One provision that’s received relatively little attention, however, is what the Democratic presidential hopeful calls “a country-by-country minimum tax on foreign earnings.” It’s one of two provisions that could effectively end large multinational companies’ ability to stash profits in overseas tax havens — a problem that has vexed domestic policymakers for several decades.
Warren’s proposal would bump the corporate tax rate back to 35 percent — recall it was slashed to 21 percent under the 2017 Tax Cuts and Jobs Act — and require U.S.-based multinationals to “pay the difference” between the rate imposed in the country where the profit is booked and the 35 percent rate in the United States. If, for example, a company booked $1 billion in profits in a country with a corporate tax rate of 10 percent, it would have to pay a 25 percent tax on those profits to the U.S. government.
Economists Emmanuel Saez and Gabriel Zucman called for exactly this type of policy in their recent book, “The Triumph of Injustice." They note that international tax havens such as Ireland (corporate tax rate: 12.5 percent) and Bermuda (zero) have created a “race to the bottom,” inviting American companies to shift paper profits to those countries to avoid paying U.S. taxes.
Consider the case of large U.S.-based multinationals such as Coca-Cola or Google. In the 1960s, according to data compiled by Saez and Zucman, American multinationals listed about 5 percent of their foreign profits in tax haven nations; by 2016, fully half of foreign profits were.
Strictly speaking, there’s nothing wrong with earning profits overseas; U.S. companies open international divisions if that’s where the growth is. But Saez and Zucman write that many large companies aren’t doing legitimate business in tax haven countries — they’re simply moving profits there on paper.
For instance, they write, if corporate profits booked in tax havens reflected real economic activity, you’d expect those corporations to have tangible investments in those countries — capital such as property and machines. You’d also expect those companies to have significant payroll expenses in those locations, to pay the workers who are presumably generating all those profits.
But here’s what it looks like when Saez and Zucman add capital and wages to their tax haven chart.
Sure enough, back in the 1960s and early ’70s U.S. multinationals listed similar levels of profits, capital investments and wage expenses in tax havens. But in the intervening decades, tax haven profits have exploded, while capital and wage expenditures remained relatively flat. That’s a smoking gun indicator that “nothing of substance” is happening in tax havens, at least as far as the typical American corporation is concerned.
Saez and Zucman’s solution is to do what Warren has proposed: Institute a global minimum corporate tax for American companies, so there’s no incentive for multinationals such as Google and Apple to list their profits in Ireland or Malta. That makes those companies more likely to list earnings domestically, making them subject to U.S. taxes.
One objection to this proposal is the dreaded threat of corporate inversion: Wouldn’t it simply cause a Google or a Facebook to flee the country and set up headquarters in a tax haven to avoid U.S. taxes as much as possible?
Saez and Zucman believe the threat of inversions is overstated: Fewer than 60 U.S. companies have done so since 1982, according to a tracker maintained by Bloomberg News. “Historically, very few U.S. companies have inverted to avoid taxation, even when the U.S. tax rate was significantly higher than the tax rate of other OECD countries, as was the case from the late 1990s to 2018," Saez and Zucman write.
That’s in part because there are strict laws and regulations governing how a company can claim nationality in a given country. Those rules were recently strengthened under President Barack Obama. There’s also a question of social pressure: Would a quintessentially American company such as Coca-Cola want to risk alienating its U.S. customers by moving abroad?
Still, Saez and Zucman propose one additional measure to safeguard against the possibility of inversions (this measure is also part of Warren’s proposal). It would allow the U.S. government to collect taxes on foreign companies proportional to the amount of sales they do in the United States.
If Coca-Cola, for instance, fled to Bermuda but continued to make 50 percent of its sales in the United States, the government would simply say that 50 percent of its profits are subject to the 35 percent minimum corporate tax. Saez and Zucman write that many states already apportion domestic companies’ taxes this way to calculate and collect their state-level corporate taxes.
“Nothing prevents countries (and not only local governments) from applying this system,” they write. Both the global minimum corporate tax for U.S. companies, as well as apportionment of U.S. profits for foreign companies, are permissible under current international treaties, according to Saez and Zucman. The only thing stopping the United States from implementing such a system is political will.
There is, of course, a longstanding ideological tradition in economics that opposes higher corporate tax rates such as the ones proposed by Warren, Saez and Zucman. That’s based, in part, on the widely held view that corporate taxes (and inversely, corporate tax cuts) trickle down to workers: Corporations pay lower wages when taxes are high, the thinking goes, and they pay more when taxes are low.
That was the guiding philosophy behind the 2017 tax cuts. But Saez and Zucman contend this traditional way of viewing taxes is wrong: They say economists should consider corporate taxes as falling primarily on company owners and investors, rather than workers.
The Tax Cuts and Jobs Act has actually been instructive in this regard: Traditional economic theory would suggest — and the Trump White House predicted — that slashing the corporate tax would cause employee pay to blossom. Though some companies did indeed give highly publicized one-time bonuses to their workers in the wake of the act’s passage, overall wage growth remains on the same trajectory it was at before 2018.
If the corporate tax cut is going to trickle down to the average worker, in other words, it hasn’t happened yet. Economists like Saez and Zucman would say, then, that there’s little harm in bringing the rate back up to 35 percent — and in ensuring that American companies can’t park their profits overseas to avoid paying their fair share.