Taxes, consequences and choices

My grandkids like to play a game called, “Would You Rather.” Through barely stifled giggles, they present one preposterous choice to another. And now Grandma must choose. It’s a clever, little game. Ultimately, you learn more about the other person—what is valued.

Voters must make choices, too. Recent passage of the Inflation Reduction Act makes that clear.

It’s another monstrous spending package that may have little or no effect on inflation. Many economists and studies like the Penn Wharton Budget Model from the University of Pennsylvania sounded the alarm. Still, the controlling Democratic Party pushed it through. Not a single Republican voted for it.

About $370 billion goes toward climate change initiatives. The Internal Revenue Service gets $80 billion over 10 years, with about half of that money going toward increased enforcement. And the 2010 Affordable Care Act, still not able to operate without massive subsidies, gets another $64 billion. That will buy us three more years of Obamacare.   

But there’s one piece of this legislation that deserves greater consideration by its critics—an alternative minimum tax of 15% for corporations earning a billion or more annually in income.

An initial concern was the issue of accelerated or bonus depreciation. Corporations (and all businesses) incur expenses and make purchases in order to stay competitive. These write-offs lower taxable income. There are two sides to running a business—generating income and managing costs. The final version of this bill, though, left in the ability to accelerate depreciation of certain purchases.

What’s different is C corporations will now face either a 15% minimum tax on its adjusted financial statements—the ones where they could announce banner years to their shareholders—or taxation through its regular tax forms—the ones where they could announce a loss or little income to the Internal Revenue Service. Corporations will pay the larger of either the minimum tax or the regular tax.  

We got to this place when it was learned, all too often, that enormous corporations with dominant market share were paying little or no federal income tax. 

In 2016, The Joint Committee on Taxation (JCT) identified 100 C corporations with the largest incomes. From that group, it selected 50 and studied tax liabilities for each. It was an impressive lot. These 50 companies held more than one-quarter of all assets reported from 1.6 million C corporations. Of those 50 companies studied, about one-in-five reported no federal income tax after credits.

Billion-dollar businesses argue that they have shareholders to satisfy. The Tax Foundation has been equally critical of JCT’s findings and states, “The corporate tax is also borne by owners of shares, including retirees and others…”

Everyone with a 401K or other retirement account, with even small stakes in large, publicly-held corporations, wants high-performing returns.

The Tax Foundation continues, “Corporate taxes do not come freely but rather at the expense of more investment, more job opportunities, and higher wages.”

That’s a legitimate argument. But the same is true for small businesses. Taxes paid by small businesses come at the expense of more investment, more job opportunities, and higher wages.

Keep in mind, small businesses account for about half of all private sector employment. They’re a big deal, too. But they’re also expected to pay their taxes.

This is one of those times when you can’t have both things, and it’s an uncomfortable choice.

Would you rather see the wealthiest corporations in this country pay their fair share of taxes, even if it meant your 401K would stumble—especially if the stock market is already struggling? Or would you rather look the other way when billion-dollar companies don’t pay their fair share of taxes, as long as it improves your chance to enjoy a high-performing retirement account?

There’s no one right answer, but have one. Then, own it.

Even children know that our choices define us.