A Simplified Way to Tax Multinational Corporations
You’ve been hearing a lot about corporations “renouncing their US citizenship” through “tax inversions.” This is when a company buys or merges with a non-US company and claims to no longer be based in the US to get out of paying certain taxes. The company does, however, keep the same employees, executives, buildings, sales channels and customers it had inside the US before the switch.
The epidemic of tax inversions represents just one of many ways corporations are dodging their taxes by taking advantage of our outdated and rigged corporate tax system. It is time for a serious debate about corporate taxes, and on Monday a new report by District Economics Group economist Michael Udell offered a bold new alternative that is so radically simple that even the most clever corporate tax accountant would have a hard time finding a way around its fair and universal proposition: If a company sells products or services in the US, it must pay taxes on the US proportion of its worldwide sales.
But first, let’s explore how today’s complexity enables corporate tax avoidance.
Are We “Broke” or Just Not Collecting the Taxes We Are Owed?
“America is broke,” declared House Speaker John Boehner a few years ago. But clearly the country is not broke; we are just being robbed, as many corporations create ways of avoiding, dodging, shirking and generally not paying their taxes. The share of federal revenue coming from corporate taxes has dropped from around 32 percent in 1952 to 8.9 percent now. As a share of gross domestic product, it has fallen from about 6 percent of GDP then to less than 2 percent now. Meanwhile the rest of us — including small domestic companies that don’t have armies of tax consultants — have to make up that shortfall, either through increases in things like payroll taxes, or through cuts in the things government does to make our lives better.
Our big problem is that the big, multinational corporations use so many tax avoidance techniques that it is difficult to keep up. One of the larger dodges is that we allow corporations to “defer” (i.e. never pay) taxes on profits made outside the US. So they engage in all kinds of schemes to make it look like their profits are not made here. As a result many companies owe very little tax on the proceeds from their US operations, and then defer their non-US profits from being “brought home” to avoid paying the taxes on non-US sales.
It is estimated that as much as or even more than $2 trillion of taxable profits are being hoarded outside of the US because of deferral. Meanwhile, the corporations lobby for a “repatriation tax holiday” to let them bring these profits back with little or even no tax.
For example, currently Pfizer sells a whole lot of its medicines inside the US, but claims to lose money here, resulting in little-or-no inside-US tax to pay. A Bloomberg story on Pfizer’s tax schemes reports, “earnings before taxes outside the US were $15 billion in 2011 while losses within the country were $2.2 billion. … These operating results appear to be inconsistent with [Pfizer’s] domestic and international revenues, which in 2011 were $26.9 billion and $40.5 billion, respectively.”
So Pfizer piles up the cash – as much as $73 billion of taxable profits were held outside the US in 2012.
Even if these corporations do bring the money back, it is very difficult to pin down which countries may have already taxed them and by how much, so it is very difficult to compute their US tax liability. It is very difficult to sort through the complex maze of corporate ownership and the use of schemes like “transfer pricing, advance pricing agreements, cost sharing agreements, interest allocation arrangements, and check-the-box regulations,” along with many other ways corporations game the tax system.
So along with this maze of complexity in figuring out how much corporations owe, in most cases the tax system depends on the corporations themselves to accurately report and pay the correct amounts. Needless to say, the incentives can end up working against the revenue needs of the government. The end result is that, one way or another, the multinational corporations get away with paying a lower effective tax rate than they should…. [continue reading]
— by Dave Johnson writing for Campaign for America’s Future.