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This week in Bidenomics: Chasing corporate profits

President Biden needs a lot of money for his infrastructure and social welfare plans. Big companies have a lot of money. So the race is on for Uncle Sam to get more of it.

The main element of Biden’s “made in America” tax plan is a hike in the corporate tax rate, from 21% to 28%. But Biden actually backed away from another tax hike that was part of his platform as a candidate. Biden ran by calling for a 15% minimum tax on companies earning $100 million or more that pay less than 15% by using tax breaks to shrink their tax bills. But Biden’s formal plan raises the income threshold to $2 billion, essentially applying the tax only to the biggest U.S. companies.

That’s certainly a relief for many companies that would have been subject to a minimum tax under the old plan but aren’t under the new one. I used data from S&P Capital IQ to figure out how many companies would get a reprieve under Biden’s milder plan. Among the companies in the S&P 500 index, 411 earned more than $100 million during the last 12 months of reported earnings. Only 124 companies earned more than $2 billion. So 287 companies that would have faced a minimum tax under Candidate Biden’s plan do not under President Biden’s plan.

Which companies would? Some are obvious, such as tech giants Apple, Microsoft and Facebook, banks such as JP Morgan and Bank of America, and giant retailers such as Amazon, Walmart and Home Depot. But there are other names you might not guess, such as railroad Norfolk Southern, manufacturer Illinois Tool Works and retailer Dollar General. Here’s a list of all companies that hit the threshold for $2 billion in net income:

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There may not be a solid economic rationale for drawing an arbitrary profit threshold and imposing a new tax on companies above it, but not below it. There’s a political rationale, however. The most profitable companies are thriving, by definition. It’s an easy populist argument to say they should share a little more of the wealth. These companies have ample resources to defend themselves, so it’s not like ruthless federal agents are abusing a mom-and-pop operation.

They also have a ton of money. The annual profits of those 124 companies total $898 billion. If they all paid 15% of their net income in tax, that would be $134 billion, which is 63% of all corporate income tax the government collected in 2020. That would be coming from a fraction of 1% of the 33 million businesses in the country.

It’s not nearly as simple as that, of course, which is why Biden and his fellow Democrats are searching for new ways to wring more revenue from businesses. Biden and Treasury Secretary Janet Yellen are correct that business taxes have shrunk dramatically as a portion of federal revenue, while tax from regular income has modestly increased. The catch is that businesses—especially multinationals—have many ways of reducing their tax bills, while most ordinary taxpayers don’t.

The $898 billion in profit those 124 companies earned, for instance, doesn’t all come from the United States. And some of the profit that does come from U.S. sales doesn’t stay in the United States. Biden and Yellen are proposing new ways of reducing corporate profit-shifting from country to country, but most advanced nations would have to agree to the same rules, which seems unlikely.

WASHINGTON, DC - MARCH 05: Treasury Secretary Janet Yellen listens during a meeting with President Joe Biden in the Roosevelt Room of the White House,  March 5, 2021 in Washington, DC. Yellen has recently commented that bitcoin is an “extremely inefficient” way to conduct monetary transactions. (Photo by Al Drago-Pool/Getty Images)
WASHINGTON, DC - MARCH 05: Treasury Secretary Janet Yellen listens during a meeting with President Joe Biden in the Roosevelt Room of the White House, March 5, 2021 in Washington, DC. Yellen has recently commented that bitcoin is an “extremely inefficient” way to conduct monetary transactions. (Photo by Al Drago-Pool/Getty Images)

Reaching the $2 billion threshold

Perusing corporate profitability suggests other problems with a 15% minimum tax for big companies. There are 10 companies whose profits were 10% above the $2 billion threshold, or less (see page 8 and 9 of the graphic above). Companies can reduce profitability in many ways, and any company would be rational to shave the bottom line if it meant falling below the threshold for a surtax. If Biden’s minimum tax went into effect, we’d almost certainly end up with fewer companies above the $2 billion threshold, or whatever the threshold turned out to be. Some companies might even split themselves into smaller entities, if it meant sizable tax savings that accrued to shareholders.

Since the tax applies to profits rather than revenue, there are some very large companies that wouldn’t have to pay it. Missing from the list of companies with $2 billion-plus in profit, for instance, are AmerisourceBergen, McKesson, Exxon Mobil, AT&T and Ford. All are among the 25 largest U.S. companies, by revenue. It’s logical that money-losing companies should be excused from paying income tax, but basing taxes on book profits makes you wonder how companies might game their reporting to lower their tax burdens.

Signage is pictured at a Walmart store Tuesday, Aug. 4, 2020, in Oklahoma City. (AP Photo/Sue Ogrocki)
Signage is pictured at a Walmart store Tuesday, Aug. 4, 2020, in Oklahoma City. (AP Photo/Sue Ogrocki)

Supporters of a minimum corporate tax point out that publicly owned companies often tell very different stories in the financial reports they publish for shareholders and the filings they make to the IRS. We don’t know precisely, because tax filings are confidential. But different rules govern each type of filing. Public reports largely measure operational performance, and CEOs have an incentive to maximize the profit they claim, which typically boosts the stock price. The incentive is completely different for tax filings, where the goal is to minimize taxable income.

If companies began to owe taxes based on the “book income” reported to shareholders, it would create a new incentive to minimize book income, and some new bottom-line metric of operational performance might emerge. Corporate America excels at financial innovation, especially the devious kind, and it’s not hard to imagine howls of outrage as CEOs find yet another way to evade the tax man.

Congress might not pass Biden’s minimum corporate tax. It adds complexity by counteracting other tax breaks meant to incentivize investment and innovation. It singles out companies based on their success, and it might still leave loopholes for tax lawyer to exploit. If it ever does pass, expect a lot of companies to suddenly become less profitable.

Rick Newman is the author of four books, including "Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips, and click here to get Rick’s stories by email.

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