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The corporate media in recent days has been busy resurrecting and re-reporting the deal negotiated weeks ago by Janet Yellen, US Treasury Secretary, to get 100+ other nations to sign on to and introduce a 15% global corporate alternative tax in their countries.
But why is the mainstream media bringing it up again now? Is it to soften the blow of Biden’s repeal of his proposal to hike corporate taxes in the US from Trump’s 21% to 26%? (It was 35% pre-Trump)? Or is there something else as well that explains why the media is running the global tax story that’s already weeks old?
The global sign on to Biden’s 15% global minimum tax, announced weeks ago, is purportedly designed to prevent big multinational corporations’ manipulating governments by seeking out, and getting, special tax deals in certain countries at the expense of others.
A notorious example is Ireland, where US and other multinational corps locate their headquarters and book their global tax payments at Ireland’s lower corporate tax rate which is, on average, only 2%-3%, for most corporations.
Ireland is also the favorite locale for what’s called the ‘Inversion’ tax loophole. Per the loophole, US multinationals sell products or services in large quantities in other countries, but book their profits in Ireland simply because they locate their company headquarters there. They make nothing in Ireland, in many cases, but get to pay the Ireland much lower corporate tax rate instead of much higher tax rates in countries where the corporation actually does make and sell goods and services.
The biggest US corporate beneficiaries of this Inversion loophole have been US pharmaceuticals, tech companies, finance companies, corporate consulting companies, and many others. Under Clinton US corporations got to activate the loophole by simply ‘checking a box’ on the US corporate tax forms.
But Ireland is not the only back door out of domestic corporate taxes. There’s a host of others. Luxembourg and Netherlands in Europe also come to mind. There are others outside Europe as well.
The inversion tax loophole has enabled US corporations in particular to play one country against another and choose the lowest in which to relocate headquarters and book global profits at lowest rates.
The inversion loophole isn’t the only tactic US multinational corporations use to move their profits around to pay lower rates outside the US’s.
Another favorite tactic of US multinational corporations is to engage in what’s called manipulation of ‘internal’ pricing. That’s where a company manipulates its prices between its global subsidiaries: for example, it makes its US operations pay artificially higher prices for parts and materials it purchases from its subsidiaries offshore. That way the US operation records higher costs, and thus lower profits; from the higher prices it charges its US operations, its subsidiary gets higher sales revenue and higher profits. But it pays a lower profit rate in the offshore operations. In short, by clever internal pricing the US multinational corp reduces its profits and tax in the US, while increasing profits and tax offshore. Its net global tax payment is reduced.
The Biden administration has hyped the benefits of a global 15% minimum corporate tax as a way to make the biggest US corporate tax avoiders what more operations offshore, employ inversion loopholes, or just engage in ‘internal pricing’ to pay their fare share. Some have been paying nothing despite billions in sales revenues. But Biden’s 15% proposal does nothing for corporations manipulating internal pricing and nothing as well for ending inversions.
The global corporate tax ‘race to the bottom’ that Biden’s 15% minimum tax is supposed to correct is similar to the ‘race to the bottom’ tax game US corporations have been playing between the 50 US states for decades. For years, US corporations have been moving their headquarters operations from one state to another to lower their taxes; or else threaten to do so in order to get states and cities give them special tax breaks just to remain. They just don’t call it ‘inversions’ when carried on within the US. In recent years US multinational corporations have exported and adapted this tax strategy to the global stage as well. Biden’s global tax is designed to try to do something about it on the global stage, while doing nothing within the US.
The 15% minimum is supposed to stop corporations manipulating countries’ tax systems. At least that’s what Biden and US Treasury tells us. But don’t trust the much hyped global 15% corporate minimum to accomplish what they say it will. Here’s just three reasons why not:
First, Biden’s 15% tax may never see the light of day. It will take all the 100+ countries–including the USA–to also pass actual tax legislation after the recent, much hyped 15% deal. The 15% treaty only says the 100+ are committed to try. It will take years just to get half of them to pass enabling legislation.
Second, the recently announced 15% global minimum tax is a negotiated treaty. That means, per the US Constitution, it must be ratified by the US Senate first (even before any US enabling legislation is introduced in Congress). Does anyone really think the current US Senate will approve that treaty? After it’s just done everything to prevent any stimulus legislation from being funded by reversing the Trump tax cuts?
Third, even if the 15% passes legislatures in the US and the 100+ countries who signed on to the treaty, what will prevent each country also passing more tax loopholes to the 15%, with accompanying exemptions, exceptions, off-setting tax credits, and so on?
The Corporate Tax 40 Year ‘Shell Game’
The ‘shell game’–i.e. trading off corporate tax rates for loopholes and then loopholes for rates–has been going on for years, especially in the USA.
The four decade shell game occurs when the public learns of the massive loopholes that have been created and demands they be closed, Congress passes partial laws to close a few of the loopholes and exemptions, but then lowers the corporate tax rate.
Just look at the US tax system since 1980: whenever corporate tax rates got too low and it raised the public ire, Congress partially raised back the nominal corporate tax rate but in the same legislation increased the loopholes, exemptions, etc. That trend is evident in the 1981 Reagan tax cuts, followed by the 1986, thereafter by Clinton in 1997, then a series of Bush Jr. tax cuts in 2001-04, then Obama in 2012-13.
The pretense of the ‘shall game’ was ended altogether by Trump in 2017, however, when he massively cut corporate tax rates but didn’t even bother to close any loopholes. He also ended all semblance of a corporate Alternative Minimum Tax. Corporate America got a triple whammy windfall. With Trump the ‘shell game’ itself disappeared. The ‘pea in the shell’ was evident for all to see. Instead of ‘now you see it, now you don’t’ we got ‘now you see it, and now you see it even better’!
This ‘shell game’ of trading rates for loopholes over time results in corporations paying less and less in total net taxes. The US corporate tax rate used to provide more than 20% of US government tax revenues in the 1960s; it now provides barely 5%.
The shell game goes on with the Biden 15% minimum corporate tax. It will be easily negated by US multinational corporations continuing to manipulate their internal pricing between their US operations and offshore subsidiaries; it will continue so long as the inversions loophole remains. The 15% looks good on paper but for various reasons stated above, is almost certain not to take effect for many years–if even then. If it’s a treaty and doesn’t pass the Senate, for certain other countries will not implement it if the US fails to do so.
The Corporation As Capitalist Conduit
What the mainstream media refuses to say when hyping the global minimum tax (or any of the chronic corporate tax cutting that’s been going on for decades) is the role it plays in the ever accelerating income and wealth inequality in the US today.
The corporation is the conduit for distributing massive amounts of income and wealth to capitalist shareholders. In the past decade more than $12 trillion has been distributed by corporations in the US to their shareholders in the form of stock buybacks and dividend payouts. During the Obama years these combined distributions rose from $700 billion a year to nearly $1 trillion a year. Under Trump, 2017-2019 the amount averaged $1.2 trillion a year. This year, 2021, under Biden it is projected to rise to $1.5 trillion. The massive distribution of income enriches individual capitalists, who then mostly reinvest it into stocks, bonds and other financial securities–i.e. forms of wealth–thus driving wealth inequality as well as income inequality. The assets of wealth (i.e. stocks, bonds, etc.) then throw off even more income as the buybacks and dividends keep rising further.
If the corporation is the institutional conduit for funneling more and more income and wealth to the capitalist class, then the corporate tax shell game is the liquid that flows through that conduit.
As capitalist investors accumulate more income and wealth due to corporate distributions rising made possible by the tax ‘shell game’, the individual wealthy capitalist-investors get to keep more and more of what the corporation distributes to them as well. Individual tax rates and loopholes are also expanded so that the individual capitalists get to keep more of what their corporations distribute to them in buybacks and dividends.
Corporate Tax Hikes as Political Marketing
This shell game will not end with the global 15% tax. Nor will it end with the recent proposals for an individual billionaires tax or a tax on billion dollar profit companies that the Democrats are now proposing as ‘smoke and mirrors’ funding for Biden’s Build Back Better plan (see my article of last week, ‘The Smoke & Mirrors Billionaires Tax and 15% US Corporate Minimum Tax’). The Global tax is of the same species, just a different genus. All are about creating a facade for politicians to make the public think something is being done about the tax system that ever enriches the wealthy and their corporations.
The recent proposals by Biden to raise the corporate tax in the US back a little, from Trump’s 21% to 28%, would have contributed to reversing the trend. So too would the proposal by Biden to raise the personal income tax on the wealthiest back to 39%. Before Trump the corporate tax rate was 35%. He reduced it to 21%. Biden originally proposed to raise it back in part to 28%. Then he lowered that to 26%. Now he’s dropped it altogether in his latest ‘framework’ for his Build Back Better bill.
But proposals for actual tax rate hikes on corporations and wealthy capitalists have been abandoned this past week by Biden and the Democrats as they capitulated to corporate lobbyists–and their shills in the Senate (Manchin, Sinema) and House (Cuellar).
Now in lieu of actual tax hikes on corporate America we get the smoke & mirrors of taxing billionaires and the ‘looks good on paper only’ global 15% corporate tax. Watch for still more abandonment of proposals to make the rich and their corporations pay and in their replace tax increases that look good on paper but which the politicos know can never result in any real revenue.
What’s needed instead is a total radical overhaul of the US tax system. That system has, according to this writer’s calculations, provided US corporations and their shareholders and wealthy financial speculators no less than $15 trillion in total tax cuts since 2001! Reforms are no longer possible. The income and wealth shift through the current tax system has reached such proportions that tinkering with it will not be enough. Something more fundamental is required. But that’s another story.