Recent weeks have seen corporate leaders and investors mobilize publicly and privately to oppose President Biden’s proposed overhaul to the tax code. Many corporate leaders are working hard to paint the suggested changes as “bad for American businesses,” and their efforts appear to be bearing fruit: moderate Democrats in Congress have started to waiver and signaled their intent to pare back the proposal.
But this political calculus belies the truth of Biden’s plan: eliminating tax loopholes for major multinational corporations would actually put corporations that operate in the United States, and American workers, in a more competitive position compared to their international peers.
The current US corporate tax rate is 21 percent, but, as recent headlines of dozens of Fortune 500 companies paying zero dollars in federal income taxes last year attest to, there are many ways for major corporations to avoid paying that much. Many of the most effective ways corporations avoid taxes involve shifting their profits and operations overseas and leaving companies that operate solely in the US at a massive competitive disadvantage.
Few people outside of corporate America realize just how significant an advantage multinational corporations have when compared to their domestic counterparts. To start, they automatically get a 50 percent discount on their taxes on all profits booked overseas. American profits are taxed at the full corporate rate of 21 percent, but profits of foreign subsidiaries are only taxed at 10.5 percent.
This is even more significant than it may seem at first glance, because corporations have become experts at recording profits in low-tax countries even when those profits actually occurred elsewhere. When what you pay for an iPhone at an Apple Store in New York can easily end up being counted as profit for Apple of Ireland, the international tax rate matters quite a bit.
at first glance, because corporations have become experts at recording profits in low-tax countries even when those profits actually occurred elsewhere. When what you pay for an iPhone at an Apple Store in New York can easily end up being counted as profit for Apple of Ireland, the international tax rate matters quite a bit.
Few people outside of corporate America realize just how significant an advantage multinational corporations have when compared to their domestic counterparts.
It doesn’t stop there, however. These multinationals are then able to subtract the taxes they pay to foreign governments from what they owe the IRS. If that amount is more than the 10.5 percent they would typically have to pay, they owe the US government nothing.
This credit applies to people too. In 2013 I spent a few weeks working in Greece, so I paid a small amount of Greek income taxes and deducted that from my US income tax bill. But unlike multinational corporations, individuals still have to pay the full US tax rate on foreign earnings. The credit I got in the United States was exactly equal to what I paid in Greece, so I was not any better off financially.
It gets even worse, though! Under the current tax system, corporations actually get a special accommodation for “tangible assets” held overseas. The US gives them a tax discount for what is considered the routine rate of return for physical assets, like factories and equipment, held overseas. For now, that rate of return is set at 10 percent, meaning that for every $10 million in tangible assets a company has overseas, the first $1 million it earns in profits every year is tax-free.
Basically, the more equipment and factories a company has overseas, the more tax-free profit it can earn. This not only gives multinational companies a tremendous tax advantage over companies that manufacture in the US, it also hurts American workers.
Take the hundreds of workers that General Electric laid off in 2018 when it closed its plant in Salem, Virginia and transferred their positions to a new, $200 million factory in Pune, India. Those workers didn’t just have to worry about cheaper competition in other countries, they also had to worry about the United States government literally subsidizing their jobs being shipped overseas. And now General Electric, thanks to its investment in Pune, can claim about $20 million in profits a year completely tax-free.
When you combine these loopholes with a cadre of other tax breaks, it allows many companies to completely avoid paying their federal dues. How are domestic companies and mom and pop operations supposed to compete?
Corporations like Apple, Facebook, Google, and Microsoft now send their profits over to places like Ireland and pay some taxes to foreign governments, completely disinvesting in our country where their profit was originally made. I’m glad that Dublin has extra money to recobble their streets, but here in America, our infrastructure is in grave need of repairs.
Most of these advantages became law thanks to the 2017 Trump tax bill, the Tax Cuts and Jobs Act. For CEOs to claim that they can’t compete internationally without the tax breaks they’ve had for less than four years is ridiculous, especially when you consider that in the years before the Trump tax bill, US corporations still booked over $2 trillion in profits annually.
The Biden corporate tax plan would end all of these built-in advantages for multinational corporations and put every company in the US, large and small, on a level playing field when it comes to taxes. That’s not anti-business, that’s just fair.
