The news that 60 of the world’s largest corporations had paid zero in federal income taxes last year (some even got rebates) sent America’s challenged outrage meter up another notch.
Still, the conventional wisdom goes, now that global corporations are a fact of life, it’s all but impossible to prevent them from bobbing and weaving through the world’s most tax-friendly jurisdictions to keep the amount of tax they owe to a bare minimum. This, of course, deprives taxpayers in the United States and elsewhere of valuable tax revenues that could be put to wonderful social uses like better paid teachers or family leave or free college or universal health care.
“Concretely, if Apple sells 20% of its products in the United States, the U.S. federal government would say that 20% of Apple’s global profits are taxable in the United States.”
But what if the inability to tax multinational firms were more the product of a lack of will than the absence of a policy way?
“Contrary to a widespread view it is possible to tax multinational companies (potentially at high rates) in a globalized world, even in the absence of international policy coordination,” writes Gabriel Zucman, economist at the University of California Berkeley and an expert on inequality tax avoidance by the super wealthy.
40% of profits diverted to tax havens
Zucman says some 40% of multinational profits are channeled to tax havens each year. “The United States loses about 15% of its corporate income tax revenue because of this shifting,” he says.
So how are policy makers and tax enforcers supposed to clamp down on capital that can move around the globe at the speed of light?
Donald Trump and his Republican entourage promised big benefits to workers from their massive corporate tax cut of 2018—but many workers discovered they ended up paying more than they had in previous years.
What’s more, the investment boom projected by the tax cuts proponents have utterly failed to materialize. “The good news is that there is a way to tax multinationals in a way that addresses both tax competition for real activity and for paper profits,” Zucman writes.
Individual countries can avoid profit-shifting by taxing the consolidated profits of firms proportionally to where they sell products.
“Concretely, if Apple
sells 20% of its products in the United States, the U.S. federal government would say that 20% of Apple’s global profits are taxable in the United States,” the economist argues.
Can’t move your customers
“This would put an end to profit shifting because firms cannot affect the location of their customers (they can’t move their customers to Bermuda; and if they try to pretend that they make a disproportionate fraction of their sales to low-tax places, this form of tax avoidance is easy to detect and anti-abuse rules can be applied),” Zucman says.
“This would also put an end to competition for real activity, because in such a system there is no incentive for firms to move capital or labor to low-tax places; the location of production becomes irrelevant for tax purposes,” he says.
Zucman points to the microcosm of U.S. state taxes as a way to coordinate corporate taxes across disparate jurisdictions. “Note that 40% of multinational profits shifted offshore, although a large figure, is lower than for U.S. multinationals alone (55%). That is, although multinationals from all over the world use tax havens, U.S. multinationals appear to use them particularly extensively.”
Not only is such a measure the right thing to do from a budgetary perspective, it also makes sense as a way to tackle inequality and even enhance corporate efficiency.
“Raising the corporate rate to 35% (as was the case until 2017) or to 50% (as was the case in the 1950s, 1960, and 1970s) would significantly increase the effective tax rate on wealthy individuals in the United States, and the overall progressivity of the U.S. tax system, Zucman concludes.
“In turn, this would contribute to curbing the rise of inequality which has reached extreme levels in the United States compared to other developed economies,” he adds. “Beyond the effect on inequality, such a move would make the tax system fairer and hence more legitimate, eventually contributing to making globalization more sustainable.”
Deprived of revenue
Not everyone is a fan of Zucman’s proposal. Nobel laureate and Columbia University economist Joseph Stiglitz has argued that a system focused on “final sales” would hurt developing countries by depriving them of tax revenue that should arguably be captured from the economic activity happening locally.
However, Stiglitz’s solution, a formula that accounts for both final sales and employment, comes with loopholes that fiscally adept corporate actors could drive fleets of automated trucks through. He proposes the creation of a “global minimum corporate-income tax.”
But that takes us back to the original problem — a lack of international cooperation as the perennial excuse for inaction on taxes. Let’s take the money where we can get it, I say. Making sure corporate income is accounted for and adequately taxed is essential to any long-term solution to extreme wealth inequality.