Big corporations will always cheat (yep, I said cheat) on their taxes.
Here's how to deal with it
Let me give you a heads up: First, I’m going to tell you some things that will make you ill. Then I’m going to present a cure. It will make you feel better—until, of course, you realize that knowing the cure brings us as close to implementing it as buying an electric guitar does to making you a rock star. Then you’ll feel ill again. Don’t say you weren’t warned.
Corporations don’t like to pay taxes. More importantly, our tax code makes it crazy easy for them to avoid paying taxes. Thanks to Citizens for Tax Justice, we know that 15 companies in the Fortune 500 earned a collective $23 billion in profits in 2014, yet their corporate income tax bill that year was—you can probably guess where this is going—zero. (The federal government actually paid rebates to all but two of them). And not the kind of Zero that entertains. This is the kind of zero that makes people want to occupy a park in Manhattan’s Financial District.
The graphic on the right, also from Citizens for Tax Justice, gives a bit more detail. Those 15 companies netted a cool $23 billion in profits in 2014, and yet, collectively, they didn’t just pay nothing in corporate income taxes—they received $731 million back from the government. Furthermore, from 2010 through 2014 their collective profits amounted to $107 billion, yet together they paid a paltry $1.7 billion in corporate income taxes—an infinitesimal rate of 1.6 percent. Wouldn’t you like to have their accountant?
It’s hard to keep track of the manifold different ways corporations avoid taxes. To name just a few, there’s accelerated depreciation, through which companies can defer taxes by claiming that an asset they purchased is losing value more quickly than it actually is; deducting stock options issued to company execs; or simply parking earnings overseas (Fortune 500 companies have stashed $2.1 trillion abroad, with just 30 of them accounting for two-thirds of that haul) because they don’t have to pay taxes on those profits until and unless they bring them back to the U.S., which there’s no reason for them to do.
Additionally, there’s the one that’s been in the news most often recently: Corporate tax inversions. Remember that one? That’s when a U.S. company—Pfizer announced such a deal late last year—buys a foreign rival in the same industry and locates the newly merged company in the country where its former rival is located. Why do this? To take advantage of the lower corporate tax rates in that country.
Other than holding a couple of confabs in (to take Pfizer as an example) Ireland, nothing else about the company changes. It is no less a U.S. company in any material sense than it was the day before the merger. But now, the rest of us have to make up for the taxes that company should have paid on its profits—profits earned thanks in large part to investments we’ve made collectively in infrastructure, education, etc., not to mention a legal system that protects the company’s patents. These investments all enhance the ability of that company to earn those profits. This strategy represents a relatively recent discovery. There was one such move in the 1980s, but more than 50 in the past 10 years—and the pace has only been increasing during the past few years.
Angry yet? Well, there’s another one of these deceptions you may not have heard of, and it may well be the most offensive one yet. It’s called—get this—earnings stripping. It’s a tactic available not only to companies that have performed an inversion, but to any non-U.S. company that earns any money within our borders.
How does it work? The company essentially borrows money from itself, but on paper it’s actually the part or subsidiary within the company that’s located in the U.S. borrowing the money from parts located abroad. Since the U.S.-based part pays interest on that debt, it can use those interest payments to offset profits earned here. With a stroke of the pen, and no actual money leaving the corporation, its U.S. profits—and thus its tax bill—have up and vanished like a fart in the wind (has there ever been a better screenplay than The Shawshank Redemption?).
These methods of tax avoidance may be legal—barely—but they nonetheless amount to cheating by any definition that takes morality into account. Our tax laws were designed to tax the profits of companies operating in America. Making those profits disappear through accounting maneuvers is about as honest as the three-card monte guy hustling tourists in Times Square.
Corporate tax cheating infuriates on many levels. First of all, it rewards dishonesty, and encourages a broader corporate culture of seeing government-issued rules as obstacles to get around—and we’ve seen the deadly consequences of such attitudes held by companies from the auto industry to the mining industry and beyond.
In structural terms, it also means bigger companies—which are much more likely to be international—gain a yooooge (I’m referencing Bernie here, not Trump, in case you were wondering) advantage over smaller, domestic-only competitors that can’t muck around by shifting money abroad. Why would we want a tax policy that disadvantages smaller businesses, given that companies generally create fewer jobs the bigger they get?
Even if we could change the law to plug each and every one of the aforementioned loopholes—and we certainly don’t seem to be able to do even that—creative accounting will just come up with another way to cheat the U.S. Treasury. The definition of insanity is doing the same thing over and over again but expecting different results. The time has come to do something radically different.
So here’s a proposition: Get rid of corporate income taxes completely. The system is fundamentally unworkable. Would we lose some good measures within the tax code, measures that encourage companies to make productive investments? Yes, we would. But overall, the costs are worth the benefits of getting rid of all the ways companies exploit loopholes to avoid paying what they should.
In addition to leveling the playing field among companies, and making American companies more competitive with their foreign rivals—thus presumably benefiting their employees at least somewhat—eliminating corporate income taxes would also remove one of the most corrupting aspects of our political system, namely corporations lobbying politicians to make favorable changes to the tax code. It wouldn’t get money out of politics altogether, but it would be a significant step toward reducing its influence.
Am I crazy? Am I going to just do away with those taxes willy-nilly? Give me a little credit. Let’s look at the numbers: In 2015, the U.S. government expects to collect $341 billion in corporate income taxes, or about 11 percent of total revenue. What I’m calling for is tax reform, not tax cuts. Since taxing corporate profits isn’t working, we need to replace that revenue, and we need to do it in a responsible, progressive way.
As a progressive, I have two requirements when it comes any such plan: First, it has to bring in an appropriate amount of revenue. Second, it has to do so in an economically progressive way, i.e., with those fortunate enough to earn the most paying the most. I’m not committed to any particular set of mechanisms, so long as whatever ones we pick achieve those two requirements, and do so in a way that doesn’t somehow harm the broader economy.
The biggest beneficiaries of eliminating corporate income taxes are those who own corporations. The very wealthy hold a disproportionate percentage of stocks and bonds, and therefore they must make up the tax revenue corporations currently contribute. I don’t have the training to crunch the numbers, so details are a bit light, but I’d certainly start by raising the capital gains tax significantly—given that the value of corporations should increase nicely if they no longer have to pay taxes on their U.S. profits. I’d also implement a tax on financial transactions, eliminate the carried interest loophole, increasethe tax rates on qualified dividends (unqualified dividends are already taxed as ordinary income) for those in upper income brackets, and raise income tax rates as well as estate taxes on the upper end as well. Most of these measures—in particular the first four where information is already reported automatically to the federal government—are far more difficult to avoid than corporate income taxes are currently.
While an overall increase in tax revenue would ideally fund measures such as increased infrastructure spending—in particular mass transit— as well as in education, job training, spending on our inner cities, and a host of other priorities, getting tax reform passed would be so beneficial that I’d be willing to compromise and support a revenue-neutral set of reforms in order to win the necessary support from Republicans to get it through Congress as currently constructed. It’s important also to note that since President Obama took office, he and congressional Democrats have succeeded in making the federal tax code significantly more progressive through a number of tax increases on those in the top couple of percent. Still, there’s more to do on that front.
In the end, I won’t quibble on the specifics of how we do it—that’s open to questions both mathematical and ideological. But what is not in question is that our corporate tax system is beyond repair. Small fixes won’t cut it. Between lobbying for tax breaks on the one hand, and coming up with gimmicks to slither out of their tax obligations on the other, corporations are always going to be one or more steps ahead of of the tax code. Let’s get rid of the corruption it engenders, and the unfair advantages it confers, and let’s do it in a way that ensures the wealthiest among us—in whose pockets corporate profits ultimately end up anyway—pay their fair share.