Open

by Kimberly Clausing

  1. Indeed, if one goes back to the East India Company (1600–1874) or the Hudson Bay Company (1670–), one finds two companies with extraordinary market power and control over international trade. In the Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith persistently critiques the market power of large businesses, and expresses dismay at the role of the state in sponsoring and facilitating their market power. For example, Smith argues: “To widen the market and to narrow the competition, is always the interest of the dealers.… The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.”

  2. All data on multinational operations are from the US Bureau of Economic Analysis. As in Figure 7.1, GDP numbers are provided to give an indication of scale, not to imply that sales of different parties would add up to GDP. GDP is a value-added concept, whereas sales are not.

  3. While multinational companies perform the vast majority of trade by volume, about 97 percent of the companies that export are small companies with fewer than five hundred employees. However, the 3 percent of companies that export that are large are doing the vast majority of trade. For more discussion of the role of small companies in trade, see Patrick Delehanty, “Small Businesses Key Players in International Trade,” Office of Advocacy Issue Brief No. 11, Small Business Administration, December 1, 2015, https://www.sba.gov/sites/default/files/advocacy/Issue-Brief-11-Small-Biz-Key-Players-International-Trade.pdf

  4. See studies and data cited within Andrew B. Bernard, J. Bradford Jensen, Stephen J. Redding, and Peter K. Schott, “Global Firms,” Working Paper 22727, NBER Working Papers, National Bureau of Economic Research, 2016.

  5. Mihir A. Desai, “The Decentering of the Global Firm,” World Economy 32:9 (2009): 1271–1290.

  6. “How Much of Your Car Is Made in America,” Consumer Reports News, June 15, 2011, https://www.consumerreports.org/cro/news/2011/06/how-much-of-your-car-is-made-in-america/index.htm.

  7. “Trade in Value Added,” TiVA Indicators database, Organisation for Economic Co-operation and Development (OECD), http://www.oecd.org/industry/ind/measuringtradeinvalue-addedanoecd-wtojointinitiative.htm.

  8. Richard Dobbs, Tim Koller, Sree Ramaswamy, Jonathan Woetzel, James Manyika, Rohit Krishnan, and Andreula Nicolo, “The New Global Competition for Corporate Profits,” McKinsey Global Institute, September 2015. Beyond these measures, the problem may be even larger due to the common ownership patterns of large firms. For discussions of the implications of common ownership, see Jose Azar, Martin C. Schmalz, and Isabel Tecu, “Anticompetitive Effects of Common Ownership,” Journal of Finance, 73:4 (2018); Jose Azar, Sahil Raina, and Martin C. Schmalz, “Ultimate Ownership and Bank Competition,” CEPR Working Paper, July 2016.

  9. For an overview of the data describing these trends and a discussion of their implications, see Jason Furman and Peter Orszag, “A Firm-Level Perspective on the Role of Rents in the Rise in Inequality,” presented at “A Just Society” Centennial Event in Honor of Joseph Stiglitz, Columbia University, October 16, 2015.

  10. US Treasury Department economists calculate that the fraction of the corporate tax base that is excess returns averaged 60 percent from 1992 to 2002, but has since increased to about 75 percent over the period 2003–2013. Laura Power and Austin Frerick, “Have Excess Returns to Corporations Been Increasing Over Time?” National Tax Journal 69:4 (2016): 831–846.

  11. David Autor, David Dorn, Lawrence F, Katz, Christina Patterson, and John Van Reenen, “Concentrating on the Fall of the Labor Share,” Working Paper 23108, NBER Working Papers, National Bureau of Economic Research, 2017; David Autor, David Dorn, Lawrence F. Katz, Christina Patterson, and John Van Reenen, “The Fall of the Labor Share and the Rise of Superstar Firms,” Discussion Paper 1482, CEP Discussion Papers, Centre for Economic Performance, 2017.

  12. Over the previous thirty years, corporate savings have increased their share of total global savings by about twenty percentage points. See Loukas Karabarbounis and Brent Neiman, “Declining Labor Shares and the Global Rise of Corporate Saving,” Working Paper 18154, NBER Working Papers, National Bureau of Economic Research, 2012.

  13. Yet, the typical firm is not more profitable; the highly successful companies at the top of the distribution drive these trends.

  14. See Germán Gutiérrez and Thomas Philippon, “Investment-Less Growth: An Empirical Investigation,” Working Paper 22897, NBER Working Papers, National Bureau of Economic Research, 2016.

  15. On the savings glut, see: Ben S. Bernanke, “Why Are Interest Rates so Low, Part 3: The Global Savings Glut,” Brookings, April 1, 2015, https://www.brookings.edu/blog/ben-bernanke/2015/04/01/why-are-interest-rates-so-low-part-3-the-global-savings-glut/. On secular stagnation, see Lawrence H. Summers, “Secular Stagnation and Monetary Policy,” Federal Reserve Bank of St. Louis 98:2 (2016), 93–110.

  16. See David Weil, The Fissured Workplace: Why Work Became So Bad for So Many and What Can Be Done to Improve It (Cambridge, MA: Harvard University Press, 2014).

  17. Furman and Orszag, “A Firm-Level Perspective.” Firms with market power do not generate optimal outcomes for pricing, capital allocation, or labor mobility, unlike their perfectly competitive counterparts.

  18. Furman and Orszag, “A Firm-Level Perspective.”

  19. US Treasury data indicate that the top 5 percent of taxpayers receive 65 percent of dividends and 80 percent of long-term capital gains. See Tax Policy Center, “Distribution of Long-Term Capital Gains and Qualified Dividends by Cash Income Percentile, 2017,” Tax Policy Center T17-0082, March 21, 2017.

  20. Opinions differ within the profession regarding whether high CEO pay is merely a reflection of very high productivity. For a review of studies that argue in both directions, see James Kwak, Economism: Bad Economics and the Rise of Inequality (New York: Pantheon Books, 2017), 80.

  21. Thomas Akabzaa, “African Mining Codes, a Race to the Bottom,” African Agenda 7:3 (2004): 62–63; Enrico Carisch, “Conflict Gold to Criminal Gold,” Open Society Initiative of Southern Africa (OSISA), November 13, 2012; Mark Olalde, “The Haunting Legacy of South Africa’s Gold Mines,” Yale Environment 360, November 12, 2015.

  22. For a thorough discussion of this example, see Elizabeth R. DeSombre, Flagging Standards (Cambridge, MA: MIT Press, 2006).

  23. A rigorous empirical investigation confirms that employment and other real measures of multinational activity are less negatively correlated with tax rates across countries, when controlling for other variables, than are profits or financial measures. See Kimberly Clausing, “The Nature and Practice of Capital Tax Competition” Global Tax Governance (Colchester, UK: ECPR Press, 2016), 27–54.

  24. This is the share of total net income earned by foreign US multinational firm affiliates that was booked in Bermuda. Data are from the US Bureau of Economic Analysis surveys of US multinational companies. For data on the Ohio State study body, see “Ohio State University Statistical Summary,” https://www.osu.edu/osutoday/stuinfo.php.

  25. Indeed, this comparison understates the likely magnitude of the problem, since the measurement of GDP in Bermuda is likely distorted by tax avoidance and the huge amounts of “paper profits” that are booked in Bermuda. In 2014, Bermudan GDP was $5.9 billion, implying an implausibly high GDP per capita of about $91,500.

  26. While law requires companies to price such transactions as if they were occurring at “arm’s length” with unrelated entities, in practice these laws are difficult to enforce, as there is often substantial ambiguity regarding the true arm’s-length price. Evidence of tax-motivated transfer pricing is substantial
; see Kimberly Clausing, “Tax-Motivated Transfer Pricing and US Intrafirm Trade Prices,” Journal of Public Economics 87:9 (2003), 2207–2223; Kimberly Clausing, “International Tax Avoidance US International Trade,” National Tax Journal 59:2 (2006), 269–287.

  27. For examples of press coverage, see articles on tax avoidance by Jesse Drucker, including “Google 2.4% Rate Shows How $60 Billion Is Lost to Tax Loopholes,” Bloomberg, October 21, 2010, https://www.bloomberg.com/news/articles/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-tax-loopholes. For a seminal treatment of the larger problem, see Edward D. Kleinbard, “The Lessons of Stateless Income,” Tax Law Review 65:1 (2011), 99–171.

  28. See Kimberly Clausing, “The Effect of Profit Shifting on the Corporate Tax Base in the United States and Beyond,” National Tax Journal 69:4 (2016): 905–934. The numbers in the text reflect some extrapolation to the present year from estimates for 2012, which were $77 to $111 billion in revenue loss for the United States, and about $280 billion in revenue loss for non-haven countries, including the United States.

  29. Related issues will be discussed in greater detail in Chapter 9.

  30. Office of the US Trade Representative, “Transatlantic Trade and Investment Partnership (T-TIP),” September 28, 2017.

  31. The agreement was reached in October 2016; it must still be approved by parliaments before implementation. For details regarding the agreement, see “CETA Chapter by Chapter,” Trade—European Commission, September 28, 2017, http://ec.europa.eu/trade/policy/in-focus/ceta/ceta-chapter-by-chapter/.

  32. Environmental issues present a classic example of market failure. Without government intervention, the market will produce too much of goods that cause environmental harms, since neither the producer nor consumer of harmful products bear the full social cost of their production. This means governments must intervene to discourage the production of goods that generate environmental harms, either by taxing the harm directly (for example, a tax on pollutant emissions) or by implementing regulatory policies that seek the same aim.

  33. See Eric V. Edmonds and Nina Pavcnik, “International Trade and Child Labor: Cross-Country Evidence,” Journal of International Economics 68:1 (2006), 115–140; ILO, “The End of Child Labour: Within Reach,” Report, International Labour Organization, 2006.

  34. PPP numbers adjust for price differences across countries. Such data make the United States a smaller share of the world economy since price levels are lower in most developing countries. For example, India’s economy is much larger in terms of PPP than in terms of USD, since a dollar of income can buy more goods and services in India than in the United States.

  35. For example, the Pfizer-Allergan inversion deal was scuttled due to the Treasury inversion regulations, although there is talk of possible revival given the changing regulatory climate in the Trump Administration.

  36. Kimberly Clausing, “Corporate Inversions,” Tax Policy Center; Urban Institute and Brookings Institution, August 20, 2014.

  37. The official title of the law is Public Law 115-97.

  38. The US tax base is notoriously narrow and there is a preference in the US tax code for noncorporate business structures. There are also important distortions within the corporate tax code. For example, debt-financed investments are tax-favored relative to equity-financed investments. By providing an incentive to increase leverage, this creates financial vulnerability for the US economy. For more, see Kimberly A. Clausing, “Strengthening the Indispensable US Corporate Tax,” Working Paper, Washington Center for Equitable Growth, September 12, 2016.

  39. Only about 30 percent of US equity income is taxable at the individual level by the US government, in part due to tax-free treatment for most income earned in retirement accounts, pensions, college savings accounts, and non-profits. Also, the corporate tax is a “backstop” for the individual tax; without a corporate tax, the corporate form becomes a tax shelter. See Leonard E. Burman, Kimberly A. Clausing, and Lydia Austin, “Is US Corporate Income Double-Taxed?” National Tax Journal 70:3 (2017): 675–706.

  40. For a thorough treatment of the burden of the corporate tax, see Kimberly A. Clausing, “In Search of Corporate Tax Incidence,” Tax Law Review 65:3 (2012), 433–472.

  41. Double taxation is avoided by providing foreign tax credits for taxes paid to foreign governments. Still, foreign tax credits will be very small for income earned in tax havens since so little foreign tax is paid.

  42. A per-country minimum tax especially reduces the incentive to earn income in tax havens. A global minimum tax may perversely encourage foreign income in both high- and low- tax (haven) foreign countries relative to income earned in the United States, since high-tax foreign income can offset minimum tax due on haven income.

  43. An astounding 82 percent of profit shifting occurs with respect to seven havens with effective tax rates lower than 5 percent. See Clausing, “The Effect of Profit Shifting.”

  44. Corporate inversions occur when companies are driven by tax considerations to rearrange their organizational structure to move their headquarters overseas on paper. An exit tax would require such corporations to pay their tax due before expatriating. For more on inversions, see Kimberly Clausing, “Corporate Inversions,” Tax Policy Center; Urban Institute and Brookings Institution, August 20, 2014.

  45. It would also necessitate rules to help establish corporate residence. The anti-inversion laws suggested in Clausing, “Corporate Inversions,” would be a useful step in that direction.

  46. Multinational companies exist because they earn more working together as one commonly-owned global company than they would if they were separate domestic companies operating at arms’ length. Yet, where should this extra income be booked? In some respects, it has no true national source, since it is the global integration of business activity that generates the additional income.

  47. A thorough discussion of such proposals is provided in Reuven S. Avi-Yonah and Kimberly A. Clausing, “Reforming Corporate Taxation in a Global Economy: A Proposal To Adopt Formulary Apportionment” in Path to Prosperity: Hamilton Project Ideas on Income Security, Education, and Taxes (Washington: Brookings Institution Press, 2008), 319–344; Reuven S. Avi-Yonah, Kimberly A. Clausing, and Michael C. Durst, “Allocating Business Profits for Tax Purposes: A Proposal to Adopt a Formulary Profit Split,” Florida Tax Review 9:5 (2009), 497–553.

  48. See Kimberly A. Clausing, “The US State Experience under Formulary Apportionment: Are There Lessons for International Reform?” National Tax Journal 69:2 (2016), 353–385. For more on implementation details, see Michael C. Durst, A Formulary System for Dividing Income among Taxing Jurisdictions, Bloomberg BNA Tax Management Portfolio No. 6938 (2015), https://www.bna.com/formulary-system-dividing-p73014475964/.

  49. For a more detailed treatment of these issues, see Clausing, “Strengthening the Indispensable US Corporate Tax.”

  8. Immigrants, We Get the Job Done!

  1. At a key point in the musical, as Alexander Hamilton fights the Revolutionary War alongside Marquis de Lafayette, they turn to each other and exclaim, “Immigrants, we get the job done!” This line forms the basis of an excellent song on The Hamilton Mixtape, an album released in December 2016 by the brilliant creator of the Hamilton musical, Lin-Manuel Miranda.

  2. In recent decades, much evidence indicates that American economic mobility is no greater than that of other countries. The narrative of the American dream, however, lives on.

  3. This figure includes both legal and undocumented migrants.

  4. For an example from Germany, see “Startup-Kultur: Immigrants Are Bringing Entrepreneurial Flair to Germany,” Economist, February 4, 2017.

  5. The Partnership for a New American Economy and the Partnership for New York City, “Not Coming to America,” May 22, 2012. Together, immigrants and their children are nearly one in four Americans. See Francine Blau and Christopher Mackie, eds. The Economic and Fiscal Consequences of Immigration. National Academy of Sciences, Engineering a
nd Medicine Panel Report. September 2016.

  6. Information is for the 87 U.S. startup companies valued at over $1 billion (as of January 1, 2016) that are not yet publicly traded and that are tracked by The Wall Street Journal and Dow Jones VentureSource. See Stuart Anderson “Immigrants and Billion Dollar Startups,” Policy Brief, National Foundation for American Policy, 2016.

  7. Stuart Anderson, American Made 2.0: How Immigrant Entrepreneurs Continue to Contribute to the US Economy, National Venture Capital Association, July 2013.

  8. Rachel Massaro, “2016 Silicon Valley Index,” Institute for Regional Studies, 2016.

  9. Ethan Lewis and Giovanni Peri, “Immigration and the Economy of Cities and Regions,” In Handbook of Regional and Urban Economics Volume 5 (New York: Elsevier, 2015), 625–685.

  10. For evidence on higher patent rates, see Jennifer Hunt and Marjolaine Gauthier-Loiselle, “How Much Does Immigration Boost Innovation?” American Economic Journal: Macroeconomics. 2:2 (2010), 31–56. For evidence on greater innovation in communities with immigrants, see William R. Kerr and William F. Lincoln, “The Supply Side of Innovation: H-1B Visa Reforms and US Ethnic Invention,” Journal of Labor Economics 28:3 (2010), 473–508. For resulting positive effects on native workers, see Asadul Islam, Faridul Islam, and Chau Nguyen, “Skilled Immigration, Innovation, and the Wages of Native-Born Americans,” Industrial Relations: A Journal of Economy and Society 56:3 (2017): 459–488.

  11. The number for economics is 58 percent. For data, see “Table 21: Graduate students in science, engineering, and health in all institutions, by detailed field, citizenship, ethnicity, and race: 2015,” National Science Foundation. “Survey of Graduate Students and Postdoctorates in Science and Engineering, Fall 2015,” https://ncsesdata.nsf.gov/datatables/gradpostdoc/2015/html/GSS2015_DST_21.html.

  12. Giovanni Peri, Kevin Shih, and Chad Sparber, “STEM Workers, H-1B Visas, and Productivity in US Cities,” Journal of Labor Economics 33:S1 (2015): S225–S255.