According to the Post’s Jeff Stein, President Biden said on Monday that “You have 51 or 52 corporations of the Fortune 500 haven’t paid a single penny in taxes for three years. Come on, man. Let’s get real.” This builds on Treasury Secretary Janet Yellen’s first major speech the same day, where she called on all countries to adopt their own global minimum taxes, and the unveiling of the tax proposals accompanying the $2.3 trillion American Jobs Plan. Clearly, the Biden administration wants to make big multinational corporations pay more taxes. So how do they plan to do it?
Biden is proposing big taxes on business
President Biden’s measure would raise $2.7 trillion over 15 years, nearly half of which — $1.2 trillion — would come from increasing the statutory corporate tax rate from 21 percent to 28 percent. While this would put business taxes at only half the peak rate levied in the 1960s, it would still be the biggest tax hike on business in U.S. history that’s not related to funding war. Unsurprisingly, businesses have launched an “all-out war” over the tax hikes, and Sen. Joe Manchin III (D-W.Va.) on Monday called for reducing the rate to 25 percent, 10 points below the Obama administration rate.
Here’s what really bothers businesses: Biden isn’t just changing the statutory rate, or what businesses are supposed to pay in theory, but also the effective rate, or what they would actually pay. Because of a variety of deductions, offshoring, exporting and creative accounting techniques, businesses now pay an estimated effective rate of just 9.7 percent. Increasing the rate would require a lot of changes.
Taxing multinational companies is complicated and politically fraught
As Martin Hearson and I explain in a forthcoming article in Perspectives on Politics, taxing multinationals — which earn money in a variety of jurisdictions, each with its own taxes — is complicated. There are two basic approaches. The first, advocated by pro-tax advocates, is called “formulary apportionment” and allocates taxing rights across jurisdictions according to some objective measure such as share of sales. The second, “transfer pricing,” gives corporations practical discretion over where they report accruing global income, thus allowing them to lower their taxes by reporting in the low-tax jurisdictions.
To understand this, imagine a world where a big multinational such as Apple made 60 percent of its sales in California, 30 percent in Oregon and 10 percent in Ireland. Under a standard formulary apportionment approach, Apple would owe California income taxes on 60 percent of its income, while Oregon and Ireland would get dibs on 30 percent and 10 percent respectively. Moreover, Apple would owe the U.S. federal income taxes on 90 percent of its profits, accounting for its sales in the two states. Under transfer pricing, in contrast, Apple could use complicated licensing and royalty schemes to report 100 percent of its profits in low-tax Ireland, depriving California, Oregon and the United States of their shares.
Currently, U.S. businesses can use transfer pricing to lower their reported income, letting them reduce their tax bills at the U.S. government’s expense. Since the 1970s, the share of U.S.-based multinational corporations’ profits reported in non-U. S. jurisdictions has soared 300 percent. Some companies avoid paying income tax altogether through a combination of tax havens, accounting tricks and lax Internal Revenue Service enforcement.
In 2017, President Donald Trump made an already complicated and corporation-favoring tax system more so. He lowered the corporate tax rate from 35 percent (where it had been for a generation) to 21 percent. And through what economist Kimberly Clausing, who’s now with the Biden administration, calls “America Last” provisions, he increased the offshoring bias of the tax code, including by allowing companies to deduct the first 10 percent return on foreign assets. The cost of this giveaway: $1.9 trillion.
It will be harder for corporations to play games with taxes
The Biden plan is intended to bring the effective rate closer to the statutory rate, while discouraging U.S. business from offshoring activities and jobs.
For starters, the U.S. would charge American companies a minimum 21 percent rate on profits in each country where they earn income, making it less attractive to book profits in tax havens like Ireland. If Ireland doesn’t charge at least 21 percent, companies like Apple would owe the United States the difference. While not quite a formulary method, surveilling how and in which countries corporations report income takes a step in that direction, reducing incentives to report income in tax havens in the first place. And if other countries adopted global minimum tax rates, as Yellen suggests, the incentives would be lowered even further.
That’s not all. The plan also blocks U.S. corporations from claiming tax havens as their residence, eliminates the Trump deductions for offshoring assets, offers a tax credit for bringing jobs into the United States and promises to give the IRS far more resources to go after tax cheats. Finally, the plan requires that very large multinational companies pay at least a 15 percent effective tax rate on U.S. income, preventing them from using accounting schemes to pay nothing at all.
Corporate taxes are now politically visible
Multinational tax arrangements are difficult for ordinary people to understand — they typically fall under what political scientist Pepper Culpepper calls “quiet politics,” political questions that only specialists pay attention to. However, by focusing on how the United States taxes multinationals, Biden has made the topic visible to more ordinary citizens. It will be interesting to see what happens if Biden succeeds in moving away from the current, complex system that companies can manipulate to a simpler system, one giving more clout to nonprofits, advocacy groups and other observers unable to hire armies of economists and lawyers, as corporations have done.
Conceivably, this shift could allow citizens to debate new questions. If the United States can raise rates to 28 percent, why not 35 percent, as some in Congress, such as Sen. Bernie Sanders (I-Vt.), want? If the federal government can collect taxes on tax haven income, why permit U.S.-based corporations to move their profits offshore in the first place? If they succeed, Biden’s taxation proposals may reshape U.S. politics.
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Todd N. Tucker (@toddntucker) is director of governance studies at the Roosevelt Institute.
This post was updated on April 6, 2021.