Post #21-Take the Money and Run: The Privileged World of the Multinational Corporation (Part 1)

Another tax season has come and gone, and most of us—good citizens that we are—have sighed and paid our share.  But how many of us are aware that there’s a whole other world out there, a world of global (or multinational) corporations, where avoiding taxes while making immense profits is a way of life.  Armed with large staffs of lawyers, consultants, and lobbyists, as well as friendly members of Congress, the MNC navigates the regulatory minefield with assuredness. While their workers fight for decent wages—an uphill battle, as my previous posts on inequality have shown—MNC CEOs and CFOs fight for deregulation, loopholes, tax breaks, and a union-free workplace.  They usually get what they want.

They say membership has its privileges.  Tax avoidance—the ability to pay reduced or no taxes regardless of rising revenue—is one of them.  By operating branch plants abroad in a so-called tax haven, MNCs often pay little or no tax on profits there while limiting taxation at home: double non-taxation, in short.  The practice amounts to profit shifting, and it pays off handsomely: about $50 billion a year in tax avoidance by US-based MNCs, according to the Brookings Institution.  As one study of MNCs doing business in India found: “Our analysis of financial and ownership data of more than 1,500 MNCs operating in India (which is home to one-quarter of the world’s population who are undernourished) shows that in 2010 those MNCs with links to tax havens reported 1.5 per cent less profits. They paid 17.4 per cent less in taxes per unit of asset and 30.3 per cent less in taxes per unit of profit than MNCs with no such links” (www.christianaid.org.uk/images/ca-op-9-multinational-corporations-tax-havens-march-2013.pdf).

Why are tax avoidance and profit shifting important?  First, tax avoidance deprives home and host governments of a great deal of revenue that, at least in theory, could be used for social benefit.  Second, the practice contributes to the ever-widening gap between rich and poor: the corporation takes advantage of its economic power in poor countries, while the poor remain in desperate circumstances outside the office doors.  Third, it means jobs foregone: the corporation, being loyal only to its directors and investors, takes work overseas when it suits the bottom line.  Yet it isn’t penalized for fleeing abroad.  Even when MNCs are granted a tax holiday or greatly reduced taxes in return for bringing profits and, supposedly, jobs back home, they wind up taking the money and running.  Responding to legislation passed in both the George W. Bush and Barack Obama administrations, companies returned to the US, took the tax savings, then reduced their work force and went back overseas when the holiday ended: see www.nytimes.com/2007/07/24/business/24drugtax.html?pagewanted=all).

Fourth, profit shifting means huge profits without (in many cases) payment of one dime for the privilege of maintaining headquarters in a rich country.  Some of the largest US corporations pay no federal income tax at all, and haven’t for years.  Among them are Pepco, GE, Boeing, Verizon, and Duke Energy—in all, 26 major companies that didn’t pay taxes from 2008 to 2012.  (Thanks to Citizens for Tax Justice for tracking this: see www.ctj.org/pdf/notax2012.pdf.)  This is hardly an American phenomenon.  Europeans have lately been up in arms about Apple, Starbucks, Google, Facebook, and Amazon, all of which likewise have paid little or no taxes for years on their operations there.

Fifth, the multinationals take advantage of tax loopholes and other regulations that you and I—and, for that matter, smaller and larger businesses that don’t go abroad—cannot.  As one recent study noted, besides finding tax havens, MNCs also reduce taxes “by shifting income from high-tax locations to low-tax locations, by exploiting differences between the tax rules of different countries, and by taking advantage of tax subsidy agreements with host countries” (http://tippie.uiowa.edu/accounting/mcgladrey/workingpapers/02-22.pdf).  Increasingly, multinationals are engaging in inversion, in which US-based companies acquire a foreign company—say, in Britain—and then become a British company for purposes of paying at a far lower tax rate than they did back in the US. (See Steven Rattner’s article at www.nytimes.com/2014/05/03/opinion/end-corporate-taxation.html?ref=opinion.)

The answer to this problem is almost too obvious: simple fairness.  As the study of India says, “MNCs should report their profits and pay their taxes where their economic activities and investment are actually located, rather than in jurisdictions where the presence of the MNC is sometimes fictitious and explained by the adoption of tax-avoidance strategies.”  MNC leaders might accept this idea, provided they are granted a dramatic reduction in the corporate tax rate. This request is almost laughable, since corporations today pay an average effective tax rate of 20.5%—that is, the statutory 35% top rate minus tax credits, deductions, and other gimmicks.  That rate is the lowest it has been since Herbert Hoover’s presidency (www.nytimes.com/2014/04/05/business/economy/corporate-profits-grow-ever-larger-as-slice-of-economy-as-wages-slide.html; thanks to my friend Rick Crispino for bringing this article to my attention).

So why don’t rich-country governments do anything about this inequity, since so many face serious budget shortfalls?  One would think they would want to capture the tax benefits that they are entitled to.  The answer is politics.  These corporations contribute liberally to preferred political parties, political action committees, candidates, and causes.  Look at how the Koch brothers, deeply invested in coal and gas, are spending huge sums at every level of governance to undermine solar energy.  Moreover, governments appreciate dominant corporate brand names, which carry cultural and political values around the world: think Levis, Coca-Cola, IBM, Nike, Sony, BP, Samsung.  Think capitalism.  Some MNCs have virtual monopolies on their goods and services, such as the major oil companies, advertising and news agencies, and agribusiness, making them allies of their home governments and indispensable to foreign governments and businesses.  Corporations are useful to governments because they sometimes gain entry to countries with which certain governments do not have diplomatic relations, such as North Korea and Cuba in the case of the US.  (The opposite is also true: MNCs will insist on doing business despite their home governments’ policies, such as US and European companies now operating in Russia while their governments are imposing sanctions.)  And multinationals often account for the bulk of a country’s exports (e.g., around 60% of China’s), giving them a degree of political power that their governments lack.

Thus, it pays (literally) for governments to allow tax and other breaks for multinationals.  And not only that: governments will often go to great lengths to protect them.  Many of you will recall legendary cases in which the US helped orchestrate the overthrow of elected governments: Iran under Mohammad Mossadegh in 1953, Guatemala under Jacobo Arbenz Guzman in 1954, and Chile under Salvador Allende in 1972.  Corporate interests were a large part of the motive for these interventions: in order, Big Oil, United Fruit, and ITT.  Today, in the Russia-Ukraine standoff, we have another example of protection of MNC interests.  As a deputy director of the National Security Council acknowledged a few weeks ago on the PBS “News Hour,” one reason for “calibrating” sanctions against Russia—in plain English, imposing them very slowly, from weak to strong—is to “protect” US companies doing business in Russia.  MNCs hate sanctions; doing business should transcend political concerns, in their view.  If the US and EU really wanted to pin the Russian economy to the wall, they would impose serious restrictions on all financial and commercial transactions with Russia.  But they are loath to do so, because MNC leaders have surely made clear their preferences to US and European leaders.

In short: The global corporation lives in a world apart, able to take full advantage of favorable tax and other laws while in essence being subsidized by working people at home and abroad.

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3 Comments

  1. Good post. How amusing that i have something in common with corporations – i pay no income tax. It’s because i chose not to have an income; my personal way of imposing sanctions on a system i deeply disagree with. Nobody really notices when it’s just me doing it, but if everyone decided they were no longer paying taxes…………..We are entering an era where corporate control (of world affairs and resources) is no longer covert. It is increasingly obvious where the power lies to more and more people…..Finding a way to discredit money….showing it’s illusory nature to the public at large, could be an effective Achilles heel. That strategy requires a new paradigm and mythos suited to the impending environmental catastrophe…..a viable and attractive alternative to the rat race. Money is the blood of this Beast. Let’s give it a virus while we still can…….

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