Pitched as the long-awaited salvation of a broken system, President Donald Trump’s overhaul of the corporate tax code appears to have in fact doubled the number of major profitable corporations that find a way to pay zero dollars in income tax.
There were 60 such firms listed on the Fortune 500, a new report from the Institute on Taxation and Economic Policy (ITEP) showed Thursday, with a combined $79 billion in pre-tax revenue and nothing paid to the U.S. government in income tax. The group’s previous research had found an average of 30 profitable zero-tax firms per year in the decade before Trump’s tax law.
But such pay-nothing corporate takers would disappear under a new tax proposal from Sen. Elizabeth Warren (D-MA), announced Thursday in a blog post from her presidential campaign’s web team.
Warren’s proposal breaks from stubborn technocratic complexity, leaving messy, convoluted corporate tax code to one side – in a file marked “fix this later” – in favor of a new, separate, and simple levy on only the highest profits.
The first $100 million a firm nets in a year would be untouched by the new proposal. For every dollar of profit they claim to shareholders beyond that, firms would have to send seven pennies to the government.
As ITEP senior fellow Matt Gardner told ThinkProgress, “We know that in many cases companies are playing games with two sets of books. Requiring them to stick with one story in terms of profitability has a lot of appeal.”
ITEP’s new numbers don’t just illustrate the reason Warren’s trying to go big on this issue. They also hint at its limitations, offering fresh evidence that modern businesses can always spend enough money on creative accounting to stay ahead of whatever new contraptions lawmakers devise. Policy thinkers of every ideological stripe have put decades into this Wile E. Coyote impression, ginning up various highly technical policy devices to stymie this big-biz maneuvering, only to watch as companies that brag publicly about multi-billion-dollar profits meep-meep away in a cloud of Roadrunner dust when the taxman comes around.
Warren’s new high-profit tax would be assessed against the publicly filed profit-and-loss figures presented to shareholders instead of the diligently massaged, poverty-pleading figures execs share with the government.
It would be easy to overstate the virtues of this simplicity. Warren’s tax would inevitably fall prey to some version of the same creative tax math that currently delivers perverse outcomes through the mainline corporate code.
Her tax might be substantially harder to avoid, but some firms would still find a way. Tax avoidance is a miniature industry unto itself, generating billions in billings for the advisers and bankers and accountants involved. Indeed, banks make $1 billion a year just from their work helping wealthy investors shrink the taxable amount of their dividend income from stock holdings — an iceberg-tip hint at the full magnitude of the money being made by such third parties.
“You have people that do nothing but think up ways to avoid paying taxes,” Center for Economic and Policy Research economist Dean Baker told ThinkProgress.
That crowd is notoriously devious and enjoys a permanent upper hand in their tilts with the IRS; for one grim example, Baker pointed to a since-outlawed practice of taking out life insurance on low-wage retail workers so that the premiums can be written off to reduce annual tax obligations.
“How is the IRS supposed to say that’s not a legitimate business expense? Are they gonna go through every line item on every company’s bookings, every dollar of Walmart and Boeing’s returns?” Baker said. “You can clearly do better than what we’re doing now. But the IRS can’t get inside every corporate headquarters and double-check everything.”
As it happens, the economists Warren asked to evaluate her idea in brief assume that companies would manage to be roughly as successful in percentage terms at avoiding the new levy as they are at evading the current code. Nevertheless, they still find that it would raise a trillion new dollars over the next decade for roads, schools, aircraft carriers, and all the other things the state does to make sure people and businesses have an opportunity to make money in the first place.
If correct, that projected trillion-dollar boost would raise corporate tax revenue by approximately 50% above current law.
How can the tax project so favorably in raw-dollar revenue terms if corporations are managing to avoid the same proportion of this new payment? Warren’s central trick, Economic Policy Institute economist Josh Bivens said, is targeting the profits firms report globally instead of letting them shuffle income across international borders to wipe it off the tax bill.
“Once you take international profit-shifting off the table you really shut down the leakiest part of the corporate tax code,” Bivens told ThinkProgress. “That should be the lodestar of corporate reform for progressives.”
The likeliest primary tool for avoiding Warren’s levy, renowned inequality scholars Emmanuel Saez and Gabriel Zucman wrote to her, would be ersatz corporate divorces where large firms split into scads of smaller units each reporting profits below her $100 million mark.
Regulations would have to be written here to ensure that clusters of technically separate but commonly ruled conglomerates couldn’t employ this particular dine-and-dash tactic. Others to resolve gray areas in corporate accounting rules would likely be necessary as well, according to the pair’s two-page assessment of the proposal.
The need for additional rulemaking to deliver on the “Real Corporate Profits Tax” illustrates that it isn’t quite as foolproof as it might appear in Warren’s presentation. The White House hopeful has obvious incentive to depict the plan as a masterstroke akin to Alexander the Great untying antiquity’s famed Gordian Knot by slicing through it with his sword.
But she’s also realistic about what else has to happen: a proper overhaul of the corporate tax code alongside this new surcharge on hyper-profitable firms, to replace the false dawn of the Trump tax bill with something that offers more robust returns to taxpayers.
Taken together, the new tax and the old idea would move the overall relationship between private money-hoarding and public needs in the right direction – and by much longer strides than most of Warren’s fellow Democrats have yet suggested, Bivens said.
“It’s very disheartening how few Dems are making full-throated calls for getting back up to pre-[Trump] rates,” Bivens said. Layered atop Trump’s 21% nominal corporate rate, Warren’s proposal would get halfway back up to the 35% figure that was so disingenuously maligned for so long. “[S]ome are even floating 25 as their preferred rate,” said Bivens, “so, a proposal that moves to 28 and says that it’s just a downpayment on overall reform seems good to me.”
“But that should be a grudging end-point,” Bivens said, “not the opening bid.”
And even if Warren’s proposal falls a little short of its projected impact, ITEP’s Gardner says that this is still a big push in the right direction as it will help to lessen society’s tolerance for firms that put nothing into the collection plate while telling the working, taxpaying public they made huge profits.
“I think we desperately need the American public to have a little more confidence in our institutions, and having a tax system that requires all these companies to pay something in federal income tax could really help rebuild that public trust,” Gardner said. “That would be an important gain from a democratic accountability perspective.”