This story is part of the series in the prospectus about how the next president can move forward without new legislation. Read all the articles on our Day One Agenda here.
A year ago, my colleagues and I published a report that found that 91 profitable Fortune 500 companies avoided paying federal corporate taxes in 2018, the first year the Trump Tax Act went into effect.
The law lowered corporate tax rates from 35 percent to 21 percent. Proponents claimed it simplified tax law when it actually replaced complicated tax loopholes with newer, equally complicated loopholes so that large corporations with teams of lawyers and accountants could avoid much or all of the tax. The average federal income tax paid by profitable Fortune 500 companies as part of their profits in 2018 was just 11.3 percent, well below the legal rate of 21 percent.
The public has long told respondents that corporate taxes should be increased, not decreased. President-elect Biden won his election after campaigning for a promise to increase taxes on wealthy individuals and companies. Republican lawmakers trying to block this legislative priority could pay a price in the next election, given how popular they are. But what can Biden do in the meantime if he can’t get a tax certificate through Congress?
He can do a lot. Many of the problems with our corporate tax are due to ineffective regulations, incorrect priorities with the IRS, and a lack of transparency in the company’s financial reporting. The new administration can address these issues without the permission of Congress.
Trump’s unlawful regulations to extend corporate tax breaks
Biden can begin Trump’s Treasury regulations to implement the 2017 tax law. Several legal scholars have concluded that these regulations give wealthy individuals and companies even greater tax breaks than the law they are implementing allows. Biden’s finance department should at least replace these regulations with legally compliant ones.
This is especially true of the rules that affect multinational companies. The 2017 law exempts most offshore profits of American companies from US tax. Some particularly large offshore profits are said to be subject to US tax, but at only 10.5 percent, half the 21 percent rate that applies to domestic profits. This legislative language could encourage companies to move profits and operations offshore. (So much for America First.) But Trump’s Treasury Department made it worse.
At the time the law went into effect, corporate attorneys generally understood that offshore profits would be subject to the US minimum tax of 10.5 percent in some cases. They believed that companies could avoid this tax if they paid taxes to foreign governments on these offshore profits of at least 13.125 percent. (The law allows companies to deduct 80 percent of their foreign tax payments from their U.S. tax, and 80 percent of 13.125 percent is 10.5 percent.)
However, after the law went into effect, they found that some companies were paying foreign taxes at a higher rate, which, however, was required to pay US taxes due to interactions with other arcane tax laws.
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The New York Times reported that the companies concerned, including Procter & Gamble, News Corporation, Liberty Mutual, Anheuser-Busch, Comcast, and others, took a shortcut and asked instead of asking Congress to fix what they call it Considered Errors of Law The Treasury Department issues rules to interpret the law to say something other than what it actually says.
Secretary Mnuchin signed up and created a “tax exemption” from taxes on offshore profits, which are not included in the law. To this end, Mnuchin has borrowed a definition of “high tax” – a foreign tax rate of at least 18.9 percent – from a completely different part of the law that, according to legal scholars, should not apply in this situation.
The evidence of this illegal multinational corporate giveaway is now taking hold. Many publicly traded companies mention the regulatory changes and their impact on their tax liability in their most recent quarterly financial reports. Some have even explained how much this change saved them. The Wall Street Journal just reported that “more than 30 companies disclosed more than $ 300 million in benefits from the regulation.” This is probably just the tip of the iceberg as most companies are unlikely to disclose the implications.
Our own look at the quarterly financial reports shows that only seven companies accounted for $ 273 million of that amount, and several companies only reported effects for 2018 and 2019, not 2020. As the Wall Street Journal reported, the recipient with the largest to date known benefit is Philip Morris International, who saved $ 93 million over the past two years, 2018 and 2019. This is just one example of illegal corporate tax giveaways that the Biden government could easily reverse and potentially force billions in more payments.
Investigate the obvious candidates for tax evasion
America’s corporate tax was a mess long before the Trump tax bill. Much of this mess can be fixed by in-depth administration without new legislation. In some cases, a simple re-prioritization of the IRS enforcement efforts could help.
When public companies release financial information to investors, they must list any tax breaks that they claim are likely to be rejected by the IRS. (Accounting regulations call these “unrecognized tax breaks,” or UTBs.) Businesses literally post breaks that they claim the IRS believes are likely illegal. Incredibly, in many cases, companies are allowed to maintain these tax breaks simply because the IRS cannot reach a conclusion until the statute of limitations expires, which can be as little as three years.
We recently looked at the companies’ annual financial reports for 2019 and found that five companies – Chevron, Dell, Eli Lilly, ExxonMobil, and General Electric – withheld $ 1 billion in tax breaks that they previously admitted they had tax authorities would likely not stand up to scrutiny by the IRS or the state.
For example, last year, according to ExxonMobil’s 2019 Annual Report, the oil giant cut its (very large) UTB total by $ 279 million because the statute of limitations on certain tax savings expired. ExxonMobil’s relationship with the tax authorities is like a child telling their parents, “I’ve just done some things that you won’t approve of,” and the parents don’t have time to investigate.
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Like parents, the tax authorities are overwhelmed these days. From 2010 to 2018, lawmakers cut the IRS budget by 20 percent in inflation-adjusted dollars, which resulted in a 22 percent reduction in staff, including 30 percent of law enforcement staff. These cuts are illogical since every dollar spent on tax enforcement brings in several dollars in tax revenue. While Republicans and Democrats disagree on how our tax laws should be written, they should at least agree to provide adequate resources to enforce the laws currently in force.
Until that happens, in-depth administration should steer IRS resources away from income audits of low-income taxpayers and toward more audits of large companies, especially those announcing they are applying for tax breaks that are likely to be ineligible.
Ensuring tax transparency for listed companies
We know from the financial reports of publicly traded companies that many of them avoid federal income taxes. But we seldom know exactly how they do it. It would be helpful for the public and lawmakers to know how to do it so that we have a better idea of how we can reform our tax laws.
Companies are required to provide the IRS with a form explaining why the income they report in their prospective investor financial information is different from the income they report to the IRS. Natasha Sarin and Larry Summers recently argued that the Securities and Exchange Commission should require companies to include this form, the M-3, in their financial statements.
Such disclosures could be crucial for lawmakers seeking fairer corporate taxation. Right now, members of Congress resentful about Amazon’s near zero tax rate on billions of dollars in income simply cannot know what specific tax breaks helped the company achieve this. We know Amazon has saved over $ 1 billion in unspecified “tax credits” over the past three years, but we can’t be sure how much of those US government credits, much less what credits for them are responsible. When highly profitable companies use tax laws to avoid liability, everyone – from politics to the public – should be able to understand how this happens.