Time To Fix The Corporate Alternative Minimum Tax

by: Bill Egnor AKA Something The Dog Said

Mon Mar 28, 2011 at 06:34:30 AM MST

There is often a bit of cognitive dissonance when one finds oneself agreeing with even part of the agenda of ones political opponents. I find myself there, in small part, with the desire of the Republicans to simplify the tax code, at least in some areas. Of course the devil is in the details of what should be simplified and who pays the cost, and there, of course the Republicans and I part ways.

Pretty much everyone is familiar with the Alternative Minimum Tax. It is a tax provision that was put in place to prevent deductions from completely wiping out income tax obligations. It was enacted in its current form without an indexed increase for inflation, so it has been monkeyed with in an ad hoc basis as more upper middle class folks started making more money and running afoul of it.

What you might find shocking in the wake of the news that General Electric is not only paying no tax this year but getting around 2 billion in tax benefits (what a person would call a refund, but not really) is that it applies to corporations too.

In fact the threshold is rather low, with a corporation falling into the Corporate AMT at just $310,000 of income. The problem is that that companies like GE and B of A have all kinds of things they can do to avoid paying this tax.  

Yeah, you got that right, they pay their taxes and fund some other nation, and we let them write that off against their taxes here! They get all the benefits of being an American corporation but they are not paying for those benefits. In fact is worse than that. They are actively helping other nations fund their infrastructure and social programs while denying that money to the US.

There are other things that allow mega-corporations like GE to skirt the taxes they should be paying. One of them is that this year they will file 7,000 separate tax returns. What makes this a boon to them over all is that some of their divisions will not make a profit this year. In fact some of them are set up to show a loss, and reduce the overall tax the GE pays. This kind of thing must end. It is not right that a company which will have a 4 billion dollar US profit is treated like it lost money over all.

The problem with any AMT is that it is effectively a flat tax. I am not a fan of flat taxes in general. Supporting changes that would make this flat tax more effective just increases the argument that we should have one for individuals as well. However in this case I am ready to say that there should be no way to avoid paying all taxes when you make a profit of over 500 million.

By setting the bar so much higher we get around most, but not all of the talk about it hurting "small business". As along as giant companies like Bechtel fall into the definition of small business by virtue of their single owner status, we'll have this problem, but that is for another day.

The tax does not even have to be that high for us to benefit greatly. Right now, in theory, the CAMT is 20%.  Since many of these companies are completely getting around it setting the bar at 10% would still generate 100 million per billion of profit.

By assuring that a business will have to pay at least 10% of their profit as tax, no matter what, we put a lot of the incentives back in the right place. They can work as hard as they like to keep that tax at only 10% but they can not ever receive a tax benefit when they make an overall profit as a company. It would also reduce the benefit of off-shoring income and keeping it in other countries.

If this kind of tax were in place GE alone would be paying 400 million in tax this year. I don't think that this is an unreasonable level for a company as big as this who made 4 billion in profit. B of A would pay 300 million and the list goes on and on.

Another area we could look at is sitting money. There is 1.6 trillion dollars in corporate cash that is sitting on the sidelines of the economy. It is time that money either works for the economy or some of it goes to the government who will put it into the economy. A 2% annual "sitting money" tax on cash assets over 500 million would go a long way to encourage companies to invest in the economy of the country they are based in.

At a time when we are looking at drastic cuts to government programs we have to be looking to the people and companies that benefit the most from the American system. My Republican friends will say that if we do this we will drive these companies out of the U.S..

To that I have to call BS. They know that they have it better here than they will anywhere else in the world. They benefit from our system of governance that gives them a disproportionate say in the way the nation is run. They benefit from the status of being a company based in the world's largest economy and they benefit from the good will of the American people. Even companies that have nearly completely outsourced their manufacturing to other nations want to be able to say they are an American company.

I know that this will not be an easy sell. The Dark Lord of Anti-Tax Grover Norquist is never going to allow his thralls to support this idea. Just because it will be hard does not mean we should not do it. The big companies of this nation, like the people in the top 1% of incomes are the ones that benefit the most from being here, it is time for them to pitch in.

When we talk about shared sacrifice that has to mean everyone or it is meaningless sloganeering. It is time to simplify one part of the tax code and that part is the one that allows you to make billions and still get a billion dollar tax benefit.

The floor is yours.