The engine of the corporate tax system is sputtering, and Democrats are trying to fix it with a Band-Aid instead of a wrench. They’re proposing a corporate minimum tax, which they call the “Amazon tax,” targeting U.S. companies that pay little or no taxes despite reporting billions in profits each year to shareholders.

The Democrats’ proposed 15% levy on the world-wide financial-accounting earnings of large, highly profitable companies may sound familiar. It was originally proposed by Sen. Elizabeth Warren during her bid...

Sen. Elizabeth Warren speaks during the Senate Armed Services Committee hearing in Washington, Oct. 26.

Photo: Tom Williams/Zuma Press

The engine of the corporate tax system is sputtering, and Democrats are trying to fix it with a Band-Aid instead of a wrench. They’re proposing a corporate minimum tax, which they call the “ Amazon tax,” targeting U.S. companies that pay little or no taxes despite reporting billions in profits each year to shareholders.

The Democrats’ proposed 15% levy on the world-wide financial-accounting earnings of large, highly profitable companies may sound familiar. It was originally proposed by Sen. Elizabeth Warren during her bid for president. Democrats are pushing this tax again now, hoping it will encourage passage of a $1.85 billion reconciliation bill to fund President Biden’s Build Back Better plan.

Any plan to tax financial-accounting earnings is ill-conceived, as I argued on these pages in May 2019. Blurring the lines between taxable income and financial-accounting profit would inevitably lead to political meddling in financial-accounting rules and damage the usefulness of financial accounting for investors.

The political meddling has already begun. In September 2019, shortly after Sen. Warren introduced her version, she and 11 other senators wrote to the Financial Accounting Standards Board, a private institution that defines best procedures for accounting, urging it to increase disclosure of foreign subsidiary activities for the purpose of improved tax enforcement. If tax enforcement or any other political objective were to enter the decisions of the FASB, accounting standards would immediately deteriorate.

Politicians and the FASB have vastly different objectives. Financial-accounting rules are created by the apolitical FASB to provide information useful to investors. In contrast, tax-accounting rules are largely determined by Congress to achieve such objectives as raising revenue, encouraging or discouraging certain behavior, and redistributing wealth. Two accounting systems are necessary, one for pursuing social objectives through the tax system, the other for giving investors comparable, reliable and timely information. The U.S. is not unique in this regard. Every developed country has a tax-accounting system that is separate from its financial-accounting system.

Because the objectives of the two systems are different, the income they compute is different. In some years, the discrepancies can be large. A company will appear to have paid a very low amount of tax if its taxable income is low compared with its financial-accounting earnings. The opposite also happens, but these occurrences go largely unnoticed. In fact, discrepancies between financial accounting and tax accounting are evidence of a system that works. It does not justify a new tax on financial-accounting income.

If Congress wants to raise more revenue and prevent companies from reporting low tax rates, it should change the tax code. For 2018, Amazon reported more than $11 billion in income to shareholders and paid no federal income tax, largely because of tax deductions the company received after compensating employees with restricted stock. The solution? Reduce deductions on restricted stock.

In 2018, FedEx reported more than $3.5 billion in income to shareholders and paid no federal income tax, largely as a result of accelerated depreciation deductions. The solution? Roll back bonus depreciation and other investment tax benefits. The list goes on. Companies often report low tax payments because they have posted losses in the past, they have significant investments in sustainable energy, they operate in countries with low tax rates and so on. Each of these tax breaks was enacted to achieve political, social or economic objectives, but could be altered by changing tax laws if Congress believes raising revenue or reporting higher tax rates is more important.

Taxing financial-accounting earnings would harm the people the Democrats intend to protect: small investors and workers. Trying to fix the corporate tax system using financial accounting standards is like trying to fix a car at a doctor’s office. Take the car to a mechanic instead.

Mr. Dyreng is a professor of accounting at Duke University.

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