Corporate Governance

The Renewing America Initiative is releasing today our new Policy Innovation Memo “Curtailing the Subsidy War Within the United States,” which I co-authored with Associate Director Rebecca Strauss. The problem is a vexing one. Governors and state governments quite rightly spend an enormous amount of time and energy trying to attract job-creating investments to their states. They think about how to get the right mix of tax policy, education, infrastructure and sensible regulation that will draw business to their states. They compete vigorously with other states, and other countries, to sell companies on the merits of locating in their state. All of this deserves applause. But sadly, that is rarely enough. Companies, especially large ones, are quite capable of playing states off against each other to extract millions in taxpayer dollars. Boeing, Caterpillar, Toyota and most recently the electric car maker Tesla are just a few of the companies that have played this game with great success. And so state governments are forced into bidding wars, offering special tax breaks, gifts of land or other subsidies to persuade companies to choose their state over others. It is a racket that costs states about $80 billion a year, which amounts to roughly seven percent of total state budgets. As Becky and I wrote in a New York Times op-ed that appeared on Saturday: “From a national perspective, this is about as dumb as it gets. Taxpayer money is wasted to pay off companies that would most likely have invested somewhere else in the United States.” Figuring out what to do about these bidding wars is a whole lot harder. The easiest solution would be for the federal government simply to ban such subsidies. As one correspondent put it to me after the NYT article appeared: “Your op-ed takes the long way ‘round.” There is a solid legal argument to be made that Congress has the constitutional authority to forbid state subsidies, and current practices may well violate the Commerce Clause. The European Union, which in most respects is much less centralized than the United States, has a “State Aid” law that severely restricts the sort of subsidies that members states like France and Germany can offer to companies. Sadly, after considering these options, we concluded that however strong the legal case for federal pre-emption, the political likelihood of this happening in Congress as it is currently configured is about one-in-a-bazillion. For purposes of economic development, U.S. states these days are almost like independent nations, with the federal government doing little or nothing to stop states from bidding freely for business. So, much like independent nations, states will only end the handouts if they voluntarily see the benefits of cooperation. That is what made us look at international models of cooperation, such as those in the World Trade Organization (WTO) and the Organization for Economic Co-operation and Development (OECD). Surely if sovereign states can see a collective interest in rules that restrict subsidies--however imperfectly they are enforced--then U.S. states should be able to do the same. Our report sketches out a model for how this could work, starting with greater transparency on what states are currently spending, and building up to regional pacts in which states agree to curb their subsidies if others do the same, while remaining free to compete with other states that refuse to abide by the rules. We suggest several ways the federal government could help. We do not underestimate the difficulty of this. It will take political courage for state leaders to take the first step. It will involve complex negotiations. Subsidies are not always easy to define, and some subsidies--say community college training geared to the specific needs of a large employer--are clearly desirable. And it could easily fail--a similar push in the early 1990s by Illinois governor Jim Edgar came to naught. But the alternative is continue large and wasteful subsidies that are likely to become even larger and more wasteful. As we put it in the NY Times piece: “The only way for states to stop corporations from playing divide-and-conquer is to figure out ways to work together.”

The Renewing America initiative is publishing today the latest in our Progress Report and Scorecard series, “Standard Deductions: U.S. Corporate Tax Policy.” This is one of those rare issues on which there is actually something of a broad consensus in Washington--corporate taxes, most Republicans and Democrats agree, should be low enough to attract investment, high enough to raise a reasonable share of federal revenues, and reasonably immune to tax avoidance strategies by companies. On all three tests, the current U.S. corporate tax system, which was last overhauled in 1986, fails. The statutory corporate tax rate in the United States is now the highest in the developed world, yet it raises less revenue than in most other rich countries. And U.S. companies are increasingly adept at reorganizing, sheltering profits offshore, and using dozens of other legal schemes to reduce their tax burden. A better system, most agree, would lower the statutory tax rate and eliminate most, if not all, of the special deductions. Beyond those generalities, however, it has proved enormously difficult for Congress to find a way forward on tax reform. Dave Camp, the Republican chairman of the House Ways & Means committee, recently released the most comprehensive, honest, and courageous proposal for tax reform in many years, and then promptly announced he was not running for re-election. The reaction from his own colleagues, and from much of the business community, made it clear that his proposal was dead on arrival. Our report, and a companion op-ed that appears today in Fortune, suggest some reasons why. While U.S. multinational companies often complain that the U.S. tax system puts them at a competitive disadvantage, the numbers suggest otherwise. Despite the high statutory U.S. corporate tax rate--about 39 percent including federal and state taxes--very few companies pay anything close to that. The average effective tax rate is about 27 percent, which is roughly on par with what other corporations pay in similar advanced economies. And the share of total U.S. tax revenues paid by corporations has been flat for the past three decade even as corporate profits have risen to record levels. And as our 2012 CFR backgrounder on corporate tax reform showed, compared with the 1950s and 1960s corporate tax revenue today is small fraction of what it once was. U.S. corporations benefits from a range of deductions. The biggest is the deferral of taxes for profits earned overseas; U.S. taxes are not due on those profits unless they are repatriated, and as a result many companies retain those profits offshore, a stash that currently exceeds $2 trillion. The effective U.S. tax rate on foreign profits is extremely low, about 3 percent. The results are not entirely fair: corporations with large overseas operations, or those with large intangible assets like patents and trademarks that can report profits in low-tax jurisdictions like Bermuda or Ireland, pay much lower taxes than domestic retailers or service firms. Manufacturers also enjoy significant tax breaks for capital investments and R & D. Yet since these are the companies most exposed to international competition, the lower effective rate may make sense from a competitiveness perspective. All of which underscores why Rep. Camp’s blueprint did not win much corporate acclaim. In order to reach the long-sought goal of bringing down the statutory corporate federal tax rate from 35 percent to 25 percent without further reducing the overall corporate tax share, he had to close many of these deductions, as well as raising taxes on large banks and some other powerful sectors. They have pushed back hard, and the Republican leadership has made it clear that Camp’s proposal is going nowhere. But it has changed the conversation certainly. My hope is that other ideas long deemed politically impossible, like creating a federal value-added tax (VAT) on consumption, might now find their way on to the table as a more palatable alternative. This was one of the recommendations of CFR's 2011 Independent Task Force on U.S. Trade and Investment Policy, for which I served as co-project director.  VATs are used in every other advanced economy, and they have allowed those countries to cut corporate tax rates below U.S. rates. And under World Trade Organization rules they can also be rebated for exports, which would further help U.S. international competitiveness. And a VAT could probably be designed in ways that do not make the tax system more regressive. We conclude in the report by citing polls that suggest there is strong public support for tax reform. There are certainly potential gains for the politicians that can make it happen. But there is still a long road ahead, and at the moment, no end in sight.

Antitrust law, which has evolved primarily through landmark Supreme Court cases, plays an essential role in the maintenance of efficient markets and promotion of long-term U.S. economic prosperity.

President Obama has been nothing if not a model of consistency in his State of the Union speeches, focusing again and again on the critical need to lift up America’s struggling middle classes. There is no more important issue on the agenda today. But in any political leader, consistency and conviction need to be twinned with a sense of opportunity and timing. And last night’s State of the Union speech was a big missed opportunity in that regard. More than at any point since Democrats lost control of the House of Representatives in 2010 following the health care overhaul, President Obama actually has a chance for major legislative victories this year. House Republicans are seriously considering passing immigration reform, which has been the president’s top priority for the past three years. With major trade negotiations under way with Asia and Europe, the president will need new trade promotion authority to move the treaties through Congress, and the Republicans seem prepared to give it to him. And tax reform, while a longer shot, has made modest progress thanks to the tireless work of House Ways & Means chairman Dave Camp (R-MI) and outgoing Senate Finance Committee chairman Max Baucus (D-MT). Each of these issues merited barely a mention in the speech, and on none of them did the president give any kudos to Congress for the efforts being made. House Speaker John Boehner (R-OH), aware of the rising political costs of his party’s current stance on immigration, is risking confrontation with his Tea Party wing to try to move forward. He is expected to release a set of principles for immigration reform this week that is likely to leave many Republicans unhappy. The president could have offered a small olive branch, as he has done previously, by encouraging the House to move ahead with its own set of proposals, which could then be reconciled with the Senate bill passed last year. Instead, he only offered clichéd restatements about the value of immigration reform to the U.S. economy. On trade, many congressional Democrats are certainly less than enthusiastic about passing trade promotion authority, and Obama clearly wanted to avoid a fight with his own party. He instead offered the blandest possible endorsement--“We need to work together on tools like bipartisan trade promotion authority.” But if Obama is unwilling to challenge his party directly on trade, as President Bill Clinton did in passing NAFTA, how can he expect Speaker Boehner to do the same on immigration? And on tax reform, rather than calling out the Camp-Baucus efforts and offering a pat on the back and a willingness to work together, Obama stuck to his formulaic call to “close loopholes” and end “incentives to ship jobs overseas.” The president certainly has a right to feel burned by the Republican Congress. His efforts over the years to reach a grand budget bargain with Speaker Boehner, for instance, came to naught. But again, politics is about change and possibilities, and just because compromise failed in the past doesn’t mean it can’t succeed in the future. Obama at least acknowledged the recent deal that has finally called a truce to the budget wars, but would it have hurt to give a shout out to its architects, Rep. Paul Ryan (R-WI) and Sen. Patty Murray (D-WA)? Or perhaps a mention of the critical role played by House Appropriations Committee chairman Harold Rogers (R-KY) and his Senate counterpart Barbara Mikulski (D-MD)? At the least, the president missed an easy opportunity to build some good will. Instead, the president’s advisers seemed to have persuaded him that, rather than using this moment of possibility to build some issue-by-issue bipartisan alliances on big pieces of legislation, this year was the time to focus on “executive action.” That means no need to try once again to find messy compromises with the Republicans, but it just feeds into the GOP meme that the president is abusing his authority and ignoring the Congress. And the list of promised executive actions was underwhelming--a “College Opportunity Summit,” new “manufacturing hubs,” reform of job training programs, and a new retirement savings bond. These are all worthy initiatives, but hardly the stuff of a strong presidential legacy. The things that really matter require Congress to act. The president’s advisers may be right that there is little chance for cooperation with Congress, especially in yet another election year. And certainly there are important parts of the president’s agenda (a minimum wage increase, an infrastructure bank, an unemployment insurance overhaul) that simply don’t have the necessary GOP support. But with Republicans almost certain to retain the House in elections this November, there are two options--try to seize the opportunities that are there for cooperation, or live with three more years of legislative gridlock and occasional executive actions too small for the scale of the problems.

Many states and cities offer a variety of tax incentives (credits, exemptions, deductions) to businesses with the aim of spurring growth and job creation, but few carefully analyze the costs and benefits. Some recent research has brought the wisdom of corporate tax breaks into question, and several states are considering reforms to assess the public value of their programs. In July 2013, Rhode Island passed the Economic Development Tax Incentives Evaluation Act. The law requires the state’s revenue department to evaluate new tax incentives within five years and reassess them every three years. Evaluation criteria include: the number of taxpaying firms receiving the incentive; the number of jobs supported by each firm receiving the incentive; the revenue generated by the incentive recipients and their employees; and the original goals of the legislation. Analysts will also report when data is unavailable or of low quality. Just last year, Rhode Island (along with twenty-five other states) was identified in a report by the Pew Charitable Trusts as “trailing behind” in evaluating tax incentive effectiveness. And so in considering reforms, Providence consulted Pew’s experts, including Robert Zahradnik, policy director for work on state fiscal health and economic growth. Zahradnik told CFR that “the final bill does a lot of things that, if implemented the way it is intended, will make Rhode Island a leader in evaluating tax incentives.” He identified four important requirements of the law: routine evaluation of incentives; measurement of benefits and costs; drawing clear conclusions; and requiring the governor’s budget to recommend continuing, reforming, or ending each tax incentive. Tax incentive programs vary in breadth from overall investment incentives, to industry-specific programs, to one-off arrangements designed to woo or retain a single employer. A study by Good Jobs First, a Washington, DC–based nonprofit promoting greater corporate and government accountability, has found that the frequency of so-called “megadeals”—deals with incentive packages over $75 million—doubled from ten deals in 2007 to twenty-one deals in 2012. In 2012, Nike threatened to move a five-year, $150 million corporate expansion outside of its home in Oregon unless the state guaranteed the shoemaker’s tax burden wouldn’t increase for decades. Oregon, which ultimately met Nike’s demand, taxes multistate firms on a "single-sales factor" basis, which only taxes profits within the state, not on global sales, property, or payroll. Governor John Kitzhaber and Nike said the deal could directly and indirectly create twelve thousand jobs and net the Oregon economy $2 billion each year, but officials reportedly did not release data to support these claims. However, the legislation did require Nike to directly create at least five hundred jobs. A special series by the New York Times last year highlighted many of the criticisms associated with corporate tax incentives at the local level, which are estimated at $80 billion per year. “A portrait arises of mayors and governors who are desperate to create jobs, outmatched by multinational corporations, and short on tools to fact-check what companies tell them,” wrote Louise Story. In one notable case, the town of Ypsilanti, MI, sued General Motors unsuccessfully in the 1990s after the town granted the automaker more than $200 million in tax incentives, only to have it close the facilities years later. The court ruled against Ypsilanti, saying that the statements GM made in lobbying for the tax abatements—“to continue production [at the facility] and maintain continuous employment for our employees”—were not legally enforceable promises. While all states use tax incentives, an analysis of twenty years of data by economists Robert S. Chirinko and Daniel J. Wilson found that general state investment tax credits appear to only shift investment between states, and have no effect on new capital formation. Chirinko and Wilson also determined that manufacturing locations are much less mobile geographically than overall capital. This is perhaps not surprising; manufacturing locations often have large, specialized equipment, a network of suppliers, and employees with specialized training, which would make relocation more difficult than a generic office building. However, manufacturing firms are the most frequent beneficiary of tax incentive programs. Other major beneficiaries include corporate offices, technology firms, tourism, and the film industry, which has enjoyed a rapid growth in targeted incentives from just a few million dollars in 2003 to $1.3 billion in 2011. Rhode Island’s new program of analyzing its tax incentives should help lawmakers to better understand the ultimate value of these programs, and whether they truly accomplish their goals. Supporters of tax incentives typically see them as a means to attract large employers that provide good jobs, particularly those whose revenue draws from outside the local area. But competition between states in attracting these businesses may lead to a “race to the bottom,” though Chirinko and Wilson argued that states have historically reacted to common economic forces rather than each other’s programs. Critics such as the Institute on Taxation and Economic Policy and the Center on Budget and Policy Priorities argue that incentive programs are expensive and provide uncertain benefits to cities, states, and the nation. It is also difficult to determine whether tax incentives are a pivotal factor in many business decisions. Lower tax revenues could even hurt growth by limiting a jurisdiction’s ability to provide public goods that attract companies, such as good physical infrastructure, a well-educated workforce, and a safe environment.

It was Vladimir Ilyich Lenin,  an astute student of the system he was determined to destroy, who is purported to have said: “The capitalists will sell us the rope by which we will hang them.” After reading the Washington Post story this week on corporate political donations to Republicans, it seems he may have been on to something. The point of the quote, apocryphal or not, is that business too often suffers from a short-term mentality in which the sale of the rope (bigger profits!) outweighs the longer-term consequences, however grave they might be. It is hard to know how else to explain the bizarre pattern of political giving uncovered by the Post story. According to the story, a joint effort by the Post and the invaluable Center for Responsive Politics, some of the richest business lobbying groups gave a majority of their Republican donations to lawmakers who voted against lifting the debt ceiling and re-opening the government. Take the American Bankers Association (ABA). From 2009-2012, it gave $2.2 million to Republicans who voted no on the debt ceiling increase, versus $2 million to Republicans who voted in favor. Giving by many other big business groups was nearly as tilted to the 144 House members and 18 senators who voted to default on U.S. debts. In other words, an association that represents the interests of bankers – whose success depends above all else on financial stability – gave a majority of its GOP donations to members of Congress who were willing to risk a financial conflagration that could have cost ABA member companies billions of dollars in losses. None other than Frank Keating, the ABA president, put it succinctly when asked about the potential consequences of a default: “This is just completely mad, as far as most of the community bank people are concerned, and I’m sure their customers and clients.” If it’s completely mad, then why are the ABA and many other prominent business associations supporting these members? The reason is that the same Republicans willing to risk a default are also in favor of policies that business believes will reduce expenses and help their bottom line – lower taxes, less government spending and lighter regulation. The short-term gains of supporting these politicians have outweighed the potential longer-term consequences. The problem is part of a larger one that professors at the Harvard Business School have identified as a failure by American business to protect the “commons” that are vital for its own profitability. Investing in workplace training, nurturing local suppliers, and spending on research are all costly activities, and many companies are loathe to pay the up-front costs on the uncertain promise of future gains. It is easier to search for quick cost savings. But if every company behaves the same way, the United States becomes a less attractive place to invest, to the collective cost of both business and the larger society. A federal government that can be relied on to pay its debts is one of those things that is rather essential to a well-functioning "commons." The encouraging news is that business may finally be waking up to the consequences of its own short-sightedness. As one Texas fundraiser told Politico: “Why do I want to fuel a fire that’s going to consume us?“ It’s not just the near default, but also the failure of the GOP to deliver on major business priorities such as immigration reform. Donations appear to be dropping for a number of prominent Tea Party Republicans, and big business donors are scouting around for alternative candidates to support. Surely such candidates exist, those who favor business and but also understand the need for effective and intelligent government. The two are hardly mutually exclusive. Sadly, business has been behaving for too long as if they were.

Months of relative calm on the U.S. fiscal front are set to end this month as Congress returns from summer recess, staring down the barrel of a possible government shutdown on October 1 (start of FY 2014), and another likely debt-limit fight shortly thereafter. Amid the mounting budget debate, many fiscal policy experts have called for a total rewrite of U.S. tax law akin to what last occurred 27 years ago. The Tax Reform Act of 1986 (TRA 1986) overhauled a code riddled with special exemptions and credits (tax expenditures for individuals and corporations) that made the system overly complex, less equitable, and less efficient. Much like today, there was a desire among many policymakers to rehabilitate the way the country brings in revenue to boost growth and entrepreneurship, and improve fairness. Leading the charge for tax reform in the early 1980’s, oddly enough, was a former basketball star-turned senator, who developed antipathy for the complexities of the federal tax code as a top earner in the NBA. Three decades on, Bill Bradley, in a recent CFR interview, was just as passionate about the need for fundamental tax reform, and he highlighted some important lessons from his experience.  (Federal revenue losses from corporate and individual tax expenditures fell after the 1986 reforms, but have risen steadily in the decades since, as shown in Figure 1.) “There are four things necessary if you are going to have a shot at doing income tax reform today,” he told me. “One, you need a committed president; two, a committed Treasury secretary; three, a chairman of the [House] Ways and Means Committee and a chairman of the [Senate] Finance Committee who see their own political interests served by passing reform. And four, which is debatable, you need some zealot talking about tax reform all the time. Thirty years ago, that was me,” he said. Bradley, now a Managing Director of Allen & Company LLC and a member of the board of directors of Starbucks Company, says tax reform was his top priority when he came to the Senate in 1979. Indeed, in many ways, the then 39-year-old New Jersey lawmaker laid the foundation for the ’86 overhaul with his Fair Tax Act of 1982 (co-sponsored with then Rep. Dick Gephardt), which sought to simplify the code, lower top rates and cull distortive tax breaks. Although the legislation died in committee along with thousands of other bills in the 97th Congress, journalists of the day were keen to acknowledge its seminal contribution to TRA 1986 and the dogged leadership of its author. In Showdown at Gucci Gulch, the definitive postmortem of the politicking behind TRA 1986, Al Hunt, then Washington bureau chief at the Wall Street Journal, writes in the introduction: “At every critical juncture Bradley stepped in to provide an important push; rarely has a legislator with no formal leadership role or committee chairmanship played such an instrumental role in a major piece of legislation.” (“Gucci Gulch” was the name given to the hallway outside the Senate Finance Committee, where leading tax lobbyists in “expensive Italian shoes” plied their trade.) Bradley says that there were a few simple, but significant principles that helped guide both parties in the 1986 effort: one, equal income should pay equal tax (i.e. loopholes should go); two, the market is a better allocator of resources than Congress (i.e. taxation shouldn’t bias investment choices); and three, those who have more should pay more. While he was careful to stress that the policy negotiations in those days could have collapsed (and nearly did) at any time, Bradley said that the overarching principles outlined above provided a lodestar to the legislative process. “There was something in there for both Democrats and Republicans,” he said. “Republicans wanted lower rates and Democrats wanted fewer loopholes. And there was an agreement that together we could get both.” A problem with modern reform efforts, says Bradley, is the lack thus far of a highly detailed plan put forth by tax legislators or the president, who both often speak broadly and vaguely about the issue. “If you are serious about getting it done, there is no substitute for a very specific proposal; I did it in ’82, I did another one in ’84 and ’85; [president] Reagan did one in late ’84, and another in mid ’85, and then we were off to the races because the president and the legislature had put out exactly what they mean about tax reform,” he said. Leadership and buy-in from the White House was essential to the success of TRA 1986, Bradley said. “Reagan bought into it because when he was an actor the [top marginal income tax] rates were 90 percent. I bought into because when I was playing basketball, I was a depreciable asset. There were mutualities there that could be achieved only by agreeing.” Today, however, the political calculus may be different. Sen. Max Baucus (D-MT), chairman of the Finance Committee—who along with Rep. Dave Camp (R-MI), chairman of the Ways and Means Committee, have been whistle-stopping the country pushing comprehensive tax reform—has often tried to downplay the role of the White House, fearing President Obama’s public support could stoke opposition in the Republican-controlled House. Still, others intimately involved in the success of 1986 like Bradley say the president should be more out front in the proposal process. “If you’re going to ask people to walk the plank with you on important issues, and the president is just waiting to see what you produce, they’re not going to be willing to do it,” Bob Packwood (R-OR), who led the Senate Finance Committee when it unanimously passed TRA 1986, told Politico in July. Of late, a central question dividing the parties on this issue has been whether dollars generated from eliminating tax expenditures will all be used to bring down rates—a revenue-neutral approach—or whether a portion will be used for new fiscal stimulus and/or deficit reduction. To the chagrin of many Republicans, President Obama proposed using corporate tax reform to do the latter in late July, despite the administration’s past support for revenue-neutrality. Meanwhile, Baucus and Camp, who have created a bipartisan website to solicit reform ideas, plan to put forward their respective proposals (for corporate and individual taxes) in the coming weeks. But most analysts say the march toward a 1986-like fundamental rewrite of the code in the next sixteen months is decidedly uphill. (In January 2015, Baucus will retire and Camp will lose his chairmanship [term limits.]) Looking ahead, Bradley sees an opportunity for both sides to compromise by eliminating expenditures straightaway, but bringing down rates only as per capita income rises. “The idea is a rising tide lifts all boats. You close the loopholes immediately and use the money for deficit reduction, infrastructure and education. And then you say, for instance, if per capita income grows 2 percent per year, the [top marginal income tax] rate can go from 39.6 to 38. If it grows to 3, you get down to 37, until it’s back to 35 percent. That way you have both parties able to get what they want: lower rates, growing middle class income and targeted spending and deficit reduction.” More Renewing America Interviews can be found here.

Another day, another major acquisition of a U.S. firm by a Chinese company. The $4.7 billion deal announced today in which China’s Shuanghui Group has agreed to buy the world’s biggest pork producer, Smithfield, is the largest such transaction to date, and nearly double the price paid last year by Dalian Wanda to acquire the U.S. movie theater company AMC. But in every other respect it is just another in a growing string of large, and only moderately controversial, Chinese purchases of U.S. firms. What the bid suggests is that Chinese companies are finally figuring out that, in most sectors, the U.S. economy is far more open to Chinese investment than they had believed. Of the ten largest Chinese purchases to date, all but two have taken place in the past two years, in sectors as diverse as hotels, auto parts, and aviation lease financing. While all were subject to scrutiny by the U.S. government’s Committee on Foreign Investment in the United States (CFIUS), none posed insurmountable hurdles. The Smithfield deal will face a CFIUS review as well, but in all likelihood it will raise no issues. The pork business is hardly one that waves strategic red flags. And from a trade and commerce perspective, it looks like a winner. U.S. companies, including Smithfield, have long faced an array of irritating obstacles selling U.S. pork to China, which is the largest market for pork and pork products in the world. Many of those should become easier to navigate with a Chinese company in charge. And Smithfield’s shareholders, who had been agitating for a sale, are likely to be happy with the $34 per share offer price, a 31 percent premium over Tuesday’s closing share price. For Shuanghui, which has agreed to leave Smithfield’s staff and operations intact, the deal should help bring higher standards to the Chinese pork industry, which has been beset by a series of scandals including sales of tainted pork and the dumping of dead pig carcasses into rivers. Many Chinese companies have long been frustrated by the U.S. security review process, begging U.S. officials to offer them a clear roadmap to which sectors were open for Chinese investment and which were closed. The U.S. government has never offered such a roadmap, but the sheer accumulation of deals is starting to suggest that one exists. Telecommunications is off-limits (see anything involving Huawei), as are any investments that bring a Chinese company anywhere near a U.S. military installation (see Ralls and windfarms). But many other sectors appear more or less wide open. The growing number of acquisitions by privately-owned Chinese enterprises, rather than state-owned companies, is also an encouraging trend. Thilo Hanemann of the Rhodium Group noted last month that private Chinese companies have spent more on U.S. deals in the past 15 months than they did in the previous 11 years. Shuanghui was a state-owned company, but was taken private in a 2006 share offering that was open to foreign investors. Given the growing U.S. concerns over Chinese cyber-espionage, however, CFIUS appears to be circling the wagons even tighter around the telecommunications sector. The committee this week gave its approval to the $20.1 billion takeover of Sprint, the U.S. telecoms firm, by Japan’s Softbank, putting aside a political campaign by rival Dish Network to quash the deal on national security grounds. Dish had enlisted several senators and run full-page ads claiming the takeover would threaten U.S. security, hoping to force Softbank to withdraw from the fight. A similar political campaign in 2005 by Chevron succeeded in forcing China’s National Offshore Oil Corporation (CNOOC) to withdraw its $18.5 billion bid for Unocal. CNOOC learned its lessons, however, by moving slowly and taking a series of minority stakes in U.S. oil firms, and recently won CFIUS approval for the acquisition of the U.S. assets of Nexen, the Canadian oil and gas firm, though with unspecified conditions. In concluding the deal to acquire Sprint, Softbank agreed to an unusually aggressive set of conditions set by CFIUS. According to Reuters and the Wall Street Journal, Softbank agreed to remove all Huawei hardware from Sprint’s networks by 2016, and to install a government oversight committee that will have a veto over future equipment purchases. These are all encouraging signs that the U.S. government is focusing on genuine security threats, while holding out an “open for business” sign for other deals. That will be good for both the U.S. and Chinese economies.

Watching the Senate hearing yesterday with Apple chief executive Tim Cook, I came to the conclusion that there are some things the government should not be trying to do even if the reasons for doing so are obviously good ones. And one of those things is taxing corporations. I say this reluctantly because the share of the government’s total tax take paid by corporations has been falling steadily for years, and continues to fall even as corporate profits have reached record highs. This fine backgrounder by my Renewing America colleague Jonathan Masters points out that corporate tax payments as a percentage of GDP have fallen from more than 5 percent in the 1950s to less than 2 percent today. While corporate taxes are still the third largest source of federal revenue, they accounted for less than 8 percent of Treasury revenue in 2011, compared with 47 percent for the individual income tax and 36 percent for the payroll tax. In the 1950s, taxes on corporate profits accounted for about one-third of federal revenue. From an equity perspective, corporate profits should clearly be taxed more heavily. But the Senate investigation into Apple, which showed that the company avoided U.S. tax on at least $74 billion in profits over three years, and the brazen defense of Apple’s tax record from  Mr. Cook, showed why this simply won’t happen. In a global economy where it’s relatively easy for companies to move physical operations to low-tax countries, and even easier to shift paper profits to those jurisdictions, there is no way that governments can extract anything close to the tax revenue they believe they are owed. One of the Senate investigators called it a game of “Whac-a-Mole” – once the committee uncovered one tax dodging strategy by Apple there were many more that popped up. The reality of modern multinational corporations in a global economy is that governments will always be, at best, several steps behind the clever tax lawyers. This is not just true in the United States. Europe has faced precisely the same problem; the UK had its own uproar earlier this year when it discovered that Starbucks had scarcely paid any corporate tax because it was effectively booking all its profits through subsidiaries in Switzerland and the Netherlands. So what can be done to make companies pay a fairer share? One possibility is to negotiate an international arrangement to crack down on “tax haven” countries. The Clinton administration tried this in the late 1990s, led by one of the country’s distinguished public servants, Stuart Eizenstat, who was then deputy Treasury secretary.  Despite his determined efforts through the OECD and the support of many European countries, the initiative came away empty-handed. Too many countries simply refused to bargain away their sovereign power to cut taxes to attract investment, even if that “investment” is sometimes little more than a postal drop box. A second possibility, and one that will be on the table if Congress takes up tax reform this year, is to cut the high U.S. statutory tax rate (currently the highest in the OECD at 35 percent) back to a more competitive level, say in the mid-20s. This is what Mr. Cook recommended at the hearing. But as the Senate investigation showed, in many cases Apple was paying less than two percent in taxes on its overseas profits. Even at a 25 percent top tax rate, companies would have little additional incentive to expand their operations in the United States. Mr. Cook suggests a still lower “single digit” rate for repatriation of overseas profits, which might encourage companies a bit, but would net minimal revenue for the Treasury. A third option, being pushed by the “Lift America Coalition” of U.S companies from Coca-Cola to Xerox, is for the United States to move to a “territorial” tax system in which profits are taxed only in the country where they are earned. This is what most European countries do. The problem with that, however, is that it would increase even more the incentive for companies to shift profits offshore, and in reality there is little the IRS can do through regulations to prevent this. Not only would this erode corporate tax payments still further, companies that can shift profits easily -- such as technology and intellecual property-based businesses -- would be the big winners, while those that actually make things in the United States would see little benefit. The frustrating reality is that there is only one sensible solution actually within the power of the U.S. government to enact and enforce – abolish the corporate tax entirely. This is not as radical as it sounds. The tax on corporate profits has always been a double tax, since profits are taxed a second time when they are distributed to shareholders as dividends or capital gains. A revenue-neutral tax reform could make up most of the losses from corporate taxes with higher tax rates on dividends and capital gains. The Joint Committee on Taxation has estimated that taxing capital gains and dividends at the same rate as ordinary income (a top rate of 39.6 percent rather than the current 15 percent) would raise an additional $160 billion, which is only a bit less than the $181 billion corporations paid directly in taxes in 2011. Of course the idea of raising dividend and capital gains taxes is anathema to many and would be bitterly resisted. But the alternative is worse – to watch companies like Apple pay an ever dwindling percentage of their profits in tax to the U.S. government, while Congress and the administration stand by powerless to do anything about it.

In the wake of the collapse of the garment factory in Bangladesh, I have been thinking a lot about the issue of corporate social responsibility. The factory was making clothes for western companies including Primark of the UK and Loblaws of Canada, and in many ways the clothing companies have been among the most focused in recent years at trying to police their supply chains to ensure safer working conditions and decent wages. Yet at least 430 people were killed working to meet deadlines set by western companies in a facility that should have been torn down years ago. A compelling new article by MIT political scientist Richard Locke in the Boston Review, drawn from his new book The Promise and Limits of Private Power: Promoting Labor Standards in a Global Economy, does a lot to explain why. “Despite many good faith efforts over the past fifteen years, private regulation has had limited impact,” he writes. “Child labor, hazardous working conditions, excessive hours, and poor wages continue to plague many workplaces in the developing world, creating scandal and embarrassment for the global companies that source from these factories and farms.” Locke’s conclusions are based on a decade of research that began with an intense focus on one company, Nike, which has been a leader in trying to ensure fair labor standards among its suppliers around the world. Yet even Nike, he concludes, has been unable to maintain consistent high standards in its contract facilities. The focus on corporate social responsibility as a response to weak labor standards in developing countries was always a poor second best. In the early 1990s, he points out, there had been a big effort by trade unions and other NGOs to include social and labor clauses in trade agreements, with the goal of increasing pressure on developing country governments to protect labor rights and uphold sound environment regulations. The North American Free Trade Agreement (NAFTA), whose negotiations I covered as a reporter, pioneered this approach by including labor and environmental “side accords.” But the effort was largely ineffectual, in part because developing country governments fought the inclusion of social clauses in trade agreements as a form of disguised protectionism. While labor and environmental chapters are still included in U.S. trade agreements, their real world impact has been minimal. In the absence of strong international agreements, Locke writes, “private, voluntary regulation became the dominant approach.” But even among serious, committed companies like Nike, the results have been underwhelming. The core problem is competing priorities. The global brands “want high-quality products delivered as quickly and cheaply as possible. They also fear that harsh working conditions could, if discovered, create scandal and hence risk to their reputation. Yet because they are competing with one another, they are unwilling to pay extra for improved working conditions, which could lead to price increases that threaten market share.” Modern business models, in which product life cycles are short and companies are constantly remaking their product lines to please finicky consumers, put further pressure on developing world factories to drive their workforce ever harder. Locke concludes that little progress is possible without a more active role by governments. Governments in the developing world, with western support, need to use a mix of carrots and sticks to encourage, and if necessary compel, companies to improve wages and working conditions. Some like Cambodia, Brazil, Argentina, and India are doing so in places, but they remain the exceptions. The United States has a strong interest in encouraging progress. Apart from better protecting workers in developing countries, rising standards around the world can discourage global companies from flocking to countries like Bangladesh in search of ever lower labor costs. The trickle of manufacturing back to the United States is coming in part because rising wages in China are reducing that country’s once enormous cost advantages. It is in the U.S. interest to encourage the same trends in other countries. The United States and other developed country governments could do a lot more, particularly in pressuring their companies to put people before profits. Sander Levin, the top Democrat on the House Ways and Means Committee who has been a leader on this issue for more than two decades, called on President Obama this week to “bring together key European and American retailers that have sourced from Bangladesh to adopt a common response leading to a universal standard guaranteeing basic workplace safety and fundamental worker rights.” What is clear in the wake of Bangladesh is that the companies will not do this on their own. It will require active, and effective, intervention by governments.

The European Commission, the EU’s antitrust authority, announced a decision earlier this week to fine Microsoft $731 million for violating the terms of a previous antitrust settlement, which analysts say may constitute a warning to other dominant multinational firms and signals the EU’s willingness to go farther than their U.S. counterparts. U.S. antitrust law aims to increase the economic efficiency of markets by preventing firms from unduly limiting competition. In this CFR Backgrounder, Renewing America contributor Steven Markovich examines the evolution of U.S. antitrust policy and its role in the global marketplace.