Trump’s Corporate Tax Proposal Would Trigger a Global Race to the Bottom
Trump’s proposal to reduce the corporate tax rate will contribute to a global taxation race to the bottom where the losers will be all countries and the winners will be corporations, explains tax justice expert James Henry
Greg Wilpert: Welcome to The Real News Network. I’m Gregory Wilpert joining you from Quito, Ecuador. After months of vague proposals President Donald Trump finally presented a more detailed tax reform plan on Wednesday. The plan covers all aspects of existing US tax law such as income tax, business tax, deductions, the estate tax, among many other elements.
One area that most people probably do not pay too much attention to is the corporate tax aspect. It’s complicated and affects people’s lives only indirectly. Joining me from Sag Harbor, New York to analyze Trump’s corporate tax reform is James S. Henry. He is an investigative economist and lawyer, global justice fellow at Yale University, and senior advisor at the Tax Justice Network. Thanks for being here, James.
James Henry: Good to be with you.
Greg Wilpert: There are many aspects we could talk about, including about Trump’s corporate tax overhaul, such as the reduction of the corporate tax rate, the elimination of deductions, the system of how taxes are assessed, et cetera. Let’s take some of these one by one. First he is proposing to reduce the corporate tax rate from 35% to 20% with the argument being that the current 35% rate is not competitive when compared to other countries around the world. What are your thoughts on this aspect of Trump’s corporate tax reform?
James Henry: Well, I think that’s just one of the many lies that he’s put out here. Just completely bogus. This Goldman tax plan, it should really be called because it’s so beneficial to Wall Street firms like Goldman. In fact, the United States corporate tax system is, no one really pays 35% unless they’re completely brain dead. Most US multinationals, for example, companies like Apple, Google, and Microsoft have been able to avoid paying more than 5% to 10%. The average effective rate for all US business is about 12%, which is well within the range of being competitive. These are the best companies in the world. There’s no evidence that US multinationals or businesses in general are suffering from having too high a tax rate.
In fact, this measure by Trump would upset about 10 years of progress that the world community has made toward getting rid of the sort of race to the bottom that we’ve had. The US cuts its effective rate, or its nominal rate to 20%. That’s just going to set off a lot of reciprocal reductions like we’ve seen since the 1970s and ’80s by other countries. We have this kind of race to the bottom.
The territorial tax, this is the most important aspect of this proposal that he’s proposing. US now has a worldwide corporate income tax. Under this proposal if a company like Apple shifts all of its income to an offshore haven by doing, transferring intellectual property to Bermuda or Ireland, even more than it’s been doing already, they’ll be able to pay itself royalties tax-free. This is like a relief plan for tax havens.
In the last decade we’ve had the OECD, the G20, United Nations all working hard on reforming the international corporate tax systems so that it’s more fair to developing countries. We actually have companies like these giants, actually paying a fair share of taxes. This plan, if it were adopted, I don’t think it will be, would undermine all of that progress.
Greg Wilpert: Why do you think, first of all, it won’t be adopted? I mean, the Republicans seem to be very in favor of this and they have pretty solid majorities. What’s standing in the way?
James Henry: Well, there’s actually interesting splits developing within the Republican party. Republicans used to care about deficits. One of the features of this plan is that it relies on voodoo economics. It’s making massive tax cuts without having any sources of revenue to make up for them. It’s going to blow a hole in the US deficit. It’s also going to hurt the trade deficit because this will strengthen the dollar, make US goods more expensive. Those two deficits are going to blow up by trillions of dollars here.
I think that this is going to be upsetting to some of these Republicans when they come to their senses. I think they were basically reacting to the fact that Trump has not done anything so far, hasn’t gotten a single thing of any of his promises through Congress. There’s a temporary kind of willingness to overlook these big differences of opinion. Once they get down to negotiating the fine details I can guarantee you that some of the deficit hawks will come out of the woodwork in the Republican party.
Greg Wilpert: One of the things that the tax plan is supposed to do according to at least some of the initial reports is for one thing eliminate deductions in order to compensate for the lower tax rate. The other thing is that foreign companies should be taxed more it seems in order to compensate for the loss of revenue from not taxing domestic companies’ profits that they make abroad. What do you think about this idea of taxing foreign companies instead of taxing domestic companies when they make profits abroad?
James Henry: Well, we already do tax foreign companies. We can’t discriminate against them. That’s a violation of the WTO. We wouldn’t want US companies to be paying artificially higher tax rates when they go to compete around the world. I think the basic problem with this plan is it really doesn’t reflect anything but self-interest on the part of the Republican, the elite, the Wall Street elite.
This plan was designed and written by Gary Cohn, the former president of Goldman Sachs. Goldman is a huge equity investor. Private equity firms now control a great deal of the stock market. This is obviously going to help, there’s also features in this that are going to help so-called pass-through investors. People like Donald Trump himself but also the partners at Goldman Sachs are going to be taxed at a 25% maximum rate on their income for some technical reasons.
Basically this corporate tax plan, which I’m focusing here on just is not going to create jobs. We tried this kind of repatriation that they’re talking about. There’s two trillion dollars sitting offshore but a lot of that money under this plan would come back entirely tax-free, even though a lot of it derived from these bogus transfers of intellectual property. Companies like Apple transferring intellectual property to low tax havens and then been paying themselves royalties tax-free.
Now he’s going to give them a tax break on all that offshore profit, pseudo profit that’s going to come back without any conditions. President Bush tried this plan of repatriating corporate profits from offshore back in 2004. It created no jobs. Most of the money when the shareholder buybacks, which are just blowing up wealth inequality and helping senior management at these companies, but there were no conditions on the repatriation, insisting that companies spend money on investment here. This is just a giveaway plan.
Greg Wilpert: Well, actually that gets me to one of the next issues I want to touch on. What is the alternative? If we recognize that there’s a problem with the holding of profits that companies make abroad how do we get that back? You suggested something about introducing some kind of conditions. What would be the alternative?
James Henry: Well, there’s work underway now and I think the key thing is to do a tax reform at a multilateral level. What we need is really agreement on a fair international minimum tax for big companies like Google and Microsoft to pay. That’s something we can only work out with our partners.
Right now there’s a system where you’re basically allowing companies to transfer artificial profits to separate entities in places like…or the Cayman Islands and then treat them as real companies even though they’re not doing any business there and avoid tax. There’s about $300 billion a year of uncollected taxes based on that kind of profit shifting.
That’s exactly the problem that the G20 and the OECD has been working hard to correct with their base erosion profit shifting project over the last five years. That’s just coming to fruition. The United States should sign up for it and collaborate with other wealthy countries to devise an alternative system, which would look at what we call, within the United States we have 50 states that have their own state income taxes. They’ve worked out a system to allocate corporate taxes on a fair basis based on real activities going on in those states. Sales, assets, employment. That’s the kind of system, that formulary apportionment system, that we actually need on a global basis to get this international tax system fixed, but the Trump system is going to declare war on every other country that we’re competing with here in terms of taxation. It’s just going to be another race to the bottom.
Greg Wilpert: Okay. We’ll certainly pay attention to how this race to the bottom develops if it continues in that direction. We’ll probably come back to you at that point. I was speaking to investigative journalist and tax lawyer James S. Henry. Thanks again, James for having joined us.
James Henry: Great. Have fun in Ecuador.
Greg Wilpert: Thank you for watching The Real News Network.
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