Corporate tax avoidance shifts the burden from capital to workers

The claim

When corporations deploy offshore subsidiaries, inter-company loans, royalty arrangements, and transfer pricing to route profits through low-tax jurisdictions, they reduce the revenue available to governments that fund public services. That revenue shortfall must be made up somewhere. Workers and wage-earners — who cannot establish a subsidiary in the Cayman Islands or reassign their salary income to a Bermuda holding company — pay higher payroll and income taxes to compensate. Consumers pay higher sales and value-added taxes. The result is a structural redistribution of the tax burden from mobile capital to immobile labor, engineered not through democratic deliberation but through the legal architecture of the international tax system.

The mechanism

The core mechanism is tax base mobility. Corporate profits are legally a function of where they are declared, not where the underlying economic activity occurs. Transfer pricing rules permit firms to set prices on transactions between subsidiaries; royalties on intellectual property held in low-tax jurisdictions can strip taxable income from high-tax countries to near zero. Debt can be routed through subsidiaries so that interest payments reduce taxable income in high-tax locations. These are not marginal adjustments — they are the core business of major accounting and law partnerships.

Labor income has no equivalent mobility. A worker who earns wages in Ohio cannot declare that income in Bermuda. Payroll taxes apply to economic activity at the point of employment. This asymmetry — capital can migrate to the most favorable tax treatment, labor cannot — means that when corporate tax revenue declines as a share of total revenue, the compensating revenue sources are structurally limited to taxes that fall on immobile factors: wages, consumption, property.

The burden-shifting claim does not require a conspiracy or an explicit legislative act. It is an emergent outcome of rules that assign taxing rights based on legal form rather than economic substance. Each individual corporate tax optimization is typically legal. The aggregate effect — a decades-long decline in corporate tax’s share of public finance, offset by rising payroll tax revenue — is a structural transformation in who pays for government.

The evidence

The long-run revenue composition shift

The most direct evidence for burden-shifting is the historical record of US federal revenue composition. In fiscal year 1952, corporate income taxes contributed 32.1% of federal revenue; by FY2022, that figure had fallen to 8.9%. Over the same period, payroll taxes — Social Security and Medicare contributions paid by workers and employers — rose from 9.8% to 35.5% of federal revenue (OMB Historical Tables, Table 2.2). As a share of GDP, corporate tax revenue fell from approximately 6% in the mid-1950s to under 1.5% in the 2010s.

This shift cannot be explained by the decline of large corporations or the rise of pass-through entities alone. The market capitalization of US publicly traded companies has grown enormously as a share of GDP. S&P 500 companies report record profits. What changed is the effective tax rate on those profits.

Offshore profit-shifting: the Zucman estimates

Gabriel Zucman’s The Hidden Wealth of Nations (2015) provides the most comprehensive quantification of offshore profit-shifting. Using bilateral trade data and the discrepancy between reported assets and liabilities in national accounts, Zucman estimates that approximately $8.7 trillion in financial wealth is held offshore globally, generating roughly $200 billion in annual revenue loss across all countries. For the United States specifically, Zucman and co-authors (Tørsløv, Wier, & Zucman, 2018) estimate that approximately 40% of US multinational profits are shifted to low-tax jurisdictions annually — predominantly Ireland, Luxembourg, Switzerland, Singapore, and Caribbean territories.

The mechanism is operationally straightforward. A technology company locates its intellectual property in Ireland. It licenses that IP to its US operating subsidiary, which pays royalties — reducing US taxable income and building Irish income taxed at an effective rate sometimes close to zero under arrangements like the “Double Irish with a Dutch Sandwich.” The economic activity — the engineers, the servers, the customers — remains in the United States. The profit does not.

The Apple ruling and documented transfer pricing

The European Commission’s 2016 ruling on Apple’s Irish tax arrangements provides a documented, legally adjudicated example at scale. Two Irish incorporated subsidiaries — Apple Sales International and Apple Operations Europe — held the rights to Apple’s non-US intellectual property. These subsidiaries were tax residents of neither Ireland nor the United States under the prevailing rules. The Commission found that Ireland’s tax rulings from 1991 and 2007 allowed Apple to apply an effective tax rate of 1% on its European profits in 2003, declining to 0.005% in 2014. The Commission ordered Ireland to recover €13 billion in unpaid taxes. Apple appealed; the European Court of Justice ruled against Apple in September 2024, affirming the €13 billion liability.

This is not a theoretical estimate. It is a legal ruling on a specific set of arrangements, with a quantified revenue loss. Apple held $214 billion in offshore cash by 2017, largely held in these structures.

Clausing’s estimates of US-specific losses

Kimberly Clausing (2020) uses firm-level data and regression analysis to estimate US-specific corporate tax losses. Her central estimate for the post-TCJA period is $77–111 billion annually in profit-shifting losses — substantially reduced from pre-TCJA levels (when GILTI and other provisions did not exist) but still large. She documents that the effective federal income tax rate for S&P 500 firms, using GAAP financial statements, averages approximately 13%, compared to the statutory 21%. The gap is accounted for by deferred taxes, tax credits, and continued offshore deferral.

The distributional consequence is direct: the gap between statutory and effective rates at large multinationals represents tax revenue that would otherwise fund public goods and reduce the burden on other revenue sources. Small businesses — which cannot access transfer pricing structures or establish Cayman Islands subsidiaries — face effective rates closer to the statutory rate. The National Federation of Independent Business has repeatedly documented this disparity, noting that small businesses cannot access the planning structures available to large multinationals.

Cross-national comparisons

Germany and Japan maintain higher corporate tax collection as shares of GDP than the United States despite statutory rates comparable to or higher than the post-TCJA US rate (Germany’s combined rate is approximately 30%; Japan’s approximately 29.7%). The difference is partly attributable to tighter controlled-foreign-corporation rules and stricter transfer pricing enforcement. France introduced a digital services tax in 2019 specifically to capture revenue from firms routing profits through Ireland and Luxembourg — a policy response that would be unnecessary if profit-shifting were not occurring at scale.

The Netherlands and Ireland function as evidence of the mechanism from the conduit side: both maintain competitive effective rates for multinational structures and attract paper profits far in excess of their economic activity. Luxembourg, with a GDP of approximately $80 billion, reports more foreign direct investment inflows per year than the United States or China.

OECD BEPS and the Pillar 2 minimum tax

The OECD’s Base Erosion and Profit Shifting (BEPS) project, initiated in 2013 and producing action plans through 2015, represents an international institutional acknowledgment that profit-shifting is a real and large phenomenon — not a theoretical concern. BEPS Action 13 introduced country-by-country reporting, which has improved tax authorities’ ability to identify profit allocation mismatches. The subsequent Pillar 2 framework (2021), establishing a global minimum effective tax rate of 15% on large multinationals, was adopted by over 130 countries and is projected by the OECD to raise approximately $220 billion annually if fully implemented. The United States has not fully enacted Pillar 2 domestically as of 2026.

The existence and scale of an OECD multilateral project specifically designed to address this problem is itself strong evidence that the problem is real, large, and structurally embedded in the rules of international taxation.

Who benefits

The primary beneficiaries of corporate tax avoidance are large multinational corporations with significant intellectual property and offshore operational capacity. Technology companies (Apple, Google/Alphabet, Meta, Microsoft) and pharmaceutical companies (Pfizer, Johnson & Johnson, Merck) are the largest users of IP-based transfer pricing structures because their most valuable assets — software, patents, brand — can be legally assigned to low-tax subsidiaries with minimal friction. A manufacturing company cannot move its factory to Ireland; a pharmaceutical company can move the legal rights to a drug patent.

Private equity firms benefit from carried interest treatment and the deductibility of interest on leveraged buyout debt — related but distinct mechanisms that reduce effective tax rates below statutory levels for investment income.

The accounting and law partnership industry — the Big Four accounting firms (Deloitte, EY, KPMG, PwC) and major tax law practices — earns substantial revenue directly from the complexity of avoidance structures. These firms have a financial interest in the rules remaining complex and in the international tax system remaining fragmented. They employ former treasury officials and tax authority personnel and are among the most active lobbying voices opposing simplification and BEPS implementation.

The lobbying infrastructure opposing corporate minimum taxes and BEPS implementation is funded primarily by the Business Roundtable, the US Chamber of Commerce, and sector-specific trade associations. The Chamber spent over $70 million on lobbying in 2021, a significant portion related to TCJA preservation and opposition to the Biden administration’s proposed corporate minimum tax provisions.

The counter

The strongest counterargument is that nominal corporate tax incidence is not the same as economic incidence. Standard economic theory suggests that some portion of the corporate tax burden is borne by labor (through reduced capital investment and lower wages) and by consumers (through higher prices). If this is true, reducing corporate taxes might benefit workers and consumers more than the statutory incidence suggests. Greg Mankiw, Kevin Hassett, and others in the Treasury during the Trump administration argued that 70% of the corporate tax is borne by workers through lower wages — a claim subsequently contested by the Congressional Budget Office, which uses a 25% labor-incidence assumption, and by most academic labor economists.

The international competitiveness argument has genuine merit at the margin. Before the TCJA reduced the US statutory rate from 35% to 21%, the US had the highest statutory corporate rate among OECD nations, creating a real incentive for inversions — transactions where US companies reacquired by foreign acquirers to access lower-rate domiciles. The number of US corporate inversions fell substantially after 2017. Rate competitiveness and profit-shifting are distinct problems, and solving one does not automatically solve the other.

It is also true that the incidence of payroll tax increases is contested. The conventional view is that both employer and employee portions are borne by workers through lower wages, meaning the shift from corporate to payroll taxes may be less severe than the headline revenue numbers suggest if the counterfactual is higher payroll taxes rather than higher income taxes on wealthy individuals. The burden-shifting argument is strongest when the counterfactual is higher progressive income taxation; it is weaker if the compensating revenue comes from broadly borne consumption or payroll taxes regardless of corporate rate levels.

Finally, the Pillar 2 minimum tax represents a genuine partial solution. A 15% global floor — even if below the statutory rates of large economies — substantially compresses the tax differentials that make profit-shifting worthwhile. If fully implemented and enforced, it would reduce but not eliminate the burden-shifting dynamic described above.

References

Clausing, K. A. (2020). Profit shifting before and after the Tax Cuts and Jobs Act. National Tax Journal, 73(4), 1233–1266. https://doi.org/10.17310/ntj.2020.4.05

Crivelli, E., de Mooij, R., & Keen, M. (2016). Base erosion, profit shifting and developing countries. FinanzArchiv: Public Finance Analysis, 72(3), 268–301. https://doi.org/10.1628/001522116X14646834385460

European Commission. (2016). State aid: Ireland gave illegal tax benefits to Apple worth up to €13 billion (Decision SA.38373). https://ec.europa.eu/commission/presscorner/detail/en/IP_16_2923

Hines, J. R., Jr., & Rice, E. M. (1994). Fiscal paradise: Foreign tax havens and American business. Quarterly Journal of Economics, 109(1), 149–182. https://doi.org/10.2307/2118431

OECD. (2015). Explanatory statement: OECD/G20 Base Erosion and Profit Shifting Project 2015 Final Reports. OECD Publishing. https://doi.org/10.1787/9789264263437-en

OECD. (2023). Tax challenges arising from the digitalisation of the economy — Global Anti-Base Erosion Model Rules (Pillar Two): Inclusive Framework on BEPS. OECD Publishing. https://doi.org/10.1787/782bac33-en

Tørsløv, T. R., Wier, L. S., & Zucman, G. (2023). The missing profits of nations. Review of Economic Studies, 90(3), 1499–1534. https://doi.org/10.1093/restud/rdac049

U.S. Office of Management and Budget. (2024). Historical tables, Budget of the United States Government, FY2024, Table 2.2: Percentage composition of receipts by source. https://www.whitehouse.gov/omb/budget/historical-tables/

Wright, T., & Zucman, G. (2018). The exorbitant tax privilege (NBER Working Paper No. 24983). National Bureau of Economic Research. https://doi.org/10.3386/w24983

Zucman, G. (2015). The hidden wealth of nations: The scourge of tax havens. University of Chicago Press. https://doi.org/10.7208/chicago/9780226245560.001.0001