Author Archives: Michael Froomkin

GE pays no US taxes. Do we need an Alternate Minimum Tax for corporations?

Individuals often use tax-avoidance strategies to reduce their personal income taxes. Concerned that all the loopholes were eroding revenue collection, Congress enacted the Alternate Minimum Tax, which is supposed to be a floor on the amount that people would have to pay.

Wikipedia, which I recognize is probably not the ideal source for this, summarizes the AMT as follows:

AMT is computed at 26% or 28% for individuals and 20% for corporations on taxable income as adjusted for AMT. Taxpayers are allowed a flat exemption amount but not personal exemptions or the standard deduction. The exemption for 2010 is $72,450 for married couples filing jointly or a qualified widower, $36,225 for married individuals filing separately, $47,450 for single individuals, and $40,000 for corporations, and is phased out at higher incomes. Individuals may not deduct taxes or miscellaneous itemized deductions, depreciation deductions are computed using longer lives and slower methods, other adjustments apply. The AMT rate for capital gains and qualified dividends currently is the same as the regular tax rate for such items. A foreign tax credit and eight other business credits are allowed to reduce AMT.

GE makes a lot of money, much of it in the US, but structures its business to escape corporate tax. Why not have a rule similar to the personal AMT for very large corporations, say those with revenue over $500 million or $1 billion to start? Or perhaps with profits — if we could define that term much more rigorously than used in the current tax code — over some suitably large number.

I recognize that the personal AMT has critics, some making legitimate points. AMT is not indexed, so the bite goes deeper into the upper middle class every year (I could see that as a bug or a feature). AMT reduces the economic effects of various deductions which are supposed to give incentives for activities we claim to want to encourage. That’s true, but the idea is that allowing too much tax avoidance is a worse evil.

Some legitimate criticisms of the personal AMT wouldn’t apply to a corporate AMT. For example, the AMT undermines the effect of the child tax deduction and hurts taxpayers living in high-tax state since they are worse off from not getting to deduct their state taxes. Those won’t I think be issues for big corporations which just have subsidiaries instead of children, and tend to be present in all states.

A rule taxing gross sales rather than net profits has the advantage of being harder to game, but also runs into the problem that there are some corporations with huge turnover but also huge losses. A rule that taxed actual profits runs into the problem that giant firms like GE already use accounting games to make their profits appear to happen in low-tax foreign jurisdictions. These are not easy problems to solve, but isn’t it is time to address them?

The personal AMT notoriously doesn’t consider the effect of foreign taxes. I don’t know how that would or should work for a corporate AMT, especially given existing tax treaties. If the tax is on domestic sales, that may not be as much of an issue. If the tax is profits, domestic or world-wide, the foreign tax issue will matter.

Tax law is far from one of my strong suits, so I invite instruction on that and all the other points above.