Reclaim the American Dream

Another Blog Post By

Hedrick Smith

Tax Games Corporations Play

Washington – Okay, let’s talk turkey about taxes and their implication for U.S. economic growth and inequality. But let’s get real. Let’s get beyond the political kabuki dance in Washington, with politicians echoing well-rehearsed lines. That means focusing on real-world economics.

Discovery No 1 one is that almost no major U.S. corporation, certainly not those that do business overseas, actually pays the 21% corporate tax rate, set by law. In fact, on average, Fortune 500 companies pay about half that much – 11.3% according to the non-profit Institute for Taxation and Economic Policy and Taxation, working from corporate reports.

Federal Tax Data from the Center on Budget and Policy Priorities

The second big discovery is that despite endless whining from Corporate America about its unfair and impossibly heavy tax burden, corporate taxes and the corporate share of overall U.S. tax revenues has been shrinking over the past six decades, down sharply from 32% of the total in the 1950s to 7% in 2019. And the rest of us have to make up that difference.ghi

Bragging to Wall Street, Playing Poor to IRS

Finally, to get how corporate tax games are played, you have to understand that US corporations keep two sets of financial books – one for the public and the other for the taxman – and that’s legal under law.

The first set of books, shared with Wall Street and the public, reports so-called “book income,” which is the rosy version of corporate earnings, companies bragging to Wall Street about how much money they made. The second set of books does the opposite. Filed privately to the I.R.S, it shrinks company profits to the bare minimum, to zero if possible, by using every conceivable tax loophole and legal deductions for corporate contributions to 401k plans, employee health insurance, certain R&D and much, much more.

Last year, for example, 55 large US corporations, including FedEx, Nike, Duke Energy, Nucor, SalesForce, Archer-Daniels-Midland, Booz-Hamilton, and four dozen more paid zero federal corporate income taxes despite publicly reporting more than $40 billion in pre-tax profits, according to data mined by the Institute of Taxation and Economic Policy.

If these 55 US corporations had paid the official 21% tax rate, they would have owed Uncle Sam $8.5 billion, but instead, they got $3.5 billion in tax rebates through government tax credits. And that’s just the tip of the iceberg.

Over the past decade or two, all the corporate giants have worked this game – Apple, Google, Coca-Cola, Pepsi, Caterpillar, General Electric, Goldman Sachs, Merck, Pfizer, you name it. In all, the tax code allowed Corporate America to avoid paying $100 billion a year in taxes on their overseas profits – potentially several hundred billion over several years, according to an academic study cited by the Biden administration.

Apple Tax Dodge – “The Double Irish with a Dutch Sandwich”

”How do they do that?” you ask. “How do they get away with that?”

The answer lies in the massive mushrooming of overseas operations by  U.S. corporations in every economic sector from finance to energy to pharmaceuticals to manufacturing to hospitality, plus some sleight-of-hand profit shifting to their foreign subsidiaries, sometimes little more than ghost offices in foreign tax havens.

(top) Headline from the St. Kitts and Nevis Observer, March 11, 2021; (bottom) Horseshoe Bay Beach, Bermuda

Overseas is the key word. For the last three decades, the bulk of profits earned by U.S. multinationals from operations of their overseas subsidiaries have not been subject to taxation by the U.S., unless companies brought those foreign profits back home. So in real-world Monopoly, profits from overseas operations had a Get-Out-of- Taxes-Free card.

In recent years, the stash of overseas profits has topped two trillion dollars at times. Even that huge tax exemption did not satisfy Big Business. So their financial geniuses found other ways to evade Uncle Sam through what is called profit-shifting – that is, legally escaping U.S. taxes through paper transactions that shift income and profits generated by products made, work done, or inventions created inside the U.S. to their foreign-incorporated subsidiaries in lower-tax countries.

Apple, for example, became famous for  a tax dodge dubbed as  “the Double Irish with a Dutch sandwich.” This is how it worked. Apple’s creative teams in California would invent some new high-tech wrinkle for the iPhone or the iPad, and Apple would transfer ownership of the patent for that lucrative technology to its subsidiary in a low-tax haven like Ireland. Then it would book the revenues from that technology through the Netherlands and the Caribbean to Ireland so that those profits were taxed at an effective rate of 1% in Ireland instead of then going rate of 35% in U.S.

Caterpillar, which makes tractors and earth-moving equipment in Illinois, ducked U.S. taxes by simply removing the name and address of its home office from its billing invoices and told its foreign customers to send their payments to Caterpillar’s subsidiary in lower-tax Switzerland.

Coca-Cola and Pepsi reduced their U.S. tax bite by having foreign subsidiaries produce their soft drink syrups in low-tax countries like Singapore (Coke) and Ireland (Pepsi) and booking their profits in those countries. More broadly, 85 major U.S. companies, like GE, Microsoft, Pfizer, Merck, and IBM, reported total earnings of $800 billion in one year alone in the tax havens of Bermuda and the Cayman Islands.

Biden: A Higher Corporate Tax Bite Will Reduce Inequality

Joe Biden is blowing the whistle on this game, in order to restore fairness to the U.S. tax system. Biden believes that closing the huge foreign loophole in our tax system by imposing a 15% minimum corporate tax will pay off big-time in good jobs, economic growth, and greater American competitiveness if the U.S invests those corporate tax dollars in modernizing the nation’s infrastructure.

Business groups like the U.S. Chamber of Commerce, Business Roundtable, and National Association of Manufacturers – echoed by Minority leader Mitch McConnell and Senate Republicans – are up in arms. They warn that that higher corporate taxes will backfire. They say increased taxes  will slow economic growth and cripple U.S. companies in global competition.

But we’ve heard this siren song before and our experience with the Trump tax cuts of 2017 belies this pitch. In 2017, those same big business groups asserted that cutting corporate taxes would lead to corporate investment in American jobs and generate economic growth. But that did not happen. The annual U.S. economic growth rate stayed stubbornly stuck at 2.4 percent for two years before the Trump tax cuts and at 2.4 percent for two years after the tax cuts. The promised economic gain did not materialize.

Even worse, when U.S. corporations were offered a bonus tax cut for bringing home their foreign profits. Once again they promised investment, jobs, and growth. Once again it didn’t happen. Instead, the Federal Reserve reports, U.S multinationals brought home $777 billion and spent the largest chunk of those repatriated foreign profits into higher dividends and stock buybacks that sent stocks soaring on Well Street and delivered huge financial payoffs to the corporate and financial elite.

Tapping into $1 trillion Profits of U.S Billionaires

Biden proposes to reverse that process: To fight economic inequality by stemming the Niagara of corporate profits to the financial elite – to the top 1% – by raising corporate taxes  The time is ripe, given the galloping growth of inequality during the pandemic.

Thanks to skyrocketing profits at Apple, Amazon, Netflix, Google, Zoom, and a fleet of hot internet services that we all needed while trapped at home during the pandemic, Americas 650 billionaires – the main owners of tech high fliers – added $1 trillion to their wealth during the pandemic year of 2020, while most American families struggled to pay the rent, put food on the table and stay economically afloat..

That’s the lop-sided inequality that Biden is now trying to reverse by making Corporate America pay its fair share of the nation’s tax burden so that we can invest in creating more good American jobs here at home and build our collective future. “It’s honest. It’s fair,” says Biden. “It’s fiscally responsible, and it pays for what we need.”