Wolf Richter reports on a proposal by Janet Yellen, President of the Federal Reserve.
Large corporations – and there are only a few dozen to which this would apply, according to the proposal – should pay income taxes on the inflated and puffed-up income they report to their shareholders under ... GAAP [Generally Accepted Accounting Principles], rather than paying no taxes, or even getting paid tax benefits, on the losses they report separately to the IRS under the tax code.
Small corporations ... use the same accounting principles for earnings and for taxes, or vice versa, and we have no illusions, and there is no reason to inflate income.
But Nike reported $4.1 billion in pre-tax income to its shareholders over the past three years and had a three-year effective tax rate of minus 18%, meaning the IRS paid Nike large amounts of money, the so-called “tax benefits,” instead of collecting taxes from Nike, according to a report by the Institute of Taxation and Policy. There were 55 companies of this type in the report.
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If large corporations have to pay 15% minimum income tax on their profits as reported under GAAP, it could possibly bring some honesty and reality to financial reports because, under the 15% minimum tax on book income, companies that inflated and puffed up their income would have to pay 15% taxes on that inflated and puffed-up income. This would be a costly disincentive to inflate and puff up income.
It would make CFOs think twice. In theory, GAAP financial statements could become more honest, policed by the threat of having to pay 15% in taxes on puffed-up income. And that could be a game changer – when there are suddenly tax incentives to be realistic with financial reporting. And that’s why Wall Street will fight furiously to sink this thing.
There's more at the link.
This is long overdue. Big corporations have "bought" the tax code for decades, using lobbyists to pressure politicians to pass amendments that favor them at the expense of all other taxpayers. That's how most major corporations pay minimal or no tax on their billions of dollars in annual profits. However, they all effectively use two sets of books: one they present to their shareholders, usually showing very healthy profits, and the other that they send to the IRS, showing tax losses in every direction thanks to the convoluted intricacies of the tax code.
If corporations are forced to pay tax on their claimed profits, the Treasury will be much better off, and we as a nation will be able to afford a much better balanced budget. However, as Richter points out, those corporations will kick and scream and protest to the heavens, and do their best to prevent such a tax from being implemented. Will our politicians force them to pay up, or will they succumb (yet again) to corporate bribery in the form of "contributions to their re-election fund"? Your guess is as good as mine . . . and mine's not very hopeful.