Friday, November 4, 2022
Weekly SSRN Tax Article Review And Roundup: Kim Reviews Kamin's Ambition, Limits, And Politics Of The Global Minimum Tax
This week, Young Ran (Christine) Kim (Cardozo; Google Scholar) reviews two new works by David Kamin (NYU), Why Book Minimum Taxes? Taking Politics Seriously, 177 Tax Notes Fed. 193 (Oct. 10, 2022), and The Ambition and Limits of the Global Minimum Tax, 177 Tax Notes Fed. 385 (Oct. 17, 2022).
The two articles I introduce today were written by David Kamin, who served as Deputy Assistant and Deputy Director of the National Economic Council under President Biden until May of 2022. Kamin’s articles focus on the corporate alternative minimum tax (AMT) and are his first publications since returning to academia. On a personal note, I was thrilled to discover that Kamin chose to write on a topic that is dear to me.
Kamin’s first article, Why Book Minimum Taxes? Taking Politics Seriously, presents a political argument for book minimum taxes. It explains how book minimum taxes address the challenge of coordinating political actors inside the United States and around the world. The recent enactment of a new corporate AMT in the United States has generated a mixed response. Some critics argue that Congress should fix the corporate income tax system directly by limiting subsidies, raising rates and not imposing another tax base as a backstop.
In addition, some object to using book measures in the tax system because they believe that book measures will place too much pressure on accounting standards and the institutions that develop those standards. Kamin responds to all of these criticisms in the body of his article and concludes by imploring his readers to take politics seriously in the arena of tax policy.
The book minimum tax debate currently at issue stems from the recent global tax agreement under the OECD's Pillar 2. The book minimum tax under Pillar 2 is considered an effective instrument in the international context—even among critics—given the significant political and institutional barriers to other forms of tax reform. More direct measures, such as mandating statutory tax rates and limiting permissible tax expenditures, are impossible given global policies and political institutions. Using book income can also be justified as necessary for negotiation because no ready-made alternative definition of income exists for the world to adopt as part of a global minimum tax. In fact, major corporations report audited financial statements that are plausibly uniform, albeit not entirely uniform, thanks to the International Financial Reporting Standards (IFRS) and the generally accepted accounting principles (GAAP). And while corporate taxpayers may exhibit a behavioral response to using financial statements for tax purposes, the trade-offs depend on empirical questions like how much companies will change book reporting and whether changes in reporting will improve or worsen the quality of information provided to financial markets.
In his article, Kamin specifically asks why book minimum tax critics are more vociferous in their objections to the domestic corporate AMT than in their objections to the international framework. And while the case for minimum taxes may be less compelling when the U.S. version of minimum tax is not the same as the book minimum tax negotiated at the OECD, Kamin presents a persuasive case for a book minimum tax by highlighting the importance of taking politics into account. Many alternatives for raising revenue from corporations have failed. The failed negotiation over the latest reconciliation bill is a prime example of this reality. Clearly, interest group politics make it impossible for policymakers to act in ways that benefit the general public. Therefore, delegation may be a solution in various political contexts. For instance, when Congress picks which military base should be closed, it often delegates the process to a commission on base realignment, thereby solving the collective action problem. Kamin draws a parallel when he suggests that a tax base defined by a combination of financial regulators overseeing the financial accounting standard and Treasury accomplishes a similar solution via delegation. Overall, Kamin’s focus on politics implies that he considers previous repeated political deadlocks and frustrations regarding policy options for raising corporate tax revenue a serious matter of concern.
Kamin’s second article, The Ambition and Limits of the Global Minimum Tax, turns readers’ attention to the global book minimum tax. Many policymakers and scholars, including Reuven Avi-Yonah (Michigan, Google Scholar) and myself, argue that Pillar 2 may discourage tax competition and the race to the bottom (see our article here). Kamin, on the other hand, argues that the minimum tax does not end competition for many types of business activity or limit the ability of governments to provide subsidies to specific business sectors. Races to the bottom, Kamin writes, would continue even if the global agreement were fully implemented. I do not think that Kamin and I disagree. Rather, Kamin’s analysis takes a more realistic and technical approach to Pillar 2. In other words, Kamin emphasizes the fact that the global tax deal is more targeted and limited than many proponents suggest. To be more specific, the minimum tax targets the taxation of the largest returns to capital investment and efforts to shift large profits to low-tax jurisdictions. If implemented, Pillar 2 would restrict the related forms of tax competition: competition for paper profits and competition for activity associated with very large returns.
At this point, it is important to understand the limits of Pillar 2. The new global minimum tax regime applies to tax only. It does not apply to how governments treat businesses on the spending side. However, economically speaking, tax and spending are interchangeable. Therefore, the question is: would the agreement accomplish nothing if governments employ an expedient to offer tax incentives to multinationals under a different label of spending-side grants? The answer is and should be negative. Governments should be meaningfully limited in terms of the benefits they can deliver—and how much they can shield high-return income from resulting in net transfers to governments—through what are characterized as grants. This is because the Pillar 2 rules effectively impose substantive guardrails that distinguish grants from tax cuts.
There are additional limitations in the new Pillar 2 regime. Qualified refundable tax credits and certain transferable tax credits may get spending-side treatment and be subject to a 15 percent haircut if the business in question is subject to the minimum tax. The timing differences between book depreciation and tax depreciation would not generate additional liability under the minimum tax. The substance-based carveout and high revenue threshold (over €750 million annual revenue) create a flexibility that many companies will use to escape from the minimum tax regime. However, Kamin points out that very large returns from the largest companies or profits shifted into a country from activity occurring elsewhere (and so appearing as large profits) are still likely to face tax.
In the United States, the issue of subsidies that may be affected by the minimum tax regime would be the research and experimentation (R&D) tax credit and the foreign-derived intangible income deduction (FDII). Still, Kamin argues that there are readily available routes for flexibility when it comes to R&E credit and that effects could be modest when it comes to FDII.
In short, the proposed Pillar 2 regime does stop a competition: the race for paper profits through profit shifting and for activity associated with the largest returns. This is a significant and important step forward even though other competition for business activity will continue. Additionally, I believe that Kamin takes a realistic and technical view of the global minimum tax to show concerned corporate taxpayers that only a small portion of them will be affected by this new regime.
Though I remain skeptical of Pillar 1, I support Pillar 2's global minimum tax regime and look forward to its successful implementation. I appreciate Kamin's recent service in the government and his two articles introduced in this review. And while I continue to be disappointed by the U.S. version of book minimum tax in the Inflation Reduction Act, Kamin has persuaded me that it may very well be the best we can have at the moment. The two articles in this review bridge the gap between the academic ivory tower and the practical policy battleground by providing insight into what is motivating the domestic and global book minimum taxes.
Here’s the rest of this week’s SSRN Tax Roundup:
- Lital Helman (Columbia; Ono Academic College Faculty of Law), Innovation Funding and the Valley of Death, SMU L. Rev. (forthcoming)
- Beckett Cantley (Northeastern) & Geoffrey Dietrich (Cantley Dietrich LLC), Reserve Mechanical Corp v. Comm: A Potential Death Knell for Aggressive Captive Insurance (Oct. 26, 2022)
- Claudio A. Piga (Università degli Studi di Genova), Luisanna Onnis (Cardiff University), Maurizio Conti (Università degli Studi di Genova) & Anna Bottasso (University of Genoa), VAT Cuts as Emergency Policy Intervention: Evidence from the UK Case (Oct 26, 2022)
- Hamza Bennani (CEROS, Université Paris Nanterre) & Matthias Neuenkirch (University of Trier - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute)), Too Complex to Digest? Federal Tax Bills and Their Processing in US Financial Markets (Oct. 21, 2022)
- Rainer Niemann (Graz) & Mariana Sailer (WU), Do Taxes Explain Why Firms Rarely Use Penalty Remuneration Contracts? (Oct 26, 2022)
- Candice Hux (Northern Illinois), Lindsay M. Andiola (Virginia Commonwealth University) & Tracy Noga (Bentley), Interprofessional Collaboration and Conflict between Auditors and Tax Specialists During Audit Engagements (Oct 27, 2022)
- Linda K. Krull (Oregon) & Juan Wu (Minnesota State), Changes in U.S. Multinational Firms’ Investment and Income Shifting after the 2017 Tax Cuts and Jobs Act (June 20, 2022)
- David M. P. Samuel (Singapore Management University), The Effect of the Tax Cuts and Jobs Act on Foreign Investment of U.S. Multinational Corporations (Oct 22, 2022)
- Jeong-Bon Kim (City University of Hong Kong), Yupeng Lin (National University of Singapore), Ying Mao (Lingnan University) & Zheng Wang (City University of Hong Kong), Banking Market Consolidation and Tax Planning Intermediation: Evidence from Client Firm Tax Haven Operations, The Accounting Rev. (Forthcoming)
- David Amaglobeli (IMF), Valerio Crispolti (IMF) & Xuguang Simon Sheng (American), Cross-Country Evidence on the Revenue Impact of Tax Reforms, IMF Working Paper No. 2022/199 (2022)
- Lorraine Eden (Texas A&M), The (Not So) Simple Analytics of the New Amount A, 107 Tax Notes Int’l 1487 (2022)
- Shu-Chien Chen (Erasmus University), Discourses in the Tampon Tax Campaign, J. Gender and Feminist Studies (2022)
- Lex Fullarton (Curtin) & Dale Pinto (Curtin), Australian Taxation Office Pronouncements: Why Tax Advisers Need to Exercise Caution, 23(2) J. Australian Tax’n (2022)
- Jason Anderson (Kansas) & Ross Riskin (Investments & Wealth Institute), This Filing Season Provides an Opportunity for Student Loan Borrowers, 175 Tax Notes 59 (2022)
- Daniel J. Hemel (NYU), Polysemy and the Law, 76 Vanderbilt L. Rev. (Forthcoming 2023)