Presidential candidate, Senator Elizabeth Warren, speaks at a campaign rally in Glendale, California, February 18, 2019.
Elizabeth Warren has been dominating the ideas primary since entering the race for president. Today, on the eve of the April tax deadline, she’s turning her attention to the only major legislation passed since Republicans regained control of government—the Trump tax scam.
Warren’s proposal, announced this morning, would place a 7 percent surtax on large and profitable corporations. It would raise over a trillion dollars in the next decade, and restore some fairness to a tax code tilted toward corporations that can afford high-priced accountants to work their magic.
As the Prospect has reported, the prize of the Trump tax scam was large corporate tax cuts, which did not spur investment but got leaked out to executives and investors through mechanisms like stock buybacks. This gave corporations an enormous return on their investment in Republican politicians, with next to nothing for ordinary people or small businesses.
But as Warren recognizes, the corporate tax system has been fraying for decades, well before the tax scam broke it. Effective tax rates—the rates corporations actually pay—dropped significantly between 1988 and 2012, with $109 billion avoided per year by the end of the cycle. Twenty-nine large corporations paid no net income tax on $37.9 billion in profits in 2015, a very common scenario. Last year, Amazon reported no tax payments on more than $10 billion in annual income.
There are a variety of reasons for this: carried-over losses from prior years, credits for things like research and development or depreciation of equipment, as well as spurious booking of profits offshore, and a host of other exemptions, deductions, and loopholes. When highlighting profits to shareholders in audited financial statements, corporations use one set of accounting rules designed to maximize that figure. But when calculating taxable profits for the IRS, they turn over every stone to offset income and reduce that number. That’s how you get the absurdity of multi-billion-dollar corporations paying no taxes.
There are two potential remedies. You can scour the corporate tax code line by line, figuring out which credits are legitimate and which aren’t. But every tax credit is cherished, at least to someone; trying to pare them back from a relentless business sector would be difficult and laborious.
Another option is what Warren has proposed: a kind of alternative minimum tax (AMT) for corporations. There actually was a corporate AMT, but it was loophole-ridden and ineffective, as the spectacle of dozens of profitable companies paying no taxes indicates. The 2017 tax law finally killed it. Warren’s proposal, the Real Corporate Profits Tax, could succeed where the corporate AMT has failed.
Unlike the AMT, the new surtax would be imposed on top of the existing corporate tax burden, for corporations reporting more than $100 million in annual profits on their audited financial statements. Since corporations want to maximize earnings numbers to investors, and would in fact be harmed financially by lowballing that number, this is a forcing mechanism to keep companies honest.
The first $100 million would be exempt from this new surtax, with a 7 percent tax on every dollar above that. So a company making $1.1 billion in annual profits would owe $70 million. The Real Corporate Profits Tax “will make our biggest and most profitable corporations pay more and ensure that none of them can ever make billions and pay zero taxes again,” Warren wrote in a statement outlining the plan.
The tax would apply to worldwide profits on U.S. corporations, so shifting earnings to tax havens or low-tax jurisdictions would not avoid it. The tax would be imposed on the highest profit figure a company reports in an audited statement, whether using generally accepted accounting principles (GAAP) or not. Foreign companies with “significant” U.S. operations would be subject to the tax, which could present a challenge to tax collectors. However, for example, a foreign pharmaceutical firm with profits from U.S. sales over $100 million would have to pay the tax.
Emmanuel Saez and Gabriel Zucman, two economics professors from the University of California, Berkeley, who have done groundbreaking work on inequality and corporate tax avoidance, estimated that 1,200 public companies would have to pay this tax, and that alone would raise $1.05 trillion over the next ten years. This is an undercount, because it doesn’t include privately held corporations, whose data is harder to locate and analyze. (Private companies don’t always publicly disclose profits, nor do they use the required accounting standards of public firms. However, they must justify income measurements to the IRS with an audited statement, which could be used for this purpose.)
Saez and Zucman factored in an avoidance rate of 15 percent, so they recognize that corporations will fight tooth and nail to minimize tax liability. They cite three possible avoidance strategies: manipulating net income figures, splitting up business lines to keep earnings for each individual subsidiary below the threshold, or simply shifting headquarters to a foreign country.
Regulations could ensure that companies splitting up to avoid tax are actually split, rather than artificially made a subsidiary with the same owner or director calling the shots. That doesn’t totally explain how companies with passive ownership—like Warren Buffett’s Berkshire Hathaway conglomerate—would be treated.
The Treasury Department’s 2016 anti-inversion rules have tamped down on companies moving on-paper headquarters, but with more at stake with this situation, stricter rules, like the exit tax Warren proposed in her individual wealth tax, might need to be attempted.
If successful, the Real Corporate Profits Tax would stem the inexorable slide that has seen corporate taxes trend lower. “It sets an important revenue base line for reforming the corporate tax system consistent with the core American value that everyone pay their fair share of tax,” said Stephen Shay, a former Treasury Department official now at Harvard Law School, in a statement supplied by the Warren campaign.
It would also level the playing field between small and large businesses. In general, larger corporations can afford better tax analysts to game the system, as well as gain access to sophisticated offshore tax havens. As a result, larger companies historically pay a lower effective corporate tax rate. The exemption on the first $100 million in profits helps reverse this inequity. Large companies that don’t use a lot of exemptions may get socked with a bigger tax burden, but remember, the Trump tax scam already lightened their load far more than this surtax would add back. And this concept doesn’t prevent a Warren administration from making other changes to the corporate tax code to attack giveaways.
The beauty of Warren’s idea lies in its simplicity. Instead of factoring in all the loopholes and credits, tax collectors would just use a company’s reported earnings and take a percentage. Companies would be less able to evade this. “If a company tells its investors it made more than $100 million this year, it’s going to have to pay some taxes,” Warren explains. There would definitely be some challenges—handling foreign corporations with U.S. business lines, ensuring that private companies comply—but it’s far cleaner than most corporate tax plans, whose benefits get tangled in a morass of exceptions. And it foregrounds that companies using the public commons and benefiting from America’s resources need to give back, to sustain the system.
Warren hasn’t yet broken out in 2020 polls or fundraising reports, but in terms of vision and policy she has been peerless, laying out the challenges America faces, the power behind the status quo, and how to chip away at that power and restore it to the people. Regardless of her campaign outcome, she has set a bar for the progressive agenda that any Democrat seeking to lead must match.