THE MOST innovative part about the age-old problem of tax evasion is the ever-changing vocabulary that has been created to describe it. It became tax “avoidance” and the latest cause célèbre is tax “inversion”.
Unfortunately, “enhancing” the English vocabulary in such nebulous ways with new terms is about the only thing that is going on with regard to tax reform in the US.
True, at 35 percent of profit, the US has one of the highest nominal corporate tax rates in world. But don’t be confused by that statement. As a report published by the non-partisan Government Accounting Office found in May last year, lawyers and accountants employed and retained by all those profitable US corporations made sure that their clients paid US federal income taxes amounting to no more than about 13 percent of their pretax worldwide income in 2010 (the latest data available).
What’s worse, Citizens for Tax Justice reported that 26 major US corporations paid no net federal corporate tax at all between 2008 and 2011.
Astonishingly, these companies made more money after taxes than before taxes. Savour the prominent names among them: Boeing, Verizon, Mattel and Duke Energy.
All these fine companies consider themselves icons of the American business firmament. Their patriotic garb notwithstanding, they are relentless in their intent and action to undermine American society and its future prospects by engaging in their favourite sport – ruthlessly gaming the tax system.
So let’s get real: the only reason why US corporations can evade and avoid fair taxation is our collective lack of political will. Perversely, Democrats and Republicans alike in the US Congress – supposedly the representatives of the “people” – are actively aiding and abetting that process.
Why? Because owing to the dysfunctions of the US political system, they are critically dependent on donations from corporate America.
In the process, other than in terms of (false) rhetoric, they have sold out the original promise underpinning of the American Dream – fairness and equality – to the narrow interests of their donors.
What could be done if we had a functioning political system that was truly established to serve the legitimate interests of the American people, rather than just pretending to do so?
It’s really quite simple. First, mergers and acquisitions should not allow US corporations to become corporations of more “tax-friendly” jurisdictions (a process now referred to as tax inversion). They should be taxed in the US, provided they continue to be managed here and maintain business in the US. It is matter of law how we define “headquartered” or “subject to US taxes,” not some God-given classification.
Second, the US should tax all foreign income of US companies – just as is actually done to all US citizens who work outside the country.
Third, tax havens should be shut down permanently. It is as tiring as it is misleading to hear policymakers whining about the existence of tax havens and how they destroy the tax culture of corporations. In fact, it is within our own control to render these perverse structures useless.
Fourth, once the tax revenues owed to the US government have been successfully repatriated, then the politicians in the US Congress can look at the country’s corporate tax code.
As it stands, small and medium size enterprises were the only ones who really bore the brunt of the US’s high corporate tax rates because they lack the means of evasion, avoidance or inversion.
How might this all end? Lower tax rates would help small and medium enterprise to become more profitable, allowing them to create jobs. But guess what: the US might even become an attractive destination to foreign companies because of new and low marginal tax rates.
So, Republicans and Democrats: you want to create jobs, improve inequality and set us on a course for sustainable growth? Here is a roadmap. Now get on with it.
Uwe Bott is the chief economist of The Globalist Research Centre.