The logos of Google, Apple, Facebook, Amazon and Microsoft are displayed on a cellphone and a laptop screen.
Justin Tallis | AFP via Getty Images
Over the past few weeks, business leaders and investors have mobilized publicly and privately to oppose President Biden’s proposed revision of the tax law. Many corporate leaders are working hard to label the proposed changes “bad for American businesses” and their efforts appear to be bearing fruit: moderate Democrats in Congress have begun to abandon the proposal, signaling their intention to scale it down.
But this political calculation belies the truth of Biden’s plan: removing tax loopholes for large multinational corporations would put companies operating in the United States and American workers in a more competitive position relative to their international counterparts.
The current U.S. corporate tax rate is 21 percent, but as recent headlines from dozens of Fortune 500 companies that paid $ 0 in federal income tax last year show, there are plenty of ways for large corporations to avoid as much. Many of the most effective ways companies can avoid taxes are to move their profits and activities overseas, putting companies that operate entirely in the United States at a massive competitive disadvantage.
Few people outside of America’s major corporations realize the significant advantage multinational corporations have over their domestic counterparts. At the beginning you will automatically receive a 50 percent discount on your taxes on all prizes booked abroad. American profits are taxed at the full corporate tax rate of 21 percent, but profits from foreign subsidiaries are taxed only 10.5 percent.
This is even more meaningful than it might seem, as companies have become experts in capturing profits in low-tax countries, even if those profits were actually made elsewhere. If what you pay for an iPhone in an Apple Store in New York can easily be counted as profit for Apple of Ireland, the international tax rate is pretty important.
Few people outside of America’s major corporations realize the significant advantage multinational corporations have over their domestic counterparts.
It doesn’t stop there, however. These multinationals are then able to deduct the taxes they pay to foreign governments from what they owe the IRS. If that amount is higher than the 10.5 percent they would normally have to pay, then you owe nothing to the US government.
This credit also applies to people. In 2013, I worked in Greece for a few weeks, so I paid a small amount of Greek income tax and deducted that from my US income tax bill. But unlike multinational corporations, individuals still have to pay the full US tax rate on foreign income. The loan I got in the US was exactly what I paid in Greece, so financially I was no better.
But it gets worse! Indeed, under the current tax system, companies receive special provisions for “tangible assets” held overseas. The US gives them a tax rebate on the usual rate of return on physical assets held overseas, such as factories and equipment. Currently, that return is 10 percent, which means that for every $ 10 million in property, plant and equipment a company has overseas, the first $ 1 million in profits it makes each year is tax-free.
Basically, the more devices and factories a company has abroad, the more tax-free profit it can make. This not only gives multinationals a huge tax advantage over companies that manufacture in the US, but it also harms American workers.
Take the hundreds of workers General Electric laid off in 2018 when it closed its Salem, Virginia facility and moved their positions to a new $ 200 million factory in Pune, India. Not only did these workers have to worry about cheaper competition in other countries, they also had to worry that the US government was literally subsidizing their jobs for shipping them overseas. And now, thanks to its investment in Pune, General Electric can claim around $ 20 million in profit per year, completely tax-free.
When you combine these loopholes with a host of other tax breaks, many companies can avoid their federal taxes entirely. How should domestic companies and mom and pop businesses compete?
Corporations like Apple, Facebook, Google and Microsoft are now sending their profits to countries like Ireland and paying some taxes to foreign governments, thereby completely disinvesting in our country where their profits were originally made. I’m glad Dublin has extra money to repave its streets, but here in America our infrastructure is in dire need of repair.
Most of these benefits were enshrined in law thanks to the Trump Tax Act of 2017, the Tax Cuts and Jobs Act. When CEOs claim that they can’t compete internationally without the tax breaks they’ve had for less than four years is ridiculous, especially when you consider that U.S. corporations still had over $ 2 trillion in the years leading up to the Trump tax bill. Dollars in profit posted annually.
Biden’s corporate tax plan would end all of these built-in benefits for multinational corporations and put every company in the US, large or small, on a level playing field on taxes. It’s not anti-business, it’s just fair.
Morris Pearl is chairman of the Patriotic Millionaires, former CEO of BlackRock, Inc. and co-author of Tax the Rich! How lies, loopholes and lobbyists make the rich richer.
