The U.S. corporate tax haven
from David Ruccio
When we think of corporate tax havens, we often think of offshore accounts. Well, think again: the United States has become a giant tax haven for corporations.
That’s what’s so crazy about the current call to lower corporate tax rates in the United Stats: they’re already (as graph below shows) paying a historically low percentage of federal tax revenues.
But that doesn’t stop mainstream economics like Laura Tyson from not only not arguing against raising corporate tax rates but arguing that they should lowered. What’s the “logic” of her argument? Nothing more than that capital is mobile, other countries are slashing corporate tax rates, and so the United States must follow in this race to the bottom in order to attract “mobile capital and technological know-how to support jobs and wages for immobile workers.”
There’s nothing new here. It’s the tired logic we hear time and again: corporations create jobs and we need to do everything we can to lower the costs of investment. It’s not enough that corporations privately appropriate the surplus workers create, some of which is taxed to finance public goods (like public education and physical infrastructure, from which the corporations benefit). Their investments need to be made even cheaper, through “accelerated depreciation, the domestic manufacturing production deduction and the research and development tax credit.” Follow this logic and corporations now pay only 7 percent of federal tax revenues. What does Tyson want, for the percentage to drop to zero?
Nancy Folbre understands the illogic of the proposals put forward by Tyson and others, and sides with citizen groups—such as UK Uncut, US Uncut, Citizens for Tax Justice, and others—who are engaged in a campaign both to embarrass corporate tax-evaders and to propose alternative tax measures.
The fact is, we’re being held hostage—by corporations and mainstream economists alike—to the idea that one tiny group in society has the right to appropriate most of the surplus and to decide when and where most jobs will be created. And, if it doesn’t get its way, it’ll deploy its capital elsewhere.
That’s why the United States has become a giant corporate tax haven. And, if things continue as they are, it’ll become an empty shell—just as empty as those offshore “headquarters” corporations have been using to avoid taxes on their profits.
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This is a clear example about how a little knowledge can be dangerous. The US now boasts the highest marginal corporate tax rate in the industrialized world (39.6%). This graph is skewed by large cap companies and multinationals which have the benefit armies of accountants and lawyers as well as global operations that allow them to take advantage of the most attractive tax jurisdictions and keep tax rates low.
The big problem for those who actually understand which entities generate jobs in the US – startup companies and new ventures – is that all but the top 10% of the largest companies must pay $7 in compliance for every $1 in taxes they pay just to navigate the regulatory and tax environment. Small companies are currently drowning in a sea of legislation, regulation and the most complex and convoluted set of tax rules in the known world. This is a huge hurdle that many simply are unable to make to become viable long-term. As a result, their very existence and return to prosperity along with the capacity to hire new workers has been seriously compromised.
The answer is not to raise corporate taxes but to simplify them and lower the rate for those upon which we rely to create jobs. A flat tax which would mean that all corporations and wealthy would not be able to tax advantage of tax breaks to pay little tax. But it is an idea that armies of accountants and lawyers will always fight.
You obviously lack a real understanding of how outsourcing works. It actually creates more US based jobs than are lost overseas as well as helps us enjoy our current standard of living.
You also seem to have missed the fact tax benefits offered to corporations have attracted talent, ideas and new businesses which have been responsible in a large part of US corporate dominance globally – a benefit which we all enjoy.
If we are to maintain the our current standard of living, we must create a system that favors entrepreneurial ideas, invention and the creation of valuable intellectual property, not a system that punishes productivity and innovation through higher taxes. How many know that the US is the only industrialized country that taxes based on citizenship, not domicile and wondered why such a system was adopted years ago by Congress? It was adopted to try to even the playing field and prevent the successful from leaving to pay lower taxes elsewhere. But many would argue that such an idea has failed to achieve its intended goal. It is also the reason that Foreign Sales Corporation Rules and the like originally invoked in the 1970s because they were necessary to keep US corporations competitive globally. But these benefits have gradually been eroded which you may celebrate as good news. Unfortunately, it adds greater motivation for international companies to move headquarters overseas and take valuable jobs with them.
I don’t expect you to understand this as they run counter to your argument and beliefs. You have made your decision and its ‘down with corporate tyrants and let’s increase the taxes they pay.’
What you fail to appreciate is the corporations and their jobs are mobile. Punish them with uncompetitive tax rates and legislation and they can simply leave and we are all the poorer for it. There are many jurisdictions around the globe that have realized that they can achieve better results by using honey to attract talent, initiative and new ideas instead of vinegar.
It seems a contradiction to say that the US is a corporate tax haven, which implies that enterprise flourishes in the USA, and also that business in the USA is an empty shell. We need to distinguish the top marginal tax rate, which is relatively high, and the average tax rate, which is low.
Well its all part of the great rising inequality argument (that republicans cant, wont or refuse to get their head around until their own voters bite them which isnt far off) isnt it?
I hope and pray but for some it takes a huge mess before they can fight their way out of it abd for the avaerage US citizen living under this deplorable tax evasion by the wealthy and corporates and suffering near government shutdown and severe cuts in government spending….
Isnt it about time they asked why?
“It’s not enough that corporations privately appropriate the surplus workers create, some of which is taxed to finance public goods”.
You could set the corporate tax rate to 0% for all I care if we simply taxed this private appropriation adequately to support the necessary public goods. There really would be nothing left for those actually engaged in productive business to complain about.
Dear Matt
1. We all agree that the tax system has to be simple.
2. I think we all agree that there are no international macro-economic benefits when it comes to a tax race to the bottom.
2. I do agree with the statement that: “we must create a system that favors entrepreneurial ideas, invention and the creation of valuable intellectual property, not a system that punishes productivity”. Of course we must. But taxes do not always punish productivity. Taxes (or the investments financed with taxes) often enhance productivity. According to quite some estimates, infrastructural investments (by the government) were one of the main reasons why productivity of companies could increase so much. And yes, roller bearings and air tires and trucks also have to do a lot with this.
In democratic societies, you often get something in return for your taxes: roads, domestic peace, enforcement of contracts, education – those kinds of things. As far as I’m concerned, the productivity of the average company is greatly enhanced by the existence of government sponsored roads (while the road building companies of course like building these roads, as it’s a quite sure profit). Of course, the glorious Millau bridge in France is has been designed and built and is explited by a private company (the same that built the Eiffeltower, by the way) – but even then it has been the French government which acted as the ‘entrepreneur’, the prime mover. Yes: the government as entrepreneur – in fact one of the highlights of the twentieth century economic history! And governments can be pretty effective to (at least in my country), for instance when it comes to repairing roads after an unusual severe winter.
Governments are, of course, dangerous entities, which have to be controled and curtailed by countervailing forces. But I can’t help noticing that they did a lot of good things to, the last century. Just look at infrastructure, just look at health care, just look at education. Long story short: governments expenditures and investments have often been really good, for business. Yes, that’s a one sided story. But I’m really getting fed up with the idea that the government has to take care of everything while companies have to pay nothing (and another thing: path breaking innovations are often engineered by ridiculously small companies, not by the big ones). Believe me: I’m all in favor of dynamic companies. And I’ve a natural distrust of the government (and an even alrger acquired distrust of quango’s) – but it’s somewhat naief to state that lower taxes will solve all of societies ailings. Sometimes, higher taxes may even be needed to solve them.
By the way: just read a nice IMF study on equality and growth: equality is good for growth! Tax the rich and educate the poor! (though less upward subsidies might do better, in the short term).
Click to access sdn1108.pdf
I agree with much of what you say.
However, I strongly disagree with your point 2.
“2. I think we all agree that there are no international macro-economic benefits when it comes to a tax race to the bottom”
I fully support “a tax race to the bottom.” As you imply, governments by their very nature are parasitic entities that cost our economies. If a country like Monaco, Luxembourg, Switzerland, Ireland or Andorra lower their corporate tax rates to attract new ventures, congratulations to them! This whole OECD Harmful Tax Competition campaign is wasteful and hurts productivity.
History has proven that with very few exceptions, governments keep getting bigger and less efficient. If the goal is to narrow the income gap, larger governments have actually made the problem worse, not better.
I also disagree with your statement, “governments expenditures and investments have often been really good, for business.” That is pure crap especially when you consider that large businesses (like those that benefit from government subsidies are net jobs losers. Startups and new businesses generate 100% of new jobs in our economy. Large government does very little if anything to help them which is a real shame.
To put it bluntly, I have never understood the faith that voters seem to have in the belief that governments can spend their money better than they can. That misconception is misguided and at it very worst leads to very dangerous inbalances of government power at the cost of person liberty.
Helping the poor is not possible by becoming one of them and history has proven time and again, that government may be a necessary evil but the bigger they get, the more evil they become. And unfortunately, its the poor who take the biggest hit.
I will be interested to read you link. I’m not aware of any examples where equality was good for growth but good luck in your taxing the rich to do so. Increasing tax rates and overall tax burdens has only widened the gap between rich and poor, not narrowed it!
“As you imply, governments by their very nature are parasitic entities that cost our economies”
To avoid misunderstandings: my idea is that governments surely can be parasitic (i.c. pre-revolution Tunesia, pre-revolution Dutch Republic (1568), almost all colonial governments – the list is indeed long). That’s, however, in my view not always the case.
What is really parasitic is the uber rich who are shoving or muscling their once accepted tax obligations down to lower and lower deciles whilst crying aboout their tax burdens.
‘Tax competition’ allows the biggest businesses who can afford the means to avoid tax to compete unfairly with other businesses who cannot but may be far more efficient. That is surely what is happening here in UK where local businesses are continually losing out to the big players, when it comes to govt contracts for example.
“Tax competition allows big businesses to compete unfairly”? Give me a break. Who ever told you that doing business was supposed to be fair? But you think that growing govt bureaucracies taking big chunks of taxes will make the system fairer? All the research I have done shows that governments are entities onto themselves, and the bigger they get, the less efficient (more expensive) they become. Taxes rarely filters down to those (like startup companies) that really need it.
But you and I are from different planet so this will be good news for you. Based on the recent UK increases in taxes and reams of new regulation, I understand a number of big banks and brokers will be leaving the City of London for fairer shores. It might even be as big as what happened in the early 1960s when the Kennedy Amendments increased taxes on interest etc which effectively chased a number of financial businesses to the UK and launched the City of London as a global financial center. Guess all good things come to an end sooner or later.
I wonder how many taking part in this discussion are actually self-employed business people versus those who work for govt, educational institutions or large corporations? Seems to me there are very few in business for themselves from the tone and content of the posts.
Good Matt. Let the big bankers and brokers go and take their overpaid staff with them. Maybe the US economy will get back to giving tax breaks to small businesses again, and encouraging real production instead of pie in the sky financial speculation. If we think the big banks and brokers pay taxes anywhere, they probably dont and probably pay small fees to empty Seychelles tax haven offices, which is one reason for the charts you see above. Let the US keep the people who really do contribute their taxes.
I am sure there is a good logic that escapes me in trying to understand why US provides tax benefits to US companies to outsource jobs. So, the corporations increase their margins, lay off people in US while enjoying all benefits from countries like Malaysia and Singapore. And why is there a tax benefit to move jobs to Puerto Rico or Costa Rica.
So, while talk about increasing jobs, corporations are just getting more and more greedy and have no accountability for lack of social responsibilities. And US govt is helping them using our taxes until we are employed and pay those through our noses.