WASHINGTON—Democratic presidential candidate Elizabeth Warren is proposing a new 7% tax on the largest, most profitable U.S. companies, a move that would increase corporate tax collections by about 30% over the next decade.
Her Real Corporate Profits Tax, projected to raise $1 trillion over a decade, would apply to profits above $100 million each year, and it would be based on the world-wide posttax income companies report on their financial statements. The new levy, affecting about 1,200 companies, would come on top of the existing income tax system.
“We need corporate tax reform, but we also need to recognize that enormous companies with armies of lawyers and accountants will always try to exploit any deductions and exemptions that remain,” Ms. Warren wrote in announcing the proposal. “To raise the revenue we need—and ensure every corporation pays their fair share—we need a new kind of tax that big companies can’t get around.”
The corporate-tax proposal is the latest sweeping policy idea from Ms. Warren, a Massachusetts senator who has also proposed an annual wealth tax on the richest Americans, universal child care and $500 billion in new spending on affordable housing.
Ms. Warren’s latest proposal would mark a fundamental change in how the U.S. taxes corporations. It would raise taxes on some companies that make significant global profits but, for a variety of reasons, may pay relatively little to the U.S. government under the current tax law.
The tax would operate as a backstop to the U.S. corporate tax, making some deductions less valuable and reversing some of the tax cuts that the Republican-led Congress and President Trump enacted in 2017.
Because the tax would apply to global income, the proposal would raise taxes on U.S. companies’ foreign operations, undercutting the tax planning companies have done to push profits into low-tax jurisdictions abroad.
The effect on foreign income is one of the main appeals of the proposal, said Gabriel Zucman, an economics professor at the University of California, Berkeley, who worked with Ms. Warren’s campaign on the idea.
“It’s hard to manipulate,” he said. “It’s reported to shareholders, and you can’t shift profits abroad.”
Currently, companies report their financial-statement income under one set of rules and their taxable income under another. The two sets of rules are broadly similar, but there are some gaps between income under U.S. generally accepted accounting principles and taxable income.
That can cause significant differences, particularly in how stock options, capital expenses and municipal bond interest are treated. For example, when a company buys equipment, it can take all of the cost as a tax deduction immediately under the 2017 law. But for financial statement purposes, the company takes deductions over the life of the asset.
In the near term, that makes financial-statement income larger than tax-return income and it can contribute to situations in which companies have sizable global profits and relatively low U.S. taxes. The change Ms. Warren is proposing could be felt most in capital-intensive industries and in technology companies with stock options.
Ms. Warren specifically cited
which reported $10.1 billion in world-wide posttax profit for 2018 and a negative $129 million liability for current federal taxes as measured under accounting rules. Amazon did report a $1.2 billion total accounting cost for income taxes and said it paid $1.2 billion in cash taxes.
Under Ms. Warren’s proposal, Amazon would have paid $698 million more to the U.S. for 2018. In a statement, Amazon said it pays all the taxes it owes and that its profits are modest as it makes heavy investments.
The proposal might encourage companies to change how they report income and could reduce the amount of useful information that investors get, said Michelle Hanlon, a tax accounting professor at the Massachusetts Institute of Technology.
“I think it’s a terrible idea to do this,” she said. “If you want to change taxable income, just change taxable income.”
Under Ms. Warren’s proposal, if companies reported a non-GAAP measure of income to investors that was higher, they would owe the tax based on that. The IRS would also develop rules to tax foreign companies with U.S. operations and make it harder for U.S. companies to take foreign addresses to avoid the tax.
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