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Corporate Tax Avoidance: How it happens, how it is changing, and what to do about it - YouTube
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- [Announcer] This is Duke University.
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- Hi everyone, my name is Scott Dyreng.
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I am Associate Professor of Accounting
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and have been at Fuqua since 2008.
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And I am excited to be a part of the
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Fuqua Faculty Conversations Series
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and to chat with you
about some of my research.
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Most of my research focuses
on corporate taxation.
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Whether we like it or
not, we are all affected
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by the tax system, and
corporate taxes in particular
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have been a frequent
topic in the popular press
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and policy circles as of late.
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As I'm sure you've
noticed, there have been
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many articles in major newspapers
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and other publications
over the past several years
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that have argued the corporate
tax system is broken.
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Most of these articles use
one or two high profile firms
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as anecdotes to illustrate
variations on the common theme
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of a broken, non-competitive
corporate tax system.
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Exactly why the tax
system is broken, however,
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is sometimes less clear,
and often the articles
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have directly opposing
views about what makes
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the system flawed and how to correct it.
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I find these articles
scary, quite frankly,
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and I'm concerned that our policy makers
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could make long lasting,
growth damaging changes
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to our tax system, unless
great care is taken
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to first understand what
is broken with our system
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and what we want to fix about it.
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Prescribing tax policies
based on extreme anecdotes
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that sell newspapers might be like setting
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construction requirements for door frames
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based on the height of NBA players,
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the danger being that
the cost of implementing
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those policies might outweigh the benefits
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if the policies are based on
unusual or extreme examples.
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So, what are some commonly held beliefs
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about corporate taxes and what do the data
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actually tell us about those conceptions?
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I'll spend the next few minutes discussing
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three beliefs that I often hear recited.
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The first commonly held
belief is that large
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U.S. multinational companies pay very low
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or even no corporate income tax.
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This idea comes from a number of articles
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that have appeared over the past
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several years in the popular press.
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Some of the most widely
circulated articles
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publicized Google's 2.4 percent tax rate,
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or GE's 1.8 percent tax rate, or even
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Caterpillar's 2.4 billion in tax savings.
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These articles were adorned with the names
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of common tax haven
countries, like Bermuda,
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Cayman Islands, Switzerland and Ireland.
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And they described tax saving strategies
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with fascinating code names,
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like the Double Irish
or the Dutch Sandwich.
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So, just how common is it for a company
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to pay a tax rate below five percent?
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Well, it turns out that the average
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publicly traded U.S.
company pays about 28 cents
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of every pretax dollar
it earns in income taxes
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to governments around the world.
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Of course there are some firms that pay
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very low tax rates, like those highlighted
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in the articles that you've probably seen,
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but there are also companies
that pay very high tax rates.
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In fact, about a fourth of
publicly traded U.S. companies
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pay more than 35 cents
of every pretax dollar
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in taxes to governments around the world.
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So, how do Google, GE, and other companies
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manage to pay such low tax rates?
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It turns out there are volumes
of research, some of which
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I have worked on, that
examine this question.
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And the major take away
is that we don't have
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a very good understanding of the causes
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of variation in corporate
effective tax rates.
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But we do know that many of these firms
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have substantial earnings
in foreign countries,
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and have lots of intangible property
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like patents and trademarks.
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They also take advantage of tax credits
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for research and
development, manufacturing
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and energy, and they have sophisticated,
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sometimes very creative tax departments.
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Why do we have a tax system
that gives tax credits
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and is fraught with so many loopholes?
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While your gut reaction
might be to exclaim
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that the tax system is broken,
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a more complete answer is
definitely more complex.
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The objectives of the
tax system are multifold.
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It is true that one objective
is to raise revenue.
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But it is also the case
that the government
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uses the tax system to
encourage investment
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in certain types of assets
or in specific industries.
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The government also uses the tax system
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as a tool to stimulate economic growth
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and to achieve social goals,
like wealth redistribution.
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So, observing that some
firms pay low tax rates,
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while other firms pay high tax rates,
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is not a smoking gun suggesting
the tax system is broken,
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as some commentators suggest, but instead
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could simply be the result
of 30 years of legislation
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designed to achieve objectives other than
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collecting revenue and
filling government coffers.
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The second commonly held
belief is that the U.S.
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has the highest corporate
tax rate in the world.
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It turns out that this is mostly accurate.
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It is true that the statutory
U.S. corporate tax rate,
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at 35 percent, plus around five percent
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state corporate tax
rate, is higher than most
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other developed countries in the world,
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including most European countries.
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We have arrived at this
position not because the U.S.
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has raised corporate
tax rates, but because
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the rest of the world has steadily reduced
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corporate tax rates
over the last 30 years.
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But even though our
statutory rates have remained
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essentially constant for almost 30 years,
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the effective corporate tax rates,
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or the fraction of income tax paid on each
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pretax dollar of earnings has
steadily declined over time.
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In fact, between 1988 and
2012, effective tax rates,
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or the rates that companies actually pay,
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dropped about a half a
percentage point each year.
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Some point to this as
evidence that our tax system
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is not really broken,
but is indeed competitive
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with tax systems around the world.
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Others argue that making
firms jump through loopholes
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to achieve a competitive
tax rate is inefficient.
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Whichever opinion you
hold, the fact remains
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that the average U.S.
corporation has a lower
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effective tax rate today
than 25 or 30 years ago
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when the tax system was last reformed.
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The third commonly held belief is that
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the U.S. tax system
encourages U.S. companies
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to invest overseas,
instead of here in the U.S.
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In theory, the U.S. tax system is designed
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to achieve capital export neutrality,
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meaning that U.S. firms
should be indifferent,
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in terms of taxation,
between investing a dollar
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in the U.S. and investing a dollar abroad.
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Thus, in theory, firms should
invest their marginal dollar
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in the country where it can
most efficiently provide
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a return on capital, with
taxes playing a minimal role.
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But, in practice, U.S.
companies can defer paying
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U.S. taxes on foreign earnings until
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they need the cash in the U.S.
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If the U.S. tax rate is expected to drop
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in the future because of
tax reform or a tax holiday,
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then U.S. companies will face lower taxes
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on foreign earnings
than domestic earnings.
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Moreover, there is an accounting
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benefit to foreign earnings.
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As long as those earnings
are determined to be
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indefinitely reinvested, then there is
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no requirement to record a tax liability
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for those earnings, even
though the firm may,
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in fact, owe tax to
the U.S. in the future.
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This quirk in U.S. accounting
rules can provide a boost
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to bottom line earnings for
multinational U.S. firms.
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So, while there is no
explicit tax provision
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written to encourage offshore investment,
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once all the nuances of our
current system are understood
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there is some incentive
to recognize earnings
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in relatively low taxed foreign countries,
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especially if those
earnings can be classified
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as indefinitely reinvested
and the cash left abroad.
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What then can tax reform accomplish?
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Will tax reform raise more revenue?
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While this might be
possible, most proposals
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are revenue neutral and
won't fill government coffers
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any more than the current system.
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Will tax reform tighten
the distribution of
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effective tax rates, so that there are
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fewer companies paying very low rates
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and fewer companies
paying very high rates?
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This could be achieved, but even in 1986,
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the last time the tax system was reformed,
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there was still significant variation
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in the rates companies paid.
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It seems that politicians don't have
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a strong appetite for
making the system fair.
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Instead, they each want
something that benefits
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their respective constituents,
which tends to lead
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to a tax system riddled with idiosyncratic
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provisions that benefit a few firms here
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and a few firms there,
creating winners and losers.
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Will tax reform encourage investment
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in the U.S. instead of abroad?
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Maybe the system can be refined to help,
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but the fact of the matter
is that most of the world's
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untapped markets are outside of the U.S.,
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and there is nothing in the tax system
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that can change the fact
that the fundamental driver
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of foreign investment is
growth in foreign countries.
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So, could tax reform encourage
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repatriation of foreign earnings?
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Yeah, if tax reform were properly executed
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it could mitigate, or
even remove the incentive
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firms currently have to leave
their foreign earnings abroad.
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But, recent research suggests that
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even if those earnings were repatriated
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to the United States, we might not see
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massive new investments
in domestic projects.
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Instead, it is more
likely that we would see
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dividend payouts, or share repurchases.
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And if earnings are ultimately
returned to shareholders,
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then shareholders can make decisions about
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the most efficient
redeployment of their capital.
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In sum, many believe our
corporate tax system is broken
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and have issued calls to fix it.
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But very few seem to
understand what it means
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to have a broken system, or what a
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repaired system might accomplish.
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The research we are
undertaking here at Duke
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and at other institutions
around the country,
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is helping to shape this
debate in a way that we hope
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will result in meaningful,
effective tax reform.
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Clearly, a 10 minute
video is only sufficient
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to touch the surface of
the corporate tax system.
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I look forward to the
opportunity to chat with you
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in a few weeks, where we can
engage in meaningful discussion
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about the current state of
our corporate tax system
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and possible directions for future change.
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I hope to see you then.
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