving countries the political flexibility they desire when it comes to their overall tax system?

It’s solving that political problem, and it means taking seriously those political challenges in these institutions as you’re coming up with your tools.

Robert Goulder: That is an excellent point, especially for those of us inclined to be overly cynical.

Now as for the second paper, “The Ambition and Limits of the Global Minimum Tax,” you suggest that some people have been misconstruing this key element of the pillar 2 proposal about the race to the bottom.

Is it going to stamp out all forms of tax competition? Are we just going to legislate or regulate tax competition away?

You’re basically saying, “No, that’s not really what’s pushing this and that’s not the outcome that they envision. All forms of tax competition are not going to go away. It’s just going to shift a little.”

Can you explain that?

David Kamin: Sure. I think that frequently — not always, but frequently — what the global agreement is trying to do gets misconstrued both by advocates — and I will say, in some cases, I would not be surprised if at some point I gave a set of talking points, which I think probably now does not correctly convey what the agreement does — and also by critics.

Specifically, the agreement really is tightly focused on establishing that minimum rate on the very largest returns to capital and on the very largest profits. Relatedly, restricting profit shifting, which basically shows up as a really large return to capital on very little economic activity in some low-tax country.

The agreement does arrest that, which is what could be a competition for the reporting of those large profits or, alternatively, competition for the location of activity associated with those really, really big profits.

What it doesn’t do, though, is do very much to otherwise restrict countries from engaging in various forms of fiscal competition when it comes to business activity. At various points, advocates may have suggested it would end such races. Critics, including those in Congress and others, have said that it really restricts Congress’s ability to provide incentives that Congress may want to provide for business activity.

It doesn’t. Just to go through a few examples … obviously Congress just enacted the CHIPS Act, providing a set of very significant incentives for chip manufacturing in the United States and engaging in somewhat of a fiscal competition among countries for the location of chip manufacturing.

The same is true when it comes to green tax credits, where Congress just enacted a set of green tax credits. Those incentives would face very little restriction under the global agreement of countries. Other countries could adopt similar incentives. Very little restriction.

Given the way the rules are worked and what is included as a tax cut, incentives like that, accelerated appreciation and so on, means that what ends up getting left is just the very largest returns to capital and then profit shifting. That is a worthy goal.

I think it’s worth asking whether we should in some way try to stop some of those other forms of fiscal competition. But right now it is proving hard enough to get countries to agree to stop competitions when it comes to the very largest profits and profit shifting, and that’s where the agreement ends up focusing.

Robert Goulder: Final question for you, professor. I wanted to get your general thoughts on the different approaches taken by the recent U.S. legislation and the path that the OECD has outlined with their GLOBE proposals. Similar but not identical.

In the United States we have GILTI, BEAT, and FDII, and now we have this book minimum tax, and the OECD has the GLOBE proposals.

Do either of those jump out at you as the more optimal approach to cracking this nut?

David Kamin: Yeah, I mean, in a number of the ways that the United States has taken unilateral action in this area, you see some of the makings of what could end up being a global agreement, where you could actually get action around the world to try to target those large profits and profit shifting.

Obviously GILTI was part of the 2017 Tax Cuts and Jobs Act. It has the beginnings of the makings of the kind of regime that you begin seeing through the globe minimum tax. Obviously it is a form of minimum tax.

Now it’s got some really significant flaws in it. The rate is too low. It also importantly does not go country by country, which helps reduce a set of really bad incentives that can get created when you don’t have a country-by-country system.

There was also obviously the BEAT, which was at least attempting to target foreign base multinationals and their profit shifting and stripping out of the United States. Obviously there are ways in which the BEAT could be reformed so that it looks something like an enforcement mechanism against other countries that aren’t taking action like the United States. Something like the UTPR negotiated through the GLOBE.

The book minimum tax in itself also has some of the echoes of what was negotiated on the global stage. It’s obviously still quite different. It does not go country by country. It has a somewhat different tax base even as it uses financial accounting and so on.

I do think that in the end if these tools can be shifted to be consistent with what was negotiated on the global side, and obviously get other countries to move along with that, still remains the best path to try to really target those very large profits, profit shifting, which has been a goal of U.S. policymakers.

It is obviously now at this point a rocky path, given the fact the U.S. Congress didn’t act in the Inflation Reduction Act, given the fact that Europe remains still not having acted, though they continue discussing.

But I think that what was negotiated still remains. It sets out the basic system and principles that are the best path forward for trying to accomplish those goals.

Robert Goulder: There you have it. Our featured articles of the month are “Why Book Minimum Taxes? Taking Politics Seriously” and “The Ambition and Limits of the Global Minimum Tax.” The author is David Kamin, professor of law at NYU.

Professor, thank you for joining us.

David Kamin: Thanks for having me.

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