Sen. Elizabeth Warren recently posted online, "Giant corporations like Amazon report huge profits to their shareholders — but they exploit loopholes and tax havens to pay close to nothing in taxes." (AP Photo/Susan Walsh)
As companies such as Amazon and other technology giants face criticism over what are perceived as low effective tax rates on top of large public profits, the appeal of Warren's proposal is clear. But it could also negate tax preferences to encourage investment in workers or renewable energy, which could provoke a backlash in both parties.
After a Senate Finance Committee hearing on Thursday, Warren took to Twitter to call out the online retailer again for its tax payments. Amazon reported a negative tax rate in 2018 despite having pretax profits of more than $10 billion. More recently it paid a 9.4% effective tax rate in 2020, according to the Institute on Taxation and Economic Policy, a left-leaning research and advocacy group.
"Giant corporations like Amazon report huge profits to their shareholders — but they exploit loopholes and tax havens to pay close to nothing in taxes," Warren wrote on Twitter. "That's just not right — and it's why I'll be introducing a bill to make the most profitable companies pay a fair share."
The company responded on Twitter by noting that it paid $1.7 billion in federal corporate taxes in 2020 while also generating $18 billion in state sales taxes.
"You make the tax laws @SenWarren; we just follow them," the company said. "If you don't like the laws you've created, by all means, change them."
The reply provoked further back-and-forth messages between the two accounts, on taxes as well as Amazon's supposed anti-union actions.
During the hearing, Warren said that a minimum book tax would be harder for companies to game, as they would be reluctant to depress the earnings they report to shareholders.
"A small tax on profits — like the number that CEOs like to brag about: their book profits — would ensure that even the companies that are most skilled at gaming the tax code would have to contribute a fair share," Warren said.
Warren's proposal would add a 7% tax on profit above $100 million, as reported in financial statements. Companies would pay the tax alongside the normal corporate income tax — if they owe it.
Biden's proposal, while similar, includes key differences that would ultimately make it less onerous to businesses. While it would tax income at a 15% rate, it would apply as a true alternative minimum tax, kicking in only when corporate income tax fell below that rate.
While Amazon's international tax practices have come under fire by not only nonprofit critics but the Internal Revenue Service, differences between its effective tax rate and the statutory rate are likely due to domestic laws. According to its most recent annual report, reductions in its income tax rate are largely attributable to accelerated depreciation and deductions for excess stock-based compensation.
Both issues can create a disconnect between a company's taxable income and its profits recorded through financial accounting.
Accelerated depreciation, which was enhanced through the 2017 Tax Cuts and Jobs Act , enables a company to deduct most of the costs of new investments in the first year those costs are incurred. But the company will still report those costs through a depreciation schedule for accounting purposes, reducing costs and increasing profits for the first year that the investment is recorded.
Likewise, the tax code bases its measure of stock compensation on the share price when the option is exercised, while financial accountants must include those costs based on estimates in earlier years.
Much of the divergence between the tax code and financial accounting are due to differences in when expenses are recorded, rather than the total amount. While accelerated depreciation enables companies to deduct more expenses immediately, it does not affect the overall value of the deduction compared with normal depreciation.
But critics says it still allows companies to reduce tax payments in unfair ways that run counter to the intent of the laws.
"Accelerated depreciation appears to do little more than reward profitable companies for making investments they would have made anyway," said Amy Hanauer, executive director of ITEP, in written testimony submitted during a Thursday hearing of the Senate Budget Committee.
An alternative minimum tax could negate these tax benefits without repealing them directly, which critics of the idea cite as a drawback, but can also be part of its political appeal.
"Sometimes the easiest tax increases end up being the generic ones that don't go after specific tax breaks," said George Callas, managing director of government affairs and public policy at Steptoe & Johnson LLP, and a former tax counsel for the U.S. House Committee on Ways and Means.
Some experts warn that increasing the tax burden on new investments, even indirectly, could create adverse economic effects, especially as the economy climbs out of the recession provoked by the coronavirus pandemic.
"There is a risk that it could impact corporate investment and the recovery," said Kyle Pomerleau, a resident fellow at the American Enterprise Institute, a conservative research group. "It could increase the burden on new investment, since it is stacked on top of the ordinary corporate tax."
The Biden administration has indicated that it is looking at tax hikes to help pay for a proposed trillion-dollar infrastructure spending bill. While the White House has not yet released any details about the plan, many expect to see corporate tax increases as part of the package.
Sen. Ron Wyden, D-Ore., the chairman of the Senate Finance Committee, said he would soon release a new "framework" for international corporate tax changes. A spokesperson for Wyden said the proposed legislation would not include Warren's proposal but would focus on changes to the international provisions of the TCJA.
--Editing by Tim Ruel.
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