By
David Morse
July 23, 2019 at 5:00 am ET
Elizabeth Warren released an “economic patriotism” jobs plan recently that takes two bold positions. First, it emphasizes manufacturing as the key driver of middle-class job creation in the U.S. And second, it presents concrete proposals to actually rebuild domestic American manufacturing. This distinguishes her from other Democratic presidential contenders who are merely preoccupied with raising taxes on the highest earners.
Warren’s plan offers 10 specific areas in which federal policy can be retooled to help domestic manufacturers, including currency revaluation, R&D investment, worker training and enhanced Buy America requirements. These are important measures that would undoubtedly help to create good-paying manufacturing jobs. It’s a response to what troubles Warren — “giant ‘American’ corporations who control our economy … have no loyalty or allegiance to America.” As Warren justifiably sees it, Washington has long served “the interests of multinational corporations and international capital,” with “millions of good jobs lost overseas.”
Warren’s concern over economic inequality is understandable, as is her goal of “putting American workers and middle-class prosperity ahead of multinational profits and Wall Street bonuses.” It’s unfortunate, then, that given the depth and specificity of her framework, she seems to have missed one of the most significant barriers to U.S. manufacturing competitiveness: the large disparity in taxation between domestic companies and foreign multinational corporations.
What Warren overlooks is a gaping hole in the middle of her tax plan, specifically the “Real Corporate Profits Tax.” By targeting only U.S. multinational corporations, she overlooks that foreign multinationals have a significant tax advantage over domestic companies.
Even with revisions to the U.S. tax code adopted in the December 2017 “Tax Cuts and Jobs Act,” foreign multinationals still maintain an inherent advantage over American companies. Their tax obligation is limited simply to revenue they claim is connected to their U.S. operations. But that obligation becomes vanishingly small when filtered through various, intermediary steps that establish overseas tax liability — in the Bahamas, the Cayman Islands, Ireland, etc.
In contrast, U.S. corporations are taxed based on their total worldwide income. And so, they end up paying a higher tax rate than overseas competitors. The blunt truth is that domestic companies have no foreign subsidiaries with which to hide their profits. For better or worse, they don’t possess the “tax shelters” that, in 2018, allowed 60 Fortune 500 companies to pay no taxes on a total of $79 billion in profits.
Since Warren is intent on addressing the huge disparity that multinationals enjoy over domestic companies, she should support changes to the U.S. tax code that can discourage such tax avoidance. What’s needed is a corporate tax system based on “sales factor apportionment.” Corporations would be assessed a tax on the profits of sales that take place in the U.S. market. This means, if a company earns $10 million in profit from sales in the U.S., it pays a tax on the entire $10 million. That should be a reasonable request, noting the access to America’s lucrative consumer market that generates such massive profits in the first place. And it means that companies would no longer be able to defray taxes by claiming “residence” in one or more tax shelter nations.
Holding foreign and American multinational companies accountable means them finally facing the same tax obligation that currently encumbers domestic companies. And it would help to level the playing field for struggling domestic companies.
Warren is absolutely correct: “the very largest companies pay a lower effective corporate tax rate than smaller companies.” But corporate tax policy currently belongs to multinational companies. If Warren wants a fair, effective tax policy to help rebuild domestic American manufacturing, she should consider a corporate tax system based on sales factor apportionment that would finally and fully tax multinational corporations.
David Morse is tax policy associate director at the Coalition for a Prosperous America (CPA).
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