First, a little context.
U.S. corporations love to whine and complain about their onerous tax burdens, often citing the 35 percent top statutory tax rate on corporate profits. But with help from legislators, loopholes and clever tax advisers, their actual tax liability is far lower. On average, U.S. corporations pay an effective tax rate closer to about 20 percent, according to calculations from Gabriel Zucman, an economics professor at the University of California at Berkeley.
And some of the most sophisticated multinationals have infamously paid little or no tax at all, even in years when they reported billions in profits.
How can that be?
Large U.S.-based multinational companies have gotten really, really good at “shifting” their profits abroad — that is, manipulating their income statements so that even when they sell goods to U.S. consumers, the proceeds get booked in low-tax countries such as Ireland and the Netherlands. Zucman estimates that this profit-shifting alone costs the U.S. government about $100 billion in corporate tax revenue annually.
Such large-scale corporate tax shirking is not a victimless crime (and of course it is, technically, legal). When big, sophisticated companies find ways to shortchange Uncle Sam, other taxpayers — including workers, consumers and small businesses — have to make up for the shortfall. As Leona Helmsley might say, the little people get stuck with the bill.
Even so, despite their obvious stake in the matter, ordinary Americans haven’t paid much attention to corporate tax shirking. And so there hasn’t been much popular pressure to do anything about it.
Lately, one corporate tax avoidance tactic has gotten Americans riled up: the “tax inversion ,” which is what it’s called when a U.S. company merges with a smaller foreign company to reduce its U.S. tax liability. Often the company is changing its headquarters on paper but not altering much (or any) of its actual day-to-day operations.
Inversions are no worse for our nation’s fiscal health than other tactics used to shield profits from the taxman. In fact, inversions are not even the main way that U.S.-based multinationals reduce their payments to the U.S. government.
But the image of an American-born-and-bred company such as Burger King, Pfizer or Walgreens attempting to turn its back on its homeland seems to stir up nationalistic sentiment. For patriotic reasons, if not really fiscal ones, this particular form of tax avoidance has aroused the ire and revulsion of regular Americans.
As a result, it has also attracted renewed attention from politicians, including Clinton.
Clinton’s strategy for curbing inversions boils town to three parts.
Part one would restrict when the U.S. government formally recognized a company as having left the United States (only when it was at least 50 percent foreign-owned, rather than the current, 20 percent threshold). Part two would apply an “exit tax” to companies trying to leave (something similar happens to individuals who renounce their citizenship). And part three would make it harder for multinationals to transfer profits from their U.S. subsidiaries to their lower-tax foreign parents through intra-company “loans” (this is known as “earnings stripping”).
Almost all of the tax experts I’ve consulted — people who’ve worked for both Republican and Democratic presidents and legislators — agree that these proposals would probably reduce the incentives to invert, at least in the near term. Still, it’s hard to say how easily these policies could be circumvented eventually.
Federal policymakers are pretty much always outgunned and outmanned by the armies of tax attorneys and accountants employed by big multinationals, and past attempts to curb tax inversions were also initially successful but ultimately skirted or outsmarted.
Curbing corporate tax avoidance under the current system, in other words, is a lot like Whac-a-Mole. Which is why we really need a much more comprehensive overhaul of the U.S. tax system, which we last did nearly three decades ago. The next reform likely requires a radical rethinking of not only statutory tax rates, but also how profits are apportioned to different countries in the first place.
Still, it’s dangerous to do nothing while we wait for that, especially when — for once — there’s some political will to plug at least one of the holes in the tax code. In the time it takes for Congress to grow the backbone needed for a full overhaul, the tax base will only get ground down further.
Clinton’s proposals for curbing tax inversions may ultimately just be a Band-Aid, but we don’t want to bleed out while we wait for the more holistic cure.
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