Making Sense of CAMT

The Inflation Reduction Act’s book minimum tax is looking to be the least popular tax policy, among experts, since at least the Tax Cuts and Jobs Act’s pass-through deduction.

(For those not steeped in tax policy, that’s pretty unpopular.)

Officially known as the Corporate Alternative Minimum Tax, CAMT, often pronounced “Camtee” (also not a popular nickname despite becoming ubiquitous), it is filled with exceptions, fails to conform to new standards set by the Organization for Economic Cooperation and Development for minimum taxes, and will likely lead to economic distortions, critics claim.

Nevertheless, it’s proven to be popular with the public at large, earning top spots in the stump speeches of President Biden and Democrats across the country during the recent midterm elections. Making companies pay “what they owe”--who could be against that?

Kim Clausing, a tax law professor at UCLA and a top official at the U.S. Treasury Department during the IRA’s passage, also recently defended the law, despite conceding many of the critics points. Her case is worth looking over, as it likely highlights how the law may be judged years from now.

“To some extent, it’s a bit of a mysterious tax base,” Clausing said during an online panel hosted by the Tax Policy Center. “It’s not as narrowly targeted as if, say, we had raised the corporate tax rate.”

Nevertheless, she noted, it will raise $200 billion over 10 years, from some of the largest U.S. companies.

The tax has a perhaps deceptively simple conceptual design, that betrays the complexity that has already emerged for those facing implementation. (Just see the Association of International Certified Professional Accountants 40-page letter of questions to Treasury.) CAMT will target only companies with effective tax rates below 15%--not based on their taxable income, but based on the financial profits they report to shareholders, or the equivalent for private companies. Financial income uses different metrics than taxable income, and companies have an incentive to maximize, not downplay, their reported profits. In theory, this will catch companies who have found ways to avoid paying the full amount of taxes which the tax code intended.

The problem is that financial “book” profits and taxable income vary for many reasons, most of which don’t have to do with nefarious profit-shifting. Sometimes it’s simply apples-to-oranges comparisons, and to criticize low book payments is like complaining that someone is driving 80 kilometers-per-hour in a 55 mile-per-hour zone. Other times, Congress has enacted incentives which are supposed to lower effective tax rates.

Indeed, during the legislative process lawmakers added back into CAMT many of those exceptions, almost as if they were reverse-engineering the original tax base. The law will account for green energy credits, credits for research & experimentation, and accelerated depreciation of new investments.

Clausing noted that those exceptions could result in many companies continuing to pay nothing in taxes, based on the metric of tax payments over book profit. But she said it’s important to look at the underlying factors leading to those low effective tax rates.

“Is it that they’re not paying taxes for a reason that we think is bad?” she said. “I think if you look into the details, I think you’ll see that the reason that companies are below the threshold in the future, will usually be because they’re doing something that the government is explicitly trying to encourage.”

That’s a very reasonable point–but it’s also a point that critics of CAMT, and the whole concept of measuring effective tax rates on book income, have been making for years. But when Biden excoriates the 55 Fortune 500 companies that didn’t pay taxes in 2020, the implication is that it’s, on its face, nefarious–or that it’s just wrong, period.

With many of the biggest factors taken out, CAMT will likely focus on “more minor differences” between book and tax income, she said.

Clausing acknowledged that ideally Congress would re-examine these incentives and decide which ones are worth keeping, rather than clawing the problematic ones back through a broad minimum tax that will likely hit many more companies unintentionally. But the messy process of passing the IRA through both chambers of Congress didn’t leave that option.

“I don’t think Congress had the appetite to go through the lines of the M-3, and decide, ‘let’s change the tax treatment of this, that and the other,” she said. “I think they just thought, ‘well if it's too advantageous then you should have to pay some kind of minimum tax,’ it was just easier in a way.”

In some cases, though, CAMT may be Congress’ way to limit even the “good” tax incentives a bit.

“I think we sometimes get into the situation where we’ve given people preferences for X, and Y, and Z, and we’ve made the tax code favorable for A, and B, and C, and we want nonetheless for companies to pay some tax,” Clausing said. “So rather than saying, ‘OK, well XYZ and ABC are not as desirable as we thought they were, we instead find the minimum tax more attractive…If you manage to do so much of these activities that you get below some threshold, then maybe you should pay some tax.'”

Just as Congress can decide which tax incentives are most desirable to favor, it can also decide when taxpayers can access those incentives. But should it?

This is the basic conundrum, because while the tax code does have preferences for certain activities, they’re normally created within the rubric of defining taxable income. The R&D credit exists because research and development is recognized as a legitimate cost, and costs are part of the equation for measuring profit.

Likewise, defenders of the deductibility of stock options–one of the biggest differences left in CAMT–claim it maintains parity between equity compensation and cash salaries. By limiting the benefits of that deduction, CAMT potentially tilts the code in favor of cash, creating a deadweight loss.

The tax code was hardly distortion-free before. But it’s relatively rarer for Congress to create a distortion on purpose–to change the basic conception of the tax code as a measure of income. It works against the very principle of fair taxation that reformers claim they’re working towards–to make sure everyone “pays what they owe.”

Still, it’s hard to work around that basic gut reaction to the notion of huge companies getting tax refunds from the government. That’s no doubt why Sen. Joe Manchin, a savvy reader of public moods, agreed to the book minimum tax while nixing the OECD’s Pillar 2 global minimum tax, which more narrowly targets base erosion. I think it has more to do with how the concept of profitability can be misleading for modern companies which prioritize spending and growth over profit margins.

But whichever way, that popular impulse will need to be dealt with.

Tax policy experts have an unfortunate tendency to be drawn towards policies that are the most conceptually pleasing, and to act like taxes ought to be sorted out on some higher plane above politics. In a democracy, they have to get down in the messy reality with the rest of us. But it’s worth to keep in mind what the ultimate goals are.

DISCLAIMER: These views are the author's own, and do not reflect those of his current employer or any of its clients. Alex Parker is not an attorney or accountant, and none of this should be construed as tax advice.

LITTLE CAESARS: NEWS BITES FROM THE PAST WEEK

The European Union state aid investigations don’t quite get the press they used to, partially because the TCJA’s deemed repatriation took away the giant piles of U.S. cash that were sitting around Europe. Yet, they’re still important to the functioning of the international tax system, and this week the European Court of Justice struck a major blow against the commission’s basic strategy in its case against Fiat Chrysler. You can read some (admittedly opinionated) commentary from Texas A&M Prof. William Byrnes here.

I’ve often noted how varied estimates of multinational profit-shifting can be–the United Nations and U-C Berkeley Prof. Gabriel Zucman added another data point with a new study showing that income-shifting increased by nearly twenty times between 1975 and 2019. One note–the study only covers two years since the TCJA passage.

Sometimes it’s hard to remember that the OECD has other projects besides its Two-Pillar Solution for global taxation. Earlier this week it reported progress made on the automatic exchange of financial information between jurisdictions, which has proven to be transformative for government efforts to stamp out tax evasion. The OECD also said that 28 new jurisdictions have signed on to the exchange agreement.

PUBLIC DOMAIN SUPERHERO OF THE WEEK

Red Mask, published by Magazine Enterprises in 1948. A cowboy who was inspired by a 100-year-old legend to become a Zorro-like figure, to fight El Terror and other villains.