That’s according to a 2011 report by a subcommittee of the U.S. Senate Homeland Security committee. In fact, it found the 15 largest repatriating corporations cut jobs and reduced their overall U.S. workforce by 20,931 people.
The top companies increased stock buybacks, rewarding shareholders and boosting their executives’ pay — despite provisions of the 2004 law prohibiting use of the repatriated cash for those purposes.
It’s another way that tax changes are worsening both income inequality and the racial wealth gap, because stock buybacks disproportionately benefit high-income white Americans.
The 2004 repatriation “not only failed to achieve its goal of increasing jobs and domestic investment in research and development,” concluded the subcommittee’s report, “it did little more than enrich corporate shareholders and executives while providing an estimated $3.3 billion tax windfall for some of the largest multinational corporations.”
Congress responded by doing it all over again in 2017, giving the same group of companies a variation on the tax break it had awarded them in 2004.
The Tax Cuts and Jobs Act of 2017 lowered the tax rate on most repatriated funds to 15% — not as bargain basement as in 2004, but still a dramatic cut — and gave multinational corporations a much longer holiday to bring the money home: eight years.
Promising that the tax break would “turn America into a job magnet,” President Donald Trump claimed that no less than $4 trillion would come back to the States. “This is money that would never, ever be seen again by the workers and the people of our country,” he said.
The money is coming back — but not to American workers or communities thirsty for corporate investment. Instead, just as in 2004, it is flowing to shareholders and executives. A report by the Federal Reserve found in 2019 that share buybacks for the 15 largest corporations holding offshore cash “rose sharply” after the law passed.
Money helps explain why this sort of thing keeps happening.
Every year corporations spend more than 85% of the total reported expenses associated with lobbying Congress. By contrast, labor unions, which represent interests of working people, account for less than 2%.
And though corporate donors lean Republican as a rule, they give generously to both parties. Over the past six election cycles, business-related donors contributed roughly $7 billion to Democrats and Republicans apiece, according to OpenSecrets, a nonpartisan body that tracks contributions.
Ellen Miller, who long oversaw Washington-based nonprofits that tracked the influence of money in politics, thinks that’s why Republican zeal to cut taxes was long met by less-than-energetic opposition.
“The campaign finance system we have that is inundated by corporate donors has kept Democrats asleep on this issue,” she said in an interview.
The so-called carried interest loophole is a perfect example of how companies use the influence they’ve bought.
Democrats and some Republicans have railed for years against the provision, which lets private-equity and hedge fund executives pay taxes on their pay at nearly half the going rate. Even Trump called for its end. The Inflation Reduction Act negotiated this year by Sens. Chuck Schumer and Joe Manchin would have narrowed the loophole, but even that was too much for the private-equity industry.
Company lobbyists turned to Sen. Kyrsten Sinema of Arizona, a Democrat to whom investment firms have contributed $2.7 million in the past five years.
She killed the provision. The carried interest loophole lives on.
The ‘angel of death’ loophole
Washington’s restructuring of another tax — one that affects only a handful of Americans — may best show how elected officials have shaped the tax system for the few.
In place since 1916, the estate tax has been defended by Democrats and some Republicans for many years to prevent what President Franklin D. Roosevelt once described as the “transmission from generation to generation of vast fortunes by will, inheritance, or gift.” Andrew Carnegie, one of the richest Americans and an income tax foe, had this to say about the estate tax: “Of all forms of taxation, this seems the wisest.”
But laws enacted by Republican-controlled Congresses slashed the number of taxpayers paying it from 27,568 in 1982 to 2,584 in 2021.
Collections, adjusted for inflation, were virtually unchanged over that period — even though household wealth among the rich exploded during that time.
That dramatic reduction in estate tax filings is the result of highly successful campaigns over the years by Republicans labeling it the “death tax” and advancing specious arguments about alleged injustices. One of the most popular was the claim that it forces the sale of family farms.
“They have wonderful farms, but they can’t pay the tax, so they have to sell,” Trump said in 2017.
But according to the Urban-Brookings Tax Policy Center, several analyses have not turned up “a single farm that went out of business due to estate tax liability.”
Because of favorable laws and clever tax planning, the number of estate tax returns continues to plummet. “Only morons pay the estate tax,” Trump White House advisor Gary Cohn is said to have told congressional Democrats in 2017 when they were calling for a rate increase.
Even before cuts in the estate tax, the wealthy long ago figured out how to pass along the family fortune tax free: It’s called the “angel of death” loophole, the vehicle by which great wealth is passed from one generation to the next and allowed to compound tax free into even greater value. It is the foundation on which the wealth of some of America’s richest families is built.
It works like this.
Say you bought 1,000 shares of Widget Company stock at $50 a share in 1980. By 2022, the stock is worth 10 times as much. If you sell those shares, you’ll owe capital-gains taxes of $100,000. But if you die and leave those shares to your favorite niece, no tax is owed and your niece has escaped a $100,000 tax bill.
Estimates put the amount of lost tax revenue from this loophole as high as $54 billion a year.
Closing it is on Biden’s agenda, as it was on Obama’s, as it has been on tax reform agendas for decades. But still it exists, having avoided any serious challenge in recent years.
Contrast that plum preserved by Congress for the rich with what Congress took away from the middle class in the so-called SECURE Act in 2019 (Setting Every Community Up for Retirement Enhancement).
Prior to the law, someone who inherited an IRA could withdraw payments from that retirement account over their entire life, thus stretching out taxes owed over many years, possibly decades. But SECURE mandated that withdrawals from an inherited IRA be taken within 10 years. Now a much larger portion of inherited IRAs will go to taxes because many beneficiaries will have to withdraw the money while in a higher tax bracket, before their own retirement.
That means a middle-class worker who inherits a $1 million IRA might pay $240,000 to $320,000 in taxes. A scion of a wealthy family who inherits $100 million in stock, meanwhile, pays no capital-gains taxes at the time and can cash it out whenever desired.
The bottom line
Over the past four decades, the federal tax system has been transformed into something akin to a private-equity fund for wealthy taxpayers, giving them remarkable returns from multiple sources. As Congress showered them with benefits, most Americans struggled to keep up with the cost of living.
Median household income in 1981 was the equivalent of $62,000 in today’s dollars. Since then, the earnings of the majority of American families have been mostly stagnant, just barely keeping up with inflation. Think of it as standing still financially for 40 years.
Social Security and Medicare taxes add to the brutal squeeze. They take 7.6% of wages from workers who earn $60,000. It’s only a 2% bite for someone earning $1 million because Social Security taxes are capped for high earners.
The flow of money to those at the top is at the heart of the growing concentration of wealth. The more money you make, the more opportunities to save and allow your excess income to compound.
No group of working Americans has paid a steeper price for income inequality in the tax-cutting past four decades than African Americans. Their median household income of $45,870 is nearly 40% lower than that of white households. Over the decades, “next to no progress has been made in closing the black-white income gap,” concluded a report for the Federal Reserve Bank of Minneapolis in 2018. “The typical black household remains poorer than 80 percent of white households.”
Because Black families have fewer opportunities to set aside money and accumulate assets, the wealth gap between white and Black families is even worse. White families on average have six times more wealth than Black families: $983,400 for whites; $142,500 for Blacks, according to Federal Reserve data. Half of African American families have assets of less than $25,000.
And those numbers were compiled before COVID-19, a bigger financial hit to African Americans than any other racial or ethnic group, according to the Census Bureau.
For most of the period when the country had a more progressive tax system, racial discrimination was legal. By rule and practice, the U.S. government largely blocked Black families from accessing federal programs that helped white families build generational wealth.
In the past four decades, meanwhile, wealth-building opportunities for people with modest resources have been in short supply. Sixty percent of the country — the people on the less-income side of the scale — have a lower share of total assets in the U.S. now than in the late 1980s, according to the Federal Reserve.
It would take big change to turn that around. The tax provisions in the Inflation Reduction Act are only a modest step in that direction.
Biden’s original tax proposals were much more ambitious than what wound up in that law. He called for raising top tax rates on individuals back to the Clinton-era 39.6% and on corporations from 21% to 28%, taxing capital gains like wages, eliminating the “angel of death” loophole that allows the wealthy to pass their stock holdings to heirs tax-free, and many other provisions to shift more of the tax load to those at the top.
Public opinion polls show significant support for most of his tax proposals. But there’s virtually no hope for their adoption by the politically split incoming Congress.
Yet some believe that these proposals show a shift in thinking about taxes that could pave the way for more in the future.
“Biden’s investment and tax plans were more impressive than in any other previous election campaign, and he followed through with those proposals in his budget,” said Clemente, the Americans for Tax Fairness executive director.
To Chuck Collins, a senior scholar at the Institute for Policy Studies who has been tracking income inequality for years, it is more urgent than ever that the U.S. do something about the growing chasm between those at the top and everyone else — something besides making it worse.
“Our current policies are propelling us toward a society that even the rich don’t want,” he said, “with the ultra-wealthy living in walled, gated communities driving bulletproof Mercedes, a precarious middle class with a larger percentage of people with no financial reserves.
“You don’t want your children growing up in an apartheid society. It creates volatility and social and political instability. Which is what we are wading into now.”
Journalist James B. Steele has twice won the Pulitzer Prize for coverage of federal taxes and is the co-author most recently of America: What Went Wrong? The Crisis Deepens.
Clarification, Dec. 12, 2022: We added a note to a graphic showing business income taxes as a share of the total to clarify how the IRS defines those taxes.
