The current United States tax code allows some of the
most profitable companies in the world to not pay any
federal corporate income taxes.
The present tax system ain't fair.
Actually, at least 55 of the largest corporations in
America paid no federal corporate income taxes on
their 2020 profits.
And paid zero in federal taxes.
Some of these companies include big names like
FedEx, Nike, HP and Salesforce.
These companies are not doing anything illegal, and
these companies pay many other forms of taxes.
If a large, very profitable company isn't paying the
federal income tax, then we have a real fairness problem
on our hands.
And it's costing the government billions.
You can think about a bucket of corporate tax breaks that
are deliberately there in the tax code.
And overall, they cost the federal government roughly
$180 billion each year.
And for comparison, the corporate tax brings in
about $370 billion of revenue a year.
Those 55 corporations would have paid a collective total
of $8.5 billion.
Instead, they actually received $3.5 billion in tax
rebates.
Corporations can receive refunds just like
individuals do.
And that doesn't include corporations that paid only
some of these taxes.
But not all.
The federal government estimates that there's about
40 billion each year and corporate taxes that are
clearly owed.
Here's how the most profitable companies in the
country avoid federal corporate income taxes.
It's important to note the federal income tax is not
the only tax corporations pay.
They're subject to state and local taxes, too.
Right now, we're only talking about the corporate
federal income tax rate, both domestic and
international.
The Federal tax rate at the moment is 21% for domestic
profits, but it's as low as between zero and 10.5% if
those profits are profits of a US multinational that
are earned offshore.
What do we do to make America the most competitive
place in the world?
The 2017 Tax Cuts and Jobs Act slashed the 35%
corporate tax rate to that 21%.
The only tax levied at any level that publicly traded
businesses are supposed to pay in proportion to how
well they're doing. Where the bigger you are, the more
successful you are, the more you ought to be paying.
The corporate federal income tax is about 7% of all
revenues that the federal government collects.
Let's look at Amazon as an example.
Alexa, how much tax should Amazon pay?
Sorry, I don't know that one.
Amazon became famous in 2018 when the company reported
about 11 billion in US income and paid zero federal
income tax. They actually got a tax rebate of 129
million, according to their financial reports.
We now have four years of data.
In those four years, Amazon has now reported $79
billion almost of US income and has paid a total of 4
billion in federal income tax for a four year tax rate
of 5.1%.
So what that means is that they're avoiding income tax
at the federal level.
Remember that the federal rate is 21%.
So in four years, Amazon's effective tax rate was
5.1%.
I'll emphasize that everything I've just said
about what Amazon is doing appears to be completely
legal.
Amazon told CNBC that its US taxes reflect its
investments, employee compensation and current tax
laws. The company paid federal income taxes.
Other federal taxes and state and local taxes.
Publicly traded corporations have two different ways of
accounting. So one form of accounting is for
shareholders. Let's call it book income.
You have profits that are reported to shareholders
using general accepted accounting principles under
financial accounting. And the purpose of that is
really to determine, is this corporation profitable?
Is it worth investing from a shareholder perspective,
how is the firm doing from a performance side of
things?
And the second form of accounting is for taxes,
let's call it taxable income.
You have a set of rules that are different from and often
diverge from that accounting.
It determines how much tax a corporation is paying.
And what that means is the amount of profits that
corporations may be reporting for financial
purposes may be very different from the profits
that they are reporting and they're paying taxes on for
tax purposes.
This is how some companies are able to tell investors,
we made billions of dollars, but turn around and
tell the government we made $0.
We can call all of these tools a form of tax
expenditures. Tax expenditures are any
targeted tax break, think tax credits or incentives.
We want more oil.
We want more solar energy.
We want more manufacturing.
We want higher paying jobs.
We want more capital investment. And for each of
these things, Congress has enacted a tax break that, at
least on its face, is designed to encourage these
things.
Take a tax credit for research and development as
an example.
There's the R&D tax credit, which allows companies to
take deductions and credits for their spending on
research, the things they spend money on to make
better hamburgers in the case of McDonald's.
Tool number two, accelerated depreciation, another form
of tax expenditure.
We can also call these write offs or expensing.
This is a key example of how those two different
forms of accounting, book and taxable incomes come
into play.
If you are a corporation that's really in
manufacturing, really capital intensive, you may
make a really large investment in a given year
under financial accounting rules.
To Determine your profits you're reporting to
shareholders, you may have to deduct that over, say,
ten years, for example, under the general accepted
accounting principles. For tax purposes especially, you
may be able to accelerate those deductions in the
given year and in some cases even taking a full and
immediate deduction against your taxable income for that
investment. What that means is you may be reporting a
profit for a financial accounting purposes,
reporting no profit or even a loss for tax purposes.
And that creates a difference between your
financial income and your tax income.
Tool number three, stock options.
There are tax breaks for stock options which allow
companies to write off the cost with air quotes around
of the stock options they give their executives and
other senior employees.
So that that just comes down to the different rules
between book accounting and tax accounting for when that
compensation can be deducted. For book
accounting, it's deducted immediately for tax purposes
and maybe at a later date when it's ultimately vested
to the employee. And then that creates a discrepancy
in the total amount of taxable income that these
firms are reporting.
They write them off as if they were actual cash
expense, when, of course, giving stock options to your
employees is absolutely not the same.
Sort of out of pocket expense like signing a check
every two weeks.
And finally, perhaps the murkiest of all tools, tool
number four offshoring.
There is a very deliberate at the moment lower rate for
foreign profits of US multinationals and something
between 0 to 10.5 on their foreign profits.
And that's an outright tax benefit for them that's
worth roughly $60 billion a year, according to the Joint
Committee on Taxation.
But it also creates this incentive to shift their
worldwide profits inyo that sort of foreign low tax
bucket.
U.S. based corporations are finding ways to shift income
into tax havens. You talk about the Cayman Islands,
Bermuda, Bahamas, Ireland and Luxembourg and the
Netherlands to some extent.
Their estimates that sort of shifting is in the tens of
billions of dollars a year, up to $100 billion a year.
Here's an example.
Whirlpool, a US company known for manufacturing home
appliances both in the US and Mexico.
Whirlpool tried to avoid both U.S.
and Mexican taxes on the profits from its Mexican
operations, and it did that by having the Mexican
operation owned by a Mexican company with no
employees, and then having that Mexican company owned
by a Luxembourg holding company that had one
employee. And then it tried to claim that due to the
combination of the US, Mexico and Luxembourg tax
rules the millions of dollars of its profits from
the Mexican operations wouldn't be subject to tax
in Luxembourg, wouldn't be subject to tax in Mexico and
wouldn't be subject to tax in the US.
So it was trying to sort of take advantage of the
disconnect between all of those tax systems to avoid
tax in all of those countries. And a court said,
no, that goes too far.
That's not what the law actually allows.
Whirlpool told CNBC that it follows all tax laws in the
jurisdictions in which it operates and that
Whirlpool's use of the tax code actually increased the
amount of tax that the US collected on its Mexican
profits. The IRS thought Whirlpool should have paid
those US taxes earlier.
It's still quite possible for US companies to shift
their intangible assets out of the US to avoid taxes.
And it should be a top priority of policymakers
right now to prevent them from doing so.
Accounting and tax experts say that probably the first
best way to fix a problem is to go to the tax rules
and look at each of the different provisions and
decide whether or not you want that on the tax code,
repeal those inefficient tax breaks or reduce them.
Some say that is unrealistic, otherwise it
would have happened anyway, and it's a hard thing to do.
One solution could be to beef up the IRS.
There is nothing the IRS does that is more cost
intensive that requires more resources than
investigating the tax avoidance behavior of large
multinationals.
Between 2011 and 2019, the IRS budget for
enforcement was cut by about a third.
One policy solution would be to implement minimum
corporate taxes, both an international minimum tax
and a domestic minimum tax.
A global minimum tax would end the race to the bottom
in corporate taxation.
The legislation that's been debated by Congress would
raise the US minimum tax rate on foreign profits from
10.5% to 15%.
Implementing an international minimum tax
would help tamp down on some of the offshoring of
profits that companies can maneuver about.
When that country doesn't impose at least a 15% rate
of tax, then the US will impose an additional tax so
that the corporation pays at least 15% in each
country, and that would raise about $350 Billion
over ten years.
Then there's domestic profits.
One major proposal that's come out over the last year
and advocated by both Biden administration and members
of Congress has been to levy a minimum tax on book
income.
Directly implementing a domestic corporate minimum
tax of 15% could reduce the gap between the book income
and taxable income, basically cutting down the
value of some tax expenditures.
The first priority with corporate tax reform should
be to get it to lift its own weight, to pay for
companies, to pay by whatever means something
closer to the statutory rate.
And the book income tax would certainly accomplish
that. I think there are better ways of doing it.
I think there are more all inclusive ways of doing a
minimum tax. But it's certainly better than
nothing.