5 Charts on Tackling Bad Corporate Behavior Through Taxes

The Build Back Better agenda under negotiation in Congress includes sweeping public investments to make our economy more equitable, sustainable, and resilient in the face of future crises. Another major potential benefit: several tax reforms on the table to help pay for the plan would also reduce economic inequality and curb harmful corporate behavior.

Here we highlight corporate tax proposals in play on Capitol Hill that are designed to discourage corporate tax dodging and offshoring, excessive CEO pay, and wasteful stock buybacks.

Corporate tax dodging and offshoring

For decades, large corporations have pitted countries against each other to drive their own tax bills lower and lower. This has put an enormous strain on public budgets for education, health care, and other vital investments. In the United States, the percentage of total federal revenue from corporate tax receipts dropped from 32.1 percent in 1952 to 6.6 percent in 2019, according to the Office of Management and Budget.

The Biden administration has just forged a deal with more than 130 governments aimed at ending this global race to the bottom. Each of these governments has agreed to charge large corporations a “global minimum tax” on profits of at least 15 percent.

Through rampant abuse of tax havens and other loopholes, many U.S. corporations have gotten away with paying a much lower effective tax rate (The effective rate is what corporations actually pay, while the statutory rate is what they owe before accounting for tax breaks and credits). One government survey found that U.S.-based multinationals paid an average U.S. tax rate of just 7.8 percent in 2018. The Institute on Taxation and Economic Policy found that 55 large, profitable U.S. corporations actually paid zero in federal income taxes last year.

The new corporate minimum tax would generate U.S. revenue of an estimated $148 billion over a decade. This would go a long way towards covering the costs of vital investments in the Build Back Better agenda. For example, it is more than enough to pay for universal free community college and more than twice as much as the cost of building affordable, accessible housing for more than 300,000 families.

Democratic lawmakers are also considering closing various other loopholes that have encouraged use of offshore tax havens. The House Ways and Means Committee has proposed other international tax reforms that would raise more than $300 billion over 10 years, while President Joe Biden’s more comprehensive plan would raise as much as $1 trillion.

Corporate tax rate increase

In addition to reforms aimed at reducing offshore tax dodging, Democratic lawmakers are planning to increase the statutory rate on domestic profits to ensure big companies pay their fair share. Republicans slashed that rate in 2017 from 35 percent to 21 percent, a move that will cost the country $750 billion over a decade if left unchanged.

Views among Democrats differ on the ideal rate increase. President Biden is proposing a hike to 28 percent while Senator Joe Manchin has called for a rate of no higher than 25 percent, citing concerns about driving corporate activity to lower-tax countries. These concerns, while always overblown, are now even less of an issue thanks to the global minimum tax agreement. As negotiations continue, hundreds of billions of dollars in vital Build Back Better investment funds are hanging in the balance.

The White House proposal would raise $858 billion over a decade, more than twice as much as the $400 billion expected from the Manchin plan. The revenue gap between those two proposals would be more than enough to fully fund President Biden’s proposed $400 billion investment to eliminate the waiting list for affordable home care and create good jobs with benefits for care workers. The House Ways and Means Committee has proposed a 26.5 percent rate that could generate an estimated $540 billion.

Excessive CEO pay

Corporate lobbyists have long pushed the false claim that lower corporate taxes are guaranteed to be a boon for U.S. workers. In reality, big companies have plowed tax cut windfalls into the pockets of executives and wealthy shareholders rather than boosting wages. According to the Office of Management and Budget and the Economic Policy Institute, when corporate tax receipts made up 21.8 percent of all federal revenue in 1965, the average ratio between CEO and median worker pay was 21 to 1. After the Republican tax cuts, corporate tax receipts fell to just 6.6 percent of federal revenue in 2019 while the average pay ratio rose to 320 to 1.

Senate Finance Committee Chair Ron Wyden’s list of revenue options includes an excise tax that would encourage companies to share their wealth by penalizing firms with big gaps between CEO and worker pay. While details of the Wyden plan are not public, the proposal is no doubt inspired by the Tax Excessive CEO Pay Act, which would apply graduated corporate tax rate increases based on the pay ratio between a company’s highest-paid executive and median worker. Senate Budget Chair Bernie Sanders has championed that bill, which also enjoys support from the AFL-CIO, the Center for American Progress, and numerous other organizations and academics.

Stock buybacks

Wyden also aims to use tax policy to rein in another controversial corporate activity — stock buybacks. He and Senator Sherrod Brown recently unveiled the Stock Buyback Accountability Act, which would impose a 2 percent excise tax on stock repurchases and raise an estimated $100 billion over 10 years.

As Professor William Lazonick and other analysts have long documented, stock buybacks artificially inflate executives’ stock-based pay and siphon off capital that could be used to raise worker wages or make other productive investments. In the first year after the 2017 Republican tax cuts, S&P 500 firms spent a record $806 billion buying back their own stock. While buyback spending dropped in the initial phase of the pandemic crisis, it is now rebounding to near-record levels. According to Standard and Poor’s, S&P 500 firms blew nearly $200 billion on stock buybacks in the second quarter of this year.

Wealthy Americans reap the vast bulk of financial gains from these stock buybacks and corporate tax cuts because of their disproportionate ownership of corporate stock. Federal Reserve data indicate that the richest 1 percent hold more than half of all stocks and mutual funds, while the bottom 90 percent of Americans own just 11 percent. The disparities in stock ownership are even starker if race is factored in. While 61 percent of white families owned at least some stock in 2019, only 34 percent of Black and 24 percent of Latino families did, according to the Federal Reserve.

The Build Back Better negotiations are a huge opportunity to secure health, education, and infrastructure investments that will make a real difference in American lives. These negotiations also create an opening for long overdue tax reforms. With enough public pressure, we can ensure the wealthy and large corporations pay their fair share — and discourage corporate behaviors that harm all of us.