We’ve seen some serious tax stories this month. One, movement—in theory—towards minimum corporate taxes across the globe.
The other, billionaires paying little if not taxes. The shock, the shock.
As frequently happens, the urgent conflict in media treatments can pass right by what seems to really go on under the surface.
Start with corporate taxes. Finance ministers from the G-7— Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States, in alphabetical order—in the organization’s meeting at the beginning of June said they struck a “seismic agreement on global tax reform that will mean the largest multinational tech giants will pay their fair share of tax in the countries in which they operate.”
The deal: multinationals paying “at least 15% in each country they operate.” Let’s take that apart.
First, the G-7 only includes seven nations. There’s nothing guaranteeing that other countries, typically low-tax havens, will have to go along. For all the talk over many years about fairer taxation and an end to a downward competition for low rates to attract corporations, big changes haven’t happened.
Second, 15% collection? That would suggest a minimum floor corporate tax, which doesn’t seem to be something in effect. Instead, countries set rates based on revenue after expenses and after available tax avoidance strategies.
As I’ve mentioned in the past, book tax rates can be quite different from effective tax rates. Take corporate profits before taxes, subtract corporate profits after taxes, and divide the remainder by the initial untaxed profits, and you get the effective tax rate, or the percentage of profits corporations end up paying.
Even with a current statutory corporate tax of 21%, the effective rate is barely over 14%. How can any country avoid that when tax law recognizes many types of book losses that don’t translate to actual losses of money? They can’t. You would need an entire overhaul of the tax code, which doesn’t seem to be what these government leaders are discussing.
A former White House official with whom I had a brief exchange, and who thinks raising corporate tax rates is a good idea, said that an increase “also does no harm.” But I disagree.
The harm is in the impression that something is about to change, that greater equity will arise. Instead, this sort of action is a fig leaf. As Barron’s noted, “Its effects will be slight for most companies, and won’t be felt for some time.”
There could be an attempt by big countries to force the hand of corporations, but as Forbes contributor Brian Peccarelli noted, “The U.S. has already proposed tax changes that would penalize companies from countries that don’t impose the minimum taxes, but some analysts have already suggested that this type of change to tax law could violate America’s obligations as a member of the World Trade Organization.”
A different type of fig leaf blew away when ProPublica released its story based on IRS records of the wealthy:
ProPublica has obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years. The data provides an unprecedented look inside the financial lives of America’s titans, including Warren Buffett, Bill Gates, Rupert Murdoch, and Mark Zuckerberg. It shows not just their income and taxes, but also their investments, stock trades, gambling winnings and even the results of audits.
ProPublica has obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years. The data provides an unprecedented look inside the financial lives of America’s titans, including Warren Buffett, Bill Gates, Rupert Murdoch and Mark Zuckerberg. It shows not just their income and taxes, but also their investments, stock trades, gambling winnings and even the results of audits.
Taken together, it demolishes the cornerstone myth of the American tax system: that everyone pays their fair share and the richest Americans pay the most. The IRS records show that the wealthiest can — perfectly legally — pay income taxes that are only a tiny fraction of the hundreds of millions, if not billions, their fortunes grow each year.
Now, growth of wealth at this level is in the appreciation of assets, not in the payment of cash. Capital gains aren’t recognized until something happens to pin down the value, typically the sale of an asset. If you own a lot of stock and the price keeps climbing, you too are shielded from taxes on the added wealth until you sell it and recognize the value.
But there are many techniques to also minimize the impact of wealth transfer. For example, in some circumstances, when passing money onto the next generation, assets can get what is called a basis step-up to the current market value. Suddenly, there is no growth in value. The next generation can sell without a tax on gains because technically there are none.
Another example, the Chan Zuckerberg pledge to donate 99% of their Facebook shares happens through a limited liability company, not a charity, as the Guardian has reported: “The creation of the Chan Zuckerberg Initiative – decidedly not a charity organisation – means that Zuckerberg can control the company’s investments as he sees fit, while accruing significant commercial, tax and political benefits.”
The New York Post wrote about how trusts can allow the wealthy to continue controlling their money while avoiding massive amounts of taxes when assets pass on their death to children and grandchildren.
Billionaires like Bill Gates, Mark Zuckerberg, and Warren Buffett are known to expound on wealth inequality and how there may be limits on the money someone should have and an increase in taxes on the well off. And then, as evidence suggests, they’re capable of using all the tools to pay the least amount of taxes possible.
ProPublica’s report did pull that fig leaf away. But for how long? I’d bet that by the end of the year at the latest, the PR machine, massaging those public images, will be back at work, if it isn’t already.
This article originally appeared on Forbes.
