Two weeks ago, President Joe Biden introduced an eight-year, $2.3 trillion infrastructure plan in Congress. Polling shows his plan is hugely popular. Why? Because the needs—clean water, care infrastructure, broadband, and so on—are so obvious. Biden may employ the language of transformation, but much of what is on the docket is basic nuts-and-bolts investment. To understand why that nation lacks deeply needed public investments, we need look no further than the nation’s tax system.
Billionaire heiress Abigail Disney’s testimony to the US Senate Budget Committee last month captured the underlying problem: a federal government that, due to an unwillingness to tax wealth, has fallen short of “the minimum expectations its citizens have for it to protect them in a pandemic, to offer a free decent education to their children, and a [to provide] safe infrastructure in which to work.”
What are the unmet infrastructure needs? Biden’s plan illustrates the cost of past shortfalls. As the Washington Post details, the Biden plan would provide $400 billion to build care infrastructure for an aging population, $580 billion for research and development (and manufacturing and workforce supports), and about $1.3 trillion for other infrastructure needs, as summarized below:
|Basic infrastructure||($689 billion)||Transportation||($621 billion)|
|Housing||$213 billion||Electric vehicles||$174 billion|
|Clean Water||$111 billion||Roads and bridges||$115 billion|
|Broadband||$100 billion||Public transit||$85 billion|
|Electrical||$100 billion||Rail||$80 billion|
|Schools||$137 billion||Airports and ports||$42 billion|
|Other||$28 billion||Other||$125 billion|
To pay for this, the Biden administration proposes a mix of increased taxes and borrowing, with the former centered on raising the top corporate income tax rate to 28 percent, halfway between where it was when Barack Obama was president and where it is now after the passage of the 2017 Republican tax bill.
But what matters is not simply the tax rate, but taxes paid—i.e., tax revenue. NPQ wrote about the gap between tax rates and actual revenue collected back in 2017. Back then, federal “tax expenditures” totaled $1.6 trillion. Now Maya MacGuineas, who direct the Committee for a Responsible Federal Budget, says that total is $1.8 trillion.
Of course, not all tax expenditures are unmerited. Depending on whose cost estimates you accept, between $49.6 billion and $56.2 billion of that roughly $1.8 trillion in fiscal year 2021 was the cost of the charitable tax deduction for nonprofits. Among the “big ticket” items are subsidies for employer-based health insurance and pensions. (About a fourth of that $1.8 trillion total goes to those two items.)
Still, many tax expenditure goodies are harder to defend—for example, the reduced tax rate on the active income of controlled foreign corporations will cost $82.1 billion in fiscal year 2021, according to the Joint Committee on Taxation.
The bottom line: As research conducted by the Institute on Taxation and Economic Policy (ITEP) illustrates, at least 55 major US corporations that had a combined total of $40.5 billion in profits paid $0 in federal corporate taxes. If they had paid the current corporate tax rate of 21 percent, their tax bill would come to $8 billion. Adding insult to injury, many of these corporations were able to claim rebate checks from the government.
According to ITEP’s research, “the companies…represented very different sectors of the US economy.”
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- “Food conglomerate Archer Daniels Midland enjoyed $438 million of US pretax income last year and received a federal tax rebate of $164 million.”
- “The delivery giant FedEx zeroed out its federal income tax on $1.2 billion of US pretax income in 2020 and received a rebate of $230 million.”
- “The shoe manufacturer Nike didn’t pay a dime of federal income tax on almost $2.9 billion of US pretax income last year, instead enjoying a $109 million tax rebate.”
- “The cable TV provider Dish Network paid no federal income taxes on $2.5 billion of US income in 2020.”
- “The software company Salesforce avoided all federal income taxes on $2.6 billion of US income.”
For just these 55 companies, rebates totaled $4.5 billion, bringing the effective tax rate to negative 10 percent!
Gabriel Zucman, a University of California, Berkeley economist, illustrates how the system is gamed. “More than half of the foreign profits of US companies are booked in tax havens today,” Zucman said in testimony to the US Senate budget committee. “US multinationals appear to make a particularly extensive use of tax havens in international perspective.”
Nobel Prize–winning economist Paul Krugman recently spelled out what he calls the “leprechaun economics” of this maneuver when he focused on one favored tax haven, Ireland. “Ireland is a tax haven,” he writes, “with a very low tax rate on corporate profits. This gives multinational corporations an incentive to create Irish subsidiaries, then use creative accounting to ensure that a large share of their reported global profits accrue to those subsidiaries.” No real business is conducted, but US tax liability is greatly reduced.
Tax avoidance may be even more significant. In a separate report, CRFB estimated that, “Only 84 percent of the money owed in taxes is collected each year, which resulted in a ‘net tax gap’ of $406 billion per year…about 2.8 percent of Gross Domestic Product (GDP), which would be equivalent to $6.5 trillion over the next decade.”
For the US to have a progressive tax system, fixing a flawed corporate tax system is key. As Zucman recently said in comments reported by David Leonhardt in the New York Times, “In effect, the only sizable tax for [US] billionaires is the corporate tax they pay through their firms. The main reason why the US tax system was so progressive before the 1980s is because of heavy taxes on corporate profits.”
Last week, the Biden administration began laying out plans to address this problem. Treasury Secretary Janet Yellin has called for a global minimum corporate income tax that would “help prevent a ‘race to the bottom’ in which countries cut their tax rates in order to entice companies to move headquarters and profits across borders.”
The holes in the US tax system are well known. Defenders of low corporate taxation claim that taxing more, whether by raising rates or limiting deductions, would destroy business. But available evidence suggests otherwise. Amy Hanauer, who directs ITEP, testified to the Budget Committee that “there is no evidence that low corporate taxes help the overall economy.” Hanauer notes that lowering the corporate tax rate in 2017 had failed to increase the rate of economic growth.
Disney, in testimony to Congress, spoke to the core issue, namely “a wealthy class that petulantly views its moral obligations as nuisances, that whines when it is taxed, that hides its wealth offshore to evade taxes and uses every loophole and technicality—of which there are plenty—to get, hold, and hoard sums of money so huge they can never possibly spend them.”
The bill for this elite profligacy is coming due. We will see whether, this time, corporate leaders who claim to advocate for corporate social responsibility will ante up.