At the core of President Joe Biden’s proposals is an effort to lift the top statutory corporate tax rate from 21% to 28% and to coordinate with other high-income countries to restore corporate tax revenues.
Not surprisingly, Biden’s proposals are hitting resistance from corporate lobbies and conservative media, including The Wall Street Journal editorial board, which vociferously opposes the tax measures and warns that corporate collapse will ensue. The Journal’s editorial on the issue last week conveniently left out that the Biden proposal would reverse only half of the 2017 corporate tax cut, which cut the top statutory rate from 35% to 21%, lower by far than any time during the preceding 76 years. From 1941 to 2017, the top statutory rate never fell below 31%.
Biden, indeed, might well have reversed the entire 2017 tax cut — and with good reason — but the ensuing political firestorm would have made his road that much harder. The corporate sector and the richest Americans that own these companies have long been using their vast political power to amend the corporate tax code and make a mockery of tax justice. As corporate money has increasingly flooded into federal election campaigns, especially with the advent of “soft money,” beginning in 1979, the corporate tax has been systematically gutted.
In 1949, corporate taxes accounted for 28% of federal tax revenues, but by 2019, corporate taxes were a mere 7% of federal revenues. And, according to the nonpartisan Institute of Taxation and Economy Policy, at least 55 profitable US companies paid $0 in corporate income taxes in 2020 through the use of various loopholes.
In the meantime, the share of wealth held by the richest Americans has grown astronomically. The rise in wealth was never more stunning than in 2020. As tens of millions of Americans suffered mass unemployment, hunger and disease, America’s billionaires enjoyed a soaring stock market, reflecting the profits flowing into our increasingly digital economy, the effects of low corporate taxes and the near-zero interest rates engineered by the Federal Reserve Board in response to the pandemic. According to Forbes Magazine, the net worth of America’s billionaires in March 2021 totaled $4.4 trillion, rising from $2.9 trillion just one year earlier.
Many of these corporations, of course, claim that they are providing an unalloyed service to all of us in return for their “well-deserved” wealth, but the truth is different. These companies depend on public outlays on infrastructure, research and development, and other investments, yet they do not fairly share the financial returns through adequate tax payments.
The US government rightly invested vast sums — potentially as much as $18 billion — to develop the Covid-19 vaccines, for example. Yet the beneficiary companies expect to make huge profits on the vaccines without the US government sharing the returns to the new technologies on behalf of the American people.
Meanwhile, many companies — from pharmaceuticals to Big Tech — wield far too much market power. As a result of such market power, Americans pay far more than residents of Canada and Europe for the very same drugs and medical services. So while pharma profits skyrocket, US households are gouged. And a 16-month congressional investigation completed last year found that Amazon, Apple, Google and Facebook hold “monopoly power” and abuse their dominance in certain markets (a characterization all the companies vehemently denied).
Yet the greed goes beyond tax cuts and market power. Even with low tax rates, companies use additional subterfuges to cut their taxes further, especially by shifting their international profits into offshore tax-havens. Lo and behold, the US Treasury reports that some 60% of the international profits of US multinational companies are booked in seven small tax havens: Bermuda, the Caymans, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland.
This is the diligent handiwork of politicians, lobbyists and America’s top corporate law firms. To paraphrase Captain Louis Renault in the 1942 film “Casablanca,” we should be “shocked, shocked” to know how many people in high places are involved in scamming and fleecing the American people.
Wisely and indeed boldly, given the sway of the corporate lobby with both political parties, Biden and Secretary of Treasury Janet Yellen are calling for five interconnected measures, which are needed to function as a package.
The first is to raise the corporate tax rate to 28%. The second is to impose a minimum tax of 21% on US multinational companies’ foreign intangible income (profits due to patents, trademarks, copyrights, etc.) to stop these companies from sheltering such profits in tax havens. The third is to call on other countries to join in similar minimum tax rates to prevent “leakage” of the US tax reforms. The fourth is to prevent US companies from falsely claiming an overseas tax “residence” when their operations and management are in the US. And the fifth is to restore staffing at the Internal Revenue Service so that it can resume audits of large corporations. As the US Treasury notes, IRS audit scrutiny of large companies has declined to less than 50% of the 2011 level.
Biden’s proposals are admittedly limited steps in the right direction. Some progressives are calling for much bolder measures. And while bolder steps are warranted, these are good first steps. Biden and Yellen are taking on the herculean job of cleaning the Augean stables after decades of rampant and growing tax abuse. The administration’s valiant efforts at corporate tax reform are vital and urgent efforts toward fiscal responsibility and economic justice.