The Battle for Fair Taxation is Underway
April 11, 2021
In almost 100 days President Biden has put forward a series of plans to combat both the immediate impacts of the COVID-19 pandemic and the larger global and societal problems that have too long awaited necessary governmental action. All may be needed, and all reflect on a problem that witnesses appearing before a recent hearing of the US Senate Budget Committee spotlighted. Billionaire heiress Abigail Disney’s testimony captured the underlying problem, a “government, starved of resources that cannot meet the minimum expectations its citizens have for it to protect them in a pandemic, to offer a free decent education to their children, and a safe infrastructure in which to work.”
To understand why, in a fabulously wealthy nation, governments at all levels find themselves “starved”, unable to invest in desperately needed public investments, we need look no further than the nation’s tax system and the Congress’ unwillingness to act to act, not just to increase tax rates but to fix gaping holes that allow corporations and the wealthy to avoid paying what they fairly owe. Over decades the power of corporate lobbies has been successful in creating and protecting opportunities to shelter their wealth and keep the rates they pay much lower than we might think they are from the way they are described in glaring headlines and political diatribes. The heat and smoke rising from the public arguments over whether tax rates should be higher deflects our attention from a shocking reality, even with rates at historic lows, we are failing to collect billions of dollars, funds that are so sorely needed.
The size of the lost revenue to support important government functions is staggering; last year the federal government has lost more than $2 trillion, almost enough to fully fund in one year the cost of President Biden’s multi-year infra-structure proposal. Maya MacGuineas President of the Committee for a Responsible Federal Budget, testifying at that same Senate hearing, spelled out the specific carve outs in our current tax system. “This year alone, the United States will forgo $1.8 trillion of revenue through various credits, deductions, exclusions, and other preferences. Some of these tax breaks are worthwhile, but most are expensive, regressive, and distorting, and they could be repealed or reformed.”
Research conducted by the Institute on Taxation and Economic Policy illustrated the scope of the problem by identifying 55 US corporations that had a combined total of $40.5 billion in profits that paid $0 in federal corporate taxes. If they had paid the current corporate tax rate of 21% their tax bill would come to $8 billion. Adding insult to injury, many of these corporations were able to get the government to write them checks for the rebates they were owed.
According to ITEP’s research, “the companies…represented very different sectors of the U.S. economy:
- Food conglomerate Archer Daniels Midland enjoyed $438 million of U.S. pretax income last year and received a federal tax rebate of $164 million.
- The delivery giant FedEx zeroed out its federal income tax on $1.2 billion of U.S. pretax income in 2020 and received a rebate of $230 million.
- The shoe manufacturer Nike didn’t pay a dime of federal income tax on almost $2.9 billion of U.S. pretax income last year, instead enjoying a $109 million tax rebate.
- The cable TV provider Dish Network paid no federal income taxes on $2.5 billion of U.S. income in 2020.
- The software company Salesforce avoided all federal income taxes on $2.6 billion of U.S. income.”
For just these 55 companies, rebates totaled $4.5 billion bringing the effective tax rate to minus 10%!
A major avenue for corporate tax avoidance is rules which corporate profits that are “earned” outside the United States are exempt from US taxation. According to Gabriel Zucman Associate Professor of Economics, UC Berkeley, “more than half of the foreign profits of US companies are booked in tax havens today. In 2018, according to the most recent data of the Bureau of Economic Analysis, US multinationals booked more profits in Bermuda and Ireland alone than in the United Kingdom, Japan, France, Germany, and Mexico combined. U.S. multinationals appear to make a particularly extensive use of tax havens in international perspective.”
Nobel Prize Winning economist Paul Krugman recently spelled out what he calls the “leprechaun economics” of this maneuver when he focused on one of these favored tax havens, Ireland. “Ireland is a tax haven, with a very low tax rate on corporate profits. This gives multinational corporations an incentive to create Irish subsidiaries, then use creative accounting to ensure that a large share of their reported global profits accrue to those subsidiaries.” No real business is conducted overseas except the avoidance paying what they owe.
If these loopholes were not big enough, individuals and corporations also just refuse to pay what they owe, taking advantage of an underfunded bureaucracy unable to stay on top of tax avoiders. In a separate report, CRFB quantified the annual value of taxes that went unpaid. the amount of taxes owed that go uncollected. “Only 84 percent of the money owed in taxes is collected each year, which resulted in a “net tax gap” of $406 billion per year on average…That amount is a combined $458 billion not voluntarily paid and another $52 billion collected after the IRS contacted those who were delinquent. The net tax gap of $406 billion is about 2.8 percent of Gross Domestic Product (GDP), which would be equivalent to $6.5 trillion over the next decade.”
Fixing a flawed corporate tax system is a key element to ensuring that we have a truly progressive tax system. As Gabriel Zucman recently said in comments reported by the NY Times’ David Leonhardt, “In effect, the only sizable tax for…billionaires is the corporate tax they pay through their firms. “The main reason why the U.S. tax system was so progressive before the 1980s is because of heavy taxes on corporate profits.”
Last week, The Biden Administration began to lay out its plans to finally fix this problem. Treasury Secretary Janet Yellin began a pu9sh to create international support for a global minimum corporate income tax that, in her words as reported by the NY Times, would “help prevent a “race to the bottom” in which countries cut their tax rates in order to entice companies to move headquarters and profits across borders. Together, we can use a global minimum tax to make sure the global economy thrives based on a more level playing field in the taxation of multinational corporations… “making sure that governments have stable tax systems that raise sufficient revenue to invest in essential public goods and respond to crises, and that all citizens fairly share the burden of financing government.”
The holes in our current system of taxation are well known. Voices quickly oppose any attempt to collect additional taxes, either by sealing up leaks or by raising rates with spurious claims that they are unfair and that they will discourage investment and harm the economy.
The Administration’s plan also calls for raising the nominal Corporate rate to 28%. The immediate reaction from opponents was that this would destroy businesses. These arguments have already been heard, even before the ink has dried on the Administration’s proposal. That they are not true seems clear. Amy Hanauer Executive Director Institute on Taxation and Economic Policy recently told the Senate Budget Committee that “there is no evidence that low corporate taxes help the overall economy. Proponents of the Trump tax law held out the corporate tax cuts as the key provisions that would spur economic growth. In fact, GDP growth in 2018, the first year the law was in effect, was about 2.9 percent, the same as in 2015. In 2019, the second year the law was in effect, GDP growth was 2.2 percent.”
Abigail Disney illustrated why the battle to give government the resources that it needs was so difficult when she described, in her recent testimony, the nature of the opposition, describing “a wealthy class that petulantly views its moral obligations as nuisances, that whines when it is taxed, that hides its wealth offshore to evade taxes and uses every loophole and technicality—of which there are plenty—to get, hold, and hoard sums of money so huge they can never possibly spend them.”
The struggle is again engaged. The outcome critical for our nation’s ability to face its future with fairness and equity. Who will prevail remains to be seen?