We’re now roughly two months into the global COVID-19 pandemic. Amid unprecedented economic disruption, Congress has already passed four pieces of bailout legislation at a cost of roughly $3.6 trillion. The spending is necessary, but one question keeps hanging in the air: How will Washington pay for it?
There is a means to help pay for this recovery funding — and even use it to help domestic companies get back on their feet. But adopting it will mean Congress finally fixing the massive tax cheating practiced by stateless multinational corporations.
Tax avoidance is morally infuriating to many Americans. Crafty corporations shift their profits to offshore tax havens in order to avoid paying taxes on profits earned from U.S. sales. The cost of these tax shenanigans is significant. Profit shifting costs the U.S. Treasury roughly $80 billion each year. That means the rest of us must pay more for fewer services — or spur more national debt.
It’s astounding that Amazon paid zero state or federal taxes in 2018 despite earning more than $11 billion in profits. And dozens of other Top 500 firms shamelessly paid no federal taxes in 2018 either.
At the same time, America’s domestic manufacturers keep paying their fair share of taxes. And they do so while competing against multinational firms that earn billions of dollars in profits in the United States but pay little or no taxes.
How do stateless multinationals get away with this? They establish subsidiary operations in low-tax countries like Bermuda and the Cayman Islands. Then they pay a laughably small amount of taxes to the Bermuda government so that they can tell our government they’ve already paid their tax obligations.
That’s what the pharmaceutical company AbbVie – which makes the arthritis drug Humira – did when it reported worldwide sales in 2017 of over $28 billion, including 65 percent of that in the U.S. alone. Thanks to clever but immoral profit shifting, AbbVie was able to report a “loss” of more than $2.6 billion in the U.S.
Clearly, a more pro-American tax system is needed — both to stop this tax unfairness and to recoup the revenues that multinationals should be paying to the U.S. Treasury. There is a practical solution, and it’s one that many domestic manufacturing advocates have been urging in recent years.
The United States can easily fix this enormous problem by adopting a system known as sales factor apportionment (SFA). Under SFA, companies are taxed on the profits earned from sales to U.S. customers. Whether companies are registered in Ireland, the Cayman Islands or the United States wouldn’t matter. No company would benefit from profit shifting since U.S. corporate taxes would be assessed strictly on a company’s profits from sales to U.S. customers.
Taxing all companies’ profits based on where the actual sale occurs is not only fair, but also hard for cheaters to beat. Whatever profits a company earns on sales in the U.S. market will face a corporate tax. Sales outside the U.S. will not be taxed. Clever tax accountants’ strategies to hide earnings in tax havens would become irrelevant and silly.
America’s domestic companies would finally be more competitive versus foreign and multinational competitors since they would all face the same tax obligation. Companies would bring production back to the U.S. since the tax benefit from offshoring would be eliminated.
The United States is facing serious budgetary shortfalls amid the challenge of economic recovery. To get the country back on its feet, it’s time to rebuild critical sectors of U.S. manufacturing. Adopting an SFA tax system would help America’s domestic manufacturers outcompete multinational corporations that move production overseas. And it would bring in new sources of revenue from multinationals without domestic taxpayers shouldering the burden. Tasking multinationals with finally paying the same taxes as domestic U.S. firms seems a pretty fair transaction — especially if it helps to fund the repayment of COVID debt.
Michael Stumo is CEO of the Coalition for a Prosperous America (CPA). Follow him on Twitter @michael_stumo.