A new report from ITEP highlights multiple data sets that reveal how U.S.-based multinational corporations are avoiding taxes and debunks claims that a higher tax rate would make firms less globally competitive.
The report, Why Congress Should Reform the Federal Corporate Income Tax, comes as Congress is weighing a budget plan that would increase the statutory corporate tax rate from 21 percent to somewhere between 25 and 28 percent and close or limit some of the special breaks and loopholes that companies use to avoid taxes.
Corporations have long used offshore profit shifting to avoid U.S. taxes. Even after the Tax Cuts and Jobs Act (TCJA) lowered the federal statutory corporate rate to 21 percent from 35 percent, multinationals continue to report outsize earnings offshore, indicating they are using accounting maneuvers to claim outlandish profits in tax-haven countries. For example, Bermuda’s GDP (meaning its total economic output) in 2018 was $7 billion, yet U.S. multinationals reported to the IRS $97 billion in earnings there that year. The report looks at the number of people employed by foreign nationals in Bermuda (740) and calculates that each employee would have been responsible for more than $131 million in profits if corporations’ claims were true.
Bermuda is not alone. Among the six most obvious tax havens (Bermuda, Caymen Islands, Gibraltar, Jersey, British Virgin Islands and Isle of Man), U.S. multinationals reported $204 billion in combined profits even though the combined total economic output for these countries was $30 billion.
“We have laws on the books that encourage corporations to write down nonsense on their tax return and everyone pretends it’s normal,” said Steve Wamhoff, ITEP federal policy director and a co-author of the report. “American corporations claim to generate more profits in these tiny British territories and dependencies than they earn in the UK itself, which is impossible.”
The report also highlights OECD data, which show corporate taxes as a share of GDP for 37 of the world’s most developed economies. In 2016, when the U.S. corporate tax rate was 35 percent, the U.S. ranked 7th from the bottom for corporate tax collections as a share of GDP. In 2019, the second year under the TCJA, corporate taxes as a share of U.S. GDP fell to 1 percent (from 1.9 percent in 2016), or fourth from the bottom. Only Hungary, Latvia and Greece collected less in corporate profits as a share of their economies that year.
One of the report’s key takeaways is that there is no evidence the U.S. corporate tax system was uncompetitive before the TCJA, nor is there evidence that the TCJA made them more competitive. Forbes Global 2000 data show that U.S. corporations had a significant competitive advantage in the global economy before the TCJA and that advantage remains virtually unchanged. For example, the United States accounts for just 4 percent of the global population and a quarter of global economic output, but U.S. corporations account for 40 percent of the market value and a third of the sales of the Forbes Global 2000 in 2020. These figures were similar in 2017 under the previous tax regime.
“President Biden’s tax reforms would address will solve some huge problems in our federal corporate income tax,” Wamhoff said. “Congress should not pass up this opportunity.”