December 5, 2013
Jack Rasmus, Federal Reserve Shadow Chair
“For more than three decades now, what might be called the ‘Great American Tax Shift’ has been gaining momentum. Wealthy investor households—the ‘high net worth’ and ‘very high net worth’ household investors with annual incomes of more than $5 million and $20 million respectively—have been paying less and less in taxes relative to the accelerating growth of their incomes while the more than 100 million wage earning households in the U.S. have been called on to shoulder an ever-growing relative tax burden at both the federal and state & local levels.
Within this primary tax shift trend are several additional sub-trends that are responsible for the general tax shift—central among which is the trend of the decline in the Corporate Income Tax.
By various measures, the Corporate Income Tax has been declining: as a share of total federal tax revenues, share of state revenues, as a share of total corporate profits, and as a share of US gross domestic product and national income.
Corporate Taxes As Share of Total Federal Revenues
Year Revenue Share
From the preceding table it is apparent there is both a long run decline in the share of total federal revenue derived from the Corporate Income Tax, as well as a shorter run trend of a precipitous fall, 2009-2012, in corporate tax revenues occurring during the so-called recovery period from the 2007-09 recession.
Declining Corporate Tax vs. Rising Profit Levels
Moreover, the average annual corporate tax rate of 8.2% during the last four years, 2009-2012, has been taking place as corporate profits have risen to historic record levels. Profits today, in 2013, exceed even the record levels attained in 2007 at the peak of the housing-finance bubble before the 2008 crash.
U.S. Corporate Pre-Tax Profits
1980 $223 billion
As the preceding table shows, corporate profits more than doubled during the first seven years of the George W. Bush regime. Those profits took a hit during the recession of 2008-09, but recovered rapidly—exceeding the previous highs of 2007 by 2010, only a year after the end of the recession in 2009. But despite the rapid recovery of profits, corporate tax revenues as a share of total revenues remained near recession lows. Ordinarily, corporate tax revenues should rise as corporate profits accelerate. But this has not happened since 2009. The decline in US corporate tax revenues has occurred in spite of the record surge in corporate profits since 2009. The result was an even more dramatic surge in corporate after-tax profits in the U.S. since 2009—accelerating at a rate during the Obama administration as rapidly as the rate under the George W. Bush administration. The recession of 2008-09 was thus a mere blip on the accelerating upward climb of corporate profits in the U.S.
The following graph illustrates that record surge in after-tax corporate profits since the late 1980s. That surge is the result of a major decline in the effective (i.e. actual taxes paid) corporate tax rate since the 1980s, in contrast to the official corporate tax rate of 35% that hasn’t changed much in more than two decades.
The following table shows that the accelerating growth of corporate after-tax profits has mostly occurred since 1986—when the last major tax code overhaul occurred—and especially since the 1990s. That is also just about when the corporate effective tax rate begins to diverge sharply from the official corporate tax rate.
Effective vs. Official Corporate Tax Rates
Effective Tax Rate Official Tax Rate
1990 33% 34%
1995 31% 35%
2001 29% 35%
2005 25% 35%
2009 19% 35%
2010 12.6% 35%
2011 12.1% 35%
At about one-third the official tax rate now for the past four years, the sharp decline in the effective corporate tax rate is the result of numerous changes in the corporate tax since the mid-1980s. A short list of these include:
• Changes in 1995-96 that allowed multinational corporations to pay almost no taxes to the US, by moving offshore profits around amongst company subsidiaries and to different countries with lower taxes
• The acceleration of depreciation write offs for new equipment that expanded greatly after 2001 and again after 2008
• Changes that allowed select industries and companies to tax profits as personal income at the capital gains rate or as ‘carried interest’
• Changes that allowed widespread ‘deferred tax agreements’ (DTAs) and averaging of corporate taxes up to five years to reclaim back taxes paid or future taxes to be paid
• Rules permitting corporations to deduct interest payments
• Rules allowing companies to become real estate trusts and pay no taxes
• Scores of industry-specific rules resulting in special tax exemptions and credits
The 4.2% State + Foreign Tax Addendum
The effective corporate rate does not change much when corporate payments to US state & local governments, and to foreign governments, are added to today’s record low 12% or so effective tax rate in the US. In addition to the record low 12% paid by corporations to the US federal government today, only 4.2% more is paid in state-local corporate taxes and foreign government taxes combined. That’s a total for all taxes paid globally by corporations of only about 16%.
What the 4.2% means is that US corporations are getting an even more generous break from US states. The US states’ corporate income tax rates range from 5%-10%. But corporations are only paying around 2% effectively. Ditto for the corporate foreign tax payment scenario. Official rates for corporate income taxes levied by other advanced economies range from 15% (Canada) at the low end and 34% (France) at the high end. But US multinational corporations are paying in fact only around another 2%-3% on average.
That means that not only have corporate income tax effective rates and tax payments been in long run decline, and lately in a short run freefall, but that there has been a corresponding ‘race to the bottom’ in effective corporate rates and tax payments between US states as well as between advanced ‘nation states’ worldwide.
Corporate Taxes As Percent of Corporate Profits
Yet another way of assessing the declining corporate income tax is to look at the share of corporate taxes as a percent of US corporate profits. In the 1960s, corporate taxes as a share of corporate profits averaged around 40%, ranging from 25% to 50%. In 1987, for example, Microsoft Corporation paid taxes equivalent to 33% of its profits that year; in 2010 it paid only 10%. Between 1987-2007 corporations paid on average taxes equivalent to 25.6% of their profits; since 2008, less than half that on average.
Corporate taxes paid as a share of Gross domestic Product in the US have fallen by half since the late 1970s. So too have corporate taxes as a share of National Income, even as corporate profits as a share of national income have doubled—from 7% in 1980 to 14% today. However it is ‘sliced or diced’, corporations are paying taxes less taxes today, on more and more corporate income, than ever before. The economic consequences of that are numerous and severe.
Corporate Income Tax and Income Inequality
The decline in the Corporate Income Tax has meant not only a major increase in corporate after tax income, but also a shift in more income from the corporation to its wealthy individual investors (sometimes referred to as ‘high and very high net worth individuals’ or ‘HNWIs’), as rising after-tax corporate income is ‘passed through’ in greater volumes to corporations’ stockholders, corporate bond buyers, and its CEOs and senior managers. Conversely, as the Corporate Income Tax has declined, other taxes—in particular payroll taxes at the federal level and forms of sales taxes and other regressive taxes at the state & local levels—have been raised to make up the difference in the loss of government corporate tax revenues.
The decline in the Corporate Income Tax has thus in turn contributed significantly to the contemporary trend of increasing income inequality in the US. As the decline in the corporate tax has resulted in more profits for corporate America—and in turn in more capital gains, dividends, and capital incomes for the wealthy—it has led to a corresponding rise in the total tax burden on middle and working class households and therefore a decline in their disposable income. Income inequality as a consequence of tax change has therefore had a ‘dual’ effect: raising incomes for the wealthy and their corporations while concurrently lowering real disposable incomes for wage earning households.
Parallel to the decline in the Corporate Income Tax, and the corresponding rise in Corporate Income, has been the redirection of that rising income into global financial markets’ speculation, offshore emerging market investments, dozens of country-friendly tax shelters, corporate subsidiaries abroad where revenue is diverted in order to avoid paying US taxes, and into record US stock buybacks and dividend payouts to shareholders. For the remainder of corporate income not so redirected, sheltered, avoided, or diverted, that is simply retained on corporate balance sheets as hoarded cash.
The $10 Trillion U.S. Corporate Cash Hoard
For example, more than $2 trillion today has been diverted by U.S. multinational corporations to their offshore subsidiaries to avoid paying the U.S. Corporate Income Tax, according to various business press reports.
In addition to the $2 trillion now diverted by US multinational corporations offshore, after having paid federal taxes another $1 trillion is now held as cash on hand by the 1,000 largest nonfinancial companies based in the U.S. as of mid-2013, an increase of 61% in the past five years, according to a study by the REL Consulting Group.
For financial companies, deposits in US banks are currently at a record $10.6 trillion, while bank loans outstanding have been declining since 2008 and are now at a record low of $7.58 trillion—thus leaving US banks sitting on a cash hoard of nearly $3 trillion according to the Wall St. Journal.
These record levels after taxes exist despite corporate buybacks of stock since 2009 having passed the $1 trillion mark in 2012, according to a survey by Rosenblatt Securities—with projections to increase at an even faster rate of $400-$500 billion more in 2013; and despite corporate dividend payouts of $282 billion in 2012, projected to exceed $300 billion in 2013.
That’s approximately $8.5 trillion in buybacks, payouts, and hoarded cash by US corporations since 2009 during the sub-par economic recovery of the past four years—i.e. buybacks and payouts made possible in large part by declining corporate taxation. That’s corporate income and cash that has been diverted, hoarded, or otherwise not committed to US real investment and therefore not contributing to jobs, income creation and consumption in the US.
That $8.5 trillion corporate total, moreover, doesn’t reflect still further additional dollars that have been spent by US corporations, not in the US but abroad. Total US corporate foreign direct investment is estimated at $4.4 trillion as of 2012, up from $3 trillion in 2007 and from $1.3 trillion in 2000. That’s another roughly $1.4 trillion in corporate income committed offshore since the ‘end’ of the recession in 2009.
Include hundreds of thousands of US corporations and businesses that are not part of the largest 1000 or who don’t operate offshore—plus cash socked away in depreciation funds and other special funds for all the above—and that comes to at least another $500 billion.
This more than $10 trillion in corporate income diverted offshore, distributed in buybacks and dividends, and otherwise still hoarded as cash does not include individual wealthy investors’ additional trillions of dollars they too have diverted and redirected into offshore tax shelters—from the Cayman Islands to Switzerland to Vanuatu in the pacific to avoid taxation—i.e. into what the IRS refers to as ’27 global jurisdictions’. Some estimates of this individual income tax sheltering, avoidance and fraud run as high as $11 trillion globally—of which US wealthy individual investors account at least for a third or more, about $4 trillion. Nor does the estimated $10 trillion corporate income include the scores of ways by which wealthy US households and investors are allowed to avoid, or, by fraudulent means, otherwise to reduce their tax obligations within the US. But all that’s a matter of the Personal Income Tax—not the Corporate Income Tax—and therefore a separate trend within the general ‘Great American Tax Shift’.
To summarize again briefly with regard to Corporate Income, more than $10 trillion has been taken out of, redirected, or otherwise hoarded, by US corporations since the 2008 crash. Much of that has been enabled by the dramatic decline in the Corporate Income Tax
The Corporate State Income Tax ‘Race to the Bottom’
Behind the decline in the corporate income tax as a share of total tax revenues lies the growing proliferation of corporate tax exemptions, credits, deferral of payments, and various other ‘loopholes’. This is the explanation of why the effective corporate tax rate has consistently declined while the official rate has not. This trend of declining effective rate is occurring at the state level as well as the US federal level. As previously noted, while the official state corporate tax rates range from 5% to 10%, states in aggregate are averaging only about 2% effectively in corporate tax payments. States across the US have been in a ‘race to the bottom’ to grant more and more corporate tax loopholes and exceptions in order to lure corporations from other states to their state.
A recent New York Times survey showed that states are not only lowering their corporate tax rate to lure corporate headquarters and operations, but are granting corporations cash, free use of public buildings, exemption from property taxes, and diverse other ‘awards’ in a desperate attempt to bring jobs to their states from other states. The New York Times article estimated the cost in state corporate tax revenues at around $80 billion a year. In many cases the corporations take advantage of the ‘awards’ and then create few jobs or cease operations afterward anyways.
The $80 billion a year average since 2009 amounts to more than $300 billion in reduced state corporate tax revenues. That has occurred despite a cumulative budget deficit total among all 50 states of $581 billion between 2008-2012. In a sense then, more than half of the states’ budget deficits during the past four years may be attributable to corporate tax breaks, resulting in only 2% collected of the official 5%-10% state corporate tax. But instead of targeting a restoration of corporate taxation, most of the states have targeted reducing public workers’ pensions, benefits, and wages as the solution to their budget deficits.
Among the most egregious states lowering corporate tax revenues are Texas, which provides $18 billion a year in such concessions. Oklahoma and West Virginia have granted corporate tax concessions equivalent to one-third of their annual state budgets.
The industries and corporations that are the main beneficiaries of this ‘race to the bottom’ trend in state corporate taxation are oil & gas companies, film & entertainment, technology companies, and auto companies—the latter of which pioneered the trend back in the 1980s. Since 1985, auto companies have received $13.9 billion in state corporate income tax concessions. More than 267 auto plants have been shutdown in the US nonetheless.
The trend toward declining state income taxation continues to accelerate. A number of states have, and are proposing, to eliminate corporate income taxation altogether. Most recently, Louisiana, Kansas and Nebraska. The inter-state US corporate income tax ‘race to the bottom’ thus continues.
Multinational Corporations’ Offshore Tax Games
Multinational Corporations have been engaging in a public relations full court press for the past two years, attempting to convince the public and politicians that the US corporate income tax is the highest in the world. They repeatedly point to lower official corporate tax rates throughout the advanced economies. It is true, most official corporate tax rates in Europe, Japan and elsewhere are lower than the US 35% official rate. But their corporate tax loopholes are nowhere near as generous as in the US. In addition, the ‘state’ or ‘provincial’ jurisdictions within many of these countries have higher official and effective corporate tax rates as well. Corporations pay more at the ‘state-province-district’ levels than the average effective rate of around 2% in the US.
The most telling rebuttal to US multinational corporate claims of US taxation at 35% as among the ‘highest in the world’ is that US corporations have been paying almost no tax on corporate profits earned offshore—while they have simultaneously been redirecting US earned corporate profits to their offshore subsidiaries to avoid paying US taxes as well. This game is made possible by ‘internal corporate pricing’ maneuvers. It works like this: charge the US operations high prices for goods made offshore and imported back to the US, so that there are little profits to book in the US. Then shuffle foreign made profits around to those countries with super-low tax rules and rates. Book the profits there and pay the lowest rates. Finally, refuse to pay the US foreign profits tax on even those reduced profits booked offshore.
The corporate pricing games that shift profits to offshore subsidiaries was made possible in large part by an IRS tax rule created early in the Clinton administration in 1995. This rule is referred to as the ‘Check the Box’ loophole. It enables multinational US companies to check a ‘box’ on its US tax forms that identifies a foreign subsidiary of the company as a ‘disregarded entity’ for purposes of paying taxes. The related ‘Look Through’ loophole, then allows the company to move profits between subsidiaries in its offshore operations.
Favorite places to shuffle foreign earned profits are Ireland, the Netherlands, and Bermuda. The Netherlands is preferred because it allows a company to avoid all withholding taxes. That’s called the ‘Dutch Sandwich’. Shuffle the profits there, and then on to Ireland with its 5-6% effective tax rate. Better yet, incorporate the company in Ireland in the first place and book all offshore profits there to begin with. Shuttle the profits through Ireland to Bermuda, where the effective rate is almost zero, and the combined loophole is called the ‘Double Irish’. Or how about a ‘Dutch Sandwich’ with a ‘Double Irish’?
It all sounds humorous but it isn’t. Apple Corporation last year avoided $9 billion in US taxes manipulating its profits in this manner. And remember, it’s not just actual profits earned offshore, but US de facto profits switched to offshore subsidiaries by means of ‘internal company pricing’, profits then shuffled around to low tax locations like Netherlands, Ireland, and Bermuda. Google Corp. is another clever manipulator of the arrangements, earning all its foreign income in Ireland, which its then routes through the Netherlands to avoid all withholding taxes. It thus employs a ‘Dutch Sandwich with a Double Irish’ to go.
This has all been going on since the Clinton years. The result by 2004 was the accumulation of more than $650 billion of U.S. multinational corporation profits in their offshore subsidiaries, retained there and not brought back to reinvest in the US or to pay corporate income taxes to the US government, as US politicians simply looked the other way and allowed it to continue.
During 2001-03 George W. Bush pushed a massive tax cut through Congress, involving tax cuts to personal incomes in general and in capital gains and dividend taxes for wealthy investors in particular. It has been estimated those tax cuts amounted to more than $3 trillion over the following decade, more than 80% of which went to the wealthiest US households. The same Bush tax cuts were then extended for two years from 2010-2012 by the Obama administration, costing another $450 billion to the US Treasury and adding the same to the record US federal deficits and the debt. The estimated further cost to the US Treasury to extend the same Bush tax cuts for another decade, 2012-2022, was $4.6 trillion more, according to the Congressional Budget Office research arm of Congress. The ‘Fiscal Cliff’ deal of January 1, 2013 extended $4 trillion of that $4.6 trillion. That’s more than $7 trillion in tax cuts, past and future, the vast majority of which benefit wealthy investor households in the US. But all that represents ‘Personal Income Tax’ cuts. Corporate Tax cuts since 2001 are another, additional set of cuts.
In 2002, Bush cut corporate taxes as well by hundreds of billions of dollars, in the form of new rules for accelerating corporate depreciation write offs. Depreciation write-offs on business equipment is another kind of corporate after tax profits that doesn’t show up in the latter totals. It is income that corporations ‘retain’, but must be used for subsequent re-investment in plant and equipment. But that reinvestment can occur offshore, not necessarily in the US. And so it has, as US corporations ‘foreign direct investment’ has surged since 2001, as investment in the US has stagnated.
The Bush administration then followed up its 2002 business tax cuts via depreciation acceleration, with another round of major corporate tax cuts in 2004. At the same time, in 2004, Bush declared a ‘tax holiday’ for multinational corporations on their foreign profits, now accumulated to more than $650 billion. The multinationals were then offered a sweet deal: repatriate some of the $650 billion back to the US and pay only a 5.25% official corporate tax rate instead of the official 35% rate. The precondition of the deal was that the repatriated funds had to be reinvested in the US to create jobs.
About $300 billion of the total was repatriated, but the effective rate paid was only 3.6%, not the even reduced 5.25%. And the money was not spent on investment and job creation in the US. Instead, it was used mostly to buyback stock and to finance mergers and acquisitions of competitors. This sweet deal set a precedent. Multinational corporations returned to the pricing practices loopholes noted above and continued to amass even greater profits. Today, the profits and cash hoarded offshore in non-taxable subsidiary ‘disregarded entities’ and shuffled around to Ireland and other places is no less than $2 trillion. The practices were allowed to continue under Obama in 2009 and again in 2012 with the latest ‘Fiscal Cliff’ tax deal of last January 2013. In 2012 alone, another $183 billion was added to the multinational corporate offshore cash pile.
For the past two years at least, multinational corporations have attempted to repeat the 2004 sweet deal they got from Bush. They are once again lobbying Congress, and bills have been introduced, to permit an average 8% repatriation tax if they bring back some of the $2 trillion now held offshore. At the same time, multinational corporations are pushing to sweeten their corporate tax scenario permanently on even more generous terms. They want tax rules that in effect remove all taxes on US corporate income, by moving the US to what is called a ‘territorial’ tax system. That means they would pay no US taxes on income earned offshore. That would result in redirecting even more US earned profits to offshore subsidiaries via ‘internal pricing games’, and paying even less than the mere 2-4% on offshore profits that they pay today. Today’s effective 12% US corporate tax rate would thus fall even further. That almost total elimination of the US Corporate Tax would reduce US total federal tax revenues by $60 to $100 billion annually. Equally important, it would introduce a major new and further incentive for Multinational Corporations to shift even more US jobs offshore.
The Tax Code Overhaul Bill of 2013-14
As incredible as it may seem, this proposal has almost total support within Republican ranks in Congress and among a significant number of Democrats there as well. The proposals are presented included in legislation now moving rapidly through both houses of Congress as part of a proposed major ‘Tax Code Overhaul’. Another major corporate tax cut included in that legislation—supported completely by both parties and already proposed by the Obama administration—is to reduce the official corporate tax rate from the current 35% to 28% (or even lower as proposed by House Ways & Means chairman, David Camp). All sides support at least the 28% reduction. If passed, it would mean an even lower effective US corporate tax rate than the current 12% and even less corporate taxes paid going forward. And if the ‘territorial’ tax proposal wiping out virtually all multinational corporate taxation should also pass as part of the Tax Code overhaul, that would reduce the effective Corporate Tax rate and corporate tax payments to the federal government by even more.
The prospect of a major ‘Tax Code Overhaul’ occurring is not improbable. It was declared the main legislative proposal objective by both parties in Congress earlier this year, before the recent debt ceiling-government shutdown debacle intervened this past September-October 2013. And as this writer has repeatedly predicted, the Tax Code overhaul may provide the ‘political-economic’ glue for an eventual Deficit-Debt deal and agreement yet to come in early 2014. It provides excellent ‘cover’ for the Obama administration, which is seeking some kind of political cover in the form of ‘smoke and mirror’ token tax loophole cover to justify Obama’s proposed cut in the corporate tax rate from 35% to 28%. It could also provide a cover for the right wing Teapublican faction in the US House of Representatives, allowing to claim the next deficit deal was ‘tax neutral’ in theory (if not in fact). Both sides would then cut social security and medicare spending, while restoring defense cuts under the prior ‘sequester’ spending reduction agreement already going into effect. Both then go home declaring ‘victory’, while corporations end up paying less in taxes and middle America getting less in entitlement benefits.
The Corporate Global Income Tax ‘Race to the Bottom’
Combine the example of US states’ corporate tax ‘race to the bottom’ with the above multinational corporations offshore inter-country tax shuffle games, and what you get is still another continuing trend of corporate tax ‘race to the bottom’ internationally between nation states.
In 1980 major economies in Europe, North America, and Asia had official corporate tax rates that were closely comparable. Between 1980 and 2000 some had begun to cut their official corporate tax rate. By 2010-12 the trend grew. But whereas some countries chose to reduce their official corporate rate, others chose to reduce the effective rate via introducing more tax loopholes instead of lowering the official rate. The was the case of the US since the mid-1990s.
Contrary to the argument of apologists for US multinational corporations and their claim that the US has the highest corporate tax rate, France has nearly the same official rate and Japan and the UK rates are lower but not by much, while their loopholes are not as generous. Select countries, like Germany and Canada, have significantly reduced their official corporate rates but allow their ‘provinces’ (states) to levy corporate taxes much higher than do US states. So the total corporate effective tax rate is not significantly lower among most major competitor economies. And none provide the massive corporate tax loopholes that the US does—with perhaps the exception of smaller ‘tax shelter’ economies like Ireland and Netherlands. The following table shows comparative ‘official corporate tax rates’ among major economies. After adjustments for provinces and local districts and less favorable loopholes compared to the US are factored in, claims that US multinational corporations are paying far more than their foreign competitors is just not supportable.
That US multinational are not paying more than their international competitors in other countries does not mean that corporate taxation is not declining worldwide virtually everywhere. It is. It is just that US multinationals are no less worse off than their competitors.
There is in fact a global corporate tax race to the bottom in progress, analogous to the ‘race to the bottom’ between US states. The cases of Ireland, Netherlands, and other nation states functioning as tax shelters is posing a major challenge to western economies, where tax revenues at all levels are under pressure as economic recoveries prove anemic, short, and shallow since 2009. Barely growing economies do not create businesses or jobs that pay taxes. The insufficient volume of jobs that are created are increasingly low paid, part time, contingent service sector jobs as well. That means less federal tax revenues. That means in turn slow or stagnant income growth, which translates into low consumption. That results in corporations investment elsewhere offshore in faster growth emerging markets instead of in the US, Europe or Japan—as is the case. It becomes a ‘virtueless’ cycle of low income-low growth, feeding the incentive to redirect jobs, investment, and corporate operations from competitors to one’s own economy. A leading means by which to redirect becomes lowering corporate taxation.
Some feeble efforts to slow the global corporate tax ‘race to the bottom’ has begun to emerge in Europe and elsewhere. However, the effort thus far has not produced many tangible results.
Four Corporate Tax Myths
The first two myths involving corporate taxation have already been addressed.
Myth #1: US Multinational Corporations Pay the Highest Rates in the World
When an adjustment is made for tax loopholes and offshore profits and tax manipulation, this just isn’t the case. Moreover, claims that US corporations pay more almost always ignore the picture of total corporate taxation in other countries. Often provinces and other district level political jurisdictions make corporations pay more than do US states, with their current effective rates in the low single digits.
Myth #2: Lower the 35% Corporate Tax Rate and US Multinational Corporations will repatriate much of their present $2 trillion offshore cash hoard. That will create investment and jobs in the US, and more federal tax revenue.
Believe this only if you believe somehow US multinational corporations have changed ethically since the 2004 manipulation of this proposal. They have a precedent they know they got away with before. There’s no reason to believe they won’t act the same again, and that includes using the repatriated profits to buyback stock and buy up competitors. Another indicator of their true intentions is their current hard press for a territorial tax system.
Myth #3: Business Tax Cuts Create Jobs
Evidence since 2001 is conclusive that tax cuts for corporations do not produce jobs—at least not in the US. The US for more than a decade now has a serious, structural and chronic problem of job creation. Trillions of dollars in tax cuts for business have not produced more jobs. Despite a 20 million plus increase in the US population since 2000, the size of the workforce remains about the same. Moreover, high paying jobs in manufacturing and construction continue to disappear at an alarming rate. Of the nearly million employed in manufacturing in 2000, less than 12 million remain today. Furthermore, evidence is strong that more tax cuts translate into investment abroad and in job-displacing equipment in the US. Corporate Tax cuts don’t create jobs, they destroy them. If the US were really serious about business tax cuts and job creation, it would not provide one penny of tax cut for businesses until jobs were first created. Tax cuts after job creation, not before. Nor would it allow corporations to claim tax cuts for investment-jobs created offshore, which it does now.
Myth #4: Corporations Now Pay What Amounts to a Double Tax
This argument is that both corporate profits are taxed as well as profits distributed to shareholders in the form of capital gains and dividends. Thus both amount to a ‘double taxation’, taxing persons for capital gains-dividends and taxing corporations for the original earnings as profits.
But if corporate America wants to retain the legal designation of corporations as ‘persons’ (corporate Personhood) and all its political and economic advantages of such, then there is no double taxation issue. All ‘persons’ are being taxed. What should corporations as ‘persons’ not be taxed? Or wealthy shareholders receiving capital gains from stock buybacks and dividends payouts not be taxed. If both are persons, both should be taxed. If corporate apologists want to eliminate double taxation, then they should propose to eliminate corporate personhood as well.
Raising $1 Trillion a Year: 8 Corporate Tax Reform Proposals
It is one thing to analyze and discuss the abuses of the Corporate Tax system in the US and globally, and its negative impact on deficits, debt, income inequality trends, disposable incomes, consumption, and the lack of a sustained economic recovery for all. There are no lack of analyses and discussions on taxes and income inequality trends today. It has almost become fashionable.
The real discussion must be ‘what do you propose to do about it’? Here is a short list of proposals to reverse the decline in corporate taxation and make corporate America pay once again its fair share of 33% of federal taxes. It certainly can afford it, with record level profits that show no sign of slowing.
Make the Effective Corporate Tax Rate 32%–the official rate in effect in 1954. Make it a flat rate and eliminate all 80-100 current special loopholes.
Eliminate all DTA’s (deferred tax adjustments) that allow corporations to pay current and future taxes due out of tax credits accrued in the past. End five year averaging.
Require Multinational corporations to pay the full 35% rate on foreign earnings, including on the $2 trillion held in offshore subsidiaries today. If they refuse to pay the ‘back taxes due’ on the $2 trillion, impose a 50% tariff on all goods they produce offshore and attempt to import back to the US until the back tax is paid.
Introduce a Financial Transactions Tax on both Financial Corporations and on the portfolio investment operations (financial securities investments) of Non-Financial Corporations with annual earnings more than $10 million or more than 500 employees. That financial transactions tax includes a 1% tax on all stock trades, a $100 tax per each $10,000 value of corporate bond trades, a 1% tax on all over the counter derivative trades, and a .1% tax on all retail level foreign exchange purchases.
Implement a 0.25% increase in the Medicare payroll tax, to 1.7% immediately, and another 0.25% increase after ten years.
Introduce a 2% Business-to-Business value added tax, the proceeds of which would be earmarked for the creation of a National 401k Pool, a ‘Part E’ of the Social Security Trust Fund.
Introduce an Inter-State Equilization Tax. Establish a federal recommended 7% state level effective corporate tax rate. States that lower taxes to have corporations in another state relocate to their state, must pay one-half the difference for three years to a federal fund earmarked for income and job retraining for workers displaced in the state from which the corporation moved. The corporation relocating must pay the second one-half.
Impose an offset tariff on goods and services imports from those nation states whose effective tax rate is less than 10% of the average effective corporate tax rate of its 10 largest trading partner states.
In conclusion, the charge will no doubt be raised that the preceding proposals are not politically feasible in the US at this time. That is true. It means that those political parties and their representatives responsible for the dismantling of the corporate income tax cannot be expected to solve the problems they have themselves created.
Neither of the two wings of today’s Single Party of Corporate Interests—the RepubliCrats— in the US provides a solution. Neither do the minority fractions within each wing—the Teapublicans and the ProgCus—offer an acceptable alternative—each in their own way offering solutions that amount to a return to an historical past ‘golden era’ that is no longer relevant or possible in either case.
The real solution must therefore begin with the creation of a new grass roots democratic movement—and a political party composed of elements of that movement and representing that movement—that will engage in mass protests and run for office with the intention of assuming the levers of institutional political power necessary to implement such proposals.
The bane of liberal-left-progressive politics in the US today is ‘single issue politics’. Single issue politics is easily repulsed, co-opted and discouraged. America’s countless single issue movements must unite under a single political banner. There is no lack of political discontent in America today. There is only the severe absence of a viable political organization.
There are no shortcuts. There is only NOW—‘No Other Way’.
~ Jack Rasmus serves as the Chairman of the Federal Reserve System in the Economy Branch of the Green Shadow Cabinet of the United States