By Sandy Brian Hager and Joseph Baines/The Conversation
The coronavirus pandemic is rocking financial markets, disrupting supply chains and sharply reducing consumer spending. The crisis is hitting the likes of airlines and high street retailers particularly hard, and is decimating many small businesses. Unfortunately, this is proving devastating for millions of precarious and low-income workers across the world.
Many governments have announced fiscal stimulus packages, including tax relief, to individuals and business. Such measures are welcome, but our new research suggests that they should be understood against broader shifts in the tax regime which leave society less able to withstand the pandemic.
As we show by looking at American companies, these shifts reinforce inequality not only between large and small firms but also between high- and low-income households. The result is a fraying social fabric through which the coronavirus can spread rapidly.
The Big Discount
The graph below maps the worldwide effective tax rate – the rate that is really paid as opposed to any rate set by governments – for U.S. non-financial corporations listed on the stock market. The dark grey bars show the average tax rate of the top 10% of corporations ranked by revenues, while the light grey bars show the bottom 90%. The line above the bars shows the ratio of the tax rate of the top 10% relative to the bottom 90%.
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This shows that the worldwide tax system was progressive in the 1970s, with the largest corporations paying slightly higher rates than the smaller ones. By the mid-1980s, the system had turned sharply regressive and has stayed so ever since. For 2015-18, smaller listed corporations were effectively paying a 41% rate on their profits, while larger corporations paid 28%.
What accounts for this persistent tax advantage for larger corporations? Are they gaming the domestic system? Or do they enjoy a foreign tax advantage because they have the resources to evade taxes and shift profits to low-tax jurisdictions? To address these questions, we compared the tax rate on domestic income to the rate on foreign income.
The graphs below look at how much U.S. corporations really pay in taxes to different authorities. Again comparing the largest 10% corporations with the rest, the top left graph focuses on tax payments in the U.S. as a whole. The top right graph drills down to U.S. federal taxes while the graph on the bottom left is for the total taxes paid to U.S. states. These three graphs show that the entire domestic system of taxes, both federally and at state level, has been persistently biased towards large corporations since the mid-1980s.
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This is different to what American corporations pay to other countries, as shown in the graph labeled “foreign” in the bottom right-hand corner. This rate has fallen dramatically for larger and smaller corporations alike, fitting the conventional wisdom that tax competition has intensified with globalization. Until as recently as the end of the 1990s, however, the foreign tax structure in the U.S. was progressive, meaning that the largest corporations were paying more. This has now reversed, just like it did for domestic taxes several decades earlier.
Concentration And Inequality
Why should we care if big business has a persistent tax advantage? One problem is that the tax system encourages businesses to concentrate into bigger and bigger entities. In recent years there have been growing concerns about the dominance of big business in advanced economies, including the U.S. Studies show that as large corporations take greater shares of revenues, profits and assets, they also charge higher prices, pay lower wages, provide lower quality goods and services, and scale back innovation and investment.
Most policy debate has focused on governments rolling back antitrust legislation to remedy this concentration of businesses. Our research suggests that, at minimum, corporate tax should be part of this conversation: the global tax system rewards corporations for reaching a size that is actually bad for society. This may include impeding our ability to mitigate the spread of coronavirus.
Take the notoriously concentrated pharmaceuticals sector, which was already being blamed for a growing problem of drug shortages well before the arrival of the pandemic – partly due to business decisions to discontinue old products that wereren’t profitable enough. Lobbyists for Big Pharma were also successful in blocking provisions in a new $8.3 billion U.S. coronavirus emergency spending bill that would tackle unfair pricing and thus threaten companies’ intellectual property rights over essential medicines.
The tax advantage of big business also helps to widen household inequality. Supporters often claim that tax savings allow business to expand productive capacity, employment and wages, and therefore create widespread prosperity. Yet our research shows that as the rate they effectively pay declines worldwide, large corporations scale back their capital expenditures.
If large corporations aren’t using their tax windfall to expand productive capacity, what are they doing with it? According to our findings, they are enriching their shareholders.
In the 1970s, large corporations allocated 30 cents toward dividend payments and stock buybacks for every dollar of capital expenditure. From 2010-18, the amount they spent on enriching their shareholders had jumped to 93 cents.
This surge wouldn’t be such a problem if share ownership was widely dispersed, but it’s not. The top 1% of U.S. households own, either directly or indirectly, 40% of all corporate shares, and the top 10% of households own 84%.
So the corporate tax regime has fueled inequality, which is an important vector for the spread of the coronavirus. Many people on lower incomes are forced to make the wrenching choice between going into work and potentially contracting and spreading the coronavirus, or staying at home and failing to make ends meet.
The government measures for individuals and small businesses are a welcome – but by no means sufficient – attempt at ameliorating problems that the regressive tax regime has helped to create. Let’s also use this crisis as an opportunity to reform the tax system in ways that help tackle inequality and reduce corporate concentration.
Sandy Brian Hager is a senior lecturer in international political economy at City University of London. Joseph Baines is a lecturer in international political economy at King’s College London. This article is republished from The Conversation under a Creative Commons license.
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See also from the International Consortium of Investigative Journalists:
* Crumbling Economies Must Tackle Tax Evasion To Meet Coronavirus Crisis, Experts Warn.
* Global Coalition Calls For Safeguards To Prevent Looting Of Coronavirus Relief Funds.
* Investigating The Coronavirus: Who Is Cashing In?
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Previously in tax scammage:
* McDonald’s Breaks Promise To Raise Wages.
* Last Year, Amazon Paid No Federal Income Taxes. Now, It’s Trying To Kill A Local Tax That Aims To Help the Homeless.
* Trump Vowed To Punish Companies That Moved Jobs Overseas. Is Congress Rewarding Them?
* After Long Career Bailing Out Big Banks, Obama Treasury Secretary Tim Geithner Now Runs Predatory Firm That Exploits The Poor For Profit.
* Jeff Bezos Just Became The Richest Person Ever. Amazon Workers Just Marked #PrimeDay With Strikes Against Low Pay And Brutal Conditions.
* A Sweet New Century For America’s Most Privileged.
* With Nation Transfixed By Kavanaugh Monstrosity, House GOP Votes To Give Rich Another $3 Trillion In Tax Cuts.
* Deepwater Horizon Settlement Comes With $5.35 Billion Tax Windfall.
* Offshoring By 29 Companies Costs Illinois $1.2 Billion Annually.
* Government Agencies Allow Corporations To Write Off Billions In Federal Settlements.
* The Gang Of 62 Vs. The World.
* How The Maker Of TurboTax Fought Free, Simple Tax Filing.
* $1.4 Trillion: Oxfam Exposes The Great Offshore Tax Scam Of U.S. Companies.
* How Barclay’s Turned A $10 Billion Profit Into A Tax Loss.
* Wall Street Stock Loans Drain $1 Billion A Year From German Taxpayers.
* German Finance Minister Cries Foul Over Tax Avoidance Deals.
* Prosecutor Targets Commerzbank For Deals That Dodge German Taxes.
* A Schlupfloch Here, A Schlupfloch There. Now It’s Real Money.
* How Milwaukee Landlords Avoid Taxes.
* Study: 32 Illinois Fortune 500 Companies Holding At Least $147 Billion Offshore.
* Watch Out For The Coming Tax Break Trickery.
* When A ‘Tax Bonanza’ Is Actually A Huge Corporate Tax Break.
* The Hypocrisy Of Corporate Welfare: It’s Bigger Than Trump.
* Oxfam Names World’s Worst Tax Havens Fueling ‘Global Race To Bottom.’
* Offshore Tax Havens Cost Average Illinois Small Business $5,789 A Year.
* State Tax Incentives To Corporations Don’t Work.
* GOP Tax Plan Would Give 15 Of America’s Largest Corporations A $236 Billion Tax Cut.
* Triumph Of The Oligarchs.
* Amazon Short-List Proves Something “Deeply Wrong” With America’s Race-To-The-Bottom Economy.
* Apple’s $38 Billion Tax Payment Less Than Half Of $79 Billion They Owe.
* U.S. Surpasses Cayman Islands To Become Second-Largest Tax Haven On Earth.
* Less Than Year After GOP Tax Scam, Six Biggest Banks Already Raked In $9 Billion In Extra Profits.
* After Budget Cuts, The IRS’s Work Against Tax Cheats Is Facing “Collapse.”
* $6.5 Billion: A Low-Ball Estimate Of The Walton Family’s Haul After 16 Years Of Bush, Obama And Trump Tax Giveaways.
* Illinois Could Recover $1.3 Billion Lost To Corporate Tax Loopholes.
* Whatever You Paid To Watch Netflix Last Month Was More Than It Paid In Income Taxes All Last Year: $0.
* Number Of U.S. Corporations Paying ‘Not A Dime’ In Federal Taxes Doubled In 2018.
* It’s Getting Worse: The IRS Now Audits Poor Americans At About The Same Rate As The Top 1%.
* IRS: Sorry, But It’s Just Easier And Cheaper To Audit The Poor.
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Previously in The Paradise Papers:
* ‘Paradise Papers’ Reveal Tax Avoidance, Shady Dealings Of World’s Rich And Powerful.
* Just How Much Money Is Held Offshore? Hint: A SHIT-TON.
* Development Dreams Lost In The Offshore World.
* Keeping Offshore ‘Hush Hush,’ But Why?
* Tax Havens Are Alive With The Sound Of Music.
* Today In Tax Avoidance Of The Ultra-Wealthy.
* Go To Town With This Offshore Leaks Database.
* The Paradise Papers: The View From Africa And Asia.
* The Paradise Papers: The End Of Elusion For PokerStars.
* The Paradise Papers: An Odd Call From The Bermuda Government.
* The Paradise Papers: Nevis Is An Offshore Haven Of Opportunity
* The Paradise Papers: The Long Twilight Struggle Against Offshore Secrecy.
* The Paradise Papers: A Fair Tax System Will Be Lost Without Public Pressure.
* Item: Today In The Paradise Papers: Through Death Threats And Scare Tactics, Honduran Reporter ‘Perseveres.’
* The Paradise Papers: Journalists Flee Venezuela To Publish Investigation.
* Last Stop: Chicago.
* The Paradise Papers: ‘Africa’s Satellite’ Avoided Millions Using A Very African Tax Scheme.
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Previously in The Panama Papers:
* The Panama Papers: Remarkable Global Media Collaboration Cracks Walls Of Offshore Tax Haven Secrecy.
* The Panama Papers: Prosecutors Open Probes.
* The [Monday] Papers.
* Adventures In Tax Avoidance.
* Mossack Fonseca’s Oligarchs, Dictators And Corrupt White-Collar Businessmen.
* Jonathan Pie, TV Reporter! They’re All In It Together.
* Meet The Panama Papers Editor Who Handled 376 Reporters In 80 Countries.
* The Laundromat.
‘A widow (Meryl Streep) investigates an insurance fraud, chasing leads to a pair of Panama City law partners (Gary Oldman and Antonio Banderas) exploiting the world’s financial system. Steven Soderbergh directs.’
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Previously in carried interest, aka The Billionaire’s Loophole:
* Patriotic Millionaires Vs. Carried Interest.
* The Somewhat Surreal Politics Of A Private Equity Tax Loophole Costing Us Billions (That Obama Refused To Close Despite Pledging To Do So).
* Fact-Checking Trump & Clinton On The Billionaire’s Tax Break.
* Despite Trump Campaign Promise, Billionaires’ Tax Loophole Survives Again.
* Carried Interest Reform Is a Sham.
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Comments welcome.
Posted on April 12, 2020