Super Tuesday has come and gone and with it an opportunity to debate a perennial tax dilemma for America’s domestic companies.
Right now, America’s manufacturers face a tilted playing field. They’re locked in fierce competition with large multinational corporations that are able to stash profits in tax havens. This situation leaves America’s producers carrying a greater tax load than their overseas competitors. In order to level the playing field for domestic companies, Washington needs to finally embrace a simple and effective tax plan that will stop rewarding multinational corporations for perpetually avoiding U.S. taxes.
Despite months of heated primary debates, it doesn’t appear that either of the leading Democratic presidential candidates has appropriately prioritized this issue of corporate tax avoidance. Instead, they remain focused on generating revenues to fund their major policy proposals. Unfortunately, that means some of the largest corporations in the world will continue to enjoy tax loopholes.
Both Vice President Joe Biden and Sen. Bernie Sanders (I-Vt.) have presented plans to alter the current U.S. corporate tax code. Biden won’t go as far as Sanders in terms of raising America’s corporate tax rate on international income. However, Biden is proposing to implement a modest corporate minimum tax as an alternative. In contrast, Sanders wants to ensure that American multinationals pay the full U.S. corporate tax rate. But he is less concerned about the tax advantage that foreign corporations currently enjoy. Essentially, neither Sanders nor Biden has fully homed in on the tax loopholes currently enjoyed by foreign companies.
The existing situation is untenable. Both foreign and American multinational corporations continue to use overseas operations to hide profits earned in the U.S. market. But America’s domestic companies still remain on the hook for a full corporate tax load. As a result, foreign corporations are still enjoying a lower tax rate than America’s domestic companies. This makes little sense, and domestic manufacturers deserve better.
If Biden and Sanders really want to help level the playing field for U.S. companies — and help grow middle-class jobs in productive industries like manufacturing — they must address these glaring disparities in America’s tax code. One solution would be to start holding all companies equally accountable for profits earned in America’s lucrative consumer market.
Some in Washington are now proposing a system of “Sales Factor Apportionment” (SFA). At its simplest, an SFA system would assess corporate taxes only on profits earned from U.S. sales. And so, all companies selling products or services in the United States would pay the same tax rate. This would greatly simplify the U.S. corporate tax code, since it would disregard where a company may claim to be headquartered. SFA would treat all companies equally in terms of reporting their taxes. And that would mean ending the clever paper shifting that currently allows multinationals to manipulate their profit reporting.
Multinational corporate tax avoidance remains a glaring problem. It’s estimated that in 2018, 60 Fortune 500 companies succeeded in paying zero taxes on $79 billion in profits. While not all of that avoidance can be attributed to international loopholes, overall profit shifting is estimated to cost the U.S. Treasury more than $100 billion annually in lost revenues.
America’s manufacturers and their workers want to see this fixed. Biden and Sanders must fully grasp the problem. President Trump may propose a new tax plan this fall — and he could potentially implement changes needed to shore up domestic companies that keep losing market share to multinationals. What’s needed from both sides is an SFA system that finally compels multinational corporations to play by the same rules as America’s domestic companies. Anything less will be ineffective for the U.S. economy in the long run.
David Morse is the tax policy director at the Coalition for a Prosperous America Education Fund. Follow him on Twitter @CentristinIdaho.
Morning Consult welcomes op-ed submissions on policy, politics and business strategy in our coverage areas. Updated submission guidelines can be found here.