We estimate that 33 of the 100 largest U.S. companies could be subject to President-elect Joe Biden’s proposed corporate minimum tax and pay a total extra tax of $20 billion annually if that proposal were enacted as stand-alone legislation. Because the president-elect has proposed other significant tax increases on U.S. corporations, the effect of the proposed minimum tax would likely be much less.
The new tax would apply a minimum 15 percent tax rate on income reported on financial statements of corporations with at least $100 million of book income. According to reports, foreign taxes would be creditable, and carryovers (for years with negative minimum tax liability) would be allowed. (Prior analysis: Tax Notes Federal, Oct. 5, 2020, p. 109.)
In Table 1 we use the two years of company data after enactment of the Tax Cuts and Jobs Act to estimate minimum tax liability for each of the 100 largest publicly traded U.S. companies (ranked by market capitalization). Because the proposal allows carryovers and therefore removes the potentially taxpayer-adverse effects of volatile income, for all the estimates we use an average of two years of available data (rather than average estimates of individual years). On average, over the two years these companies had nearly $1 trillion of profit and paid in cash $166 billion of federal, state, and foreign income taxes.
Under the assumption that all foreign income taxes would be creditable under this new tax, foreign income taxes have equal effect as U.S. income taxes under the proposal. Our big assumption in making these estimates is that cash taxes paid in the two-year period are equal to current liability that would appear on federal, state, and foreign tax returns filed in the two-year period. Because of late payments, audit settlements, amended returns, and other mundane factors, this assumption doesn’t hold true, but the timing mismatches are likely to be less significant over longer periods. We also assume, based on casual review of the available data, that state income taxes equal 10 percent of total income tax liability.
Estimated minimum tax liability is equal to the excess, if any, of 15 percent of book income over 90 percent of reported income tax payments paid in cash. So, for example, Amazon.com Inc. reported in its latest two annual reports (for fiscal years ending December 31, 2019, and December 31, 2018) pretax book income of $13.98 billion and $11.25 billion and cash payments of income tax of $881 million and $1.18 billion. So average pretax book income for those two years was $12.62 billion. Applying the 15 percent rate yields potential minimum tax liability of $1.89 billion.
That potential liability is reduced by U.S. federal and foreign taxes paid. Average total income tax paid over the latest two years was $1.03 billion. The cash effective tax rate is 8.2 percent. We estimate U.S. and foreign income tax to be 90 percent of total income tax paid, which is $929 million. Subtracting $929 million from $1.89 billion yields an estimated minimum tax liability of $964 million.
Besides data shortcomings, estimates are highly uncertain because future economic conditions and legislation can change, and in some cases dramatically. For companies with substantial foreign operations, the proposed significant increase in U.S. tax on global intangible low-taxed income would negate the impact of the minimum tax. For all companies, the proposed increase in the corporate statutory rate from 21 percent to 28 percent would also substantially reduce the impact of the minimum tax.
Biden Boomerang
If those two proposed tax increases are enacted, the somewhat surprising and most likely unintended effect of the minimum tax would be to reduce tax incentives for domestic capital formation and job creation, including the research credit, expensing of capital investment, the preferential treatment of foreign-derived intangible income, and Biden’s own proposed “Made in America” tax credit.
Overall, the president-elect’s business tax proposals are a combination of complex takeaways and giveaways that overall raise taxes and reduce, and in some cases, eliminate current advantages of foreign relative to domestic investment. Biden could achieve largely the same goals in a far simpler way by keeping the corporate rate close to 21 percent, repealing the tax deduction for FDII, and moving to a worldwide system.
| Latest Two Years of Before-Tax Book Income (annualized) | Cash Effective Tax Rate (ETR) | 15% of Pretax Book Income | Estimated Federal and Foreign Income Tax | Estimated Minimum Tax Liability |
|---|---|---|---|---|---|
Duke Energy Corp. | $3,585 | -12.8% | $538 | -$413 | $950 |
Advanced Micro Devices Inc. | $351 | -1.7% | $53 | -$6 | $59 |
American Tower Corp. | $1,536 | -0.5% | $230 | -$8 | $239 |
NextEra Energy Inc. | $5,594 | -0.1% | $839 | -$7 | $846 |
T-Mobile U.S. Inc. | $4,260 | 1.6% | $639 | $70 | $570 |
Fiserv Inc. | $1,319 | 2.4% | $198 | $28 | $170 |
AT&T Inc. | $21,671 | 2.5% | $3,251 | $480 | $2,770 |
Charter Communications Inc. | $2,059 | 2.8% | $309 | $52 | $257 |
Prologis Inc. | $1,831 | 3.3% | $275 | $55 | $220 |
Nvidia Corp. | $3,433 | 3.5% | $515 | $107 | $408 |
United Parcel Service Inc. | $5,836 | 4.4% | $875 | $258 | $617 |
Lockheed Martin Corp. | $6,540 | 6.9% | $981 | $405 | $576 |
Micron Technology Inc. | $5,016 | 6.9% | $752 | $311 | $441 |
U.S. Bancorp | $8,636 | 7.6% | $1,295 | $588 | $708 |
Adobe Inc. | $3,690 | 7.6% | $554 | $281 | $272 |
Amazon.com Inc. | $12,619 | 8.2% | $1,893 | $929 | $964 |
Berkshire Hathaway Inc. | $53,349 | 9.2% | $8,002 | $4,396 | $3,606 |
Bank of America Corp. | $33,669 | 10.1% | $5,050 | $3,073 | $1,977 |
AbbVie Inc. | $6,812 | 10.4% | $1,022 | $635 | $386 |
Lam Research Corp. | $2,511 | 10.4% | $377 | $235 | $141 |
JPMorgan Chase & Co. | $42,655 | 10.7% | $6,398 | $4,125 | $2,273 |
Goldman Sachs Group Inc. | $11,532 | 11% | $1,730 | $1,268 | $462 |
Intuitive Surgical Inc. | $1,391 | 12.1% | $209 | $169 | $40 |
Intel Corp. | $23,688 | 12.5% | $3,553 | $2,665 | $888 |
Salesforce.com Inc. | $845 | 12.6% | $127 | $106 | $21 |
Target Corp. | $3,933 | 13.6% | $590 | $481 | $109 |
Verizon Communications Inc. | $21,178 | 13.7% | $3,177 | $2,898 | $279 |
Chubb Ltd. | $4,953 | 14.3% | $743 | $708 | $35 |
Applied Materials Inc. | $3,718 | 14.3% | $558 | $479 | $79 |
FedEx Corp. | $1,162 | 14.4% | $174 | $151 | $24 |
Morgan Stanley | $11,269 | 14.6% | $1,690 | $1,478 | $212 |
Qualcomm Inc. | $6,600 | 14.6% | $990 | $965 | $25 |
Netflix Inc. | $1,644 | 16.2% | $247 | $239 | $7 |
Union Pacific Corp. | $7,744 | 16.7% | $1,162 | $1,164 | $0 |
Comcast Corp. | $16,119 | 17.3% | $2,418 | $2,514 | $0 |
CSX Corp. | $4,310 | 17.5% | $647 | $753 | $0 |
Facebook Inc. | $25,087 | 17.8% | $3,763 | $4,472 | $0 |
IBM Corp. | $10,754 | 17.8% | $1,613 | $1,726 | $0 |
Wells Fargo & Co. | $26,368 | 18.1% | $3,955 | $4,290 | $0 |
PayPal Holdings Inc. | $2,687 | 18.5% | $403 | $497 | $0 |
PepsiCo Inc. | $9,251 | 18.5% | $1,388 | $1,715 | $0 |
Visa Inc. | $14,337 | 18.5% | $2,151 | $2,660 | $0 |
Alphabet Inc. | $37,269 | 18.6% | $5,590 | $6,937 | $0 |
Apple Inc. | $66,414 | 18.6% | $9,962 | $11,144 | $0 |
Anthem Inc. | $5,527 | 19.4% | $829 | $1,071 | $0 |
Citigroup Inc. | $23,673 | 19.4% | $3,551 | $4,140 | $0 |
Thermo Fisher Scientific Inc. | $3,666 | 19.9% | $550 | $730 | $0 |
UnitedHealth Group Inc. | $16,963 | 20% | $2,544 | $3,060 | $0 |
Intuit Inc. | $2,040 | 20.1% | $306 | $368 | $0 |
Stryker Corp. | $2,459 | 20.3% | $369 | $448 | $0 |
MasterCard Inc. | $8,468 | 20.3% | $1,270 | $1,545 | $0 |
Amgen Inc. | $9,342 | 20.3% | $1,401 | $1,900 | $0 |
Bristol-Myers Squibb Co. | $5,472 | 20.6% | $821 | $1,013 | $0 |
Booking Holdings Inc. | $5,397 | 20.8% | $809 | $1,009 | $0 |
Honeywell International Inc. | $7,523 | 20.8% | $1,128 | $1,409 | $0 |
BlackRock Inc. | $5,583 | 20.8% | $837 | $1,164 | $0 |
Sherwin-Williams Co. | $1,671 | 20.9% | $251 | $315 | $0 |
Caterpillar Inc. | $7,817 | 21% | $1,173 | $1,474 | $0 |
McDonald’s Corp. | $7,917 | 21% | $1,188 | $1,496 | $0 |
Raytheon Technologies Corp. | $8,262 | 21.1% | $1,239 | $1,567 | $0 |
Automatic Data Processing Inc. | $3,094 | 21.2% | $464 | $590 | $0 |
Cisco Systems Inc. | $14,271 | 21.4% | $2,141 | $2,746 | $0 |
Zoetis Inc. | $1,746 | 21.6% | $262 | $377 | $0 |
Microsoft Corp. | $48,362 | 21.6% | $7,254 | $9,405 | $0 |
S&P Global Inc. | $2,806 | 21.7% | $421 | $609 | $0 |
3M Co. | $6,356 | 21.7% | $953 | $1,241 | $0 |
Costco Wholesale Corp. | $5,066 | 22.1% | $760 | $1,008 | $0 |
Coca-Cola Co. | $9,568 | 22.2% | $1,435 | $1,911 | $0 |
American Express Co. | $8,276 | 22.4% | $1,241 | $1,665 | $0 |
Charles Schwab Corp. | $4,705 | 22.6% | $706 | $1,063 | $0 |
Accenture PLC | $6,513 | 22.6% | $977 | $1,326 | $0 |
Deere & Co. | $3,986 | 22.9% | $598 | $820 | $0 |
Danaher Corp. | $3,299 | 23% | $495 | $684 | $0 |
Boeing Co. | $4,673 | 23.1% | $701 | $973 | $0 |
Nike Inc. | $3,844 | 23.2% | $577 | $803 | $0 |
Texas Instruments Inc. | $6,207 | 23.8% | $931 | $1,328 | $0 |
Home Depot Inc. | $14,636 | 23.9% | $2,195 | $3,147 | $0 |
Abbott Laboratories | $3,475 | 24% | $521 | $752 | $0 |
Walmart Inc. | $15,788 | 24.1% | $2,368 | $3,419 | $0 |
Colgate-Palmolive Co. | $3,383 | 24.4% | $507 | $743 | $0 |
Pfizer Inc. | $14,784 | 24.8% | $2,218 | $3,660 | $0 |
Johnson & Johnson | $17,664 | 24.8% | $2,650 | $3,942 | $0 |
Eli Lilly & Co. | $4,531 | 24.9% | $680 | $1,129 | $0 |
Oracle Corp. | $12,166 | 25.1% | $1,825 | $2,754 | $0 |
Philip Morris International Inc. | $10,272 | 25.2% | $1,541 | $2,590 | $0 |
Medtronic PLC | $4,626 | 26.3% | $694 | $1,218 | $0 |
Broadcom Inc. | $2,335 | 26.6% | $350 | $559 | $0 |
Cigna Corp. | $5,076 | 27.5% | $761 | $1,398 | $0 |
TJX Cos. Inc. | $4,290 | 28.3% | $643 | $1,092 | $0 |
Mondelez International Inc. | $3,145 | 29.3% | $472 | $923 | $0 |
Merck & Co. Inc. | $10,083 | 29.8% | $1,512 | $2,700 | $0 |
Procter & Gamble Co. | $10,952 | 30.2% | $1,643 | $3,307 | $0 |
Lowe’s Cos. Inc. | $4,509 | 30.4% | $676 | $1,233 | $0 |
Exxon Mobil Corp. | $25,505 | 32% | $3,826 | $8,156 | $0 |
Chevron Corp. | $13,056 | 36.6% | $1,958 | $4,304 | $0 |
Gilead Sciences Inc. | $6,480 | 38.5% | $972 | $2,246 | $0 |
Starbucks Corp. | $2,815 | 38.5% | $422 | $1,085 | $0 |
Becton Dickinson & Co. | $1,081 | 48.8% | $162 | $474 | $0 |
CVS Health Corp. | $5,202 | 49% | $780 | $2,295 | $0 |
Walt Disney Co. | $6,101 | 81.9% | $915 | $4,499 | $0 |
Totals and average cash ETRs | $995,709 | 16.7% | $149,356 | $171,949 | $20,631 |
Source: Author’s calculation using data from Yahoo Finance and from company annual reports.
[Editor's Note: This article originally appeared in the December 21, 2020, issue of Tax Notes Federal.] | |||||