It’s been a rough year to be the owner a magical kingdom. I have a friend who once worked security for Disney, and, he said the guards were employed for several months in 2020 keeping people out of the park—not a big money making venture. Disney went from a $10.9 billion dollar pre-tax profit in 2019, to a $2.4 billion dollar loss. Elizabeth Warren would like to tax book profits, in what she calls her Real Corporate Profits Tax (it turns out, I suppose, we have been heretofore taxing fake profits). While this plan has not been talked about as much recently, Senator Warren recently mentioned it in a hearing last month. So, what do you do with a firm like Disney?
That $10.9 billion profit from 2019 would have been subject, assuming a 7% tax rate on pretax income over $100 million, $800 million of real corporate profits tax. And why not? They had real profits. But, what do you do with that giant loss? As far as I know, the Warren proposal has not detailed how losses would be dealt with. In a normal income tax system, in basically all the countries in the world and all the states in the nation, you can apply losses from one year to another year. This is pretty logical—we use a year as an artificial time period, so, you should not owe taxes merely as a result of the time period over which the code measures income. For example, take an example. Imagine Goofy Corp loses $10 million in 2019, and makes $10 million in 2020, with net operating losses, over the two years, Goofy will have no tax liability (because, the net effect of income over the two years will be zero income). Imagine, instead, no net operating losses: Goofy Corp will pay nothing in 2019, and, pays taxes on the 10 million from 2020. The tax payment is purely a function of the artificial selection of a year as the period over which we account for income, and that result would be, well, Goofy. Which is why we, in the U.S., and pretty much everyone else in the world, allow losses to be applied from other periods.
So, what would the Real Corporate Profits Tax do? We don’t have the details. But, I am curious. This represents another instance of details that need to be worked out with this new tax proposal. However, this detail is more interesting that most. Why? Because the motivation for the tax, that some firms report high financial accounting profits while paying no taxes, is often caused by the use of NOLs itself. Speaking of low ETR firms, one recent academic paper found “we predict and find that the majority are primarily benefiting from a benign tax position: large net operating loss carryforwards (NOLs).”
Will one of the culprits that motivates the Real Corporate Profits Tax be allowed in the tax itself? Stay tuned…
