In 2020, the pandemic killed hundreds of thousands of Americans and unemployment rose to levels not seen since the Bureau of Labor Statistics began collecting data in the 1940s.
Even so, Amazon’s profits surged to $ 20 billion last year as people switched to online shopping. But the company then paid only 9.4 percent of its profits in federal corporate taxes 2018 zero and 2019 around 1 percent. The effective federal corporate tax rate over three years was only 4.3 percent on profits of $ 44.7 billion. That is far from the statutory rate of 21 percent.
Netflix’s profits soared to $ 2.8 billion in 2020 as people walked less and instead watched more TV at home. Still, after paying, the company paid less than 1% of those profits in federal corporate income taxes nothing in 2018 and about 1 percent in 2019. Over those three years, Netflix paid an effective aggregate rate of 0.4 percent on profits of $ 5.3 billion. Here, too, not anywhere near the statutory rate of 21 percent.
Late last week, we learned that Zoom, the video conferencing platform that has become ubiquitous for meetings, saw profits grow 4,000 percent over the past year. However, the company did not pay federal corporate income tax for 2020.
Zoom, Amazon and Netflix are not alone. The pandemic has hit many businesses, large and small, badly, and many have reported losses over the past year. But some with profits – even some with record profits from the pandemic – avoided paying corporation tax on those profits. So far, my colleagues have found more than 50 S&P 500 companies that reported profits but paid no corporation tax in the past year – a year when our lives depended on public funding for testing, research, and distribution of vaccines.
Here are some truths about avoiding corporate taxes.
- First, the legislature could address this, but has chosen not to. We were all well aware of the corporate tax avoidance crisis when Congress drafted a major overhaul of the tax code signed by former President Trump in 2017. The above numbers are the result of this new law in the first three years.
- Second, tax avoidance is not due to the current economic crisis. Corporate income tax is a tax on corporate profits. Companies that do not benefit are not affected. Switching off special breaks and loopholes would not harm the companies damaged by the pandemic.
- Third, corporate tax evasion harms ordinary Americans by reducing resources for health care, road repairs, and other essentials. Trump administration officials claimed their business interruptions would boost the economy. In fact, GDP growth in the first two years of the law was 2.9 percent and 2.2 percent, similar to or well below 2015 levels. Proponents of the breaks also argued that the benefits would be passed on to workers, reducing salaries would increase by $ 4,000 to $ 9,000. This never happened, and the Congressional Research Service found that $ 1 trillion was instead used on share buybacks, which especially enrich wealthy shareholders.
We all need the things that the public sector offers. If corporate taxes are not paid, Americans will have less for what would help our communities. That means fewer repairs to our failing infrastructure, less investment in greening our economy, and less resources to help young people go to college.
This is especially important now as policy makers will soon be discussing what our nation can afford to improve our economy and health in the future.
While our research suggests that companies already have too many tax breaks, some lawmakers want to offer even more. Some lawmakers are suggesting expanding the corporate breaks in the Trump tax bill by making the expiring expense rule permanent and repealing some tax hikes related to interest deductions and research expenses that haven’t yet come into effect.
In addition to these immediate decisions, five proactive changes would improve corporate taxation.
- First, Congress should address the avoidance of corporate taxes abroad by balancing taxes on domestic and foreign profits.
- Second, Congress should address what we might call domestic corporate tax avoidance by removing tax breaks for accelerated depreciation or allowance. Companies should pay taxes on capital investments instead, as assets actually wear out. This approach is also known as economic depreciation.
- Third, Congress should also fill the domestic book tax gap on stock options, which allows companies to tell investors and the IRS various things about the cost of their stock options.
- Fourth, if Congress doesn’t get rid of domestic business disruptions, it should enact a new minimum tax that ensures companies pay a minimum amount on their profits so that companies like Amazon, Netflix, and Zoom can’t pay zero in some profitable years.
- After all, Congress should fund the IRS so we can enforce the laws they make.
Many legislators want to keep tax breaks and still claim that we cannot afford to help people directly. In fact, we can choose a fair tax law that will give us the resources to make the child tax credit permanent, which could reduce child poverty45 percent. We can enforce tax laws and have more resources to create green jobs and make our infrastructure climate-proof. And we can fill in the gaps and generate income to help regular families pay for childcare and college.
Better corporate tax law is the way we start generating the resources needed to improve lives, reduce climate change, and create a better country.