Minimum Taxes on Business Income: Background and Policy Options

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Minimum Taxes on Business Income:
~~August 25~~November 16, 2021 , 2021
Background and Policy Options
Molly F. Sherlock
Some large corporations pay little or no U.S. tax as they report significant profits to shareholders. Some large corporations pay little or no U.S. tax as they report significant profits to shareholders.
Specialist in Public Finance Specialist in Public Finance
In an effort to curb tax avoidance among the largest corporations, the Biden Administration has In an effort to curb tax avoidance among the largest corporations, the Biden Administration has

proposed a 15% minimum tax on worldwide book income for corporations with pretax net proposed a 15% minimum tax on worldwide book income for corporations with pretax net
Jane G. Gravelle
income of more than $2 billion. Multilateral organizations have also proposed a worldwide income of more than $2 billion. Multilateral organizations have also proposed a worldwide
Senior Specialist in Senior Specialist in
minimum minimum tax, also based on book income. There are several proposals in the 117th Congress to tax, also based on book income. There are several proposals in the 117th Congress to
Economic Policy Economic Policy
either impose a minimum tax or modify existing minimum either impose a minimum tax or modify existing minimum tax laws. tax laws.

The November 3, 2021, House Rules Committee Print 117-18 modification to the Build Back Better Act (H.R. 5376) proposes a 15% minimum tax on corporations with financial statement income of more than $1 billion. One reason some entities pay little in corporate income tax is the deliberate design of the U.S. tax One reason some entities pay little in corporate income tax is the deliberate design of the U.S. tax

system, which includes specific provisions that reduce corporate taxes, referred to as system, which includes specific provisions that reduce corporate taxes, referred to as tax
expenditures. These provisions produce a substantial revenue loss relative to the yield of the corporate tax. U.S. corporate . These provisions produce a substantial revenue loss relative to the yield of the corporate tax. U.S. corporate
taxes relative to worldwide income may also be low because some income is earned abroad, and thus subject to foreign taxes. taxes relative to worldwide income may also be low because some income is earned abroad, and thus subject to foreign taxes.
Various measures are in place to prevent double taxation of that income, including a credit for foreign taxes paid. Income for Various measures are in place to prevent double taxation of that income, including a credit for foreign taxes paid. Income for
tax purposes as compared to income reported to shareholders (i.e., book income) can also differ due to limits on the tax purposes as compared to income reported to shareholders (i.e., book income) can also differ due to limits on the
deduction of net operating losses.deduction of net operating losses.
Corporate income can be measured in different ways. Corporate income can be measured in different ways. Economic income is the sum of dividends and distributions paid and is the sum of dividends and distributions paid and
changes in the market value of a firmchanges in the market value of a firm adjusted for inflation. Corporate profits as measured by the National Income and adjusted for inflation. Corporate profits as measured by the National Income and
Product Accounts (NIPA) are close to economic income but exclude all or a significant part of foreignProduct Accounts (NIPA) are close to economic income but exclude all or a significant part of foreign -source income and do -source income and do
not include capital gains. The NIPA data also include income from entities that do not pay the corporate income tax. not include capital gains. The NIPA data also include income from entities that do not pay the corporate income tax. Taxable
income is income subject to the corporate income tax as determined by the tax code. Broadly, taxable income is receipts is income subject to the corporate income tax as determined by the tax code. Broadly, taxable income is receipts
minus deductions with additional adjustments. Taxable income (also referred to as income subject to tax) cannot fall below minus deductions with additional adjustments. Taxable income (also referred to as income subject to tax) cannot fall below
zero. zero. Book income (also referred to as (also referred to as financial income) is income reported in financial statements, which includes income ) is income reported in financial statements, which includes income
and deductions guided by accounting standards. Numerous factors affect differences between tax and book income, including and deductions guided by accounting standards. Numerous factors affect differences between tax and book income, including
the point in the business cycle at which income is measured and the different treatment of many aspects of income and the point in the business cycle at which income is measured and the different treatment of many aspects of income and
deductions (e.g., foreign-source income, tax-exempt interest, and depreciation).deductions (e.g., foreign-source income, tax-exempt interest, and depreciation).
Corporate profits measured in NIPA are generally higher than income subject to tax. For large corporations, the differences Corporate profits measured in NIPA are generally higher than income subject to tax. For large corporations, the differences
between book income adjusted for tax consolidation rules and tax income (income before net operating losses and special between book income adjusted for tax consolidation rules and tax income (income before net operating losses and special
deductions, or exclusions for nontaxed entities), referred to as deductions, or exclusions for nontaxed entities), referred to as book-tax differences, vary with the business cycle. Although , vary with the business cycle. Although
tax income is generally smaller, financial income can be lower during downturns. Book income has been greater than tax tax income is generally smaller, financial income can be lower during downturns. Book income has been greater than tax
income in recent years. income in recent years.
Over time, corporate profits based on financial measures (adjusted for different consolidation rules about which parts of Over time, corporate profits based on financial measures (adjusted for different consolidation rules about which parts of
related firms are included) and tax income before net operating losses track closely, although relationships vary over the related firms are included) and tax income before net operating losses track closely, although relationships vary over the
business cycle. There has, however, been a general downward trend in the share of corporate income subject to tax.business cycle. There has, however, been a general downward trend in the share of corporate income subject to tax.
Effective tax rates measured against a base that is similar to economic income (NIPA) are considerably lower than the Effective tax rates measured against a base that is similar to economic income (NIPA) are considerably lower than the
statutory rate, even when confined to domestic income tax on domestic income. Taxes are also lower on financial income statutory rate, even when confined to domestic income tax on domestic income. Taxes are also lower on financial income
based on aggregate data provided by the Internal Revenue Service and for studies of certain subsets of large corporations. based on aggregate data provided by the Internal Revenue Service and for studies of certain subsets of large corporations.
However, some data on worldwide tax rates show higher rates relative to the statutory rate for large corporations after the However, some data on worldwide tax rates show higher rates relative to the statutory rate for large corporations after the
2017 tax cut.2017 tax cut.
In the past, minimum taxes were adopted by policymakers seeking to ensure that corporations paid at least some amount in In the past, minimum taxes were adopted by policymakers seeking to ensure that corporations paid at least some amount in
corporate income tax. The corporate alternative minimum tax (AMT), prior to its repeal in 2017, created a modified tax base corporate income tax. The corporate alternative minimum tax (AMT), prior to its repeal in 2017, created a modified tax base
by adding preferences back to the regular income tax base. A portion of the AMT relied on book income in the late 1980s. A by adding preferences back to the regular income tax base. A portion of the AMT relied on book income in the late 1980s. A
future minimum tax might be considered for a similar purpose, and to address ongoing concerns that some have raised about future minimum tax might be considered for a similar purpose, and to address ongoing concerns that some have raised about
tax avoidance. The Biden Administration has proposed a 15% minimumtax avoidance. The Biden Administration has proposed a 15% minimum tax on financial income of large firms. Recently, the tax on financial income of large firms. Recently, the
United States has enacted minimum taxes that apply to multinational firms in the international context. Current minimum United States has enacted minimum taxes that apply to multinational firms in the international context. Current minimum
taxes include the tax on foreign-source intangible income (the tax on global intangible low-taxed income, or GILTI) and the taxes include the tax on foreign-source intangible income (the tax on global intangible low-taxed income, or GILTI) and the
alternative minimum tax, which adds back certain payments to related foreign corporations (the base erosion and anti-abuse alternative minimum tax, which adds back certain payments to related foreign corporations (the base erosion and anti-abuse
Congressional Research Service Minimum Taxes on Business Income: Background and Policy Options tax, or BEAT). Multinational proposals for a global minimum tax would base the tax on financial income, aimed at tax, or BEAT). Multinational proposals for a global minimum tax would base the tax on financial income, aimed at
addressing base erosion (Global Anti-Base Erosion, or GloBE). A key concern about minimum taxesaddressing base erosion (Global Anti-Base Erosion, or GloBE). A key concern about minimum taxes , some say, is that they , some say, is that they
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~~Minimum Taxes on Business Income: Background and Policy Options~~

may reduce the effect of intended incentives in the tax code. Current minimum tax proposals would rely on financial income, may reduce the effect of intended incentives in the tax code. Current minimum tax proposals would rely on financial income,
raising concerns among some observers that such taxes could encourage the manipulation of book profits to avoid taxes. raising concerns among some observers that such taxes could encourage the manipulation of book profits to avoid taxes.
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Minimum Taxes on Business Income: Background and Policy Options

ome large corporations that report profits to shareholders pay little to no federal corporate ome 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 income tax.1 For some, this raises questions of fairness. Is a tax system that ~~al ows~~allows large large
S corporations with substantial assets, revenues, and financial profits to have a zero tax S corporations with substantial assets, revenues, and financial profits to have a zero tax
liability liability fair? Large, profitable corporations that pay little to no federal income tax are fair? Large, profitable corporations that pay little to no federal income tax are ~~general y~~generally
believed to be complying with federal tax law, which includes numerous provisions and believed to be complying with federal tax law, which includes numerous provisions and
preferences that result, in some cases, in zero tax liability.preferences that result, in some cases, in zero tax liability.
Minimum taxes are a policy tool that could help ensure Minimum taxes are a policy tool that could help ensure al all taxpayers contribute a certain amount taxpayers contribute a certain amount
of tax revenue. Minimum taxes could be used in a range of policy contexts to address a variety of 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 limitpolicy concerns. For example, minimum taxes are one policy option to limit multinational firms’ multinational firms’
abilityability to avoid taxes by shifting profits into low-tax jurisdictions. For both multinational and 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 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 liabilitysystem, ensuring that firms are not able to reduce tax liability to zero by claiming tax benefits or to zero by claiming tax benefits or
through tax planning. If a comprehensive reform of existing corporate tax law is not feasible, a 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 more targeted minimum tax might be an option for policymakers seeking to make sure al all firms firms
pay some amount in tax.2pay some amount in tax.2
While minimum taxes might address some policy concerns, they could create others. One concern While minimum taxes might address some policy concerns, they could create others. One concern
that has been raised regarding minimum taxes that has been raised regarding minimum taxes ~~general y~~generally is that they could offset the tax system’s 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 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 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 incentives could weaken the effectiveness of such policies and negatively affect corporate
investment.3investment.3
Minimum taxes of various forms appear in current policy debates. The Biden Administration has 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 proposed a 15% minimum tax on worldwide book (financial statement) income for corporations
with income above $2 with income above $2 ~~bil ion.4~~ 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 Senator Elizabeth Warren has proposed a 7% minimum tax on on
large corporations with book income over $100 large corporations with book income over $100 ~~mil ion~~million (H.R. 2680).5 The Group of Seven countries (G7) have .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 also agreed to a tax policy framework that would establish a 15% global minimum tax on a
country-by-country basis.6 As of country-by-country basis.6 As of ~~August 12~~November 4, 2021, this framework had been ~~, 2021, this framework had been agreed to by 133~~
~~countries and subnational jurisdictions.7 While the 2017 tax revision (commonly referred to as the~~

1 Media reports featuring profitable corporations believed to pay zero (or close to zero) in federal corporate taxes are 1 Media reports featuring profitable corporations believed to pay zero (or close to zero) in federal corporate taxes are
common. See, for example, Patricia Cohen, “No Federal common. See, for example, Patricia Cohen, “No Federal ~~T axes~~Taxes for Dozens of Big, for Dozens of Big, Profitable Companies,” Profitable Companies,” New York
~~Tim es~~Times, April 2, 2021, https://www.nytimes.com/2021/04/02/business/economy/zero-corporate-tax.html. , April 2, 2021, https://www.nytimes.com/2021/04/02/business/economy/zero-corporate-tax.html.
2 For a further discussion 2 For a further discussion of potential economic efficiency and equity implications of minimum taxes, see Aqibof potential economic efficiency and equity implications of minimum taxes, see Aqib Aslam Aslam
and Maria Coelho, and Maria Coelho, A Firm Lower Bound: Characteristics ~~and Im pact of Corporate Minim um Taxation~~ and Impact of Corporate Minimum Taxation, IMF Working , IMF Working
Paper, WP/21/161, June 2021, https://www.imf.org/en/Publications/WP/Issues/2021/06/08/A-Firm-Lower-Bound-Paper, WP/21/161, June 2021, https://www.imf.org/en/Publications/WP/Issues/2021/06/08/A-Firm-Lower-Bound-
Characteristics-and-ImpactCharacteristics-and-Impact -of-Corporate-Minimum-Taxation-49886. -of-Corporate-Minimum-Taxation-49886.
3 Testimony~~3 T estimony~~ of Michelle Hanlon, in U.S. Congress, Senate Finance Committee, of Michelle Hanlon, in U.S. Congress, Senate Finance Committee, Made in America: Effect of the U.S.
Tax Code on ~~Dom estic~~Domestic Manufacturing, hearings, 117th Cong., 1st sess.,, hearings, 117th Cong., 1st sess., March 16, 2021, at March 16, 2021, at
https://www.finance.senate.gov/imo/media/doc/Michelle%20Hanlon%https://www.finance.senate.gov/imo/media/doc/Michelle%20Hanlon%~~20T estimony~~20Testimony.pdf. .pdf.
4 See 4 See Department of the TreasuryDepartment of the Treasury, General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals, ,
May 2021, at https://home.treasury.gov/policy-issues/tax-policy/revenue-proposals, for a discussionMay 2021, at https://home.treasury.gov/policy-issues/tax-policy/revenue-proposals, for a discussion of the budget of the budget
proposals. proposals.
5 See5 See Sen. Elizabeth Warren, “Senators Warren and King, Representative Beyer Announce Legislation to Prevent Sen. Elizabeth Warren, “Senators Warren and King, Representative Beyer Announce Legislation to Prevent ~~T he~~The
BiggestBiggest and Most Profitable Corporations From Paying Nothing in Federal and Most Profitable Corporations From Paying Nothing in Federal ~~T axes~~Taxes,” press release, August,” press release, August 9, 2021, at 9, 2021, at
https://www.warren.senate.gov/newsroom/press-releases/senators-warren-and-king-representative-beyer-announce-https://www.warren.senate.gov/newsroom/press-releases/senators-warren-and-king-representative-beyer-announce-
legislation-to-prevent-the-biggest-and-most-profitable-corporations-from-paying-nothing-in-federal-taxes. legislation-to-prevent-the-biggest-and-most-profitable-corporations-from-paying-nothing-in-federal-taxes.
6 Department of the Treasury, “G7 Finance Ministers & Central Bank Governors Communiqué,” 6 Department of the Treasury, “G7 Finance Ministers & Central Bank Governors Communiqué,” press release, Junepress release, June 5, 5,
2021, https://home.treasury.gov/news/press-releases/jy0215. 2021, https://home.treasury.gov/news/press-releases/jy0215.
~~7 Organisation for Economic Co-operation and Development (OECD), “ 130 Countries and Jurisdictions Join Bold New~~
~~Framework for International T ax Reform,” press release, July 1, 2021, https://www.oecd.org/newsroom/130-countries-~~
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Minimum Taxes on Business Income: Background and Policy Options

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. “Tax Cuts and Jobs Act” [TCJA: P.L. ~~119-57~~115-97]) repealed the corporate alternative minimum tax ]) repealed the corporate alternative minimum tax
(AMT), it created two new minimum taxes. The base and anti-abuse tax (BEAT) is an alternative (AMT), it created two new minimum taxes. The base and anti-abuse tax (BEAT) is an alternative
minimum tax that applies to large, multinationalminimum tax that applies to large, multinational corporations making substantial payments to corporations making substantial payments to
foreign affiliates. The 10.5% minimum tax on global intangible low tax income (GILTI) was 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 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.whether these relatively new tax provisions should be modified.
This report provides an overview of minimum taxes on business income to help inform policy 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 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 tax system as it applies to U.S. corporations. A key ~~chal enge~~challenge in designing a tax system is defining in designing a tax system is defining
income. The next section discusses income concepts, followed by estimates of effective tax rates 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 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 that have previously been a part of the U.S. tax code, as ~~wel~~ well as current policy options and as current policy options and
proposals. proposals.
Taxing Business Income
The Corporate Income Tax
The corporate income tax is largely designed as a tax on corporate profits (also known as 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 ). 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 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); 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 general supplies and materials; advertising; and interest payments. The corporate income tax also
~~al ows~~allows for a number of other special deductions, credits, and tax preferences. These provisions are for a number of other special deductions, credits, and tax preferences. These provisions are
often intended to promote specific policy goals. often intended to promote specific policy goals.
A corporation’s tax liability can be calculated as: A corporation’s tax liability can be calculated as:
Taxes = [Taxable Income × Tax Rate] – Tax Credits. Taxes = [Taxable Income × Tax Rate] – Tax Credits.
The corporate tax rate is currently a flat 21%. This rate is applied to taxable income, as 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.determined for tax purposes.8 Tax credits provide a dollar-for-dollar reduction in tax liability. The The
corporate tax system becomes increasingly complex as the details of specific provisions are 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 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. (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 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 viewed as a consumption tax for business income.9 With a cash-flow tax, businesses would
expense, or immediately deduct, expense, or immediately deduct, al all capital investments. Interest deductions would be capital investments. Interest deductions would be
~~disal owed~~disallowed.10 Certain changes enacted as part of the 2017 tax revision, including bonus .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~~

~~and-jurisdictions-join-bold-new-framework-for-international-tax-reform.htm. The list with the 133 joining countries~~
~~and jurisdictions, as of August 12, 2021, is available at~~ 7 Organisation for Economic Co-operation and Development, “Members of the OECD/G20 Inclusive Framework on BEPS joining the Statement on a Two–Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy as of 4 November 2021,” https://www.oecd.org/tax/beps/oecd-g20-inclusive-framework- https://www.oecd.org/tax/beps/oecd-g20-inclusive-framework-
members-joining-statementmembers-joining-statement -on-two-pillar-solution-to-address-tax-challenges-arising-from-digitalisation--on-two-pillar-solution-to-address-tax-challenges-arising-from-digitalisation-~~july~~october-2021.pdf. -2021.pdf.
8 The~~8 T he~~ term term tax income is often used interchangeably with taxable income. is often used interchangeably with taxable income.
9 Elena Patel and John McClelland, “What Would a Cash Flow9 Elena Patel and John McClelland, “What Would a Cash Flow ~~T ax~~ Tax Look Like? Historical Panel Lessons,” Look Like? Historical Panel Lessons,” Tax Notes, ,
February 7, 2017, pp. 439-450. February 7, 2017, pp. 439-450.
10 Lily Batchelder, “ 10 Lily Batchelder, “~~T he~~The Shaky Case for a Business Shaky Case for a Business Cash-FlowCash-Flow ~~T ax~~ Tax Over a Business Over a Business ~~Income T ax~~ Income Tax,” ,” National Tax
~~Journal, vol. 70, no. 4 (December 2017), pp. 901 -936.~~
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link to page 9 link to page 9 link to page 10 link to page 10 link to page 9 link to page 9 link to page 10 link to page 10 Minimum Taxes on Business Income: Background and Policy Options

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 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 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 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 sectors and incentives designed to encourage certain behaviors. These provisions and incentives
are known as are known as tax expenditures. Corporate tax expenditures include special credits, deductions, Corporate tax expenditures include special credits, deductions,
exemptions, exclusions, and tax rates that reduce corporate income tax collections. exemptions, exclusions, and tax rates that reduce corporate income tax collections.
The Congressional Budget Office (CBO) projected the corporate income tax would generate The Congressional Budget Office (CBO) projected the corporate income tax would generate
$151.1 $151.1 ~~bil ion~~ billion in revenues for the federal government in FY2020.13 Using this baseline, the Joint 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 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 reduced tax rate on active income of controlled foreign corporations (CFCs) and accelerated
depreciation—would reduce federal tax by $45.4 depreciation—would reduce federal tax by $45.4 ~~bil ion~~billion and $43.2 and $43.2 ~~bil ion~~billion, respectively, in , respectively, in
FY2020 FY2020 (Table 1). The amount of forgone revenue associated with these provisions is substantial, . The amount of forgone revenue associated with these provisions is substantial,
relative to total corporate tax revenues. These large tax expenditure provisions, as relative to total corporate tax revenues. These large tax expenditure provisions, as ~~wel~~ well as other as other
tax expenditures listed itax expenditures listed in Table 1, are why corporate taxes paid are often less than 21% of are why corporate taxes paid are often less than 21% of
income. Since actual corporate revenue in FY2020 was larger than projected ($212 income. Since actual corporate revenue in FY2020 was larger than projected ($212 ~~bil ion~~billion), these ), these
tax expenditure amounts may also be larger.14 tax expenditure amounts may also be larger.14
Tax expenditures might be designed to advance certain policy objectives. For example, the 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 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, atincome 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 . 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 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 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 (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 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 housing (the credit for low-income housing) and renewable energy (the energy credit and the
credit for electricity produced from renewable resources). credit for electricity produced from renewable resources).

Journal, vol. 70, no. 4 (December 2017), pp. 901-936. 11 Kyle Pomerleau, “Joe Biden’s11 Kyle Pomerleau, “Joe Biden’s Alternative Minimum Book Alternative Minimum Book ~~T ax~~Tax,” ,” Tax Notes, October 5, 2020, pp. 109-116. , October 5, 2020, pp. 109-116.
12 See12 See ~~CRS~~ CRS Report R44823, Report R44823, The “Better Way” House Tax Plan: An Economic Analysis, by Jane G. Gravelle;, by Jane G. Gravelle; and CRS and CRS
Report R44821, Report R44821, Border-Adjusted ~~Consum ption~~Consumption Taxes and Exchange Rate ~~Movem ents~~Movements: Theory and Evidence , by Grant , by Grant
A. Driessen and Mark P. Keightley. A. Driessen and Mark P. Keightley.
13 This~~13 T his~~ projection reflects the anticipated decline in corporate tax receipts due to the COVID-19 pandemic. In FY2019, projection reflects the anticipated decline in corporate tax receipts due to the COVID-19 pandemic. In FY2019,
corporate tax revenues were $230.2 billion. Congressional Budgetcorporate tax revenues were $230.2 billion. Congressional Budget Office, Office, An Update to the Budget Outlook: 2020 to
2030, September 2, 2020, at https://www.cbo.gov/publication/56542. , September 2, 2020, at https://www.cbo.gov/publication/56542.
14 Congressional Budget 14 Congressional Budget Office, Office, Additional Information About the Budget Outlook: 2021 to 2031 , March 2021, , March 2021,
https://www.cbo.gov/publication/57043. https://www.cbo.gov/publication/57043.
15 Congressional Budget15 Congressional Budget Office, Office, Federal Policies and Innovation, November 17, 2014, at https://www.cbo.gov/, November 17, 2014, at https://www.cbo.gov/
publication/49487. publication/49487.
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Minimum Taxes on Business Income: Background and Policy Options

Table 1. Corporate Tax Expenditures
10 Largest for FY2020 10 Largest for FY2020
Tax
Expenditures
FY2020
as a Share of
Tax Expenditure
(billions)
Taxes
Reduced tax rate on active income of control ed Reduced tax rate on active income of control ed foreign corporations foreign corporations
$45.4 $45.4
30.0% 30.0%
Depreciation Depreciation of equipment in excess of the alternative depreciation system of equipment in excess of the alternative depreciation system
$43.2 $43.2
28.6% 28.6%
Credit for increasing research Credit for increasing research activities (Section 41) activities (Section 41)
$13.0 $13.0
8.6% 8.6%
Deduction for foreign-derived intangible income derived from Deduction for foreign-derived intangible income derived from trade or trade or
$12.6 $12.6
8.3% 8.3%
business within the United States business within the United States
Credit for low-income Credit for low-income housing housing
$9.9 $9.9
6.6% 6.6%
Energy credit (Section 48) Energy credit (Section 48)
$6.1 $6.1
4.0% 4.0%
Exclusion of interest on public purpose state and local government bonds Exclusion of interest on public purpose state and local government bonds
$5.5 $5.5
3.6% 3.6%
Credit for electricity Credit for electricity produced fromproduced from renewable resourcesrenewable resources (Section 45) (Section 45)
$4.4 $4.4
2.9% 2.9%
Deferral Deferral of gain on nondealer of gain on nondealer ~~instal ment~~ installment sales sales
$4.0 $4.0
2.6% 2.6%
Work Work opportunity tax credit opportunity tax credit
$2.9 $2.9
1.9% 1.9%
Source: Joint CommitteeJoint Committee on Taxation, on Taxation, Estimates Of Federal Tax Expenditures For Fiscal Years 2020-2024, JCX-23-, JCX-23-
20, November 5, 2020. 20, November 5, 2020.
Net Operating Losses (NOLs)
Another feature of business taxation is the treatment of net operating losses (NOLs).16 When a 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. business’s taxable income is negative, the business has a NOL. ~~Al owing~~Allowing losses to be carried losses to be carried
forward (or carried back) and deducted from taxable income in a future (or past) tax year can help 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. smooth taxable income over time and throughout the business cycle.
Current permanent law Current permanent law ~~al ows~~allows NOLs to be carried forward indefinitely. NOLs carried forward can 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 reduce up to 80% of taxable income each year. Temporary changes, enacted in response to the
Coronavirus Disease 2019 (COVID-19) pandemic, Coronavirus Disease 2019 (COVID-19) pandemic, ~~al ow~~allow 2018, 2019, or 2020 losses to be carried 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 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 the 80% offset under permanent law. Loss carrybacks can, and often do, result in an immediate
tax refund for businesses. tax refund for businesses.
Related Corporations
Large corporations often have subsidiaries (or tiers of subsidiaries). That is, they hold shares in 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 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 incorporated in the United States and some are incorporated abroad. Many subsidiaries are wholly
owned by the parent corporation, and some are owned by the parent corporation, and some are ~~partial y~~partially owned, in some cases with a majority owned, in some cases with a majority
(controlling) share and in some cases with a minority share. (controlling) share and in some cases with a minority share.

~~16 See CRS~~ 16 See CRS Report R46377, Report R46377, The Tax Treatment and Economics of Net Operating Losses,, by Mark P. Keightley. by Mark P. Keightley.
17 See17 See ~~CRS~~ CRS Insight IN11296, Insight IN11296, Tax Treatment of Net Operating Losses (NOLs) in the Coronavirus Aid, Relief, and
~~Econom ic~~Economic Security (CARES) Act, by Jane G., by Jane G. Gravelle. Gravelle.
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For tax purposes, corporate parents and their 80% owned For tax purposes, corporate parents and their 80% owned domestic subsidiaries may elect to file a subsidiaries may elect to file a
single consolidated tax return.18 With this election, each subsidiary computes its own tax liability 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 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, 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 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 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 deduction rather than a credit for foreign taxes) and U.S. income taxes, but net of state and local
taxes. Firms are taxes. Firms are ~~al owed~~allowed credits against foreign taxes paid. For example, if a firm has $100 credits against foreign taxes paid. For example, if a firm has $100
~~mil ion~~ million in income and pays taxes of 21%, but $10 in income and pays taxes of 21%, but $10 ~~mil ion~~million is subject to foreign taxes of 15% ($1.5 is subject to foreign taxes of 15% ($1.5
~~mil ion~~million), the $21 ), the $21 ~~mil ion~~ million tax is reduced by $1.5 tax is reduced by $1.5 ~~mil ion~~million, so that combined taxes ($19.5 , so that combined taxes ($19.5 ~~mil ion~~million on on
domestic income and $1.5 domestic income and $1.5 ~~mil ion~~million on foreign income) sum to $21 on foreign income) sum to $21 ~~mil ion~~million. However, if foreign . However, if foreign
taxes are 30% ($3 taxes are 30% ($3 ~~mil ion~~million), the credit on the $10 ), the credit on the $10 ~~mil ion~~ million is limited to the U.S. tax paid ($2.1 is limited to the U.S. tax paid ($2.1
~~mil ion~~million), so there is a residual tax of $0.9 ), so there is a residual tax of $0.9 ~~mil ion~~million, and foreign and domestic taxes combined are , and foreign and domestic taxes combined are
$21.9 $21.9 ~~mil ion~~million. .
For firms not filing a consolidated tax return, dividends are subject to an intercorporate dividend 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% 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 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]).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. 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 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.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 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 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 U.S. firms are not taxed. With a worldwide system, foreign profits are taxed, but a credit is
~~al owed~~allowed against U.S. tax for foreign taxes paid. Pre-TCJA, dividends paid by foreign firms were 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 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 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. 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. shareholders each owning at least 10%. Many CFCs are subsidiaries entirely owned by a U.S.
parent corporation.19 parent corporation.19
Taxed income of CFCs includes Subpart F income that is easily shifted between businesses in 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 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 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 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 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 low-tax countries that capture some of the income of the combined firm in that jurisdiction.20 Tax

~~18 T he~~ 18 The treatment of multinational corporations and their foreign subsidiaries treatment of multinational corporations and their foreign subsidiaries is discussedis discussed below.below. Firms do not file Firms do not file
consolidated returns with their foreign subsidiaries;consolidated returns with their foreign subsidiaries; rather, they exempt dividends and income or theirrather, they exempt dividends and income or their share of income share of income
in some cases. in some cases.
19 For a more detailed discussion 19 For a more detailed discussion of the international tax regime and how it changedof the international tax regime and how it changed in 2017, seein 2017, see ~~CRS~~ CRS Report R45186, Report R45186,
Issues in International Corporate Taxation: The 2017 Revision (P.L. 115 -97), by Jane G., by Jane G. ~~Gravelle~~ Gravelle and Donald J. and Donald J.
Marples. Marples.
20 Subpart20 Subpart F’s effectiveness is limited by regulations calledF’s effectiveness is limited by regulations called check-the-box, currently codified (called look-through check-the-box, currently codified (called look-through
rules) and expanded temporarily through 2025. See CRSrules) and expanded temporarily through 2025. See CRS In FocusIn Focus IF11392, IF11392, H.R. 1865 and the Look-Through
~~Treatm ent of Paym ents~~Treatment of Payments Between Related Controlled Foreign Corporations, by Jane G., by Jane G. Gravelle. Gravelle.
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on this type of income is common in most countries to prevent abuse, and was a feature of pre- on this type of income is common in most countries to prevent abuse, and was a feature of pre-
TCJA U.S. tax law. TCJA U.S. tax law.
In addition, current law imposes a tax on some of the remaining profits of CFCs under the tax on 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 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 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 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. added back to this income (termed a gross up) to measure income before foreign taxes.
U.S. owners are U.S. owners are ~~al owed~~allowed a credit for foreign taxes paid, although the credit for GILTI is limited to 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 80% of foreign taxes. Foreign tax credits are limited to U.S. taxes due, on an ~~overal~~ overall basis (so that basis (so that
higher taxes in one country can offset U.S. tax on income earned in low-tax jurisdictions). This higher taxes in one country can offset U.S. tax on income earned in low-tax jurisdictions). This
~~overal~~ overall limit is applied separately to passive income, active income outside of GILTI, and GILTI limit is applied separately to passive income, active income outside of GILTI, and GILTI
income. income.
The tax on GILTI is sometimes characterized as a minimum tax on foreign income; this might be 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 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 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 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 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. 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 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 (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 regardless of dividends, the 2017 tax revision (TCJA) also included a tax on accumulated
unrepatriated income, which can be paid in unrepatriated income, which can be paid in ~~instal ments and wil~~ installments and will increase tax rates temporarily increase tax rates temporarily
for the next several years. for the next several years.
There is a minimum tax embedded in the current international tax system—the Base Erosion and 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 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. 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. 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 Another feature of the international tax system that can affect effective tax rates is the deduction
for foreign derived intangiblefor foreign derived intangible income (FDII), which is designed to provide a similar benefit for 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. 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 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 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, 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 organized as corporations but electing to be taxed as a pass-through if the number of shareholders
is 100 or less; or limited liabilityis 100 or less; or limited liability corporations, which are organized as corporations but have corporations, which are organized as corporations but have
characteristics that characteristics that ~~al ow~~allow them to be taxed as pass-throughs. Pass-through firms can be them to be taxed as pass-throughs. Pass-through firms can be ~~smal or~~
small or relatively large. relatively large.

21 Joint Committee on 21 Joint Committee on ~~T axation~~Taxation, , Estimates of Federal Tax Expenditures for Fiscal Years 2020-2024, JCX-20-23, , JCX-20-23,
November 5, 2020, https://www.jct.gov/CMSPages/GetFile.aspx?guid=ec4fb616-771b-4708-8d16-f774d5158469. November 5, 2020, https://www.jct.gov/CMSPages/GetFile.aspx?guid=ec4fb616-771b-4708-8d16-f774d5158469.
22 See 22 See ~~CRS~~ CRS Report R43104, Report R43104, A Brief Overview of Business Types and Their Tax Treatment, by Mark P. Keightley. , by Mark P. Keightley.
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Pass- Pass-~~though~~through firms are eligible for many of the same subsidies and tax benefits as corporations, firms are eligible for many of the same subsidies and tax benefits as corporations,
but some are also eligiblebut some are also eligible for a pass-through deduction of 20% of taxable income.23 This 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 deduction is phased out for personal service firms and limited for some other businesses that do
not meet certain conditions. not meet certain conditions.
While the corporate AMT was repealed by the 2017 tax revision (TCJA), the individual AMT was 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 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 depreciation, are added back to the base, but not the pass-through deduction or most of the
provisions listed iprovisions listed in Table 1.
Measuring Income
~~Conceptual y~~Conceptually, income is computed by subtracting (deducting) the costs of doing business from , 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 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 business costs, and the timing of those deductions. A similar timing issue can occur with respect
to when receipts should be recorded.25to when receipts should be recorded.25
U.S. businesses report income differently for different purposes. One set of rules applies when 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 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 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 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 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 accounting rules are intended to produce a verifiable tax base using rules that can be implemented
and enforced. and enforced.
Under this dual reporting system, businesses may have an incentive to maximize their reported Under this dual reporting system, businesses may have an incentive to maximize their reported
financialfinancial (book) income and minimize their reported taxable income. Another complicating factor (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 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 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 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 purposes. The following sections discuss different measures of income and issues in reconciling
the different measures. the different measures.
Economic Income
A standard definition for A standard definition for economic income is consumption plus changes in net worth.26 This is consumption plus changes in net worth.26 This
definition is definition is ~~general y~~generally applied to individuals applied to individuals (where it can also be defined as consumption plus (where it can also be defined as consumption plus
savings plus unrealized capital gains). Since corporations are a collection of individual savings plus unrealized capital gains). Since corporations are a collection of individual
shareholders, the concept can be applied to corporations as shareholders, the concept can be applied to corporations as ~~wel~~ well. A corporation’s income can be . A corporation’s income can be
defined as dividends plus changes in net worth (or retained earnings). Individuals in the aggregate defined as dividends plus changes in net worth (or retained earnings). Individuals in the aggregate

~~23 See CRS~~ 23 See CRS Report R46402, Report R46402, The Section 199A Deduction: How It Works and Illustrative Examples, by Gary Guenther. , by Gary Guenther.
24 See24 See ~~CRS~~ CRS Report R44494, Report R44494, The Alternative Minimum Tax for Individuals: In Brief, by Donald J. Marples. , by Donald J. Marples.
25 For example, some businesses25 For example, some businesses ~~use~~ use cash accounting, wherecash accounting, where income and expenses are recorded when payment is income and expenses are recorded when payment is
received or made. received or made. ~~T his~~This is in contrast to accrual basis accounting, where is in contrast to accrual basis accounting, where revenue is recordedrevenue is recorded when it is earned and when it is earned and
expenses are reported when they are incurred. Cashexpenses are reported when they are incurred. Cash ~~basis~~ basis accounting may beaccounting may be simpler, but it issimpler, but it is not in accordance with not in accordance with
Generally Accepted Accounting Principles (GAAP). For more, see CRSGenerally Accepted Accounting Principles (GAAP). For more, see CRS Report R43811, Report R43811, Cash Versus Accrual Basis of
Accounting: An Introduction, by Raj Gnanarajah. , by Raj Gnanarajah.
26 26 ~~T his~~This definition is referred to as “Haig-Simons income” after the economists who advanced this concept. definition is referred to as “Haig-Simons income” after the economists who advanced this concept.
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either consume or invest dividends and either consume or invest dividends and ~~wil~~ will realize increases in the value of stock due to retained realize increases in the value of stock due to retained
earnings and any other gains in value through capital gains. earnings and any other gains in value through capital gains.
For businesses (including corporations), For businesses (including corporations), profits are receipts minus expenses, with both measured are receipts minus expenses, with both measured
on a real (inflation-adjusted) accrual basis.27 Measuring revenues and expenses on an accrual 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 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 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 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 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 value of shares. Economic income is a concept. In practice, it may be very difficult to measure
true economic income. true economic income.
To measure economic income, an adjustment must be made for the decline in the value of assets 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 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 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 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 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 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 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 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 intangible assets should reflect the increase in the nominal value of assets due to inflation as ~~wel~~
well as the economic decline in value that would occur in the absence of inflation.29as 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 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 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 the original cost increased by inflation. Similarly, net debt acquired in the past becomes a ~~smal er~~
~~liability~~ smaller liability as inflation erodes its current value, so that debt is repaid in cheaper dollars.30as 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 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 (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 “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. U.S. corporations.”32 NIPA earnings, by design, measure profits from current production.

27 Congressional Budget27 Congressional Budget Office, Office, Corporate Income Tax Rates: International Comparisons, November 2005, pp. 12-13, , November 2005, pp. 12-13,
https://www.cbo.gov/sites/default/files/109th-congress-2005-2006/reports/11-28-corporatetax.pdf. https://www.cbo.gov/sites/default/files/109th-congress-2005-2006/reports/11-28-corporatetax.pdf.
28 See28 See ~~CRS~~ CRS Report R43811, Report R43811, Cash Versus Accrual Basis of Accounting: An Introduction , by Raj Gnanarajah; and CRS , by Raj Gnanarajah; and CRS
Report R44002, Report R44002, Cash Versus Accrual Accounting: Tax Policy Considerations, by Raj Gnanarajah and Mark P. , by Raj Gnanarajah and Mark P.
Keightley. Keightley.
29 For example, assume 29 For example, assume an asset costs $1 million dollars and economic depreciation in the fifth year is $100 million. If an asset costs $1 million dollars and economic depreciation in the fifth year is $100 million. If
the price of a replacement asset has now increasedthe price of a replacement asset has now increased by 10% to $1.1 million, then depreciation should be increased to by 10% to $1.1 million, then depreciation should be increased to
$110 million to reflect the current cost of replacing that portion of the asset.$110 million to reflect the current cost of replacing that portion of the asset.
30 For example, suppose $100 million is borrowed30 For example, suppose $100 million is borrowed and repaid five years later, and that prices have and repaid five years later, and that prices have ~~increa sed~~increased by 10% in by 10% in
this time frame. An equivalent debt today wouldthis time frame. An equivalent debt today would be $110 million, but it is costing the firm only $100 million to repay be $110 million, but it is costing the firm only $100 million to repay
the debt, so there is a gain in income of $10 million. the debt, so there is a gain in income of $10 million.
31 NIPA earnings include 31 NIPA earnings include earnings from organizations that do not file a tax return, such as certain mutual financial earnings from organizations that do not file a tax return, such as certain mutual financial
cooperatives, nonprofits that primarily serve businesses,cooperatives, nonprofits that primarily serve businesses, Federal Reserve banks, and federally sponsored credit Federal Reserve banks, and federally sponsored credit
agencies. agencies. ~~T hey~~They also include also include earnings from Subchapter Searnings from Subchapter S corporations that do not pay corporate corporations that do not pay corporate ~~ta xes~~taxes and Real Estate and Real Estate
Investment Investment ~~T rusts~~Trusts that do not pay corporate taxes. that do not pay corporate taxes.
32 Bureau32 Bureau of Economic Analysis, of Economic Analysis, NIPA Handbook: Concepts and Methods of the U.S. National Income and Product
Accounts—Chapter 13: Corporate Profits,, December 2020, p. 13-1, https://www.bea.gov/resources/methodologies/December 2020, p. 13-1, https://www.bea.gov/resources/methodologies/
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NIPA’s profits from current production are computed as profits before tax, sometimes referred to NIPA’s profits from current production are computed as profits before tax, sometimes referred to
as as book profits, adjusted for (1) an inventory valuation adjustment; and (2) a capital consumption , 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.adjustment. BEA relies primarily on tax return information to determine profits before taxes. 33 33
The two adjustments are made to achieve the objective of measuring profits from The two adjustments are made to achieve the objective of measuring profits from current
production. production.
The inventory valuation adjustment (IVA) is made to reflect changes in profits that arise from 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 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 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 changes are not from current production. The IVA adjustment is applied to inventory withdrawals
such that these withdrawals are valued at current cost.34such that these withdrawals are valued at current cost.34
The capital consumption adjustment (CCAdj) is made so that profits from current production 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 reflect economic depreciation and have a value that reflects current replacement costs. When
computing income, NIPA earnings computing income, NIPA earnings ~~al ow~~allow for consumption of fixed capital using economic for consumption of fixed capital using economic
depreciation. Economic depreciation is the decline in the value of the stock of capital assets due 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 to physical deterioration, normal obsolescence, and accidental damage that occurs in the routine
course of use.35course of use.35
The tax code specifies depreciation schedules that are The tax code specifies depreciation schedules that are ~~general y~~generally more accelerated than economic more accelerated than economic
depreciation. Further, since 2001, the tax code has depreciation. Further, since 2001, the tax code has ~~general y al owed~~generally allowed for some amount of bonus for some amount of bonus
depreciation, with the bonus depreciation amount deducted in the first year.36 With 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 or when tax depreciation is accelerated relative to economic depreciation,
depreciation deductions are larger in the early years, offset by depreciation deductions are larger in the early years, offset by ~~smal er~~smaller deductions in the later deductions in the later
years, over the lifetime of a particular capital asset. With bonus or accelerated depreciation, years, over the lifetime of a particular capital asset. With bonus or accelerated depreciation,
income or profits are understated income or profits are understated ~~initial y~~initially, and later overstated. The CCAdj is made so that , and later overstated. The CCAdj is made so that
depreciation reflects economic depreciation in NIPA’s measure of profits from current 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 production. The CCAdj also adjusts measures of depreciation such that they are valued at current
~~cost.37~~

cost.37 nipa-handbook/pdf/chapter-13.pdf. nipa-handbook/pdf/chapter-13.pdf.
33 33 ~~T he~~The BEA uses BEA uses tax data as its primary source for computing corporate profits. BEA supplements tax data with tax data as its primary source for computing corporate profits. BEA supplements tax data with
financial accounting data when measuringfinancial accounting data when measuring corporate profits. Financial accounting data are relied upon more heavily for corporate profits. Financial accounting data are relied upon more heavily for
the more recent time periods, as the information becomes available more quickly than tax data. Over time, the BEA the more recent time periods, as the information becomes available more quickly than tax data. Over time, the BEA
adjustsadjusts and revises initial estimates. Seeand revises initial estimates. See ~~Bureau~~ Bureau of Economic Analysis, of Economic Analysis, NIPA Handbook: Concepts and Methods of the
U.S. National ~~Incom e~~Income and Product Accounts—Chapter 13: Corporate Profits, December 2020, p. 13-4, , December 2020, p. 13-4,
https://www.bea.gov/resources/methodologies/nipa-handbook/pdf/chapter-13.pdf. https://www.bea.gov/resources/methodologies/nipa-handbook/pdf/chapter-13.pdf.
34 For example, suppose a good is purchased34 For example, suppose a good is purchased for $100 and couldfor $100 and could be soldbe sold for $120 dollars immediately, but is held for for $120 dollars immediately, but is held for
five years. Prices rise over five years by 10%, so the good is soldfive years. Prices rise over five years by 10%, so the good is sold for $132 ($120 times 1.1). Under firstfor $132 ($120 times 1.1). Under first -in, first-in, first -out -out
(FIFO) inventory accounting, commonly used for tax purposes, the cost of the good sold is $100. With the IVA (FIFO) inventory accounting, commonly used for tax purposes, the cost of the good sold is $100. With the IVA
adjustment, the cost of the good sold is valuedadjustment, the cost of the good sold is valued at $110 rather than $100. at $110 rather than $100. ~~T hat~~That adjustment reduces the profit from $32 to adjustment reduces the profit from $32 to
$22. $22. ~~T his~~This correction eliminates the treatment of inflation as part of the profit; that is, the $20 profit rises by 10% to $22, correction eliminates the treatment of inflation as part of the profit; that is, the $20 profit rises by 10% to $22,
and the $10 increase dueand the $10 increase due to inflation is excluded. to inflation is excluded.
35 Bureau 35 Bureau of Economic Analysis, of Economic Analysis, NIPA Handbook: Concepts and Methods of the U.S. National Income and Product
Accounts—Chapter 2: ~~Fundam ental~~Fundamental Concepts, December 2020, p. 2-3, https://www.bea.gov/resources/methodologies/, December 2020, p. 2-3, https://www.bea.gov/resources/methodologies/
nipa-handbook/pdf/chapter-02.pdf. nipa-handbook/pdf/chapter-02.pdf.
36 See 36 See ~~CRS~~ CRS Report RL31852, Report RL31852, The Section 179 and Section 168(k) Expensing Allowances: Current Law and Economic
Effects, by Gary, by Gary Guenther. Guenther.
37 Bureau 37 Bureau of Economic Analysis, of Economic Analysis, NIPA Handbook: Concepts and Methods of the U.S. National Income and Product
Accounts—Chapter 13: Corporate Profits,, December 2020, p. 13-4, https://www.bea.gov/resources/methodologies/December 2020, p. 13-4, https://www.bea.gov/resources/methodologies/
nipa-handbook/pdf/chapter-13.pdf. nipa-handbook/pdf/chapter-13.pdf.
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NIPA’s profits from current production excludes dividend income, capital gains and losses, and 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 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 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 abilityeconomic income because it does not account for unrealized capital gains or the ability to repay to repay
debt in cheaper dollars. debt in cheaper dollars.
Other elements of NIPA’s profits before tax make it an imperfect proxy for examining “book Other elements of NIPA’s profits before tax make it an imperfect proxy for examining “book
income” as a tax base. income” as a tax base. ~~Specifical y~~Specifically, NIPA’s profits before tax include income from organizations , 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 that do not file corporate tax returns (e.g., Federal Reserve banks) or do not pay corporate taxes
(e.g., Subchapter S Corporations). (e.g., Subchapter S Corporations).
NIPA’s measures of corporate profits include domestic and national measures. Domestic 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 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. 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 tax system is not strictly territorial, focusing only on domestic earnings may not fully capture
economic incomes that might economic incomes that might ~~potential y~~potentially be part of the corporate tax base. be part of the corporate tax base.
National corporate profits cover activities attributable to U.S. residents. This measure includes National corporate profits cover activities attributable to U.S. residents. This measure includes
income of domestic corporations received from abroad as income of domestic corporations received from abroad as ~~wel~~ well as the income (dividends) received as the income (dividends) received
by individuals, net of payments. This definition does not correspond to worldwide income of U.S. 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 corporations because it does not capture income retained abroad by foreign-incorporated firms
and nets out payments.and nets out payments.
In 2017, NIPA’s domestic corporate profits (or profits from current production) were $1,630.0 In 2017, NIPA’s domestic corporate profits (or profits from current production) were $1,630.0
~~bil ion.39~~ billion.39 For 2018, 2019, and 2020 these figures were $1,783.3 For 2018, 2019, and 2020 these figures were $1,783.3 ~~bil ion~~billion, $1,854.4 , $1,854.4 ~~bil ion~~billion, and , and
$1,789.0 $1,789.0 ~~bil ion~~billion, respectively. NIPA’s corporate profits (or profits from current production) for , respectively. NIPA’s corporate profits (or profits from current production) for al
all U.S. firms in 2017 were $2,194.8 U.S. firms in 2017 were $2,194.8 ~~bil ion~~billion.40 For 2018 this figure was $2,259.0 .40 For 2018 this figure was $2,259.0 ~~bil ion~~billion; for 2019, ; for 2019,
$2,254.6 $2,254.6 ~~bil ion~~billion; and for 2020, $2,184.1 ; and for 2020, $2,184.1 ~~bil ion~~billion. .
Taxable Income
For corporations, income subject to tax is For corporations, income subject to tax is ~~general y~~generally total business receipts less total deductions total business receipts less total deductions , ,
with adjustments.41 One adjustment, for example, is to remove state and local government bond 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. 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 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 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 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 deductions for dividends paid—items that are also subtracted in determining taxable income.42

38 See Appendix B ~~for~~ 38 See Appendix B for the difference in treatment of bad debts. the difference in treatment of bad debts.
39 Bureau39 Bureau of Economic Analysis, of Economic Analysis, ~~T able~~Table 1.14, “Gross Value 1.14, “Gross Value ~~Added~~ Added of Domestic Corporate Businessof Domestic Corporate Business in Current Dollars in Current Dollars
and Grossand Gross ~~Value Added~~ Value Added of Nonfinancial Domestic Corporate Business in Current and Chained Dollars,” at of Nonfinancial Domestic Corporate Business in Current and Chained Dollars,” at
https://apps.bea.gov/https://apps.bea.gov/~~iT able/iT able~~iTable/iTable.cfm?reqid=19&step=2#reqid=19&step=2&isuri=1&1921=survey. .cfm?reqid=19&step=2#reqid=19&step=2&isuri=1&1921=survey.
40 Bureau40 Bureau of Economic Analysis, of Economic Analysis, ~~T able~~Table 7.16, “Relation of Corporate Profits, 7.16, “Relation of Corporate Profits, ~~T axes~~Taxes, and Dividends, and Dividends in the National in the National
Income and Product Accounts to Corresponding MeasuresIncome and Product Accounts to Corresponding Measures as Publishedas Published by the Internal Revenue Service,” at by the Internal Revenue Service,” at
https://apps.bea.gov/https://apps.bea.gov/~~iT able/iT able~~iTable/iTable.cfm?reqid=19&step=3&isuri=1&nipa_table_list=293&categories=survey. .cfm?reqid=19&step=3&isuri=1&nipa_table_list=293&categories=survey.
41 41 ~~T otal~~Total receipts include (1) business receipts include (1) business receipts; (2) interest; (3) interest on state and local government debts; (4) rents; (5) receipts; (2) interest; (3) interest on state and local government debts; (4) rents; (5)
royalties; (6) net capital gains (excluding long-term gains from regulatedroyalties; (6) net capital gains (excluding long-term gains from regulated investment companies); (7) net gain, investment companies); (7) net gain,
noncapital assets; (8) dividendsnoncapital assets; (8) dividends received from domestic corporations; (9) dividends received from foreign corporations received from domestic corporations; (9) dividends received from foreign corporations
(excluding(excluding certain taxable income from related foreign corporations only constructively received); and (10) other certain taxable income from related foreign corporations only constructively received); and (10) other
receipts. receipts. ~~T otal~~Total deductions include deductions include (1) the cost of goods sold;(1) the cost of goods sold; (2) ordinary and necessary business(2) ordinary and necessary business ~~deductions~~ deductions from gross from gross
income; and (3) net loss from sales of noncapital assets. income; and (3) net loss from sales of noncapital assets.
42 In IRS42 In IRS Statistics of Income data, net income differs from total receipts minus total deductions becauseStatistics of Income data, net income differs from total receipts minus total deductions because net income net income
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There are also limits on certain deductions for tax purposes, like limits on deductions for interest 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 paid and executive compensation. These limits make taxable income higher than it would be
otherwise. otherwise.
Income as measured for tax purposes—taxable income—differs from economic income, and 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 NIPA’s measure of profits before tax, in several ways.43 The tax code contains numerous
provisions provisions ~~al owing~~allowing for accelerated cost recovery through expensing, depreciation, or depletion. for accelerated cost recovery through expensing, depreciation, or depletion.
Accelerated cost recovery means that Accelerated cost recovery means that ~~initial y~~initially, in the early years of the lifetime of a capital asset, , 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. 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 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 amounts that were deducted for items that are more appropriately characterized as capital
formation (e.g., expensing of intangible formation (e.g., expensing of intangible ~~dril ing~~ drilling costs and research and development). costs and research and development).
In reconciling NIPA profits before tax and taxable income, not In reconciling NIPA profits before tax and taxable income, not al all adjustments, nor even adjustments, nor even al
all timing adjustments, add to taxable income. For example, the tax code does not timing adjustments, add to taxable income. For example, the tax code does not ~~al ow~~allow certain certain
deductions (e.g., fines) that are subtracted for the purposes of determining NIPA’s profits before 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 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. expense, whereas the tax code treats this as a reduction in future capital gains income.
In 2017, $1,002.3 In 2017, $1,002.3 ~~bil ion~~billion in income was subject to the corporate tax. Total receipts less total in income was subject to the corporate tax. Total receipts less total
deductions as reported on tax returns in 2017 were $1,577.8 deductions as reported on tax returns in 2017 were $1,577.8 ~~bil ion~~billion. Income that is subject to the . Income that is subject to the
corporate tax is less than receipts less deductions for a number of reasons, including taxpayers’ corporate tax is less than receipts less deductions for a number of reasons, including taxpayers’
~~ability~~ ability to deduct NOLs and part of dividends received, as to deduct NOLs and part of dividends received, as ~~wel~~ well as certain forms of income and as certain forms of income and
certain entities (primarily certain entities (primarily ~~smal er~~smaller Subchapter S corporations that elect to be taxed as pass- 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 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 above, in 2017, NIPA’s corporate profits before tax (or profits from current production) were
$2,194.8 $2,194.8 ~~bil ion~~billion. .
The 2017 tax revision (TCJA) created incentives for taxpayers to reduce taxable income reported 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 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 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 (TCJA) may have resulted in a higher than normal difference between financial (book) income
and income for tax purposes, or and income for tax purposes, or book-tax gap, for 2017. , for 2017.
Income subject to tax in 2018 was $1,956.7 Income subject to tax in 2018 was $1,956.7 ~~bil ion~~billion, which was , which was ~~substantial y~~substantially higher than the higher than the
$1,002.3 $1,002.3 ~~bil ion~~billion in income subject to the corporate tax in 2017.44 Total receipts less total in income subject to the corporate tax in 2017.44 Total receipts less total
deductions were also higher in 2018 at $2,329.3 deductions were also higher in 2018 at $2,329.3 ~~bil ion~~billion compared to $1,577.8 compared to $1,577.8 ~~bil ion~~billion, ,
respectively.45 NIPA’s corporate profits in 2018 were $2,259.0 respectively.45 NIPA’s corporate profits in 2018 were $2,259.0 ~~bil ion~~billion (compared to $2,194.8 (compared to $2,194.8
~~bil ion~~ billion for 2017). Thus, while measures of income for tax purposes differed for 2017). Thus, while measures of income for tax purposes differed ~~substantial y~~substantially between between
2017 and 2018, NIPA’s measure of corporate profits was more stable2017 and 2018, NIPA’s measure of corporate profits was more stable.. Table B-1 reconciles total reconciles total
receipts less total deductions from IRS data with NIPA’s measure of corporate profits for 2018. receipts less total deductions from IRS data with NIPA’s measure of corporate profits for 2018.

~~includes~~ includes foreign deemed income and excludesforeign deemed income and excludes interest on state and local government debt. Seinterest on state and local government debt. See ~~Appe ndix~~Appendix B..
43 See43 See Appendix B ~~for~~for a detailed reconciliation of NIPA’s profits before tax and corporate income subject to tax for a detailed reconciliation of NIPA’s profits before tax and corporate income subject to tax for
2017. 2017.
44 Internal Revenue Service, 44 Internal Revenue Service, Statistics of Income—2018: Corporation Income Tax Returns, Complete Report,
https://www.irs.gov/pub/irs-pdf/p16.pdf.https://www.irs.gov/pub/irs-pdf/p16.pdf.
45 Internal Revenue Service, 45 Internal Revenue Service, Statistics of Income—2018: Corporation Income Tax Returns, Complete Report,
https://www.irs.gov/pub/irs-pdf/p16.pdf. https://www.irs.gov/pub/irs-pdf/p16.pdf.
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Book Income
Book income is reported on a company’s income statements. Public companies are required to 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 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 are filed with the Securities and Exchange Commission (SEC).47 Public companies follow
~~General y~~Generally Accepted Accounting Principles (GAAP), as set by the Financial Accounting Standards Accepted Accounting Principles (GAAP), as set by the Financial Accounting Standards
Board, when reporting financial information. Publicly disclosed Form 10-Ks are annual reports Board, when reporting financial information. Publicly disclosed Form 10-Ks are annual reports
that describe a company’s financial conditions and contain audited financialthat describe a company’s financial conditions and contain audited financial statements. The statements. The
primary purpose of financial reporting is to provide information to investors and creditors.48 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 Managers have some discretion when reporting earnings on financial statements. Flexibility in
how certain expenses and assets are valued across industries is intended to how certain expenses and assets are valued across industries is intended to ~~al ow~~allow managers to managers to
provide relevant information regarding their firms’ economic position.49 provide relevant information regarding their firms’ economic position.49
Book income is Book income is ~~general y~~generally determined by recognizing expenses in the period that revenue determined by recognizing expenses in the period that revenue
stemming from those expenses is received.50 Book income includes certain revenues that are 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 excluded from tax income, such as interest from municipal bonds and foreign-source income of
U.S. corporations (tax income does not include U.S. corporations (tax income does not include al all foreign-source income). Under GAAP, foreign-source income). Under GAAP,
investments in capital assets are capitalized and investments in capital assets are capitalized and ~~general y~~generally depreciated over their useful life, depreciated over their useful life,
consistent with the goal of recognizing expenses in the period in which those expenses result in 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 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 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 deduction is taken when the stock option is exercised (that is, when the stock is purchased by the
employee at the lower option price). employee at the lower option price).
Large corporations—those with assets of at least $10 Large corporations—those with assets of at least $10 ~~mil ion~~million—are required to file Schedule M-3 —are required to file Schedule M-3
with their corporate tax returns. The Schedule M-3 collects information on firms’ financial 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 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 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 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 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. 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 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. is not necessarily the same as the entity filing a tax return.
Schedule M-3s filed by corporations in 2017 reported $1,408.7 Schedule M-3s filed by corporations in 2017 reported $1,408.7 ~~bil ion~~billion in worldwide consolidated in worldwide consolidated
financial statement net income. Financial statement net income for entities included on U.S. tax financial statement net income. Financial statement net income for entities included on U.S. tax
returns was $1,324.1 returns was $1,324.1 ~~bil ion~~billion in 2017.52 The tax income of these corporations in 2017 was $661.9 in 2017.52 The tax income of these corporations in 2017 was $661.9
~~bil ion.~~ billion. In 2018, worldwide consolidated financial statement income reported on Schedule M-3s In 2018, worldwide consolidated financial statement income reported on Schedule M-3s

~~46 See CRS~~ 46 See CRS Report R44894, Report R44894, Accounting and Auditing Regulatory Structure: U.S. and International, by Raj Gnanarajah. , by Raj Gnanarajah.
47 See47 See ~~CRS~~ CRS In FocusIn Focus IF11256, IF11256, SEC Securities Disclosure: Background and Policy Issues, by Eva Su., by Eva Su.
48 Joint Committee on 48 Joint Committee on ~~T axation~~Taxation, , Present Law and Background Relating to the Interaction of Federal Income Tax Rules
and Financial Accounting Rules, JCX-13-12, February 7, 2012, p. 2. , JCX-13-12, February 7, 2012, p. 2.
49 Mindy Herzfeld, “ 49 Mindy Herzfeld, “~~T axing~~Taxing Book Profits: New Proposals and 40 Years of Critiques,” Book Profits: New Proposals and 40 Years of Critiques,” National Tax Journal, vol. 73, , vol. 73,
no. 4 (December 2020), pp. 1025-1046; and Ilia D. Dichev and Jingran Zhao, “no. 4 (December 2020), pp. 1025-1046; and Ilia D. Dichev and Jingran Zhao, “ Comparing GAAP With NIPA Comparing GAAP With NIPA
Earnings,” Earnings,” Journal of Accounting, Auditing, & Finance, vol. 36, no. 3 (July 2021), pp. 517, vol. 36, no. 3 (July 2021), pp. 517 -539. -539.
50 For example, if a product is purchased for resale, the cost is not deducted50 For example, if a product is purchased for resale, the cost is not deducted until the sale is made.until the sale is made.
51 Caitlin Bokulic, Erin Henry, and George51 Caitlin Bokulic, Erin Henry, and George A. Plesko, “Reconciling GlobalA. Plesko, “Reconciling Global Financial Reporting With Domestic Financial Reporting With Domestic
~~T axation~~Taxation,” ,” National Tax Journal, vol. 65, no. 4 (December 2012), pp. 933-959. , vol. 65, no. 4 (December 2012), pp. 933-959.
52 Internal Revenue Service, 52 Internal Revenue Service, Statistics of Income—2017: Corporation Income Tax Returns, Line Item Estimates, ,
https://www.irs.gov/statistics/soi-tax-stats-corporation-income-tax-returns-line-item-estimates. https://www.irs.gov/statistics/soi-tax-stats-corporation-income-tax-returns-line-item-estimates.
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was $1,649.6 was $1,649.6 ~~bil ion~~billion, financial statement net income for entities on U.S. tax returns was $2,265.5 , financial statement net income for entities on U.S. tax returns was $2,265.5
~~bil ion,~~ billion, and tax income of these corporations was $2,220.1 and tax income of these corporations was $2,220.1 ~~bil ion~~billion.53 Applying.53 Applying tax consolidation tax consolidation
rules to rules to ~~al entities al ows~~all entities allows for an apples-to-apples (same entity) comparison of financial (book) for an apples-to-apples (same entity) comparison of financial (book)
and tax measures of income.and tax measures of income.
Although the relationship between book and tax income can change for a number of reasons, one 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 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 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.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 between book and tax income reflect both differences in income items and
differences in deductions. Income items can be larger or differences in deductions. Income items can be larger or ~~smal er~~smaller for book and tax purposes, and for book and tax purposes, and
can vary over time. For example, book foreign-source income reflects distributions out of current 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 and previously taxed income, whereas, prior to 2018, tax foreign-source income reflected
dividends not already taxed, as dividends not already taxed, as ~~wel~~ well as certain income, as certain income, ~~cal ed~~called Subpart F, that is taxed whether it is Subpart F, that is taxed whether it is
distributed or not because it is easily shifted between countries. In 2018 and later, tax income 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 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 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 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 are often larger for tax purposes because capital losses are not fully deductible from taxable
income. income.
Similarly, some deductions can be larger or Similarly, some deductions can be larger or ~~smal er~~smaller for book or tax purposes, and these for book or tax purposes, and these
differences can vary over time. Deductions for depreciation and for differences can vary over time. Deductions for depreciation and for ~~stoc k~~stock options and other forms options and other forms
of equity-based compensation are of equity-based compensation are ~~general y~~generally larger for tax purposes. Special rules that larger for tax purposes. Special rules that ~~al ow~~allow bonus bonus
depreciation or accelerated depreciation for tax purposes, which are often motivated by a desire to 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. encourage investment, are a major factor in explaining book-tax differences.
Some book-tax differences, including those due to depreciation deductions, are temporary. The Some book-tax differences, including those due to depreciation deductions, are temporary. The
costs associated with capital investment costs associated with capital investment ~~wil~~ will be recovered for both book and tax purposes, but be recovered for both book and tax purposes, but
there is a timing difference. With bonus depreciation for tax purposes, deductions are taken when there is a timing difference. With bonus depreciation for tax purposes, deductions are taken when
investments are made. For book purposes, these costs investments are made. For book purposes, these costs ~~wil~~ will be recovered over time. Other be recovered over time. Other
differences are permanent. For example, tax-exempt interest payments are included in book differences are permanent. For example, tax-exempt interest payments are included in book
income. income.
The 2017 tax revision (TCJA) may explain the significant book-tax difference in 2017, the year 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 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 larger dividend payments from foreign affiliates for book purposes but delayed paying those
dividends until 2018, when dividends became exempt. dividends until 2018, when dividends became exempt.

53 Internal Revenue Service, 53 Internal Revenue Service, Statistics of Income—2018: Corporation Income Tax Returns, Line Item Estimates
https://www.irs.gov/statistics/soi-tax-stats-corporation-income-tax-returns-line-item-estimates. https://www.irs.gov/statistics/soi-tax-stats-corporation-income-tax-returns-line-item-estimates.
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Deriving Alternative Measures of Income for Tax Purposes

To the extent that a minimumTo the extent that a minimum tax aimstax aims to apply tax to economic incometo apply tax to economic income and address aggressiveand address aggressive tax planning that tax planning that
leads to low effective tax rates, two basic options exist. One is the traditional alternative minimumleads to low effective tax rates, two basic options exist. One is the traditional alternative minimum tax (AMT), tax (AMT),
which adds back tax preferenceswhich adds back tax preferences to the taxable incometo the taxable income base in order to more closelybase in order to more closely approximate economic approximate economic
income.income. The other would be a tax based on book incomeThe other would be a tax based on book income that adjusts for provisions that are appropriate to that adjusts for provisions that are appropriate to
measuring economicmeasuring economic income.income. Both approaches could be designed to retain desirableBoth approaches could be designed to retain desirable tax preferences.tax preferences. The The
traditional AMT approach, traditional AMT approach, ~~historical y,~~ historically, has not prevented a key tax planning strategy—profit shifting by has not prevented a key tax planning strategy—profit shifting by
multinational firms—but it could multinational firms—but it could ~~potential y~~potentially be designed to do so by including foreign-source be designed to do so by including foreign-source income in ful . income in ful .
Beginning with book income tends to capture tax planning items. Beginning with book income tends to capture tax planning items.
Neither approach captures profit shifting by U.S. subsidiariesNeither approach captures profit shifting by U.S. subsidiaries of foreign parents through transfer pricing, which of foreign parents through transfer pricing, which
was the main target of BEAT, so there is stilwas the main target of BEAT, so there is stil a role for that tax to apply if it exceeds the tax paid under the a role for that tax to apply if it exceeds the tax paid under the
alternative minimumalternative minimum tax. BEAT might be modifiedtax. BEAT might be modified to focus on that objective. to focus on that objective.
Adding ~~Preference~~ Preference Items Back to Taxable Income: An AMT Approach
Book and economic income Book and economic income can be approximated by starting with taxable income and adjusting for the differences can be approximated by starting with taxable income and adjusting for the differences
between taxable income and book income,between taxable income and book income, ~~as wel~~ as well as adjusting for someas adjusting for some ~~measures~~ measures to moveto move both to economic both to economic
income.income. Although any specific set of adjustments might be made under this approach, the fol owing is a list to Although any specific set of adjustments might be made under this approach, the fol owing is a list to
consider:consider:
 
Add items Add items included in the prior corporateincluded in the prior corporate AMT base, such as percentage depletion,AMT base, such as percentage depletion, intangible dril ing costs, intangible dril ing costs,
and other rapid amortization provisionsand other rapid amortization provisions (see(see Form 4626 and instructions for tax year 2017). Form 4626 and instructions for tax year 2017).
 
Add and adjust for accelerated depreciation on equipment (eliminating the effects of expensing). Add and adjust for accelerated depreciation on equipment (eliminating the effects of expensing).
 
Adjust the cost of goods sold by deducting inflation over the holding period for firms Adjust the cost of goods sold by deducting inflation over the holding period for firms that use FIFO inventory that use FIFO inventory
accounting. accounting.
 
Add real capital gains on like-kind Add real capital gains on like-kind exchanges and add to the basis for future sale.exchanges and add to the basis for future sale.
 
Add state and local income taxes. Add state and local income taxes.
 
Capitalize and deduct over a period of time Capitalize and deduct over a period of time investments that earn future incomeinvestments that earn future income and are currently expensed, and are currently expensed,
such as research expenses,such as research expenses, advertising expenses, investment in workforceadvertising expenses, investment in workforce training,training, film production, and losses film production, and losses
from the search for oilfrom the search for oil and mineraland mineral deposits. deposits.
 
Add back the value of repaying debt in cheaper dol ars by multiplying average debt by the inflation rate. This Add back the value of repaying debt in cheaper dol ars by multiplying average debt by the inflation rate. This
amount should reduce interest deductions for purposes of the 30% cap in interest deductions, or the cap amount should reduce interest deductions for purposes of the 30% cap in interest deductions, or the cap
could be eliminated.could be eliminated. (For net creditors,(For net creditors, this adjustment would reduce income). this adjustment would reduce income).
 
Add the untaxed portion of income Add the untaxed portion of income from control ed foreign corporations (the exemption of a deemed return from control ed foreign corporations (the exemption of a deemed return
on tangible assets,on tangible assets, and the GILTI deduction). and the GILTI deduction).
 
Add FDII deductions. Add FDII deductions.
 
~~Disal ow interest~~ Disallow interest deductions of U.S. subsidiariesdeductions of U.S. subsidiaries of foreign parents to the extent they exceed a share of foreign parents to the extent they exceed a share
consistent with the share of assets or profits of the parent and consistent with the share of assets or profits of the parent and al all of its subsidiaries; if such informationof its subsidiaries; if such information is not is not
provided, disal owprovided, disal ow al interest deductions. al interest deductions.
These adjustments would produce a broader measure These adjustments would produce a broader measure of incomeof income that begins from taxable income.that begins from taxable income. With a With a
minimumminimum tax approach, the minimumtax approach, the minimum tax would also be compared to ordinary tax after tax credits. Whether tax would also be compared to ordinary tax after tax credits. Whether
certain credits were certain credits were ~~al owed~~allowed (R&D credit, (R&D credit, low-incomelow-income housing tax credit, and various energy credits) would be a housing tax credit, and various energy credits) would be a
policy choice. policy choice.
There are multiple options to address foreign taxes. One option is to There are multiple options to address foreign taxes. One option is to ~~al ow~~allow a ful foreign tax credit of 100% for a ful foreign tax credit of 100% for
the GILTI basket, but subject it to the the GILTI basket, but subject it to the ~~overal~~ overall limits.limits. A second option is to A second option is to ~~al ow~~ allow a ful foreign tax credit of 100%, a ful foreign tax credit of 100%,
but but ~~al ow~~allow the credit on a country-by-country basis within each basket. Alternatively, the credit on a country-by-country basis within each basket. Alternatively, there could be a deduction there could be a deduction
for foreign taxes paid. for foreign taxes paid.
Adjusting Book Income to Approximate Economic Income
Book income Book income could be used as a starting point for determining a broad taxable income base. With this approach, could be used as a starting point for determining a broad taxable income base. With this approach,
adjustments to book incomeadjustments to book income could be made to better approximate economic income.could be made to better approximate economic income. These adjustments might These adjustments might
include the fol owing: include the fol owing:
 
Add federal, Add federal, state and local,state and local, and foreign taxes to calculate a pretax income. and foreign taxes to calculate a pretax income.
 
Adjust the cost of goods sold by deducting inflation over the holding period for firms Adjust the cost of goods sold by deducting inflation over the holding period for firms that use FIFO inventory that use FIFO inventory
accounting. accounting.
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 
Conform the treatment of stock options by adding back book expenses for options upon grant and Conform the treatment of stock options by adding back book expenses for options upon grant and ~~al owing~~allowing a a
deduction for the difference between price and payment (if any) on the exercisededuction for the difference between price and payment (if any) on the exercise of stock options.of stock options. Some Some
argue this treatment would be appropriate because the recipientsargue this treatment would be appropriate because the recipients are taxed on exercise. are taxed on exercise.
 
Add back the value of repaying debt in cheaper dol ars by multiplying outstanding debt at the beginning of the Add back the value of repaying debt in cheaper dol ars by multiplying outstanding debt at the beginning of the
year by the inflation rate. (For net creditors,year by the inflation rate. (For net creditors, this adjustment would reduce income.) this adjustment would reduce income.)
 
Capitalize and deduct over a period of time Capitalize and deduct over a period of time investments that earn future incomeinvestments that earn future income and are currently expensed, and are currently expensed,
such as research expenses,such as research expenses, advertising expenses,advertising expenses, investment in workforceinvestment in workforce training, film production, and losses training, film production, and losses
from the search for oilfrom the search for oil and mineraland mineral deposits. deposits.
 
~~Disal ow interest~~ Disallow interest deductions of U.S. subsidiariesdeductions of U.S. subsidiaries of foreign parents to the extent they exceed a share of foreign parents to the extent they exceed a share
consistent with the share of assets or profits of the parent and consistent with the share of assets or profits of the parent and al all of its subsidiaries; if such informationof its subsidiaries; if such information is not is not
provided, disal owprovided, disal ow al interest deductions. al interest deductions.
Options related to tax credits, Options related to tax credits, including the foreign tax credit,including the foreign tax credit, are similarare similar to what was described above.to what was described above.
There are several There are several ~~chal enges~~challenges in creating a broad corporate tax base. First, in creating a broad corporate tax base. First, ~~conceptual y~~ conceptually, economic, economic income should income should
include realinclude real unrealized capital gains. It is not clear that this is appropriate for corporations. The gain on certain unrealized capital gains. It is not clear that this is appropriate for corporations. The gain on certain
physical assets is likelyphysical assets is likely attributable to inflation, with these assets depreciating in realattributable to inflation, with these assets depreciating in real terms (as addressed in terms (as addressed in
depreciation deductions). Gains in the value of intangible assets wildepreciation deductions). Gains in the value of intangible assets wil be captured in future profits. Financial assets be captured in future profits. Financial assets
that consist of stock holdings are that consist of stock holdings are ~~usual y~~usually related firms related firms that are subject to corporate tax themselves.that are subject to corporate tax themselves. It would be It would be
possiblepossible to make a mark-to-marketto make a mark-to-market adjustment for other financial assets, such as bonds. Second, economic adjustment for other financial assets, such as bonds. Second, economic
depreciation would requiredepreciation would require use of estimateduse of estimated real depreciation rates with the base adjusted for inflation as is done real depreciation rates with the base adjusted for inflation as is done
in NIPA. Using the livesin NIPA. Using the lives and methods under the alternative depreciation systemand methods under the alternative depreciation system (for building up from(for building up from the taxable the taxable
base) or book treatment for beginning with book income might be a simplerbase) or book treatment for beginning with book income might be a simpler approach because these measures approach because these measures
may approximate the present value of economicmay approximate the present value of economic depreciation. Third, there are conceptual depreciation. Third, there are conceptual ~~chal enges~~challenges in how to in how to
treat charitable contributions. For corporations,treat charitable contributions. For corporations, charitable contributions may be a formcharitable contributions may be a form of advertising or made to of advertising or made to
create goodwil ,create goodwil , in which case they would most appropriately be considered an expense. However,in which case they would most appropriately be considered an expense. However, to the extent to the extent
they are indirect consumption for stockholders,they are indirect consumption for stockholders, they should be added back in computing a tax base. they should be added back in computing a tax base.
Differences in Measures of Corporate Income over Time
The following sections compare NIPA’s measure of corporate profits to aggregate measures of 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 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 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 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. 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,” 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 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). 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 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 net income (total receipts less total deductions) and income subject to the corporate tax (taxable
income). income).
As As ~~il ustrated~~illustrated i in Figure 1, NIPA’s corporate profits track fairly closely NIPA’s corporate profits NIPA’s corporate profits track fairly closely NIPA’s corporate profits
from current production (corporate profits with IVA and CCAdj). Since the 1990s, corporate from current production (corporate profits with IVA and CCAdj). Since the 1990s, corporate
profits in the NIPA data have profits in the NIPA data have ~~general y~~generally exceeded the amount of income subject to the corporate exceeded the amount of income subject to the corporate
tax. The size of the difference, however, has tax. The size of the difference, however, has ~~general y~~generally grown over time, relative to the size of the grown over time, relative to the size of the
economy, with 2018 being an exception. Total receipts less total deductions are more variable 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, 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 are one reason for this. Income subject to corporate tax is ~~general y~~generally lower than receipts minus lower than receipts minus
deductions because of entities (e.g., Subchapter S corporations) not subject to the tax. The trends 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 in NIPA corporate profits and income subject to the corporate tax suggest that, over time, a
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~~smal er~~smaller share of corporate income has been subject to the corporate tax (although higher amounts 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). 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 1994-2018

Source: CRS figure using data from BEA and IRS. CRS figure using data from BEA and IRS.
Notes: Income subject to the corporate tax is the same as taxable income. Income subject to the corporate tax is the same as taxable income. Total receiptsTotal receipts less total deductions a less total deductions a
as reported in the IRS Statistics of Income.as reported in the IRS Statistics of Income.
Book-Tax Differences
As stated previously, large corporations—those with assets of at least $10 As stated previously, large corporations—those with assets of at least $10 ~~mil ion~~million—are required —are required
to file Schedule M-3 with their corporate tax returns. Schedule M-3 reconciles book income to tax to file Schedule M-3 with their corporate tax returns. Schedule M-3 reconciles book income to tax
income income before adjusting for NOLs and other special deductions. When deductions exceed 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 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. 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 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 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 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 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. 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 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-Schedule M-3, after differences due to consolidation have been removed (other analysis of book-
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Minimum Taxes on Business Income: Background and Policy Options

tax differences also uses pretax book income).54 Since 2009, corporations filing Schedule M-3, in 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. aggregate, have reported more in financial (book) income than tax income.
Figure 2. Aggregate Book Income and Tax Income for Large Corporations
2004-2018 2004-2018

Source: CRS calculations using data from IRS Schedule M-3. CRS calculations using data from IRS Schedule M-3.
Notes: Pretax book income Pretax book income is financial statement incomeis financial statement income of corporations filing tax returns that were required 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 mil ionto file Schedule M-3 plus U.S. tax expenses. Large corporations are those with assets of $10 mil ion or more or more
filing Formfiling Form 1120 U.S. corporate income1120 U.S. corporate income tax returns. Schedule M-3 reconcilestax returns. Schedule M-3 reconciles book income to taxable income book income to taxable income
before net operating lossbefore net operating loss deduction and specialdeduction and special deductions (“tax income” in the figure). deductions (“tax income” in the figure).
Figure 3 plots aggregate book-tax differences from 2004 through 2018. The relationship between 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 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 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 2008, aggregate tax income was larger than aggregate book income, leading to negative book-tax
differencesdifferences (Figure 2 andand Figure 3). One factor that may ). One factor that may ~~partial y~~partially explain why book-tax explain why book-tax
differences decline during economic downturns is the treatment of bad debt, which may be 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 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, 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 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. TCJA, might explain the larger book-tax difference in 2017.

54 Danielle H. Green54 Danielle H. Green and Georgeand George A. Plesko, “A. Plesko, “~~T he~~The Relationship Between Book and Relationship Between Book and ~~T ax~~Tax Income Since the Introduction Income Since the Introduction
of the Scheduleof the Schedule M-3,” M-3,” National Tax Journal, vol. 69, no. 4 (December 2016), https://www.journals.uchicago.edu/doi/, vol. 69, no. 4 (December 2016), https://www.journals.uchicago.edu/doi/
10.17310/ntj.2016.4.02#. Pretax book income can be found on Part II of the Schedule10.17310/ntj.2016.4.02#. Pretax book income can be found on Part II of the Schedule M-3, whileM-3, while federal taxes are federal taxes are
reported on Part III. reported on Part III.
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Figure 3. Aggregate Book-Tax Difference for Large Corporations
2004-2018 2004-2018

Source: CRS calculations using data from IRS Schedule M-3. CRS calculations using data from IRS Schedule M-3.
Notes: Aggregate book-tax difference is aggregate pretax book income less Aggregate book-tax difference is aggregate pretax book income less aggregate tax income.aggregate tax income. Large Large
corporations are those with assets of $10 mil ioncorporations are those with assets of $10 mil ion or moreor more filing Formfiling Form 1120 U.S. corporate income1120 U.S. corporate income tax returns. tax returns.
Measuring Tax Burden: Effective Tax Rates
Effective tax rates and how they are affected by different features of income or tax measurement 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 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 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 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 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 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 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. 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 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 the National Income and Product Accounts (NIPA), a measure that, as discussed above, largely
reflects economic income. reflects economic income.
Table 2 shows effective corporate tax rates based on measures of corporate profits from the 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 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 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 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 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 measure profits. The first is that the corporate profits include profits from Subchapter S

55 Corporate profits are from Bureau of Economic Analysis, 55 Corporate profits are from Bureau of Economic Analysis, ~~T able~~Table 1.10, “National Income and Product Accounts.” 1.10, “National Income and Product Accounts.”
FederalFederal taxes are from taxes are from ~~T able~~Table 3.2, “Federal Government Current Receipts and Expenditures,” https://apps.bea.gov/ 3.2, “Federal Government Current Receipts and Expenditures,” https://apps.bea.gov/
itable/index.cfm. itable/index.cfm.
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corporations and a less important amount from real estate investment trusts (REITs) that are 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 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 idoes not include capital gains. The effective tax rates in Table 2 adjust for these Subchapter S adjust for these Subchapter S
corporations and capital gains. Based on tax data from the IRS Statistics line counts (discussed 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 subsequently), the share of profits attributable to Subchapter S corporations was 30% of the total
in each year availablein each year available (2016-2017).56 This adjustment reduced profits. Capital gains reported on C (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%, corporation returns (firms subject to the corporate tax) increased corporate profits by 18%, 23%,
and 22% for 2016-2018.57 The first row and 22% for 2016-2018.57 The first row ofof Table 2 shows corporate federal taxes as a percentage shows corporate federal taxes as a percentage
of domestic profits for 2016 through 2020, covering tax rates before the 2017 tax revision (TCJA) 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 (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 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 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. effective tax rates. In both cases, they were about 70% of the statutory rate.
Table 2. Effective Corporate Tax Rates on Domestic Income, National Income, and
Product Accounts
Type of Measure
2016
2017
2018
2019
2020
Profits (with Subchapter S and Capital Gains Adjustment) Profits (with Subchapter S and Capital Gains Adjustment)
22% 22%
17% 17%
13% 13%
14% 14%
13% 13%
Plus Adjustment for State and Local Taxes Adjustment for State and Local Taxes
23% 23%
18% 18%
15% 15%
15% 15%
14% 14%
Sources: CRS calculations using NIPA and IRS data; see text. Initial data for profits are as fol ows:CRS calculations using NIPA and IRS data; see text. Initial data for profits are as fol ows: $1,603.8 $1,603.8
bil ion (2016), $1,617.3 bil ionbil ion (2016), $1,617.3 bil ion (2017), $1,730.4 bil ion (2018), $1,745.0 bil ion (2019), and $1,688.9 bil ion (2020). (2017), $1,730.4 bil ion (2018), $1,745.0 bil ion (2019), and $1,688.9 bil ion (2020).
FederalFederal taxes are as fol ows:taxes are as fol ows: $311.9 bil ion (2016), $245.4 bil ion (2017), $210.6 bil ion (2018), $217.3 bil ion $311.9 bil ion (2016), $245.4 bil ion (2017), $210.6 bil ion (2018), $217.3 bil ion
(2019), and $199.0 bil ion (2020). The two adjustments plus excluding payments of the Federal Reserve(2019), and $199.0 bil ion (2020). The two adjustments plus excluding payments of the Federal Reserve and and
other agencies reduce NIPA profits by 10% in 2016, 12% in 2017, and 9% in 2018. Projecting based on the other agencies reduce NIPA profits by 10% in 2016, 12% in 2017, and 9% in 2018. Projecting based on the ~~th ree~~three--
year average for the two adjustments, profits are reduced by 8% in 2019 and 10% in 2020. year average for the two adjustments, profits are reduced by 8% in 2019 and 10% in 2020.
An adjustment that might be considered is to measure the effective tax rate with a deduction for 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 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 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. 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 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 economic profits more closely, and these measures include an adjustment for inflation (measuring
the basis of assets and inventories in current dollars).58 the basis of assets and inventories in current dollars).58
The remaining issue with the NIPA data is the treatment of foreign-source income. The remaining issue with the NIPA data is the treatment of foreign-source income. Al All of the of the
measures imeasures in Table 2 include total U.S. tax, including the residual U.S. tax on foreign-source include total U.S. tax, including the residual U.S. tax on foreign-source

56 Data from line 21, Form 1120S, Internal Revenue Service, Statistics of Income, Corporation Income 56 Data from line 21, Form 1120S, Internal Revenue Service, Statistics of Income, Corporation Income ~~T ax~~Tax Returns Returns
Line Item Estimates, 2016-2018, https://www.irs.gov/statistics/soi-tax-stats-corporation-income-tax-returns-line-item-Line Item Estimates, 2016-2018, https://www.irs.gov/statistics/soi-tax-stats-corporation-income-tax-returns-line-item-
estimates. estimates.
57 Data from Internal Revenue Service, Statistics of Income, Corporate Complete Report, Table 2.3 Returns of Active 57 Data from Internal Revenue Service, Statistics of Income, Corporate Complete Report, Table 2.3 Returns of Active
Corporations, other than Forms 1120S, 1120-REIT, and 1120-RIC, 2016-2018, https://www.irs.gov/statistics/soi-tax-Corporations, other than Forms 1120S, 1120-REIT, and 1120-RIC, 2016-2018, https://www.irs.gov/statistics/soi-tax-
stats-corporation-complete-report. stats-corporation-complete-report.
58 While the NIPA base 58 While the NIPA base is close to a measure of economic income, it does not make some other adjustments, including is close to a measure of economic income, it does not make some other adjustments, including
the gain from repaying debt in cheaper dollars, that wouldthe gain from repaying debt in cheaper dollars, that would increase profits. In addition, when includingincrease profits. In addition, when including capital gains, capital gains,
only real capital gainsonly real capital gains (and not the gain due(and not the gain due to inflation) should be included.to inflation) should be included. Eliminating the inflation portion of capital Eliminating the inflation portion of capital
gainsgains ~~would reduce~~ would reduce profits. Economic income wouldprofits. Economic income would also include real unrealizedalso include real unrealized capital gains that wouldcapital gains that would increase increase
profits. profits.
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income, but do not include foreign-source income. Thus, the effective tax rates reported are 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. 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 Data to make adjustments for foreign-source income and taxes are only available for 2016 and
20172017. Table 3, for 2016, reports three different ways to address this issue. The first column for 2016, reports three different ways to address this issue. The first column
repeats the tax rates repeats the tax rates fromfrom Table 2 (the first column of numbers). The second column eliminates (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 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 rates on domestic income.59 This adjustment lowers the tax rate by a ~~smal~~ small amount, amount, ~~typical y~~typically a a
percentage point or less, reflecting the percentage point or less, reflecting the ~~smal~~ small size of the U.S. residual tax on foreign-source 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 income. The third column retains the full U.S. tax but includes foreign-source income (by adding
back income from U.S. back income from U.S. ~~control ed~~controlled foreign corporations and branch income). It provides a rough 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 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 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 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; effective tax rate of approximately 12%.61 The final column adds foreign taxes to the total;
because this measure does not capture because this measure does not capture al all foreign taxes paid, it likelyforeign taxes paid, it likely understates the true effective understates the true effective
tax rate.62 The adjustments for foreign taxes are imperfect because not tax rate.62 The adjustments for foreign taxes are imperfect because not al all firms have a tax year firms have a tax year
corresponding to the calendar year, so some of the foreign income and tax reflects 2017 levels. corresponding to the calendar year, so some of the foreign income and tax reflects 2017 levels.

~~59 T he~~ 59 The U.S. tax on foreign-source income data are from Internal Revenue Service, Statistics of Income, Corporate U.S. tax on foreign-source income data are from Internal Revenue Service, Statistics of Income, Corporate
Foreign Foreign ~~T ax~~Tax Credit, https://www.irs.gov/statistics/soi-tax-stats-corporate-foreign-tax-credit Credit, https://www.irs.gov/statistics/soi-tax-stats-corporate-foreign-tax-credit -statistics. -statistics. ~~T he~~The residual tax residual tax
is measuredis measured as the difference betweenas the difference between the foreign tax credit limit and foreign tax credits claimed.the foreign tax credit limit and foreign tax credits claimed.
60 Foreign-source income is estimated as the earnings of U.S.60 Foreign-source income is estimated as the earnings of U.S. foreign affiliates from Bureauforeign affiliates from Bureau of Economic Analysis of Economic Analysis
International Data, Direct Investment of Multinationals, Data on Activities of Multinational Enterprises, Net Income. International Data, Direct Investment of Multinationals, Data on Activities of Multinational Enterprises, Net Income.
Branch income isBranch income is reported at IRS Statistics of Income Corporate Foreign reported at IRS Statistics of Income Corporate Foreign ~~T ax~~Tax Credits Statistics, Credits Statistics, ~~T able~~Table 1, 1,
https://www.irs.gov/statistics/soi-tax-stats-corporate-foreign-tax-credit-statisticsform. https://www.irs.gov/statistics/soi-tax-stats-corporate-foreign-tax-credit-statisticsform. ~~T wo~~Two elements make this measure elements make this measure
of income either too large or too small compared to of income either too large or too small compared to ~~t rue~~true foreign-source income: branch income is foreign-source income: branch income is before deductions, before deductions,
and before income of shares of noncontrolled foreign corporations is excluded.and before income of shares of noncontrolled foreign corporations is excluded. Branch income isBranch income is so smallso small that the that the
difference isdifference is less than a percentage point if it is excluded.less than a percentage point if it is excluded. ~~T he~~ The bulk of foreign-source income is in foreign affiliates. bulk of foreign-source income is in foreign affiliates.
61 How close worldwide61 How close worldwide profits as measuredprofits as measured from NIPA data on domestic earnings are to tax data on foreignfrom NIPA data on domestic earnings are to tax data on foreign -source -source
earnings is also affected by depreciation measures. Financial data reflect slowerearnings is also affected by depreciation measures. Financial data reflect slower depreciation rates than allowed under depreciation rates than allowed under
the tax rules, but no inflation adjustments for depreciation. Inventories are not adjusted for inflation, as is the case withthe tax rules, but no inflation adjustments for depreciation. Inventories are not adjusted for inflation, as is the case with
NIPA data. NIPA data.
62 62 ~~T his~~This measure adds measure adds foreign taxes paid on branch income from Internal Revenue Service, “Statistics of Income foreign taxes paid on branch income from Internal Revenue Service, “Statistics of Income ~~T ax~~Tax
Stats—Corporate Foreign Stats—Corporate Foreign ~~T ax Credit T able~~Tax Credit Table 1,” https://www.irs.gov/statistics/soi-tax-stats-corporate-foreign-tax-credit 1,” https://www.irs.gov/statistics/soi-tax-stats-corporate-foreign-tax-credit --
table-1, and taxes paid by controlled foreign corporations from Internal Revenue Service, “table-1, and taxes paid by controlled foreign corporations from Internal Revenue Service, “ Statistics of Income Statistics of Income ~~T ax~~Tax
Stats—Controlled Foreign Corporations,” https://www.irs.gov/statistics/soi-tax-stats-controlled-foreign-corporations, to Stats—Controlled Foreign Corporations,” https://www.irs.gov/statistics/soi-tax-stats-controlled-foreign-corporations, to
domestic taxes paiddomestic taxes paid (i.e., net of the residual tax). (i.e., net of the residual tax). ~~T his~~This number may overstate foreign number may overstate foreign -source income because branch -source income because branch
income is not offset by deductions, but branch income is so small that the difference in effective tax rate is less than a income is not offset by deductions, but branch income is so small that the difference in effective tax rate is less than a
percentage point. percentage point. ~~T his~~This number may understate the effective tax rate since it does not include taxes on income of number may understate the effective tax rate since it does not include taxes on income of
interests in noncontrolled foreign corporations. interests in noncontrolled foreign corporations. ~~T he~~The measure of foreign taxes for 2017 is taken from measure of foreign taxes for 2017 is taken from ~~Inter nal~~Internal Revenue Revenue
Service, Statistics of Income—Country by Country Report,” at https://www.irs.gov/statistics/soi-tax-stats-country-by-Service, Statistics of Income—Country by Country Report,” at https://www.irs.gov/statistics/soi-tax-stats-country-by-
country-report. It reflects only larger firms, and the number wascountry-report. It reflects only larger firms, and the number was increased by 24%, the ratio by which taxes in the increased by 24%, the ratio by which taxes in the
statistics on the foreign tax credit data and the controlled foreign corporation data exceed the countrystatistics on the foreign tax credit data and the controlled foreign corporation data exceed the country -by-country -by-country
measure for 2016. measure for 2016.
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Table 3. Effective Corporate Tax Rates for 2016, Adjusting for Foreign-Source
Income and Taxes
U.S.
U.S. and
Domestic
Foreign
U.S. Tax on
Tax on U.S.
U.S. Tax on
Taxes on
Domestic
Domestic
Worldwide
Worldwide
Type of Measure
Income
Income
Income
Income
Profits (with Subchapter S and Capital Profits (with Subchapter S and Capital
22% 22%
20% 20%
12% 12%
15% 15%
Gains Adjustment) Gains Adjustment)
Plus Adjustment for State and Local Adjustment for State and Local
23% 23%
20% 20%
12% 12%
16% 16%
Taxes Taxes
Sources: CRS calculations using NIPA and IRS data; see text. CRS calculations using NIPA and IRS data; see text.
Table 4 provides the same estimates for 2017. As noted, these rates may be affected by incentives provides the same estimates for 2017. As noted, these rates may be affected by incentives
to shift taxable income between 2017 and 2018. to shift taxable income between 2017 and 2018.
Table 4. Effective Corporate Tax Rates for 2017, Adjusting for Foreign-Source
Income and Taxes
U.S.
U.S. and
Domestic
Foreign
U.S. Tax on
Tax on U.S.
U.S. Tax on
Taxes on
Domestic
Domestic
Worldwide
Worldwide
Type of Measure
Income
Income
Income
Income
Profits (with Subchapter S and Capital Profits (with Subchapter S and Capital
17% 17%
15% 15%
8% 8%
13% 13%
Gains Adjustment) Gains Adjustment)
Plus Adjustment for State and Local Adjustment for State and Local
18% 18%
16% 16%
9% 9%
13% 13%
Taxes Taxes
Sources: CRS calculations using NIPA and IRS data; see text. CRS calculations using NIPA and IRS data; see text.
It is difficult to know how these measures are affected in future years by the 2017 tax revision 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 (TCJA) changes—which lowered the U.S. effective tax rate by any measure and changed the
international system—because not international system—because not al all data sources are available. Data are not availabledata sources are available. Data are not available to to
estimate the U.S. domestic tax on domestic income. For the remaining measures, a rough 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 projection can be made by assuming branch income (which is ~~smal~~ small) bears the same proportion to ) bears the same proportion to
foreign income of affiliates as in 2017 and that taxes on foreign-source income (without 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 2017.63considering the effects of the 2017 changes) would be about the same as in 2017.63

63 Income of branches was63 Income of branches was similar but slightly lowersimilar but slightly lower in 2017: 12% in 2016 and 9% in 2017. in 2017: 12% in 2016 and 9% in 2017.
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Table 5. Effective Corporate Tax Rates for 2018, Adjusting for Foreign-Source
Income and Taxes
U.S.
U.S. and
Domestic
Foreign
U.S. Tax on
Tax on U.S.
U.S. Tax on
Taxes on
Domestic
Domestic
Worldwide
Worldwide
Type of Measure
Income
Income
Income
Income
Profits (with Subchapter S and Capital Profits (with Subchapter S and Capital
13% 13%
NA NA
7% 7%
11% 11%
Gains Adjustment) Gains Adjustment)
Plus Adjustment for State and Local Adjustment for State and Local
15% 15%
NA NA
7% 7%
11% 11%
Taxes Taxes
Sources: CRS calculations using NIPA and IRS data; see text. CRS calculations using NIPA and IRS data; see text.
Tax Rates from IRS Statistics of Income
IRS data include reconciliation of tax and book income, although these data are subject to a lag IRS data include reconciliation of tax and book income, although these data are subject to a lag
and are currently only availableand are currently only available through 2019.64 Tax returns and book income are not on a 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 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 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 data for 2017 include income from calendar year 2018. In concept, however, these rates are
similar to the rates for NIPA-based profits isimilar 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 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 (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 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 provide a pretax measure comparable to income measured for tax purposes. This measure is
reported on Schedule M-3 only for firms with $10 reported on Schedule M-3 only for firms with $10 ~~mil ion~~million or more in assets and differs from a or more in assets and differs from a
related measure, book income, to reflect different consolidation rules. For example, financial 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 reports include income of majority-owned foreign affiliates, whereas the book income measure
includes dividends of foreign affiliates as includes dividends of foreign affiliates as ~~wel~~ well as certain other minority-owned foreign income as certain other minority-owned foreign income
shares. Schedule M-1, reflecting shares. Schedule M-1, reflecting ~~smal er~~smaller firms with less than $10 firms with less than $10 ~~mil ion~~million of assets, only reports of assets, only reports
book income; however, these book income; however, these ~~smal er~~smaller firms presumably do not have major differences due to firms presumably do not have major differences due to
consolidation, so the same value is reported iconsolidation, so the same value is reported in Table 6 for these firms as financial income in for these firms as financial income in
reporting totals in the second row. Corporations with less than $250,000 of income and assets are reporting totals in the second row. Corporations with less than $250,000 of income and assets are
not required to complete Schedule M-1.not required to complete Schedule M-1.
Worldwide financial income before taxes (row 1) is similar to book income in 2016 and 2017 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 (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 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. 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 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 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 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 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 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 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 income measured on a book versus tax basis. Note that the tax rates for these measures do not

~~64 T he data can be~~ 64 The data can be found in the individualfound in the individual line accounts on the IRSline accounts on the IRS Statistics of Income Statistics of Income ~~Website~~website, https://www.irs.gov/, https://www.irs.gov/
statistics/soi-tax-stats-corporation-income-tax-returns-line-item-estimates. statistics/soi-tax-stats-corporation-income-tax-returns-line-item-estimates.
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capture capture al all income (although most of that income is probably associated with nontaxed entities income (although most of that income is probably associated with nontaxed entities
that are more likelythat are more likely to be to be ~~smal~~ small, such as Subchapter S firms). Also, measuring tax rates in row 1 , 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 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. 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 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 not very different from the rates using the same concept based on NIPA data (13% in 2016 and
2017 and 9% in 2018). 2017 and 9% in 2018).
Table 6. Effective Tax Rates on Income, IRS Data
Income
Income
Income
Effective
Effective
Effective
2016,
2017,
2018,
Tax Rate,
Tax Rate,
Tax Rate,
Income Measure
$billions
$billions
$billions
2016
2017
2018
Worldwide Worldwide Financial Financial
Income plus Federal Income plus Federal
$2,872 $2,872
$4,094 $4,094
$3,008 $3,008
11% 11%
6% 6%
11% 11%
Income Tax Income Tax
Book Income + Federal Book Income + Federal
~~Income Tax~~
$2,803 $2,803
$4,004 $4,004
$3,584 $3,584
11% 11%
7% 7%
9% 9%
Income Tax Taxable Income Before Taxable Income Before
NOLS and Other NOLS and Other
$1,285 $1,285
$1,010 $1,010
$2,595 $2,595
24% 24%
26% 26%
12% 12%
Adjustments, Adjustments, M-1 & M-3 M-1 & M-3
Taxable Income Before Taxable Income Before
NOLS and Other NOLS and Other
$1,913 $1,913
$1,656 $1,656
$3,391 $3,391
17% 17%
16% 16%
9% 9%
Adjustments Adjustments
Taxable Income After Taxable Income After
Special Deductions, Special Deductions,
$1,894 $1,894
$1,633 $1,633
$2,800 $2,800
17% 17%
16% 16%
11% 11%
Before Before NOLs NOLs
Taxable Income After Taxable Income After
NOLs NOLs
$1,643 $1,643
$1,384 $1,384
$2,587 $2,587
19% 19%
19% 19%
12% 12%
Income Subject to Tax Income Subject to Tax
$1,271 $1,271
$1,002 $1,002
$1,957 $1,957
25% 25%
26% 26%
16% 16%
Source: CRS calculations using IRS dataCRS calculations using IRS data. Al All data taken from the IRS Statistics ofdata taken from the IRS Statistics of Income LineIncome Line Item Estimates for Item Estimates for
FormForm 1120.1120.
Notes: Taxable income before NOLs was fromTaxable income before NOLs was from line 28 of Formline 28 of Form 1120, income subject to tax from line 30 of 1120, income subject to tax from line 30 of
FormForm 1120. Worldwide1120. Worldwide financial incomefinancial income is from line 1 of the M-1 schedule, plus line 4 of the M-3, Part 1 is from line 1 of the M-1 schedule, plus line 4 of the M-3, Part 1
schedule. Book incomeschedule. Book income was from line 1 of the M-1 schedule, plus line 11 of the M-3 Part 1 schedule. Both added was from line 1 of the M-1 schedule, plus line 11 of the M-3 Part 1 schedule. Both added
back federal taxable income before NOLs,back federal taxable income before NOLs, and special deductions for M-1 and M-3 filersand special deductions for M-1 and M-3 filers ~~were~~ were from the M-1 from the M-1
form line 10 plus the M-3 Part 11, line 30(d). Federal incomeform line 10 plus the M-3 Part 11, line 30(d). Federal income tax was reduced by $127 bil iontax was reduced by $127 bil ion in deferredin deferred taxes taxes
on unrepatriated accumulated income in 2017. Taxes were $313 bil ionon unrepatriated accumulated income in 2017. Taxes were $313 bil ion in 2016, $261 bil ion in 2017, and $319 in 2016, $261 bil ion in 2017, and $319
bil ion in 2018. The net deferred tax on unrepatriated incomebil ion in 2018. The net deferred tax on unrepatriated income was $14 bil ion in 2017was $14 bil ion in 2017 and $4 bil ion in 2018.and $4 bil ion in 2018.
The fourth measure is taxable income as reported on the corporate tax form before net operating 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 losses and special deductions. The fifth measure deducts special deductions (which ~~general y~~generally
relate to domestic intercorporate dividend deductions), and the sixth measure also deducts net relate to domestic intercorporate dividend deductions), and the sixth measure also deducts net
operating losses. In general, the special deductions are operating losses. In general, the special deductions are ~~smal~~ small, but they were much larger for 2018 , but they were much larger for 2018
because they captured the deduction for deemed unrepatriated income abroad. This measure (row 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 5) is a rough measure of current taxable income measured on a tax basis. It is likely to be ~~smal er~~
smaller when the economy is at full employment because of carryovers of net operating losses from 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 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 recovery). The final measure, income subject to tax, eliminates nontaxable firms that are reported
in the 1120 series, most notably Subchapter S corporations. in the 1120 series, most notably Subchapter S corporations.
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The difference between the statutory tax rate (a top rate of 35% in 2016 and 2017 and a flat 21% 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 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 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 the foreign tax credit, which offsets income taxes paid by foreign entities. Adding back foreign
tax credits ($89 tax credits ($89 ~~bil ion~~billion in 2016 and $60 in 2016 and $60 ~~bil ion~~ billion in 2017) would increase the effective rate to 32% in 2017) would increase the effective rate to 32%
(data are not available(data are not available for 2018). The remaining difference is due to other business credits—for 2018). The remaining difference is due to other business credits—
~~especial y~~especially the research credit, although other credits, such as energy credits and the low-income the research credit, although other credits, such as energy credits and the low-income
housing credits, are significant as housing credits, are significant as ~~wel~~ well. .
Effective Corporate Tax Rates Using Financial Data
Financial (SEC 10-K) data are frequently used by researchers to estimate tax rates because of Financial (SEC 10-K) data are frequently used by researchers to estimate tax rates because of
their public availabilitytheir public availability for individual companies, whereas tax data are only available in the for individual companies, whereas tax data are only available in the
aggregate due to confidentiality rules. The following sections present selected research that has 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 drawn on financial data, which is constructed under financial accounting rules (as opposed to tax
accounting rules). accounting rules).
Financial data include three measures of taxes: taxes accrued, current taxes, and cash taxes. 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 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 deductions reflecting write-off periods, losses, or, in prior law, earnings abroad that were
expected to be repatriated and create a future liability).expected to be repatriated and create a future liability). Current taxes are taxes paid on current Current taxes are taxes paid on current
income, which reflect tax depreciation rules, loss carryovers, and limitations on losses and taxes 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 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 liabilitiesactual tax paid in a period, which may not reflect tax liabilities associated with current income associated with current income
because of filing delays. Cash taxes are not because of filing delays. Cash taxes are not ~~general y~~ generally divided into federal, state and local, and divided into federal, state and local, and
foreign taxes.foreign taxes.
Financial data can also differ from NIPA data because not Financial data can also differ from NIPA data because not al all firms have calendar reporting years. 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, 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 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 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, and therefore reflect worldwide taxes on worldwide income, similar in concept to the first row,
last column, last column, ofof Table 4 andand Table 5, but they also include state and local income taxes, which are 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 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 divided by aggregate income) and the average of the firms’ effective tax rates, the latter for both
al all firms and profitable firms. Damodaran reports both taxes accrued and cash taxes. Data for the 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 aggregate measure and for average tax rates for firms with profit, for cash and accrual taxes, are
shown shown inin Table 7. The cash measure is not reported for 2016. The cash measure is not reported for 2016.
State and local taxes only explain part of the difference between the cash tax rates i State and local taxes only explain part of the difference between the cash tax rates in Table 7 and and
iin Table 4 andand Table 5. For 2017, the cash flow rate is 22%, but if state and local taxes are added For 2017, the cash flow rate is 22%, but if state and local taxes are added
to the rate ito the rate in Table 4, the comparable tax rate is 16%; for 2018, the cash flow rate is 19% and the the comparable tax rate is 16%; for 2018, the cash flow rate is 19% and the

65 Current-year data can be found65 Current-year data can be found at http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/taxrate.htm and at http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/taxrate.htm and
archived data at http://pages.stern.nyu.edu/~adamodar/New_Home_Page/dataarchived.html. A discussionarchived data at http://pages.stern.nyu.edu/~adamodar/New_Home_Page/dataarchived.html. A discussion of the rates is of the rates is
at http://pages.stern.nyu.edu/~adamodar/New_Home_Page/valquestions/taxrate.htm. The home page is at at http://pages.stern.nyu.edu/~adamodar/New_Home_Page/valquestions/taxrate.htm. The home page is at
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/data.html. http://pages.stern.nyu.edu/~adamodar/New_Home_Page/data.html.

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comparable tax rate (with state and local taxes added) is 14%. These higher rates may reflect a 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 subset that includes more profitable companies that are less likely to experience losses. The 2020
cash rates may have been cash rates may have been ~~especial y~~especially affected by losses. affected by losses.
Table 7. Effective Total (Federal, State, and Foreign) Tax Rates on Large
Corporations, Based on Financial Data
Type of Measure
2016
2017
2018
2019
2020
Aggregate Tax Rate Aggregate Tax Rate

Cash Cash

22.26% 22.26%
18.81% 18.81%
21.32% 21.32%
32.73% 32.73%
Accrual Accrual
28.49% 28.49%
26.06% 26.06%
27.38% 27.38%
19.01% 19.01%
20.43% 20.43%
Average Rate on Moneymaking Firms Average Rate on Moneymaking Firms

Cash Cash

20.28% 20.28%
25.16% 25.16%
18.37% 18.37%
21.35% 21.35%
Accrual Accrual
26.22% 26.22%
25.58% 25.58%
31.34% 31.34%
18.57% 18.57%
17.76% 17.76%
Source: Damodaran Online, http://pages.stern.nyu.edu/~adamodar/New_Home_Page/biomission.Damodaran Online, http://pages.stern.nyu.edu/~adamodar/New_Home_Page/biomission.~~ht ml~~html. .
These data show tax rates below the statutory rate for 2017 but in some cases above that rate in 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 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 lowest cash tax rates for 2019 were air transport, broadcasting, power, shoe manufacturing, and
utilitiesutilities (both general and water). Utilities and power companies have particularly large benefits (both general and water). Utilities and power companies have particularly large benefits
from accelerated depreciation. The aggregate tax rate in 2020 on from accelerated depreciation. The aggregate tax rate in 2020 on al all firms presumably reflects the firms presumably reflects the
effects of the COVID-19 recession (which led to more firms with losses) and the limitation of 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 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 reduced because taxes cannot be negative, leading to a higher aggregate tax rate. These conditions
are less representative of normal times. 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 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 percentage of domestic income, and thus corresponds, in concept, to the numbers inin Table 2.66 66
This study estimates the effective tax rate for 2018 at 11%, which is similar to those measures. It 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 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 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. 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 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 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 would pay the minimum tax proposed by President Biden (imposed at a 15% rate and ~~al owing~~
allowing NOLs and foreign tax credits).67 Sullivan estimated four firms would pay more than $1 NOLs and foreign tax credits).67 Sullivan estimated four firms would pay more than $1 ~~bil ion~~billion
under the Biden proposal: AT&T, Berkshire Hathaway, Bank of America, and JPMorgan Chase. under the Biden proposal: AT&T, Berkshire Hathaway, Bank of America, and JPMorgan Chase.
Eight additionalEight additional firms were estimated to pay more than $500 firms were estimated to pay more than $500 ~~mil ion~~million each: Duke Energy, NextEra each: Duke Energy, NextEra
Energy, T-Mobile, Lockheed Martin, United Parcel Service, U.S. Bancorp, Amazon, and Intel. Energy, T-Mobile, Lockheed Martin, United Parcel Service, U.S. Bancorp, Amazon, and Intel.

66 Institute on 66 Institute on ~~T axation~~Taxation and Economic Policy and Economic Policy, Corporate Tax Avoidance in the First Year of the Trump Tax Law, ,
December 16, 2019, https://itep.org/corporate-tax-avoidance-in-the-first-year-of-the-trump-tax-law/. December 16, 2019, https://itep.org/corporate-tax-avoidance-in-the-first-year-of-the-trump-tax-law/.
67 Martin Sullivan, “Which Large U.S.67 Martin Sullivan, “Which Large U.S. Corporations Would Pay Biden’sCorporations Would Pay Biden’s 15% Minimum 15% Minimum ~~T ax~~Tax?” ?” Tax Notes Federal, ,
December 22, 2020, pp. 1868-1872. December 22, 2020, pp. 1868-1872.
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According to Sullivan, the According to Sullivan, the ~~overal~~ overall effective tax rate would be 16.7%. Because foreign taxes effective tax rate would be 16.7%. Because foreign taxes
would be creditable against the minimum tax under the Biden proposal, Sullivan reports federal 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 and foreign income taxes on worldwide income, similar in concept to the last column ofof Table 5.
His estimates indicate that the effective tax rate would rise by two percentage points, to 18.7% His estimates indicate that the effective tax rate would rise by two percentage points, to 18.7%
with application of the Bidenwith application of the Biden minimum tax. minimum tax.
Minimum Taxes on Business Income
The tax code has, at various points in time, included different types of minimum taxes on 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 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 taxes include GILTI and BEAT. The following sections discuss these taxes, as ~~wel~~ well as other policy as other policy
options for imposing minimum taxes on business income. 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 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 minimum tax was an add-on tax imposed on preference items in excess of an exemption amount
and tax liability.68and tax liability.68 The tax was significantly modified as part of the Tax Reform Act of 1986 (P.L. 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 99-514).69 At that time, the policy goal was “to ensure that no taxpayer with substantial economic
income can avoid significant tax liabilityincome can avoid significant tax liability by using exclusions, deductions, and credits.”70 The 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 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 corporate AMT was estimated to reduce federal tax revenues by $40.3 ~~bil ion~~billion from 2018 through from 2018 through
2027.71 The corporate AMT was complex, a factor that led to its repeal in TCJA.72 It had also 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—become much less effective in raising corporate taxes as AMT depreciation—~~original y~~originally a major a major
factor in the increase in the AMT tax base compared to the regular base—was conformed more factor in the increase in the AMT tax base compared to the regular base—was conformed more
closely to regular depreciation. closely to regular depreciation.
The corporate AMT required corporations to calculate their tax liability The corporate AMT required corporations to calculate their tax liability under two sets of rules, under two sets of rules,
those of the regular tax system and tax that would be owed under the alternative system.73 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 liabilityTaxpayers would then pay the higher amount. The AMT also served to smooth tax liability over over
time. Taxpayers with AMT liabilitytime. Taxpayers with AMT liability would receive a credit for the amount that AMT exceeded would receive a credit for the amount that AMT exceeded
regular tax liability.regular tax liability. That amount could be claimed against future 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 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 whether they owed tax under the AMT. AMTI was taxable income, increased by certain

~~68 T ax~~ 68 Tax preference items included in the corporate add-on tax base were preference items included in the corporate add-on tax base were excess accelerated depreciation on real excess accelerated depreciation on real
property; amortization of certain rehabilitation expenditures, certified pollution control facilities, and railroad rolling property; amortization of certain rehabilitation expenditures, certified pollution control facilities, and railroad rolling
stock; excess badstock; excess bad debt reserves for financial institutions; excess depletion; certain capital gains; and the excess of the debt reserves for financial institutions; excess depletion; certain capital gains; and the excess of the
fair market value over the option price of certain stock options. fair market value over the option price of certain stock options.
69 Andrew69 Andrew B. Lyon, “Alternative minimum tax, corporate,” in B. Lyon, “Alternative minimum tax, corporate,” in The Encyclopedia of Taxation and Tax Policy, ed. Joseph , ed. Joseph
J. Cordes, Robert D. Ebel, and Jane G.J. Cordes, Robert D. Ebel, and Jane G. Gravelle (Washington, DC: Gravelle (Washington, DC: ~~T he~~The Urban Institute, 1999). Urban Institute, 1999).
70 Joint Committee on 70 Joint Committee on ~~T axation~~Taxation, , General Explanation of the Tax Reform Act of 1986 (H.R. 3838, 99th Congress; ~~Public~~
~~Law~~ P.L. 99-514), JCS-10-87, May 4, 1987, p. 432. For a history of the corporate AMT, JCS-10-87, May 4, 1987, p. 432. For a history of the corporate AMT , see Curtis P. Carlson, , see Curtis P. Carlson, ~~T he~~
The Corporate Alternative Minimum Corporate Alternative Minimum ~~T ax~~Tax: Aggregate Historical : Aggregate Historical ~~T rends~~Trends, Department of the , Department of the ~~T reasury~~Treasury, Office of , Office of ~~T ax~~
~~Analysis, OT A~~ Tax Analysis, OTA Paper 93, June 2005, https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/WP-Paper 93, June 2005, https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/WP-
93.pdf (cited hereinafter as “93.pdf (cited hereinafter as “ Carlson, Carlson, ~~T he Corporat e~~The Corporate Alternative Minimum Alternative Minimum ~~T ax~~Tax”). ”).
71 Joint Committee on 71 Joint Committee on ~~T axation~~Taxation, , General Explanation of P.L. 115-97, December 20, 2018, p. 436. P.L. 115-97, December 20, 2018, p. 436.
72 Eric Zwick,72 Eric Zwick, ~~“ T he~~ “The Costs of Corporate Costs of Corporate ~~T ax~~Tax Complexity,” Complexity,” American Economic Journal: Economic Policy, vol. 13, no. , vol. 13, no.
2 (May 2021), pp. 467-500. 2 (May 2021), pp. 467-500.
73 73 Carlson, Carlson, The Corporate Alternative Minimum Tax. .
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preference items (effectively preference items (effectively ~~disal owing~~disallowing deductions for those items), and adjusted according to deductions for those items), and adjusted according to
different rules related to timing and deferrals. Adjustment items modified cost recovery under the 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 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 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 provided that a NOL carryover could not reduce AMT liability by more than 90% of AMTI (as
determined without the NOL deduction). determined without the NOL deduction).
A corporation’s tentative minimum tax was computed as 20% of AMTI in excess of a $40,000 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 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), nonrefundable business credits, including the tax credit for research and experimentation (R&E),
could not be claimed against the AMT.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 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 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 to “achieve both real and apparent fairness,” by adopting a system that ~~general y~~generally required that required that
“whenever a company publicly reports significant earnings, that company “whenever a company publicly reports significant earnings, that company ~~wil~~ will pay some tax for pay some tax for
the year.”75 When enacted, the minimum tax on book income was intended to be temporary. 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 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 on “income tax principles,” was to replace the book income tax.76
The book-income AMT adjustment was a catch- The book-income AMT adjustment was a catch-al all adjustment designed to ensure that any items adjustment designed to ensure that any items
not captured in the AMT base but reported as income would be subject to tax. not captured in the AMT base but reported as income would be subject to tax. ~~Specifical y~~Specifically, the , the
book-income adjustment required taxpayers to include in taxable income one-half of any positive 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. 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 The book-income adjustment only applied to the 1987, 1988, and 1989 tax years.77 One concern
about using book income to compute tax liabilityabout using book income to compute tax liability is that book income is defined outside of the tax 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 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 book-income adjustment.78 Empirical research has found that taxpayers did manage their
earnings, adjusting book income to reduce taxes owed.79earnings, adjusting book income to reduce taxes owed.79
The Biden Administration has proposed a 15% minimum tax, based on the book income of 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 certain large corporations. Only corporations with worldwide book income in excess of $2 ~~bil ion~~

billion 74 Recovery periods under the AMT74 Recovery periods under the AMT were shortened over time, a factor that contributed to fewer firms beingwere shortened over time, a factor that contributed to fewer firms being affected by affected by
the corporate AMTthe corporate AMT . See Carlson, . See Carlson, The Corporate Alternative ~~Minim um~~ Minimum Tax. Other adjustment items made changes . Other adjustment items made changes
related to the treatment of inside build-uprelated to the treatment of inside build-up of life insurance contracts; the use of firstof life insurance contracts; the use of first -in, first-in, first -out inventory accounting -out inventory accounting
methods; and the methods; and the ~~inst allment~~installment sales method. sales method.
75 Joint Committee on 75 Joint Committee on ~~T axation~~Taxation, , General Explanation of the Tax Reform Act of 1986 (H.R. 3838, ~~99 th~~99th Congress; Public
Law 99-514), JCS-10-87, May 4, 1987, p. 434. , JCS-10-87, May 4, 1987, p. 434.
76 Joint Committee on 76 Joint Committee on ~~T axation~~Taxation, , General Explanation of the Tax Reform Act of 1986 (H.R. 3838, 99th Congress; Public
Law 99-514), JCS-10-87, May 4, 1987, p. 435. , JCS-10-87, May 4, 1987, p. 435.
77 77 ~~T he~~The book-income adjustment was replaced with Adjusted book-income adjustment was replaced with Adjusted Current Earnings (ACE) after 1989.Current Earnings (ACE) after 1989.
78 See78 See ~~CRS~~ CRS Report 89-619, Report 89-619, The Corporate Minimum Tax and Adjusted Current Earnings (ACE), by David L. , by David L.
BrumbaughBrumbaugh (November 3, 1989) (out of print; available to congressional clients upon request). (November 3, 1989) (out of print; available to congressional clients upon request).
79 For a summary of the research, see Mindy Herzfeld, “ 79 For a summary of the research, see Mindy Herzfeld, “~~T axing~~Taxing Book Profits: New Proposals and 40 Years of Book Profits: New Proposals and 40 Years of
Critiques,”Critiques,” National Tax Journal, vol. 73, no. 4 (December 2020), pp. 1025-1046. More recent work also suggests, vol. 73, no. 4 (December 2020), pp. 1025-1046. More recent work also suggests that that
financial statement income might be modified if a book income tax were to be imposed. Seefinancial statement income might be modified if a book income tax were to be imposed. See Dhammika Dharmapala, Dhammika Dharmapala,
““~~T he T ax~~The Tax Elasticity of Financial Statement Income: Implications for Current Reform Proposals,” Elasticity of Financial Statement Income: Implications for Current Reform Proposals,” National Tax Journal, ,
vol. 73, no. 4 (December 2020), pp. 1047-1064; and Jordan Richmond, vol. 73, no. 4 (December 2020), pp. 1047-1064; and Jordan Richmond, Firm Responses to Book ~~Incom e~~Income Alternative
~~Minim um~~ Minimum Taxes, February 12, 2021, https://jordan-richmond.github.io/research/book_inc_AMT.pdf. , February 12, 2021, https://jordan-richmond.github.io/research/book_inc_AMT.pdf.
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would be subject to the minimum. In support of this proposal, the Administration claims that in a 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 typical year there are approximately 120 companies that report at least $2 ~~bil ion~~ billion in earnings on in earnings on
financial statements, with a “significant share” of these companies paying no income tax.80 The 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 policy seeks “to ensure that the most aggressive corporate tax avoiders bear meaningful federal
income tax liabilities”income tax liabilities” and make it so that “highly profitable multinational corporations would no 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 longer be able to report significant profits to shareholders while avoiding federal income taxation
entirely.”81 entirely.”81
The tentative minimum tax would be computed as 15% of worldwide pretax book income, 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 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 for R&D, clean energy, and housing—and foreign tax credits would be ~~al owed~~allowed. Taxpayers would . Taxpayers would
owe additional taxes under this provision if the tentative minimum tax amount exceeded taxes 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 paid under the regular income tax. Taxpayers owing taxes under the provision would be ~~al owed~~allowed a a
book tax credit, which could offset regular income tax liabilitybook tax credit, which could offset regular income tax liability in future years (but not below the in future years (but not below the
minimum tax amount). The Department of the Treasury has estimated this tax would generate minimum tax amount). The Department of the Treasury has estimated this tax would generate
$148.3 $148.3 ~~bil ion~~ 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, 80 U.S. Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals, May 2021, p. 21, https://home.treasury.gov/system/files/131/General-Explanations-FY2022.pdf. 81 U.S. Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals, May 2021, p. 21, https://home.treasury.gov/system/files/131/General-Explanations-FY2022.pdf. 82 U.S. Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals, May 2021, p. 104, https://home.treasury.gov/system/files/131/General-Explanations-FY2022.pdf. 83 Sen. Elizabeth Warren, “Senators Warren, King, and Wyden Announce Updated Proposal To Prevent The Biggest And Most Profitable Corporations From Paying Nothing In Federal Taxes,” press release, October 25, 2021, https://www.warren.senate.gov/newsroom/press-releases/senators-warren-king-and-wyden-announce-updated-proposal-to-prevent-the-biggest-and-most-profitable-corporations-from-paying-nothing-in-federal-taxes. 84 Martin A. Sullivan, “Estimated Effects of Proposed 15 Percent Minimum Tax on Individual Companies,” Tax Notes, November 1, 2021. 85 Joint Committee on Taxation, Estimated Budget Effects Of The Revenue Provisions Of Title XIII – Committee On Ways And Means, Of H.R. 5376, The “Build Back Better Act,” As Reported By The Committee On The Budget, With Modifications (Rules Committee Print 117-18)” JCX-45-21, November 04, 2021, at https://www.jct.gov/publications/2021/jcx-45-21/. Congressional Research Service 28 Minimum Taxes on Business Income: Background and Policy Options 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. ~~in additional revenue between FY2022 and FY2031.82~~
Senator Elizabeth Warren has proposed a minimum tax of 7% on the book income of corporations Senator Elizabeth Warren has proposed a minimum tax of 7% on the book income of corporations
above $100 above $100 ~~mil ion.83~~ million (S. 2860).86 Since the tax would apply only to book income in excess of the Since the tax would apply only to book income in excess of the $100 million ~~$100~~
~~mil ion~~ amount, there is effectively a deduction so that firms just above the threshold would be amount, there is effectively a deduction so that firms just above the threshold would be
subject to a subject to a ~~smal~~ small tax that would rise as book profits increased.tax that would rise as book profits increased. Firms would be Firms would be ~~al owed~~allowed a credit a credit
against the tax for one-third of corporate taxes paid. The credit against the tax of one-third of 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 taxes would offset the tax for some firms that pay the regular income tax. Since the
corporate rate is 21%, the credit corporate rate is 21%, the credit ~~al ows~~allows an offset at a rate of 7% of taxable income, reduced by 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 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.credits). The credit also makes this tax an alternative minimum tax rather than an add-on surtax.8487
Concerns about current proposals to impose a minimum tax on book income are similar to those 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 expressed about the policy in the late 1980s. In a public finance context, researchers continue to
question how much taxpayers question how much taxpayers ~~wil~~ will change their behavior to avoid the tax. If a tax on book income 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 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.real economic activity, then there is an efficiency cost associated with imposing the tax.8588 From From
an accounting perspective, there are concerns that manipulation of book income in response to a an accounting perspective, there are concerns that manipulation of book income in response to a

~~80 U.S. Department of the T reasury,~~ ~~General Explanations of the Administration’s Fiscal Year 2022 Revenue~~
~~Proposals, May 2021, p. 21, https://home.treasury.gov/system/files/131/General-Explanations-FY2022.pdf.~~
~~81 U.S. Department of the T reasury,~~ ~~General Explanations of the Administration’s Fiscal Year 2022 Revenue~~
~~Proposals, May 2021, p. 21, https://home.treasury.gov/system/files/131/General-Explanations-FY2022.pdf.~~
~~82 U.S. Department of the T reasury,~~ ~~General Explanations of the Administration’s Fiscal Year 2022 Revenue~~
~~Proposals, May 2021, p. 104, https://home.treasury.gov/system/files/131/General-Explanations-FY2022.pdf.~~
~~83 See~~ 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 86 See Sen. Elizabeth Warren, “Senators Warren and King, Representative Beyer Announce Legislation to Prevent Sen. Elizabeth Warren, “Senators Warren and King, Representative Beyer Announce Legislation to Prevent ~~T he~~The
BiggestBiggest and Most Profitable Corporations From Paying Nothing in Federal and Most Profitable Corporations From Paying Nothing in Federal ~~T axes~~Taxes,” press release, August,” press release, August 9, 2021, at 9, 2021, at
https://www.warren.senate.gov/newsroom/press-releases/senators-warren-and-king-representative-beyer-announce-https://www.warren.senate.gov/newsroom/press-releases/senators-warren-and-king-representative-beyer-announce-
legislation-to-prevent-the-biggest-and-mostlegislation-to-prevent-the-biggest-and-most -profitable-corporations-from-paying-nothing-in-federal-taxes. -profitable-corporations-from-paying-nothing-in-federal-taxes.
84 87 In 2019, economists Emmanuel Saez and Gabriel In 2019, economists Emmanuel Saez and Gabriel Zucman estimated that an earlier version of the real corporate Zucman estimated that an earlier version of the real corporate
profits tax as outlined by Senator Warren might generate $1.05 trillion in additional corporate tax revenue over the 10profits tax as outlined by Senator Warren might generate $1.05 trillion in additional corporate tax revenue over the 10 --
year budgetyear budget window.window. ~~T his~~ This version did version did not includenot include the credit for corporate taxes paid. Seethe credit for corporate taxes paid. See Letter from Emmanuel Saez Letter from Emmanuel Saez
and Gabrieland Gabriel Zucman to Senator Warren, April 9, 2019, https://elizabethwarren.com/wp-content/uploads/2019/04/Saez-Zucman to Senator Warren, April 9, 2019, https://elizabethwarren.com/wp-content/uploads/2019/04/Saez-
and-Zucman-Letter-on-Real-Corporate-Profits-Tax-4.10.19-2.pdf. and-Zucman-Letter-on-Real-Corporate-Profits-Tax-4.10.19-2.pdf.
8588 Dhammika Dharmapala, “ Dhammika Dharmapala, “~~T he~~The Tax Elasticity of Financial Statement Income: Tax Elasticity of Financial Statement Income: ~~Implicatio ns~~Implications for Current Reform for Current Reform
Proposals,” Proposals,” National Tax Journal, vol. 73, no. 4 (December 2020), pp. 1047-1064. , vol. 73, no. 4 (December 2020), pp. 1047-1064.
~~Congressional Research Service~~
28

~~Minimum Taxes on Business Income: Background and Policy Options~~

~~book income tax could reduce the quality of information in financial reporting statements.86 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.87~~89 Michelle Hanlon and Terry Shevlin, “Book-Tax Conformity for Corporate Income: An Introduction to the Issues,” Tax Policy and the Economy, vol. 19 (September 2005), pp. 101-134. 90 Daniel Shaviro, What Are Minimum Taxes, And Why Might One Favor or Disfavor Them? (Working Paper, New York University School of Law: 2020). Jeffrey Hoopes also has expressed concern that a tax on book income would “distort the financial accounting process and politicize the FASB.” Testimony of Jeffrey L. Hoopes, in U.S. Congress, Senate Finance Subcommittee on Fiscal Responsibility and Economic Growth, Creating Opportunity Through a Fairer Tax System, hearings, 117th Cong., 1st sess., April 27, 2021, at https://www.finance.senate.gov/imo/media/doc/Hoopes%20Testimony.pdf. Congressional Research Service 29 link to page 32 link to page 32 Minimum Taxes on Business Income: Background and Policy Options
As discussed above, many of the factors that create differences between book income and tax 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 income are intentional policy choices. Congress chose to provide accelerated depreciation
~~al owances~~allowances, for example. While a corporate minimum tax based on book income could serve as a , 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 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 effects of tax incentives intended to encourage investment or economic activities if the incentives
are recaptured by a minimum tax. are recaptured by a minimum tax.
~~The Administration’s proposal~~Proposals to impose a minimum tax on firms with worldwide book income to impose a minimum tax on firms with worldwide book income
in excess of $in excess of $~~2 bil ion~~1 billion or $2 billion also could raise some policy questions. The size threshold could raise also could raise some policy questions. The size threshold could raise
horizontal equity concerns (where taxpayers in similar economic circumstances are treated 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 differently for tax purposes). Some may ask whether there is a reason that a firm with $1.9 ~~bil ion~~
billion in worldwide in worldwide book income (or income just below the chosen threshold amount) ~~book income~~ is less likelyis less likely to engage in tax avoidance strategies than a firm with to engage in tax avoidance strategies than a firm with
~~$2.1 bil ion~~ $2.1 billion in worldwide book incomein worldwide book income (or income just above the threshold amount). Providing a firm size threshold, however, could limit the . 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 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 $aggressive corporate tax avoiders” are firms with more than $~~2 bil ion~~1 billion or $2 billion in worldwide book in worldwide book
income, as opposed to firms outside this group, then there may be a rationale for imposing the tax income, as opposed to firms outside this group, then there may be a rationale for imposing the tax
on this group. 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 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 “environmental tax” of 0.12% was imposed on modified alternative minimum taxable income
(modified AMTI) of corporations above $2 (modified AMTI) of corporations above $2 ~~mil ion.88~~million.91 This tax was imposed to raise revenue for This tax was imposed to raise revenue for
the Superfund Trust Fund. For the purposes of this tax, modified AMTI was a corporation’s 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 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 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 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 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 pay the corporate AMT, but were required to compute AMTI to determine the amount of
~~corporate environmental tax owed.89~~

~~86 Michelle Hanlon and T erry Shevlin, “Book-Tax Conformity for Corporate Income: An Introduction to the Issues,”~~
Tax Policy and the Econom y, vol. 19 (September 2005), pp. 101-134.
~~87 Daniel Shaviro, What Are Minimum Taxes, And Why Might One Favor or Disfavor Them? (Working Paper, New~~
~~York University School of Law: 2020). Jeffrey Hoopes also has expressed concern that a tax on book income would~~
~~“distort the financial accounting process and politicize the FASB.” T estimony of Jeffrey L. Hoopes, in U.S. Congress,~~
~~Senate Finance Subcommittee on Fiscal Responsibility and Economic Growth ,~~ ~~Creating Opportunity Through a Fairer~~
~~Tax System~~ ~~, hearings, 117th Cong., 1st sess., April 27, 2021, at https://www.finance.senate.gov/imo/media/doc/~~
~~Hoopes%20T estimony.pdf.~~
~~88 Section 516(a) of the Superfund~~ 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. 91 Section 516(a) of the Superfund Amendments and Reauthorization Act of 1986 (P.L. 99-499) established the special Amendments and Reauthorization Act of 1986 (P.L. 99-499) established the special
tax on corporate income to provide an additional revenue stream for the Superfundtax on corporate income to provide an additional revenue stream for the Superfund ~~T rust~~ Trust Fund. S Fund. S corporations, corporations,
regulatedregulated investment companies, and investment companies, and ~~REIT s~~REITs were not subject to the tax. were not subject to the tax.
8992 Don Fullerton, “Why Have Separate Environmental Don Fullerton, “Why Have Separate Environmental ~~T axes~~Taxes?” in ?” in Tax Policy and the Economy, ed. James M. Poterba, , ed. James M. Poterba,
vol. 10 (National Bureauvol. 10 (National Bureau of Economic Research, 1996), pp. 33of Economic Research, 1996), pp. 33 -70, https://www.nber.org/system/files/chapters/c10898/-70, https://www.nber.org/system/files/chapters/c10898/
c10898.pdf. c10898.pdf.
Congressional Research Service Congressional Research Service
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~~link to page 32 link to page 32~~ 30 Minimum Taxes on Business Income: Background and Policy Options ~~Minimum Taxes on Business Income: Background and Policy Options~~

~~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 al ow for~~
~~amounts paid to be credited against regular tax liability in future years, which is a typical but~~
~~complicating feature of the AMT. Additional y, an add-on tax might also be imposed without~~
~~al owing a foreign tax credit (foreign tax credits would stil be al owed against the regular~~
~~corporate income tax). For example, the base erosion and anti-abuse tax (BEAT) does not al ow 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 stil~~
~~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 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 taxation of foreign-source income (with a foreign tax credit) GILTI deductions may be viewed as
tax subsidies.tax subsidies.9093 The GILTI tax, even if considered a minimum tax, is different from the prior The GILTI tax, even if considered a minimum tax, is different from the prior
corporate AMT because it is added to tax liability.corporate AMT because it is added to tax liability. There is no difficulty in integrating GILTI with 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 a typical minimum tax because it is part of the regular tax system. The Biden Administration has
proposed modifying GILTI and increasing revenues by proposed modifying GILTI and increasing revenues by ~~disal owing~~disallowing the deduction for tangible the deduction for tangible
assets, applying a 21% rate, and imposing the foreign tax credit limit on a country-by-country assets, applying a 21% rate, and imposing the foreign tax credit limit on a country-by-country
basis.basis.9194 (The proposal would raise the ordinary corporate tax rate to 28%, so the GILTI rate would (The proposal would raise the ordinary corporate tax rate to 28%, so the GILTI rate would
~~stil~~ still be below the ordinary rate.) Congress has also considered proposals to modify GILTI in a be below the ordinary rate.) Congress has also considered proposals to modify GILTI in a
similar way.similar way.92
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. In contrast, BEAT is an alternative minimum tax that adds back certain payments between U.S.
firms and their related affiliates and firms and their related affiliates and ~~disal ows~~disallows some credits, notably the foreign tax credit. The some credits, notably the foreign tax credit. The
likelylikely method of integrating a new minimum tax with the BEATmethod of integrating a new minimum tax with the BEAT minimum tax is to have the firms minimum tax is to have the firms
pay the highest of the three taxes: regular, BEAT,pay the highest of the three taxes: regular, BEAT, and the minimum tax. The Administration has and the minimum tax. The Administration has
proposed replacing BEAT with a provision to proposed replacing BEAT with a provision to ~~disal ow~~disallow deductions for payments to tax havens, deductions for payments to tax havens,
which it terms Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD).which it terms Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD).9396 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 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 developing a proposal for a Global Anti-Base Erosion (GloBE) minimum tax that has an income
inclusion rule similar to GILTI that inclusion rule similar to GILTI that al all member nations would adopt.member nations would adopt.9497 This proposal was 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 endorsed by the G7 on June 5, 2021, at a 15% rate; by the G20 on July 9-10, 2021; and by ~~133~~

~~90 T he Joint Committee on T axation~~137 countries and subnational jurisdictions as of November 4, 2021.98 It would require broad agreement on details among countries. 93 The Joint Committee on Taxation lists the lower tax rates imposed by lists the lower tax rates imposed by ~~GILT I~~GILTI as a tax expenditure or a departure from as a tax expenditure or a departure from
a normal tax system. See Joint Committee of a normal tax system. See Joint Committee of ~~T axation,~~ ~~Estim ates~~Taxation, Estimates Of Federal Tax Expenditures For Fiscal Years 2020 -
2024, JCX-23-20, November 5, 2020, https://www.jct.gov/publications/2020/jcx-23-20/. , JCX-23-20, November 5, 2020, https://www.jct.gov/publications/2020/jcx-23-20/.
9194 U.S. U.S. Department of the Department of the ~~T reasury~~Treasury, , General Explanations of the Administration’s Fiscal Year 2022 Revenue
Proposals, May 2021, p. 4, https://home.treasury.gov/system/files/131/General-Explanations-FY2022.pdf, , May 2021, p. 4, https://home.treasury.gov/system/files/131/General-Explanations-FY2022.pdf,
~~92 See CRS~~ 95 See CRS In FocusIn Focus IF11809, IF11809, Trends and Proposals for Corporate Tax Revenue, by Donald J. Marples and, by Donald J. Marples and Jane G. Jane G.
Gravelle. Gravelle.
9396 U.S. U.S. Department of the Department of the ~~T reasury~~Treasury, , General Explanations of the Administration’s Fiscal Year 2022 Revenue
Proposals, May 2021, p. 12, https://home.treasury.gov/system/files/131/General-Explanations-FY2022.pdf. , May 2021, p. 12, https://home.treasury.gov/system/files/131/General-Explanations-FY2022.pdf.
9497 See See OECD/G20OECD/G20 Base Erosion and Profit Shifting Project, Base Erosion and Profit Shifting Project, Tax Challenges Arising from Digitilisation: Report on
Pillar Two Blueprint, 2020, https://www.oecd.org/tax/beps/tax-challenges-arising-from-digitalisation-report-on-pillar-, 2020, https://www.oecd.org/tax/beps/tax-challenges-arising-from-digitalisation-report-on-pillar-
two-blueprint.pdf. two-blueprint.pdf.
98 U.S. Department of the Treasury, “G7 Finance Ministers & Central Bank Governors Communiqué,” press release, June 5, 2021, https://home.treasury.gov/news/press-releases/jy0215; OECD, “Members of the OECD/G20 Inclusive Framework on BEPS joining the Statement on a Two–Pillar Solution to Address the Tax Challenges Arising from the Congressional Research Service 31~~Congressional Research Service~~
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Minimum Taxes on Business Income: Background and Policy Options

~~countries and subnational jurisdictions as of August 12, 2021.95 It would require broad agreement~~
~~on details among countries.~~
GloBE GloBE would be based on financial income using the International Financial Reporting Standards would be based on financial income using the International Financial Reporting Standards
(IFRS, used by many foreign countries) or other acceptable accounting methods (presumably (IFRS, used by many foreign countries) or other acceptable accounting methods (presumably
including GAAP). A deduction would be including GAAP). A deduction would be ~~al owed~~allowed for a percentage of payroll and of assets (as yet 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 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, to 15%. GloBE also has an undertaxed payments rule, ~~fulfil ing~~fulfilling a function somewhat similar to a function somewhat similar to
BEAT. (This undertaxed payments rule is also similar to the SHIELD proposal made by the 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 Administration, which would replace the BEAT alternative minimum tax with the ~~disal owance~~disallowance of of
deductions for payments to tax havens.) The undertaxed payments rule would impose a tax on 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. 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 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 preexisting GILTI rules could be maintained as a substitute in the United States (barring measures
that that ~~substantial y~~substantially weaken GILTI), there would be issues when the U.S.-parented subsidiary is in 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 turn in a country that applies the minimum tax to its own subsidiaries. The proposal also suggests
that BEATthat BEAT not apply to payments for entities subject to the undertaxed payments rule. 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 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 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. the rules applicable to public corporations that must report their financial income to shareholders.
~~Additional y,~~ Additionally, there is flexibilitythere is flexibility in book income measures, and some firms may not keep a full set 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 of financial books. (A similar problem would arise with private corporations, many of which are
~~smal~~ small and owned by one person; even large corporations can be owned by one family.) If the 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 minimum tax were limited to large firms, most pass-throughs would be excluded. Some limited
partnerships and limited liabilitypartnerships and limited liability corporations can be very large, however. A minimum tax would corporations can be very large, however. A minimum tax would
also need to be coordinated with the existing individualalso need to be coordinated with the existing individual alternative minimum tax, which includes alternative minimum tax, which includes
pass-through businesses. One option is to require pass-through businesses. One option is to require al all firms of a certain size, however organized, to firms of a certain size, however organized, to
be taxed under the corporate tax. 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 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 additionalsize, but it might be easier to add any additional preference items to the existing individual preference items to the existing individual
minimum tax for pass-throughs. Policymakers would have to consider treatment of the 20% pass-minimum tax for pass-throughs. Policymakers would have to consider treatment of the 20% pass-
through deduction. through deduction.
A third option is to exclude pass-through businesses from a minimum tax and limit the change to 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 corporations of a certain size. This could encourage some firms, on the margin, not to incorporate
~~to avoid the minimum tax.~~

~~95 U.S. Department of the T reasury, “G7 Finance Ministers & Central Bank Governors Communiqué,” press release,~~
~~June 5, 2021, https://home.treasury.gov/news/press-releases/jy0215; OECD, “ Members of the OECD/G20 Inclusive~~
~~Framework on BEPS joining the~~ ~~Statem ent on a Two–Pillar Solution to Address the Tax Challeng es Arising from the~~
~~Digitalisation of the Econom y~~ ~~as of 12 August~~ 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 Digitalisation of the Economy as of 4 November 2021,” https://www.oecd.org/tax/beps/oecd-g20-inclusive-framework-2021,” https://www.oecd.org/tax/beps/oecd-g20-inclusive-framework-
members-joining-statementmembers-joining-statement -on-two-pillar-solution-to-address-tax-challenges-arising-from-digitalisation--on-two-pillar-solution-to-address-tax-challenges-arising-from-digitalisation-~~july-~~october-2021.pdf; 2021.pdf;
and Italian G20 Presidency, “and Italian G20 Presidency, “~~T hird~~Third Finance Ministers and Central Bank Governors Meeting,” Communiqué, Finance Ministers and Central Bank Governors Meeting,” Communiqué, ~~July~~ July 9-10 9-10
2021, https://www.g20.org/wp-content/uploads/2021/07/Communique-2021, https://www.g20.org/wp-content/uploads/2021/07/Communique-~~T hird~~Third-G20-FMCBG-meeting-9-10-July--G20-FMCBG-meeting-9-10-July-
2021.pdf. 2021.pdf.
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Minimum Taxes on Business Income: Background and Policy Options

~~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 is one policy option for ensuring that al all corporations or businesses pay some amount in taxes. An corporations or businesses pay some amount in taxes. An
alternative to imposing a minimum tax is to reconsider the tax preferences and rules that alternative to imposing a minimum tax is to reconsider the tax preferences and rules that ~~al ow~~allow
taxes to taxes to ~~fal~~ fall below the statutory rate (such as lower taxes on foreign-source income and 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, 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. 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 In the past, an AMT was used in an attempt to ensure that al all taxpayers with income contributed taxpayers with income contributed
to tax revenues. The AMT system was complex. That complexity, combined with questions about 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 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 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 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. 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 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 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. 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 Given current tax reporting requirements, large firms are already reporting data on their book-tax
differences that could ease complying with a minimum 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 Minimum taxes based on financial profits present a number of issues. In addition to the general
policy concerns policy concerns ~~potential y~~potentially associated with an AMT, an AMT that relies on book income could 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 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 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 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 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 add-on tax, general concerns that some have raised about using book income as a base for
determining tax liabilitydetermining tax liability would remain.would remain.
As debates about minimum taxes continue, policymakers may consider a number of issues. For As debates about minimum taxes continue, policymakers may consider a number of issues. For
example, how example, how ~~wil~~ will pass-through businesses be treated? What about multinational businesses? Is 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 the tax consistent with the GloBE framework? These types of questions, and others, could present
a number of conceptual and administrative a number of conceptual and administrative ~~chal enges~~challenges. .
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Minimum Taxes on Business Income: Background and Policy Options

Appendix A. Glossary
Table A-1. Glossary
BEAT
The base and anti-abuse tax (BEAT) is an alternative minimum The base and anti-abuse tax (BEAT) is an alternative minimum tax that applies tax that applies
to large,to large, multinational corporationsmultinational corporations making substantial payments to foreign making substantial payments to foreign
affiliates. affiliates.
Book Income
Book income Book income is reported on a company’s financial or incomeis reported on a company’s financial or income statements. statements.
Public companies are required to disclosePublic companies are required to disclose information on their financial information on their financial
performance on an ongoing basis. performance on an ongoing basis.
Book-Tax Difference
The difference between financial (or book) income The difference between financial (or book) income and income for tax and income for tax
purposes (also referredpurposes (also referred to as the book-tax gap). to as the book-tax gap).
Economic Income
Economic income is the sum of dividends and distributions paid and changes in Economic income is the sum of dividends and distributions paid and changes in
the market value of a firm adjusted for inflation. the market value of a firm adjusted for inflation.
Financial Income
Financial income is synonymous with book income. Financial income is synonymous with book income. Book incomeBook income is reported is reported
on a company’s financial statements. on a company’s financial statements.
GILTI
The current tax system imposes The current tax system imposes a 10.5% minimuma 10.5% minimum tax on global intangible tax on global intangible
low-tax income (GILTI). low-tax income (GILTI).
NIPA
The U.S. Bureau of Economic Analysis The U.S. Bureau of Economic Analysis (BEA) produces measures(BEA) produces measures of aggregate of aggregate
corporate profits (National Income and Product Accounts [NIPA] earnings)corporate profits (National Income and Product Accounts [NIPA] earnings) . .
NIPA’s corporate profits measureNIPA’s corporate profits measure “represents“represents the portion of total income the portion of total income
earned from current production that is accounted for by U.S. corporations.”earned from current production that is accounted for by U.S. corporations.”
NIPA earnings, by design, measure profits from current production. NIPA earnings, by design, measure profits from current production.
Profits from Current
Profits before tax, sometimes Profits before tax, sometimes ~~referred~~ referred to as book profits, adjusted for (1) an to as book profits, adjusted for (1) an
Production
inventory valuation adjustment; and (2) a capital consumption adjustment. inventory valuation adjustment; and (2) a capital consumption adjustment.
Tax Expenditure
Tax expenditures include special credits, Tax expenditures include special credits, deductions, exemptions,deductions, exemptions, exclusions, exclusions,
and tax rates that reduce corporate income tax col ections.and tax rates that reduce corporate income tax col ections. These provisions These provisions
can support certain businesses and economic sectorscan support certain businesses and economic sectors and be incentives and be incentives
designed to encourage certain behaviors. designed to encourage certain behaviors.
Tax Income
On the Schedule M-3, tax income On the Schedule M-3, tax income is taxable incomeis taxable income before any net operating before any net operating
loss deduction and special deductions. loss deduction and special deductions.
Taxable Income
Income that is subject to the corporate income tax (also referred Income that is subject to the corporate income tax (also referred to as to as
income subject to tax). income subject to tax).

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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 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 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 from taxable income that appear in the NIPA income measure, which is sometimes referred to as
“book profits.” “book profits.”

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Table B-1. Comparing Tax Income to NIPA’s Profits Before Tax, 2018
Amount
Measure of Income
($billions)
Notes
Income Measures from Tax Returns
Income Subject to Tax (Taxable Income) Income Subject to Tax (Taxable Income)
$1,956.7 Income that is subject to the corporate income tax. $1,956.7 Income that is subject to the corporate income tax.
Net Income (Less Deficit) Net Income (Less Deficit)
$3,391.4 Net income includes statutory special deductions that are subtracted in determining $3,391.4 Net income includes statutory special deductions that are subtracted in determining taxable income. Statutory taxable income. Statutory
special deductions include deductions for net operating losses special deductions include deductions for net operating losses (NOLs), dividends received,(NOLs), dividends received, and deductions for and deductions for
dividends paid. Net income also includes profits of certain pass-through entities (RICs and S corporations) dividends paid. Net income also includes profits of certain pass-through entities (RICs and S corporations)
whose profits are whose profits are ~~general y~~ generally passed through to shareholderspassed through to shareholders and taxed on individual incomeand taxed on individual income tax returns.tax returns.
Total Receipts less Total Receipts less Total Deductions Total Deductions
$2,329.3 Total receipts $2,329.3 Total receipts less total deductions differs fromless total deductions differs from net income (less deficit) in that (1) it includes tax-exempt net income (less deficit) in that (1) it includes tax-exempt
interest; and (2) it excludes constructive taxable income interest; and (2) it excludes constructive taxable income from related foreign corporations.from related foreign corporations. Constructive Constructive
taxable income from related foreign corporations is the sum of (a) incometaxable income from related foreign corporations is the sum of (a) income from control ed foreign corporations from control ed foreign corporations
(CFCs) under Subpart F; and (b) a foreign dividend gross-up, or the foreign tax deemed paid by the foreign (CFCs) under Subpart F; and (b) a foreign dividend gross-up, or the foreign tax deemed paid by the foreign
corporation that U.S. shareholderscorporation that U.S. shareholders could claimcould claim as a foreign tax credit. This amount for total receiptsas a foreign tax credit. This amount for total receipts less total less total
deductions includes C corporations and entities deductions includes C corporations and entities ~~legal y~~ legally organized as corporationsorganized as corporations whose incomewhose income is not subject is not subject
to the corporate income tax. to the corporate income tax.
NIPA Profits Before Tax Computation
Total Receipts less Total Receipts less Total Deductions Total Deductions
$2,329.3 $2,329.3

Plus Income receivedIncome received from equitiesfrom equities in in
$521.7 To compute profits before tax on a national basis, an adjustment is made to include profits from the rest of the $521.7 To compute profits before tax on a national basis, an adjustment is made to include profits from the rest of the
foreign corporations and branches by foreign corporations and branches by
world. world.
al all U.S. residents,U.S. residents, net of net of
corresponding payments corresponding payments

Plus Adjustments for MisreportingAdjustments for Misreporting on on
$411.8 Adjustment made to account for underreported income $411.8 Adjustment made to account for underreported income and nonfiling of tax returns. and nonfiling of tax returns.
Income Taxes Income Taxes

Plus Post-tabulation adjustments and Post-tabulation adjustments and
-$145.0 Adjustments for various items, -$145.0 Adjustments for various items, including adjustments (1) for tax treatment of intangible dril ingincluding adjustments (1) for tax treatment of intangible dril ing costs (IDCs); (2) costs (IDCs); (2)
revisions revisions
to expense to expense ~~al meals~~ all meals and entertainment; (3) for and entertainment; (3) for ~~smal~~ small business corporations for income that is passed through to business corporations for income that is passed through to
shareholders;shareholders; (4) to reflect a deduction for fines; and (5) for various other (4) to reflect a deduction for fines; and (5) for various other ~~items.a~~ items.a The adjustment for IDCs is The adjustment for IDCs is
positive,positive, while itemswhile items listed in (2), (3), and (4) are negative adjustments.listed in (2), (3), and (4) are negative adjustments. Other itemsOther items are both positive and are both positive and
negative. negative.

Plus interest payments of regulated interest payments of regulated
-$239.7 RIC payments to shareholders -$239.7 RIC payments to shareholders obtained from interest receiptsobtained from interest receipts are treated as dividends, rather than interest, in are treated as dividends, rather than interest, in
investment companies (RICs) investment companies (RICs)
the IRS data. the IRS data.
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Amount
Measure of Income
($billions)
Notes

Plus bad debt expense bad debt expense
$120.7 Bad debt expenses are treated as a change in corporate assets, $120.7 Bad debt expenses are treated as a change in corporate assets, and not a reduction in profits from current and not a reduction in profits from current
production, in NIPA data. Thus, corporate production, in NIPA data. Thus, corporate financial accounting profits can differ from NIPA corporate profits, financial accounting profits can differ from NIPA corporate profits,
tending to be lower than NIPA corporate profits during periods when corporations report large bad debt tending to be lower than NIPA corporate profits during periods when corporations report large bad debt
expenses. expenses.

Plus adjustment to depreciate adjustment to depreciate
$160.7 Tax law $160.7 Tax law ~~al ows~~allows for expensing of certain expenditures for for expensing of certain expenditures for ~~intel ectual~~intellectual property products (which consists of property products (which consists of
expenditures for expenditures for ~~intel ectual~~intellectual
software; research and development; and entertainment, software; research and development; and entertainment, literary,literary, and artistic originals).and artistic originals). This adjustment treats This adjustment treats
property products property products
these expenses as capital formation. these expenses as capital formation.

Plus income of organizations not filing income of organizations not filing
$84.9 Organizations not filing a tax return, whose income is included in NIPA’s measure $84.9 Organizations not filing a tax return, whose income is included in NIPA’s measure of corporate profits, include of corporate profits, include
corporate income tax returns corporate income tax returns
Federal Federal Reserve banks, Reserve banks, ~~federal y~~federally sponsored credit agencies, sponsored credit agencies, certain mutual financial institutions and certain mutual financial institutions and
cooperatives,cooperatives, and nonprofits that primarilyand nonprofits that primarily ~~serve~~ serve business. business.

Plus other adjustments to receipts other adjustments to receipts
$99.3 Other adjustments add amounts paid in state and local corporate income taxes; add amounts to reflect for $99.3 Other adjustments add amounts paid in state and local corporate income taxes; add amounts to reflect for
less less total deductions total deductions
depletion on domestic minerals; depletion on domestic minerals; ~~make~~ make an adjustment to depreciate expenditures for mining exploration,an adjustment to depreciate expenditures for mining exploration, shafts, shafts,
and and ~~wel s;~~ wells; and make an adjustment for disaster lossesand make an adjustment for disaster losses (NIPA treats disaster losses(NIPA treats disaster losses as a lossas a loss in capital; not a in capital; not a
reduction in current income). reduction in current income).

Less gains (net of losses) from gains (net of losses) from the the
$412.3 Net gains from the sale of fixed assets and securities $412.3 Net gains from the sale of fixed assets and securities are not income fromare not income from current production. current production.
sale of property sale of property

Less dividends received dividends received from from
$355.8 Dividends received $355.8 Dividends received by corporations are included in corporate receipts but are not part of current production. by corporations are included in corporate receipts but are not part of current production.
domestic domestic corporations corporations

Less income on equities in foreign income on equities in foreign
$251.7 Removes $251.7 Removes the income earned abroad by U.S. corporations such that incomethe income earned abroad by U.S. corporations such that income from current production is from current production is
corporations and branches (to U.S. corporations and branches (to U.S.
measured measured on a domesticon a domestic basis. basis.
corporations) corporations)

Less cost of trading or issuing cost of trading or issuing
$55.4 Tax accounting treats expenses for brokers’ $55.4 Tax accounting treats expenses for brokers’ ~~commissions~~ commissions as a reduction in future capital gains income,as a reduction in future capital gains income, whereas whereas
securities securities
NIPA income treats these expenses as a reduction in income NIPA income treats these expenses as a reduction in income in the current period.in the current period.

Less excess of employer excess of employer expenses expenses
$9.5 Employer expenses for defined benefit employee $9.5 Employer expenses for defined benefit employee pension plans include actual employerpension plans include actual employer contributions, imputed contributions, imputed
over actual employer over actual employer contributions contributions
employer employer contributions, and imputed interest for unfunded (or overfunded) actuarial liability.contributions, and imputed interest for unfunded (or overfunded) actuarial liability.
for defined benefit pension plans for defined benefit pension plans
Profits Before Profits Before ~~Tax~~
Tax $2,259.0 NIPA’s profits before tax $2,259.0 NIPA’s profits before tax
Source: NIPA Handbook, Chapter 13: Corporate Profits, updated DecemberNIPA Handbook, Chapter 13: Corporate Profits, updated December 2020; Table 7.16. Relation of Corporate Profits, Taxes, and Dividends in the National 2020; Table 7.16. Relation of Corporate Profits, Taxes, and Dividends in the National
Income and Product Accounts to Corresponding Measures as Published by the Internal Revenue Service,Income and Product Accounts to Corresponding Measures as Published by the Internal Revenue Service, ~~revised~~ revised July 30, 2021. July 30, 2021.
a. Through 2017, the adjustment to removea. Through 2017, the adjustment to remove the Section 199 production activities deduction was another large (positive) item in the Section 199 production activities deduction was another large (positive) item in ~~t he~~the post-tabulation amendments and post-tabulation amendments and
revisions. revisions. This provisionThis provision was repealed effective 2018. was repealed effective 2018.
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Minimum Taxes on Business Income: Background and Policy Options

Author Information

Molly F. Sherlock Molly F. Sherlock
Jane G. Gravelle Jane G. Gravelle
Specialist in Public Finance Specialist in Public Finance
Senior Specialist in Economic Policy Senior Specialist in Economic Policy

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