Co-authored by Cyrus Jabbari, USC Student and Researcher &
Logan Taylor, St. Francis Xavier University Student and Researcher
Thus far, this presidential election has been defined by themes of restoring American prosperity through economic populism.
Turns out these grassroots efforts are as genuine as AstroTurf -- for every moment spent on talks of building a wall along the southern border, we ignore the real amnesty problem, as multinational corporations are engaged in a Mexican standoff with the federal government about "tax forgiveness."
The U.S. tax code has a loophole, which exempts these companies from paying American taxes on profits earned in foreign countries until the money is returned to U.S. soil.
Overall, these globalized corporations have accumulated $2.1 trillion in untaxed profits, most of it hoarded in overseas tax havens. These companies refuse to return the money and pay their indebted taxes until Washington reduces the corporate tax rate.
This will essentially be a giveaway of hundreds of billions of dollars to multinationals, and is being negotiated by both Democrats and Republicans.
Ted Cruz once complained about "liberal media bias" in a primary debate, but reports of this tax code tomfoolery are currently drowned out by boisterous soundbites and buffoonish pundits on mainstream media, who are more interested in covering politics as if it's an episode of "The Bachelorette."
Apple, Microsoft, Oracle, Citigroup, Amgen, Qualcomm, JPMorgan Chase, Gilead Sciences, Goldman Sachs, and Bank of America will be the greatest beneficiaries of this deal. These companies collectively owe $162 billion in unpaid taxes on the $540 billion in offshore profits, according to Citizens for Tax Justice.
Proponents of lowering corporate taxes point to the U.S. rate of 35 percent state that it's the highest in the world, bogging down America's well-travelled companies. The nonpartisan Congressional Research Service concluded the effective U.S. corporate tax rate is about the same effective rate of the companies' leading competitors in other industrial economies, after accounting for exploited loopholes.
President Obama wants to reduce the rate to 14 percent, saving these companies $97 billion while a Republican proposal will raise the forfeiture to $122 billion. Allegedly liberal California Democratic Senator Barbara Boxer, sponsored by Silicon Valley companies who heavily operate overseas, and Kentucky Republican Senator Rand Paul are seeking to slash corporate tax rates to 6.5 percent.
In this instance, our bipartisan gridlock is really just an ideological battle of how badly each party wants to screw over American taxpayers.
These businesses can save as much as $400 billion in taxes owed if Washington caves to these tax code robber barons.
Why are both parties bucking under pressure? The threat of "corporate aversion."
This loophole allows companies to forego their American citizenship for tax purposes and immigrate to Ireland (or another nation) by arranging a merger or acquisition by a foreign corporation. About 50 corporations have already engaged in financial refuge by utilizing this tactic, but they don't even have to relocate factories and headquarters.
In 2004, Congress passed similarly plundering legislation called the American Jobs Creation Act, allowing companies to repatriate $362 billion at a reduced tax rate of 5.25 percent, promising to invest that money in creating jobs. The result? The largest companies moved 60,000 jobs to low-wage, low-tax countries and used their windfall to boost stock prices, enriching investors in the process.
This could've been a byproduct of technology disrupting the demand of labor, but a 2015 MIT study, noted jobs created by large corporate tax breaks are marginal at best.
The Economist acknowledges tax cuts can create jobs, but usually when it's accompanied with government stimulus spending, job bills and helping the markets in its economy generate employment.
Generally, when a municipal, state or federal government cuts taxes, they cause a loss in overall revenue, but this is defended by arguing this will make businesses more competitive or increase consumer demand by increasing their disposable income.
In theory, this increase in consumption is supposed to grow GDP enough to compensate for the loss in tax revenue. They are generally given to lower the cost of products for consumers -- intending to spur an increase in the volume of sales.
But in this case, the sale to the consumer has already been completed, and these transactions occurred in foreign markets, so forgiving these taxes doesn't even help Americans. This gift does nothing but transfer tax burden away from corporations and places in onto individuals, meaning multinational corporations benefit while American taxpayers get the shaft.
- In 1952, individuals paid 42.2 percent, corporations paid 32.1 percent and social insurance & retirement paid 9.7 percent of U.S. taxes.
- In 2015, individuals paid 46.5 percent, corporations paid 10.8 percent and social insurance & retirement paid 33.5 percent of U.S. taxes.
This is significant because payroll taxes, Social Security and Medicare taxes factor into "social insurance & retirement," meaning these taxes are paid by Americans making under a certain amount of money. We have essentially established a regressive tax system, where the burden falls on middle and lower-class Americans. So much for each party standing up for "Main Street" and the "little guy."
Wall Street Regulates Government
The same companies that fund politicians in their constant quest for reelection will also benefit from the $400 billion saved in this tax dodge. A 2015 study from Marketwatch shows both Democratic and Republican politicians receive considerable corporate donations, keeping this system perpetually dysfunctional.
Business interests have constantly pressured the U.S. government to lower tax rates in exchange for campaign contributions. The advent of Super PACs has further tilted the balance of power in their favor within the political arena.
Currently, there are 19 various PACs that have given over $1 million to candidates' campaigns, and the general election is still half a year away. In the 2016 election cycle, leadership PACs have spent $19.3 million. Super PACs in total have reported over $548.5 million to date as well.
These corporations contribute to a candidate's political campaign with their profit motive in mind. If the tax forgiveness is the only break the government grants corporate interests in 2016, the $400 billion saved in repatriating profits would be an over 700 percent return on investment.
This massive return makes the U.S. politician the most valuable asset that can be acquired by financial interests, meaning the American political process has replaced Wall Street trading floors as a place where corporations seek to bolster their profits.
In a nutshell, it's unlikely our remaining presidential hopefuls will change this system.
Do voters really believe Hillary Clinton, who gets paid speeches from Wall Street and rakes in Super PAC donations, will solve this? At least she will wag her finger at these companies and tell them to "cut it out." It's intimidated them so much, they've given her millions of dollars in campaign contributions over her career.
Meanwhile, Mr. Cruz wants to abolish the IRS, Marco Rubio wants to extend tax breaks for wealthy Americans and big businesses, and Donald Trump advocates for more corporate tax breaks and eliminating the minimum wage.
Senators Rubio and Cruz are bankrolled by corporations and Super PACs while the Donald is part of the business establishment billionaire class ironically running as a populist. Asking one of these candidates to fix this problem is like asking Ronald McDonald to stop selling Big Macs to chronic binge eaters.
Despite his bold idealism, the only candidate who actually wants to fix this system is Bernie Sanders, but American society refuses to evolve its outdated, Cold War-inspired perception of democratic socialism. Americans view voting for Bernie like newly-wed couples view moving into a neighborhood full of registered sex offenders.
The Big Picture
All things considered, does this mean corporate taxes are the only way to ensure multinational businesses pay their fair share in taxes? No, we have a plethora of options.
In a New York Times op-ed, economist Laurence J. Kotlikoff stated:
"Eliminating the corporate tax and raising income tax rates or lowering the corporate tax rate and eliminating its loopholes are not the only options. I have proposed eliminating the corporate income tax, but making shareholders pay income taxes on their companies' profits as they accrue. This leaves companies with no tax reason to avoid operating in the United States but ensures that shareholders, not wage earners, make up for any revenue losses through higher personal tax payments."
A report from Citizens for Tax Justice advocates for international tax reform:
"If Congress wants to increase revenues and encourage domestic investment, it needs to minimize the incentive for U.S. multinationals to shift profits to tax havens in the first place. It could accomplish this by ending the policy of deferring taxes on foreign income. This would mean that corporations would pay the same rate on all income, whether it is earned at home or abroad (or earned in the U.S., but disguised as foreign earnings). Plus, the tax would be due as the income is earned, eliminating the potential for perpetual deferral."
The problem here is since these businesses buy off our politicians, they receive tax breaks without any strings attached. Since corporation are mandated to maximize their bottom line, they respond by shifting jobs to nations where labor is cheaper. Meanwhile, our elected officials twiddle their thumbs in complicity.
As these businesses are granted tax breaks without any meaningful reform to prevent aversion and ignite domestic investment, these cuts are essentially rewards for companies that deter regular repatriation of foreign earnings. This also establishes a worrisome precedent, as American multinationals see these tax breaks as an incentive to withhold future earnings in the hope that another will occur subsequently.
Whether you're a liberal, conservative, moderate, progressive or libertarian, this type of corruption should be infuriating.
The people of Flint, Michigan are told their water is contaminated with lead because it would save their state $1-2 million. Americans are told we don't have the money to provide universal healthcare, paid sick/maternity leave care or affordable college education. Oddly enough, we have hundreds of billions of dollars to throw at corporations.
This line of economic thinking, enacted in the name of Ronald Reagan, has skyrocketed Fortune 500 earnings at the expense of American wages, quality of life, education and infrastructure.
During the 1980 Presidential debate, George H.W. Bush called this "voodoo economics," and for good reason; these soaring corporate profits aren't a result of wealth creation, but mainly from wealth extraction.
Meanwhile, the average American will keep waiting for that money to trickle down.