How did we get to the point where profitable companies manage to avoid paying the taxman? To answer that question, we need to focus on the differences in responsibilities of two key institutions: the Financial Accounting Standards Board (FASB) and the Internal Revenue Service (IRS). FASB is an independent agency, authorized by the Securities and Exchange Commission (SEC) to set the generally accepted accounting principles (GAAP) that public companies in the U.S. must follow in reporting financial results. The IRS is a bureau within the Treasury Department that's responsible for applying rules related to the collection of tax revenues. Those rules are set out in laws enacted by Congress.

FASB rules require public companies to generate income statements, which report net income (earnings) during the prescribed accounting period. By contrast, the IRS bases its tax calculations not on GAAP net income, but on taxable income as defined by Congress. This is the reason some profitable companies have been able to operate without any federal tax liability.

The laws governing taxation of corporate earnings allow for scores of deductions—far in excess of expense items permissible under GAAP. Many of those deductions benefit specific industries or companies. At the same time, the laws also exclude some forms of revenues that companies earn. As a result, a company's taxable income values can end up being a far cry from its GAAP net income figure.

Both in theory and in practice, companies might have a positive net earnings but zero or negative value for taxable income, putting those entities squarely in Elizabeth Warren's sights.

The separation of the two authorities has served, thus far, to insulate FASB from pressures that could move it away from its position of independence. If FASB's net income measure were to become more relevant in the determination of corporate taxes, the agency might face pressure from Congress and special interests seeking to influence the way revenues and expenses are measured and reported under GAAP.

A minimum corporate tax is not the only option for bringing taxable and reported corporate income into closer alignment. Congress clearly has had, and still could have, an alternative—one that would do more to protect FASB's independence. That is, it could reassess the IRS's definition of taxable income. To the extent that the current definition inappropriately exaggerates expenses or excludes revenues, those elections could, and should, be adjusted. Many such provisions serve the narrow interests of a minority of companies at the expense of the rest of us. Unfortunately, Congress hasn't shown the will or capacity to change those kinds of rules, irrespective of how unfair they may appear to be.

The proposal to apply a minimum tax rate of 15 percent to GAAP reported net income strikes me as a second-best alternative. If we are to have a corporate tax based on income, replacing the current definition of taxable income with GAAP net income seems to be a reasonable adjustment—one that deserves bi-partisan support.

Ira Kawaller is the principal and founder of Derivatives Litigation Services. He holds a Ph.D. in economics from Purdue University, and derivatives have been a consistent area of interest for most of his career. Kawaller contributes frequent blog postings on topics related to politics and economics at igkawaller.medium.com.