By GABRIEL ZUCMAN
Since the 1980s, countries have competed for business by reducing companies’ taxes.
A few nations, like Ireland and Bermuda, have adopted extremely low rates and become tax havens for companies like Google and Apple.
Earlier this month, 130 countries, including the United States, agreed to a blueprint to tax their companies’ profits at a minimum 15 percent rate — no matter where the profits are booked.
The pact is a step in the right direction. But for working-class Americans who have fallen behind as tax cuts helped the rich get richer, 15 percent is too little, too late.
In the decades after World War II, close to 50 percent of American companies’ earnings went to state and federal taxes. Economically, it was a golden period. Middle-class incomes grew at roughly the same rate as those of the richest Americans.
But as globalization gave companies the ability to choose where they recorded profits, Congress scrambled to keep their business by lowering corporate taxes. In 2018, American companies were taxed at an average effective rate of less than 14 percent, by our calculations.
Corporate tax breaks have helped business owners amass inconceivable amounts of money over the past few decades. Meanwhile, middle-class Americans have footed the bill, as Congress has propped up the budget by raising taxes on wages.
Taxes on wages have increased as corporate taxes have decreased.
SHARE OF NATIONAL INCOME
President Biden should be applauded for trying to end the race to the bottom on corporate tax rates. But even if Congress approves the 15 percent global minimum corporate tax, it won’t be enough to close the growing economic gap between America’s rich and middle class. Taxing multinationals at 15 percent would still leave them facing a lower rate than the average American pays in state and federal income tax.
For the Biden administration to give working families a real leg up, it should push Congress to enact a 25 percent minimum tax, which would bring in about $200 billion in additional revenue each year. Over 10 years, that money would be more than enough to pay for nationwide high-speed internet, free community college and universal preschool for three- and four-year-olds.
There’s little chance that Republicans will support a 25 percent floor. But they already had their shot at reining in tax evasion with the 2017 Tax Cut and Jobs Act, and they failed. New data from the Bureau of Economic Analysis suggests profits booked in foreign tax havens have not declined since the law was passed. In 2018, U.S. corporations reported more profit in Ireland than in Mexico, China, Germany and France combined.
CORPORATE PROFIT SHIFTING
Companies have resorted to devious schemes to justify their profit shifting. For years, the rights to Nike’s Swoosh trademark belonged to one of the company’s Bermuda subsidiaries. In its quest to avoid taxes, Apple moved some of its intellectual property to Jersey, a small island in the English Channel.
Put another way: In 2018, Facebook made $15 billion in profit in Ireland — the equivalent of about $10 million for each of its employees there. That same year, Bristol Myers Squibb recorded close to $5 billion in profit in the Emerald Isle, or roughly $7.5 million per employee.
TAX EVASION, PLAIN AND SIMPLE
This is tax evasion, plain and simple. When a company logs billions of dollars in profit in a shell company, it violates the spirit of the Internal Revenue Code’s economic substance doctrine, which states that a transaction must have a purpose other than to reduce tax liability.
But multinational companies get away with it by spending billions of dollars on top-tier lawyers and former lawmakers. Hobbled by budget cuts, the Internal Revenue Service has struggled to audit them.
The time for incrementalism is long past. For decades, Congress has been playing catch-up as business owners and a handful of tax havens have driven international tax policy. The result has been a nation where working-class Americans are left with underfunded public schools and hospitals as the wealthy board rocketships to outer space.
With a 25 percent minimum corporate tax, the Biden administration would begin to reverse decades of growing inequality. And it would encourage other countries to do the same, replacing a race to the bottom with a sprint to the top.
(Gabriel Zucman is an economist at the University of California, Berkeley, and one of the authors of “The Triumph of Injustice.” Gus Wezerek is a writer and graphics editor for The New York Times Opinion section. Reprinted from the New York Times.)