An Alternative Corporate Tax Increase
By Joel D. Joseph
(Mr. Joseph is the founder of the Made in the USA Foundation.)
President Biden's corporate tax increase can be improved with a slight change. Biden proposes that the corporate tax rate be increased from 21 to 28 percent. I would like the President to amend his proposal to allow U.S. manufacturers to have a lower tax rate, what I call the manufacturing tax rate of zero. Treasury Secretary Yellen is correct that we need a global minimum corporate tax treaty. But until we have a global minimum corporate tax treaty we will need to protect our manufacturing industry.
If we lower the corporate tax rate to 28% and eliminate all loopholes (no investment tax credits, no oil-depletion allowance, et cetera) we can institute a tax on manufacturers of zero (0%) percent. This would be based on the amount of U.S. content in the products manufactured.
Not all manufacturers are the same. This zero tax rate would only apply to products made with 100% U.S. content. For example, if a manufacturer assembles a product in the U.S. with 50% U.S. content, the manufacturer would pay an income tax of 50% of the 28% rate or 14%. However, if the manufacturer had 100% U.S. content, its tax rate would be zero.
This new manufacturing tax rate would serve to incentivize manufacturers to make their products in the United States. It would help to create millions of jobs in the USA by bringing manufacturing back to New York, Illinois, California, Ohio, Michigan and every other state.
With their lower corporate tax rates, our trading partners are eating our lunch and taking away our jobs. For example, most of our pharmaceutical manufacturers, including Pfizer, the world's largest drug maker, Johnson & Johnson, Allergan, Baxter, Eli Lilly and many others have set up shop in Ireland to avoid paying U.S. taxes. This is solely because Ireland charges a corporate tax rate of only 12.5%.
President Trump's cut in the corporate tax rate from 35 to 21 percent had little to no impact in fighting low-tax countries like Ireland. European countries have an average corporate income tax rate of 23 percent. I support the 28 percent corporate tax rate as long as manufacturers get a lower tax rate to remain competitive.
The Real Corporate Tax Rate
In 2010, the last time the Government Accountability Office measured the rate, U.S. companies paid an average effective federal tax rate of only12.6 %. That rate compares with the nominal corporate federal tax rate of 35% then in existence. Corporate accountants appear to have done their jobs well in exploiting the loopholes in our current tax code.
At least 60 major companies reported that their 2018 federal tax rates amounted to effectively zero, or even less than zero, on income earned on U.S. operations, according to an analysis released recently by the Washington, D.C.-based think tank, the Institute on Taxation and Economic Policy. Included on this list are Amazon, Delta Air Lines, Chevron, General Motors, American Electric Power, Prudential Financial, Netflix, Eli Lilly, IBM, Goodyear, and many more.
Corporations now evade U.S. taxes by issuing executive stock options, using the oil-depletion allowance, in addition to taking advantage of capital gains rates and other loopholes. Many of Silicon Valley's newest star companies are able to shelter a large portion of their profits as a result of using executive stock options. Citizens for Tax Justice estimated that a dozen technology companies, including Amazon, Twitter, LinkedIn and Priceline, "stand to eliminate all income taxes on the next $11.4 billion they earn - giving these companies $4 billion in tax cuts."
Amazon's combined federal and state effective tax rate was just 9.4%. Without this ridiculous stock-option tax break, the combined tax rate would have been 40.4 percent.
Overall, corporate taxes now contribute only about ten percent of total federal revenues. Under my proposal, corporations would pay more money to the federal treasury and thus create more jobs. On total federal tax revenues of $3 trillion a year, corporations now contribute only about $300 billion. Individual citizens pay the bulk of federal tax revenues.
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