The Inflation Reduction Act, passed by both houses, includes a 15 percent corporate minimum tax, which will be a major step toward increased government powers and forced globalization on top of being detrimental to the economy.
“It’s surprisingly close to something you could almost describe as a worldwide tax system,” Danielle Rolfes of KPMG LLP told The Wall Street Journal in November regarding the global 15 percent minimum tax.
For more than a decade, globalists have been pushing for a global corporate minimum tax that would be universal and extraterritorial, with companies paying the same amount regardless of where they are located in the world. Treasury Secretary Janet Yellen has been a proponent of a global minimum tax and was a participant in a meeting of 140 countries last October where an agreement was reached.
However, for the global corporate minimum tax to become effective in the United States, it would have to be passed by both houses and signed by the president. Yellen urged Congress to enact the 15 percent tax, calling it a victory for the United States as it would increase the government’s ability to raise money from companies. Both houses have now signed the Inflation Reduction Act, which includes the 15 percent minimum tax. Much of the funding for the act’s climate agenda, as well as the reduced cost of medical care and pharmaceuticals, will be derived from this tax.
Supporters of the tax claim that big companies exploit existing tax rules to reduce their tax burden. Under the U.S. tax regimen, private citizens and corporations are offered various write-offs, credits, and other legal means of offsetting taxes or reducing taxable income. These means are not illegal and are permitted under the law. But now, the government needs additional revenue to fund the $700 billion of spending in the Inflation Reduction Act. And so, large corporations have become a target. To assess, enforce, and carry out this additional tax collection, the act includes $80 billion worth of additional funding to the Internal Revenue Service (IRS).
While supporters of the Inflation Reduction Act claim that the expansion of the IRS will focus on collecting taxes from large corporations and wealthy individuals, in 2021, more than half of all tax audits were on persons with incomes of less than $75,000. Even more extreme, 25 percent of the audits were conducted on families who received earned income tax credit, a primary anti-poverty measure.
Not only will the size of the IRS be increased, but so will the reach and power of the U.S. government. The Financial Accounting Standards Board (FASB) is tasked with writing and updating the “generally accepted accounting principles.” These principles determine how corporate profits are calculated and, ultimately, how large their tax bill will be. The FASB is meant to be independent of the government, basing its decisions on long-standing accounting rules rather than the dictates of a sitting administration.
Under the Inflation Reduction Act, the 15 percent minimum tax will be based on book income, the income that companies show to their shareholders. Book income is generally higher than the company’s taxable income because it may not include all deductions and credits. For this reason, FASB has always maintained that a minimum tax should not be based on book income. In a speech last year, Richard Jones, the chair of FASB, said that he opposed basing a minimum corporate tax on book income as this would be akin to allowing public policy to dictate financial accounting standards.
For the United States, the corporate minimum tax will erode the separation of powers because FASB will no longer be taking independent decisions. For American companies, the tax will increase the cost of doing business. This will discourage expansion, decrease investment, and ultimately be passed on to American families in the form of higher prices and reduced employment.
The global corporate minimum tax is expected to be particularly detrimental to the developing world. Currently, the differences in tax regimens are one of the main drivers for manufacturers from the United States and other developed nations to open factories in developing countries. Now that those tax benefits are disappearing, companies may find that the lack of infrastructure and skilled workers in developing nations will drive up costs to such a level that manufacturing will shift back to developed nations.
Currently, the differential in taxes for U.S. corporations could mean a savings of as much as 35 percentage points by opening in a foreign country. Now, the differential will be reduced to 6 percentage points. The loss of tax savings to compensate for higher costs may cause an exodus of foreign companies from less developed countries.
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