June 14 is Flag Day. It marks an important day in the nation’s history: the Continental Congress passed a resolution that established the nation’s first flag on June 14, 1777. This used to be a national secular holiday, when most households showed their patriotism and loyalty to the United States by flying its flag. But the nation doesn’t seem to be in a celebratory mood these days, and Flag Day may not offer a lift to our national pride.
We have a growing pile of unmet needs and yet are constantly told we can’t afford to address them. In recent days, bridges along major roadways have been closed because the lack of ongoing maintenance has made them too unsafe to travel. We’ve watched as the number of long-term unemployed denied access to emergency unemployment benefits has passed 3 million. And we’ve seen the annual struggle of cities seeking funds for summer jobs programs for youth since federal funding has dried up.
We are told there is no money for these important public services.
And yet, U.S. corporations reported record profits and the median pay of large-company CEOs has reached record levels. Corporate profits as a share of the total economy exceeded 12 percent last year while their share of federal taxes as a percent of the economy shrank to less than two percent, near an all-time low. A recent study by Citizens for Tax Justice found that, over the last five years, the average large corporation in America paid less than 20 percent of its profits in federal income taxes, substantially less than the posted 35 percent corporate tax rate and less than many middle-class families pay.
In the prosperous 1950s, under the leadership of Republican President Dwight Eisenhower, corporate profits accounted for around ten percent of the economy and their federal taxes accounted for more than four percent of the economy. Corporations, with fewer profits in those days, were asked to provide more toward the common good through the taxes they paid. They still had plenty of money to reinvest in their companies and prosper, and their taxes helped pay for public services like schools, roads, and investments in basic research that kept our nation strong and competitive.
Today, more and more companies are abandoning their incorporation in the U.S. and shifting their registrations to foreign countries. They are doing so to avoid paying U.S. taxes. Pfizer’s recently abandoned attempt to buy Britain’s Astra Zeneca was in large part about reducing the drug giant’s tax bill. Later this year, Walgreen’s shareholders will be asked to support a more direct path, simply swapping their registration as a U.S. corporation for new corporate papers issued by Switzerland. Efforts by these corporations to lower their tax bills mean they are choosing to contribute less to the upkeep of America.
Hundreds of other U.S. corporations are taking a simpler path, using gaping loopholes in the corporate tax code to legally shift profits earned in the United States to places like the Cayman Islands, Bermuda, or Lichtenstein, where those profits are lightly taxed, if at all. Seventy-two percent of Fortune 500 corporations have subsidiaries in offshore tax havens, according to new research by U.S. PIRG and Citizens for Tax Justice. Offshore tax abuse by corporations costs the U.S. Treasury $90 billion a year, according to Reed College Professor Kimberly Clausing.
Now many in Congress — from both political parties — are seeking to recycle an old idea that has failed before. They say we need to give corporations a big tax break to entice them to bring some of the $2 trillion they have stashed offshore back to America to invest in this country. They say we can use the trickle of tax money that comes from this one-time deal to repair our nation’s roads and bridges.
This construction is wrong on three counts. First, the premise that those funds are “trapped offshore” and not available for investment at home is false. Most large companies are able to use these offshore funds as collateral to obtain low-cost loans, which means that while their profits technically remain offshore and therefore untaxed, they are able to use these funds to make investments in the U.S.
Second, giving corporations a tax holiday to pay for infrastructure projects forces taxpayers to pay twice — once for the tax break and again for the cost of the infrastructure project. A recent Joint Committee on Taxation report estimated that a tax holiday similar to the one passed by Congress in 2004 would cost almost $96 billion over ten years. Using trickles of funding from corporate tax holidays is a really expensive way to pay for roads and bridges. It is far cheaper to pay for infrastructure spending directly out of tax revenues.
Third, such an approach is a one-time fix to a problem that needs a long-term solution.
A much better approach would be to close the loopholes that have turned the tax code into a sieve that leaks tax revenue from the public treasury. Instead of generating $100 billion of new money for infrastructure once, we need a steady flow. Closing offshore tax loopholes would deliver hundreds of billions of dollars of tax revenue to help fix our roads, improve our kids’ schools, and strengthen Social Security.
This work is licensed under a Creative Commons Attribution-Share Alike 3.0 License. Scott Klinger is Director of Revenue and Spending Policies at the Center for Effective Government. Prior to joining Center for Effective Government, Scott was the Tax Policy Director at the American Sustainable Business Council and an Associate Fellow at the Institute for Policy Studies, where he wrote about issues of tax and economic inequality.