Corporate Taxation - The Next Race to the Bottom

By guest bloggers James S. Henry and Nicole Tichon

with research assistance by David Lighton


Suddenly, without warning, we appear to be in the midst of a global tax race to the bottom in corporate income taxation, with no end in sight.

One month ago, President Obama announced a new plan to reduce the “book” or nominal US corporate income tax rate from 35 percent to 28 percent.

Two weeks later, this was followed by the UK’s announcement that it would slash its top corporate rate to 22 percent by 2015, with the explicit objective of “maintaining the lowest corporate rate in the G-8.” Other EU countries are also reportedly thinking about responding in kind.

Just this Sunday, on April Fool’s Day, Japan will lower its own nominal corporate tax rate to 36.8% from 39.5%. And in three years the rate will drop another 2.3 percentage points to 34.5%.

The fact that all this new tax cutting is coming to a head on April Fool’s Day is entirely appropriate.

Only the world’s most foolish politicians, acting under the spell of election-year politics and the torrents of anti-tax propaganda spewed out by corporate lobbyists, could possibly believe that this “tax race” is anything but a costly, unproductive zero-sum game.

If it is allowed to continue, the tax race will undermine what little is left of progressive taxation all over the globe as well as our slow economic recovery. On the one hand, it threatens to throw more and more of the costs of essential government services onto the backs of the middle class and the poor, slash their services even deeper, and cost them jobs, even as they are still struggling to recover from the “1%-made” financial crisis.

On the other hand, the tax race threatens to force governments around the world to go even deeper into debt.

Either way, this serves no one’s interests but those of the world’s most self-serving multinationals and their armies of well-heeled lobbyists and anti-tax “think tanks.”

This new wave of corporate tax cutting is especially disturbing, because it defies abundant evidence that such additional cutting is not only unnecessary, but counterproductive.

For example, a comprehensive study from Citizens for Tax Justice and the Institute on Taxation and Economic Policy that analyzed 280 of America’s most profitable companies found that 78 of them paid no federal income tax in at least one of the last three years. It’s worth mentioning that the 280 companies also received a total of $223 billion in tax breaks. In fact, the report unearthed thirty companies that enjoyed a negative income tax rate over the three year period, while banking profits totaling $160 billion. Anyone who paid even one penny in taxes, paid more than the likes of Exxon Mobil, General Electric, Fed Ex, and Wells Fargo. In other words, the joke is on us.

The Congressional Budget Office, an independent, non-partisan agency, has reported that the average corporate tax rate on domestic profits - meaning the share of profits that companies actually pay in taxes — is at 12.1%. This is less than half of the statutory rate of 35%, which will be held up as the raison d’etre for American corporations’ inability to compete and continually referred to as the highest rate in the world. In fact, the corporate tax rate is at the lowest level since the early 1970s.

Contrary to what will be heard on the campaign trail today, the U.S. collects less corporate taxes as a share of GDP than all but one of the 26 Organization for Economic Cooperation and Development (OECD) countries for which data are available. The contribution of corporate tax revenue to the federal government decreased from 30 percent in the mid-1950s to 6.6 percent in 2009.

But these aren’t the statistics that will make headlines today.

The reality is that the tax rate could be 45% or 5% - the number doesn’t really matter to most profitable multinational corporations. It is especially inconsequential to 83 of the top 100 publicly traded companies who use offshore subsidiaries in low- or no- tax jurisdictions. The problem is not the rate of taxation, the problem is the loopholes, preferences and deductions that allow large corporations to both claim that their competitiveness suffers due to high taxes, while not actually pay much of a tax bill.

The corporations that benefit from the current system of taxation would like us to remain fools. These companies like to appear to the public and to shareholders as oppressed martyrs, starved of cash due to the U.S. system of taxation, while at the same time more than doubling their profits over the last ten years. Those who favor corporate tax breaks argue that it is tax cuts that are key to growth, even though practical knowledge or even having lived through the first decade of the 21st Century would dictate otherwise. It’s like the corporation that cried tax. Most recently, we saw Apple issue its first dividends due to “massive cash reserves” while at the same time lobbying for a tax holiday for the money it maintains offshore.

The constant drumbeat that tax breaks for businesses will spur growth and create jobs has rung hollow. The Des Moines Register’s Iowa Caucus poll revealed that 87% of those surveyed said that corporate tax loopholes should be closed so that every U.S. business pays some taxes. In addition, “90% of small business owners say big corporations use loopholes to avoid taxes that small businesses have to pay—and 92% say big corporations’ use of such loopholes is a problem,” according to a recent survey of small business owners (the majority of whom were Republican). Small businesses are both important job creators and trotted out as adversely affected by tax reform. In reality, small businesses are adversely affected by trying to compete with large multi-national corporations that use offshore subsidiaries in low- and no-tax jurisdictions to reduce their overall tax rate.

Finally, of course, there are many reasons why businesses choose to locate in the U.S. that have nothing to do with tax levels. They benefit from the size and depth of our markets, our consumer base, our schools, our roads, our hard-working labor force and the fact that skilled labor still dreams of living here, the professionalism and integrity of our judicial system, and the national security provided by our armed forces.

Most of all, they benefit from the fact that we have always been a constitutional democracy with a healthy middle class.

If we continue the April Fool’s game of racing to cut taxes for corporations and the economic elite, these more fundamental non-tax advantages will soon disappear. And no amount of tax cutting will ever bring them back.