Some easy truths concerning the taxes firms pay and Biden’s suggestion make them whistle

Hedrick Smith

[Editor’s note: The following essay was written by former New York Times Washington, DC bureau chief, frequent NC Policy Watch contributor and all-around legendary journalist, Hedrick Smith. It originally appeared on Smith’s own website, Reclaim the American Dream.]

WASHINGTON – Okay, let’s talk about taxes and how they affect US economic growth and inequality. But let’s get real. Let’s go beyond the political kabuki dance in Washington, where politicians repeat well-rehearsed lines. That means focusing on the real economy.

Discovery # 1 is that almost no large US corporation, let alone those doing business overseas, actually pays the statutory corporate tax rate of 21%. In fact, Fortune 500 companies pay about half of that, on average – 11.3% according to data from the nonprofit Institute for Taxes, Economic Policy and Taxes, based on company reports.

Federal tax data from the Center for Budgetary and Political Priorities

The second big discovery is that, despite Corporate America’s endless whining about its unfair and incredibly high tax burden, corporate taxes and the company’s share of total U.S. tax revenue have declined sharply over the past six decades, from 32% of the total in the 1950s 7% in 2019. And the rest of us have to make up that difference.

Bragging on Wall Street, playing poorly against the IRS

To learn how to play corporate tax games, you need to understand that US companies keep two types of financial books – one for the public and the other for the tax officer – and that is legal under US tax law.

The first series of books shared with investors and the financial press report what is known as “book earnings,” where companies express their earnings rosily and brag to Wall Street about how much money they made. The second set of books does the opposite. It is privately filed with the IRS and seeks to reduce corporate profits to the bare minimum, if possible to zero, by taking advantage of all conceivable tax loopholes and deductions.

Last year, for example, 55 large U.S. corporations, including FedEx, Nike, Duke Energy, Nucor, SalesForce, Archer-Daniels-Midland, Booz-Hamilton, and four dozen others, paid no federal corporate income tax even though they publicly paid more than $ 40 billion -Dollars reported in pre-tax profit, according to the Institute for Taxes and Economic Policy.

If those 55 U.S. corporations had paid the official 21% tax rate, they would have owed Uncle Sam $ 8.5 billion, but instead got $ 3.5 billion in tax breaks for receiving tax credits. And that’s just the tip of the iceberg.

For the past decade or two, all of the corporate giants have worked on this game – Apple, Google, Coca-Cola, Pepsi, Caterpillar, General Electric, Goldman Sachs, Merck, Pfizer, as you call it. Overall, Corporate America has avoided an estimated $ 100 billion a year in taxes – potentially hundreds of billions of dollars over several years, according to an academic study cited by the Biden administration.

Apple Tax Dodge – “The double Irish with a Dutch sandwich”

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

The answer lies in shaky accounting concepts like profit shifting and GILTI – spelled with an I not a Y. In the arcane language of tax law, GILTI literally stands for Global Immaterible Low-Taxed Income, a fancy label for US corporate profits away from overseas tax havens.

Overseas is the key word here. For several decades, profits made by US multinational corporations overseas have been exempt from US corporate taxes unless companies choose to bring those overseas profits home. In the real world of Monopoly, overseas winnings are a tax-free card.

That has covered up to two trillion dollars in profit and more. That didn’t satisfy big business either. So the financial geniuses in Corporate America looked for other ways to surprise Uncle Sam with something called profit shifting – that is, evading US taxes through paper transactions that shifted income and profits from US-made products, work, or inventions their foreign subsidiaries.

For example, Apple became famous for a tax evasion known as “Double Irish with a Dutch Sandwich”. That’s how it worked. Apple’s creative teams in California would invent some new high-tech folds for the iPhone or iPad, and Apple would transfer ownership of the patent for this lucrative technology to its subsidiary in a low-tax haven like Ireland. Then it would post the revenue from that technology to Ireland via the Netherlands and the Caribbean so that those profits would be taxed at an effective tax rate of 1% in Ireland rather than the US at a tax rate of 35%

Caterpillar, which makes tractors and earthmoving equipment in Illinois, lowered U.S. taxes by simply removing the name and address of its home office from its billing bills and requiring its overseas customers to make their payments to Caterpillar’s Swiss subsidiary at lower taxes to send.

Coca-Cola and Pepsi evaded US taxes by making their soft drink syrups in low-tax countries like Singapore (Cola) and Ireland (Pepsi) and posting their profits in those countries. Within a year, 85 major US companies including GE, Microsoft, Pfizer, Merck and IBM reported total profits of $ 800 billion in the tax havens of Bermuda and the Cayman Islands.

Biden: A higher corporate tax bite reduces inequality

Joe Biden whistles this massive corporate tax game to restore fairness to the US tax system. Biden believes that if the US invests all those new corporate tax dollars in modernizing the aging country, closing the huge overseas void in our tax system with at least a 15% corporate income tax will pay off for good jobs, economic growth, and greater American competitiveness Infrastructure.

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

But we’ve heard that siren song before, and our experience with the 2017 Trump tax cut tells us not to buy this pitch. In 2017, business leaders promised that lowering corporate taxes would lead to corporate investment in jobs and economic growth. But that didn’t happen. The annual US economic growth rate remained stubbornly at 2.4 percent for two years before Trump’s tax cuts and at 2.4 percent for two years after the tax cuts. The promised economic gain did not materialize.

The same is true when U.S. companies received a tax cut for bringing home $ 777 billion in foreign profits. They again promised investment, jobs and growth. Again it didn’t happen. Instead, the Federal Reserve reports, U.S. multinational corporations have poured hundreds of billions of billions of repatriated foreign profits into higher dividends and share buybacks, causing stocks to soar on Well Street and generating huge financial gains for the corporate and financial elite.

Raising $ 1 trillion in profits from US billionaires

So Biden suggests reversing this process: tackling economic inequality by containing Niagara’s corporate profits to the top 1% by increasing corporate taxes. The time is right, given the galloping growth in inequality during the pandemic.

Thanks to soaring profits at Apple, Amazon, Netflix, Google, Zoom, and a fleet of hot internet services we all needed at home during the pandemic, America’s 650 billionaires – the main owners of tech high-flyers – added $ 1 trillion to her Fortune during the 2020 pandemic year while most American families struggled to stay afloat economically, pay the rent, and put food on the table.

This is the one-sided inequality that Biden is now trying to fix by increasing corporate taxes so America can raise the funds to invest in our collective future. “It’s honest. It’s fair, ”says Biden. “It’s taxable and it pays off for what we need.”