YOU PAY. THEY PLAY.
You Pay Uncle Sam Taxes. Multinational Corporations Get Interest-Free Loans.
Multinational corporations get $700 billion in interest-free loans—enough to cut every American’s income-tax bill in half.
As you endure the expense and drudgery of finishing up your tax returns before this year’s delayed April 18 deadline, let’s look at how things would be if Congress taxed you like an American multinational corporation.
I’ll give you the good news first because the bad news, which I’ll leave for last, may make your blood boil.
The good news is that the income tax would be a source of wealth for you, were your family taxed like a multinational company.
That’s hard to believe, I know, because it’s nothing like what we hear in the news at tax time. But it’s well known to the country’s top tax practitioners, professors of tax and accounting and, of course, senior finance executives. They know how the tax system really operates, as I explained in my book Perfectly Legal, and as I teach my law and accounting students at Syracuse University.
To begin with, you would still have to file an annual tax return. But after that everything changes.
Instead of signing over to Washington the money you paid last year, Congress would let you keep all of the taxes you owe.
Zero-Interest Loans from Your Rich Uncle
Think of this as the equivalent of a loan on the best terms you’ll ever get. You don’t have to apply. You don’t need to prove your creditworthiness. And you can’t be turned down. You will have to pay the money back someday because, after all, it’s a loan. But you decide when to pay off your loan, which could be after your time has run out.
Best of all your loan would be interest-free. The amount you can borrow is limited only by your income. The more you make, the bigger your zero-interest loan. Every year you could take out a new loan. You can’t be turned down, either.
Think of this as the reversal of the ability-to-pay theory of taxation. Under this system those most able to bear the burden of taxation get the best deal.
Within families, zero-interest loans are common. Prosperous parents often loan money to help grown children move out on their own or, perhaps in the hope of grandchildren, to buy a first home.
That’s one of those numbers so huge it’s meaningless, so let’s reduce it to human scale. The sum of all these zero-interest tax loans equaled all of the personal income taxes from New Year’s Day through about June 13 last year. Another way to think about it: If Congress called in all those loans, the one-time surge of revenue would be enough to cut your 2015 income tax bill almost in half.
No U.S.-Only Companies Need Apply
If all this sounds like an entitlement program that’s because it is. Meet the qualifications and you automatically get the benefits.
But unlike welfare programs, which date to ancient times and have been standard since the British colonized America, this is welfare for those with no need. The only condition for this welfare is that these profitable artificial persons be transnational; a straight American company isn’t eligible.
If you’re skeptical about all of this, take a look at the five words in Internal Revenue Code Section 532 (b)(3).
That’s what prompted the proliferation of offshore subsidiaries, untold tens of thousands of them. American multinationals pay royalties and fees to their offshore subsidiaries, thereby converting taxable profits earned in America into tax-deductible expenses simply by moving money from their American pocket to their offshore pockets.
Making Money on that Zero-Interest Money
Now what could you do with your zero-interest loan proceeds?
Spending it on a vacation or a depreciating asset like a car would be foolish because someday the loan must be paid back. Multinationals know the smart move: Invest.
Many American multinationals invest in U.S. government debt—Treasury bonds and notes—the safest investment the world has ever known. And because Congress spends the taxes it has not yet collected from these multinationals the Treasury has to issue new debt every day.
New 30-year Treasury bonds pay about 2.7% interest, but the Federal Reserve keeps saying it’s going to push interest rates up, so let’s assume you net 4% annually and reinvest the interest.
For each $1 of income tax deferred, thanks to the magic of compound interest, you would have $3.24 when the bonds mature in three decades.
After paying back your $1 loan you’d keep $2.24 before taxes. Maybe that’s why lawyers refer to the “grace of Congress,” especially for those who profit now and pay their taxes by and by.
If you earn 9.6%—the average 2014 before-tax return on assets of all American nonfinancial corporations—you would have $14.64 after paying back your interest-free loan.
Now just think about that in millions and billions of dollars.
In the Works: A New Multinational Giveback
As great a deal as that is, for a lot of big multinationals it is just not enough. Legions of lobbyists, backed by suitcases full of campaign donations, are demanding better terms. Like Donald Trump, they want to renegotiate the terms of their loans after they are made. The big multinationals want forgiveness on most of their loans. They want a tax holiday.
These demands have created some bizarre political bedfellows. Senators Barbara Boxer, a liberal California Democrat, and Rand Paul, a libertarian Kentucky Republican, propose temporarily lowering the 35% corporate tax rate on all companies to 6.5% for multinational companies that pay off any portion of their zero-interest loan balances within five years.
These companies could still take out new loans as they file annual tax returns.
American multinationals have stashed an estimated $2.1 trillion of untaxed profits in investment accounts with addresses offshore. The 35% tax rate means their zero-interest loans total about $735 billion.
The Boxer-Rand proposal wants to make a nearly $599 billion gift to these companies. That’s the equivalent of all the corporate income taxes the government collects in about 21 months, my analysis of Office of Management and Budget revenue tables shows. There are several other bills like this, the least generous of which would forgive more than a half trillion dollars of corporate income taxes.
In February I spoke to a majority of the 71 progressive liberals in the House, who all said they expect that a tax holiday for multinationals will be enacted, citing intense lobbying by corporations and almost zero interest by voters. “Nobody but lobbyists talks about this,” one very liberal representative told me over coffee, implicitly criticizing both the major news organizations and constituents for not paying attention.
You may want to speak up today. Congress enacted a similar tax holiday in 2004, the American Jobs Creation Act, on the promise that it would create 660,000 jobs. Not one was created.
However, as soon as that law took effect its biggest beneficiary, Pfizer, started firing people. Soon 40,000 were off its payroll. Pfizer saved $11 billion in taxes, much of it on profits from Viagra, which are earned in America, but turned over to a tax-free European subsidiary as tax-deductible royalties.
The company pressing hardest this year for another tax holiday? The House members tell me that once again it’s Pfizer.
This essay first ran at Investopedia.