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Corporate Tax Rate: Our Rate is Not What Makes Us “Competitive”

by Patriotic Millionaires | 3.27.18

From the experts at the Economic Policy Institute:

Do U.S. corporations pay significantly more in income taxes than companies in our peer countries? No. American corporations are clearly not heavily taxed relative to international norms. While the statutory U.S. corporate tax rate of 35 percent is on the high end internationally, corporations don’t actually pay anywhere near that rate on average. Using loopholes to avoid paying their full tax bills, corporations pay an effective tax rate of between 12.5 percent and 21.2 percent. One of the key loopholes is deferral—which allows U.S. firms to pay zero taxes on profits booked overseas (often through clever accounting practices) unless and until those profits are “repatriated” (returned) to owners in the United States.

Take action above to call your elected officials and tell them that we will not settle for anything less than FULL repatriation of overseas taxable profits!

Measured as a share of total GDP, U.S. corporations pay significantly less than their international peers. In 2015, the revenue raised through U.S. corporate taxes equaled 2.2 percent of GDP. On average, other member countries of the Organization for Economic Cooperation and Development (OECD) raised 2.9 percent of GDP through corporate taxes. 18

Does the U.S. corporate tax code harm American workers by making U.S. firms less “competitive”? No. The “competitiveness” claim is just hand-waving to disguise the fact that corporate tax cuts do not boost wages or jobs for U.S. workers, and that the effective rates U.S. corporations pay are not out of line with our international peers.

While cutting U.S. corporate rates would render U.S. corporations more profitable, these cuts would do nothing to boost jobs or wages for American workers—through increased “competitiveness” or any other channel. U.S. corporate profits are historically high and yet U.S. corporations aren’t investing a lot more in plants, research, and new technology. 19

Key to understanding why this competitiveness argument is a pure dodge is the fact that the United States taxes firms on a worldwide basis, meaning that profits are taxed at the same rate whether they’re booked domestically or internationally. So, cutting corporate tax rates would just reduce the rates U.S. firms pay on profits here and abroad, which does nothing to encourage corporations to set up plants here in the United States. Not only that, the deferral loophole allows U.S. firms to avoid paying taxes on profits booked overseas until profits repatriate to the firms’ owners in the United States. Because the deferral loophole encourages corporations to keep accounting profits overseas, one obvious way to improve the “competitiveness” of the U.S. corporate tax code is to reduce the share of corporate profits appearing overseas by ending deferral and requiring that corporations pay their taxes when the income is earned—just like American families do.

Finally, some purveyors of the “competitiveness” argument imply that U.S. corporations might do better in claiming global market share against foreign corporations if our corporate rates were cut. But this would only be true if corporate rate cuts somehow translated into lower prices for the output of American firms, and no serious economist thinks this would happen. All in all, claims that U.S. corporate rates should be cut in the name of boosting American competitiveness are economic snake oil.

Does the U.S. corporate tax code force businesses to move their headquarters overseas? Even if it did, is this necessarily bad for American workers? No. Tax loopholes allow some firms to use financial engineering to make profits look like they were earned overseas, but these firms are not generally moving actual factories and jobs overseas. The solution to this problem of international tax avoidance isn’t to give up on collecting taxes; it’s to close the loopholes.

Current U.S. tax laws are already outrageously generous to tax-dodging multinational corporations. Under the deferral loophole, firms avoid paying taxes indefinitely by using accounting tricks to make profits appear to have been booked in subsidiaries overseas. Deferrals are encouraged by the prospect of ad hoc “tax holidays,” when the U.S. government gives companies that bring profits back to the U.S. in a given year a deep discount on their tax bill. For example, in 2004, legislation passed by Congress allowed companies to pay just 5.25 percent on repatriated profits, dramatically lower than the 35 percent statutory tax rate. But there hasn’t been a tax holiday on deferred overseas profits since 2004, and this has made some companies with huge offshore profits worried that they might actually have to pay the full taxes they owe on all the profits they’ve stashed overseas.

Instead of waiting and risking a future Congress that changes tax law to actually collect the full amount of taxes owed on overseas profits, some of these companies are engaging in the do-it-yourself permanent tax break known as an “inversion.” In an inversion a U.S. multinational is “bought” by a foreign company that is small enough that the original corporation can still retain managerial control over the new company. The new, now ostensibly foreign company then uses accounting gimmicks to ensure that its U.S. tax bill is zero.

But these firms generally do not move productive plants and equipment and jobs overseas; instead, they just move paper profits. To put it simply, U.S. manufacturing jobs are not moving to tax havens such as Ireland or the Cayman Islands, accounting profits are moving there and avoiding taxes, and that’s the key problem we should try to solve with corporate tax reform. Inversion is clearly nothing but a strategy to dodge taxes. In 2016, the Obama administration clamped down on one loophole that multinationals use to claim tax savings once they’ve inverted. Lo and behold, a planned inversion by Pfizer was immediately halted. 20 There’s no point in pretending you’re being bought if you’re just going to have to pay your taxes anyway.

Are profits of U.S. firms “trapped” overseas because of U.S. corporate taxes? No. Such language implies that corporations are the victims in this situation. They are not. By actively using clever if largely dishonest accounting to make profits appear to have been booked overseas, corporations are taking advantage of loopholes to evade their tax responsibilities at the expense of the American people. And, in fact, they are still able to make use of these overseas profits through financial engineering—borrowing at low rates using their offshore profits as implicit collateral.

Corporate profits are sitting overseas because corporations are hoping for another tax holiday, like the one they were given by Congress in 2004. During the 2004 tax holiday, multinational corporations were able to pay a tax rate of 5.25 percent on repatriated profits, instead of the 35 percent rate they were supposed to pay.

As corporations await another tax holiday windfall at the expense of the American people, they aren’t financially handicapped in any way by leaving these profits overseas, since they can tap these profits through pretty basic financial engineering. They can borrow at low rates, using their offshore profits as implicit collateral, and then deduct that interest from their income. The net result of these financial maneuvers is a wash to their profits, but in return they essentially get access to their overseas holdings without paying the taxes they owe. Apple has $230 billion offshore but borrowed $6.5 billion to repurchase stocks and boost shareholder returns. Microsoft has $124 billion offshore but borrowed $26 billion to buy LinkedIn.

Let’s end with an analogy. Every dollar your employer pays you triggers a tax liability for them (the employer-side of the FICA taxes that fund Social Security and Medicare). Imagine one day your employer came to you and said that they’d love to pay you your salary, but, sadly, the money is “trapped” because if they did pay, they’d then owe taxes. Would you find this a compelling argument? Or would you tell them to shut up and pay their taxes?

Would letting companies bring back (“repatriate”) their overseas profits at low tax rates (via a “tax holiday”) help the U.S. economy? No. We know that multinational corporations have already engineered ways to access these profits, by borrowing money using the offshore profits as implicit collateral. And we can see in real time what they’re doing with the money—boosting shareholder returns, not investing in the economy.

For example, Apple has $230 billion offshore but recently took on $6.5 billion in debt to repurchase stocks and boost its share price, allowing owners to realize a potential capital gain. Microsoft has $124 billion offshore but borrowed $26 billion to buy LinkedIn. When a tax holiday was implemented in 2004, there were rules in place that were supposed to ensure the money was invested. Multinational corporations got around those rules, and studies show that the offshore profits went to shareholders.

Finally, we know that savings are plentiful and interest rates are historically low. This means that corporations are already well positioned to invest in productivity-enhancing capital that could boost wages. The benefits of on-shoring a lot more corporate savings through a tax holiday would not solve the main problems the economy currently has; instead it would simply lock in a tax cut for corporations.

Other Links from EPI:

Take action above to call your elected officials and tell them that we will not settle for anything less than FULL repatriation of overseas taxable profits!

Patriotic Millionaires

Written by Patriotic Millionaires

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