Bloomberg Law
Free Newsletter Sign Up
Bloomberg Law
Welcome
Go
Free Newsletter Sign Up

U.S. Tax Law Helps Multinationals Instead of Domestic Companies

Nov. 30, 2021, 9:45 AM

One of the foundational points of the U.S. economy is that small companies form the backbone of American commerce. In fact, companies with fewer than 500 employees comprise 99% of the nation’s businesses. But even though these firms employ much of the nation’s workforce, they continue to be treated poorly compared with large multinational corporations when it comes to U.S. tax law. Congress should fix this—and make sure that hard-working American companies can continue to provide good jobs throughout the nation.

My company, Atlas Tool Works, is a perfect example. For more than a century, we’ve manufactured precision metal components for such diverse industries as aerospace, medical, and telecom. We’re firmly rooted in our Illinois community, and we pay the income, property, business, and sales taxes that support our state’s schools and infrastructure.

Much of our competition comes from overseas producers, particularly state-owned enterprises in China. Not only do many of our competitors benefit from massive government subsidies, but they don’t pay the U.S. corporate taxes that we pay each year.

This points to a wider problem—that multinational corporations with no loyalty to the well-being of the U.S. are able to pay a far lower tax rate when selling goods and services in the U.S. market.

How is this possible? Part of the reason is that multinationals report one set of profits to shareholders and an entirely different set to the U.S. government. Despite the claims of some accountants, these two sets of books do indeed create appalling tax differences.

This should be fixed through a “book tax” on the largest multinational corporations, including both the parent company and its subsidiaries. A book tax uses corporate shareholder “family” financial data in order to calculate the basis for its tax rate. This is different from the formulation that multinationals currently use to reduce their effective tax rate.

Since 2018, the U.S. corporate tax rate has been 21%. But last year, Nike paid an effective tax rate of just 14%. Apple paid 13.3%. Facebook paid 12.2%, Pfizer paid only 6.37%,  and Abbvie—maker of the arthritis drug Humira—enjoyed an effective tax rate in 2020 of negative 36%. And these are just American multinational companies. Foreign multinationals play the same games with the IRS, too.

What makes all of this possible is profit shifting, or allowing multinational companies to transfer profits to subsidiary operations in the Cayman Islands and other tax havens. However, smaller domestic companies like mine don’t typically employ these clever accounting tricks—and that leaves us paying a full federal tax load.

Last year, the Coalition for a Prosperous America (CPA) reported that America’s 500 largest public companies paid an average federal tax rate of only 8.7% on their 2019 profits. According to CPA, fully taxing these global companies would have yielded an additional $97.8 billion for the U.S. Treasury.

As it stands, though, when multinationals skimp on paying tens of billions of dollars in treasury revenue, small companies like mine end up carrying a disproportionate share of the tax burden. 

This is egregious. It shortchanges the U.S. Treasury. And it rewards companies that move jobs out of the United States.

Multinational corporations should not be allowed to avoid taxes by reporting one set of books to their shareholders and another set to the IRS. Putting an end to this tax avoidance would be a welcome reform and would bolster efforts to put American companies on a more level playing field with their foreign competitors. The book tax currently being proposed in Congress could move the needle in the right direction, especially since it includes foreign “parent companies” that earn significant profits in the U.S.

At present, multinational corporations use paper tax games to shift profits—and avoid paying U.S. taxes. The obvious answer is to close tax loopholes. 

When corporations earn revenues in the U.S., they should pay the same tax rate as domestic firms. That would help domestic companies like mine—that employ workers here at home—compete more fairly in the global marketplace. Otherwise, faceless multinationals will continue to earn record profits while giving back little to the U.S. economy.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Zach Mottl is chair of the Coalition for a Prosperous America (CPA) and president of Atlas Tool Works in Lyons, Ill.

We’d love to hear your smart, original take: Write for Us

To contact the reporter on this story: Kelly Phillips Erb in Washington at kerb@bloombergindustry.com