New CTJ Reports Explain the Tax Provisions in President Obama’s Fiscal Year 2015 Budget Proposal
Two new reports from Citizens for Tax Justice break down the tax provisions in President Obama’s budget.
The first CTJ report explains the tax provisions that would benefit individuals, along with provisions that would raise revenue. The second CTJ report explains business loophole-closing provisions that the President proposes as part of an effort to reduce the corporate tax rate.
Both reports provide context that is not altogether apparent in the 300-page Treasury Department document explaining these proposals.
For example, the Treasury describes a “detailed set of proposals that close loopholes and provide incentives” that would be “enacted as part of long-run revenue-neutral tax reform” for businesses. What they actually mean is that the President, for some reason, has decided that the corporate tax rate should be dramatically lowered and he has come up with loophole-closing proposals that would offset about a fourth of the costs, so Congress is on its own to come up with the rest of the money.
To take another example, when the Treasury explains that the President proposes to “conform SECA taxes for professional service businesses,” what they actually mean is, “The President proposes to close the loophole that John Edwards and Newt Gingrich used to avoid paying the Medicare tax.”
And when the Treasury says the President proposes to “limit the total accrual of tax-favored retirement benefits,” what they really mean to say is, “We don’t know how Mitt Romney ended up with $87 million in a tax-subsidized retirement account, but we sure as hell don’t want to let that happen again.”
Read the CTJ reports:
The President’s FY 2015 Budget: Tax Provisions to Benefit Individuals and Raise Revenue
The President’s FY 2015 Budget: Tax Provisions Affecting Businesses
Corporate Taxes News
New CTJ Reports Explain the Tax Provisions in President Obama’s Fiscal Year 2015 Budget Proposal
Congress Is About to Shower More Tax Breaks on Corporations After Telling the Unemployed to Drop Dead
If Congress decides it cannot spend money to help working families and the unemployed without offsetting the costs by cutting spending, then lawmakers should also refuse to enact tax cuts for businesses unless they can offset the costs by closing business tax loopholes. Sadly, both Democrats and Republicans refuse to acknowledge this commonsense principle as they discuss enacting the so-called “tax extenders” without closing any business tax loopholes — after failing to extend Emergency Unemployment Compensation (EUC) because of a dispute over how to offset the costs.
If there is any federal spending that should not be paid for, surely it is EUC and other temporary spending that is designed to address an economic downturn. As our friends at the Coalition on Human Needs explain:
In January, the national unemployment rate dropped to 6.6 percent from 6.7 percent in December, but jobs grew by a less than expected 113,000. Congress, by failing to renew unemployment benefits, is making things worse. According to the Congressional Budget Office, restoring EUC throughout 2014 will increase employment by 200,000 jobs… EUC has long been considered an emergency program that does not have to be paid for by other spending reductions or revenue increases. Five times under President George W. Bush, when the unemployment rate was above 6 percent, unemployment insurance was extended without paying for it and with the support of the majority of Republicans.
Unfortunately, on February 6, a measure to extend EUC by three months and another to extend it by 11 months both failed to garner the 60 Senate votes needed for passage.
Compare this to Congress’s approach to provisions that are often called the “tax extenders” because they extend a variety of tax breaks that mostly go to business interests. Unlike EUC, these provisions cannot be thought of as temporary, emergency measures. Even though these tax cuts are officially temporary, Congress has routinely extended them every couple of years with little or no review of their impacts, so that they function as permanent tax cuts.
And, sadly, lawmakers of both parties are guilty of enacting these provisions time after time without closing any business tax loopholes to offset the costs. In some years, Democrats have introduced bills that would close tax loopholes to offset the cost of the extenders. For example, in 2009, Citizens for Tax Justice and several other organizations supported legislation that would have offset the costs of the tax extenders by closing the “carried interest” loophole and other tax loopholes.
But in other years, neither party even bothered to discuss paying for the tax extenders. This happened the last time they were enacted as part of the “fiscal cliff” legislation that also extended most of the Bush-era tax cuts. Sadly, 2014 may be another year when neither party even pretends to be “fiscally responsible” when it comes to lavishing businesses with tax breaks. Several news reports indicate that Senators are discussing how to enact the tax extenders with as little debate as possible.
There Is No Provision among the “Tax Extenders” that Is So Beneficial that It Justifies Enacting the Entire Package Without Offsetting the Costs
The feeling among lawmakers that the tax extenders must be enacted under absolutely any circumstances is simply not justified, as demonstrated by examining the most costly provisions among them. This is explained in detail in CTJ’s report on the tax extenders.
The pie chart above, which is taken from the CTJ report, illustrates the costs of the individual tax extenders provisions the last time they were enacted, at the start of 2013 as part of the “fiscal cliff” legislation.
The most costly is the research credit, which is supposed to encourage companies to perform research but appears to subsidize activities that are not what any normal person would consider research, and activities that a business would have performed in the absence of any tax break including activities that the business performed years before claiming the credit. The second most costly is the renewable electricity production credit, which even many supporters agree will be phased out at some point in the near future. The third most costly is the seemingly arcane “active financing exception,” which expands the ability of corporations to avoid taxes on their “offshore” profits and which General Electric publicly acknowledges as one of ways it avoids federal taxes. These three tax provisions make up over half of the cost of the tax extenders.
Next in line is the deduction for state and local sales taxes. Lawmakers from states without an income tax are especially keen to extend this provision so that their constituents will be able to deduct their sales taxes on their federal income tax returns. But, as the CTJ report explains, most of those constituents do not itemize their deductions and therefore receive no help from this provision. Most of the benefits go to relatively well-off people in those states.
Even the provisions that sound well-intentioned are really just wasteful subsidies for businesses. The Work Opportunity Tax Credit ostensibly helps businesses to hire welfare recipients and other disadvantaged individuals, but here’s what a report from the Center for Law and Social Policy concludes about this provision:
WOTC is not designed to promote net job creation, and there is no evidence that it does so. The program is designed to encourage employers to increase hiring of members of certain disadvantaged groups, but studies have found that it has little effect on hiring choices or retention; it may have modest positive effects on the earnings of qualifying workers at participating firms. Most of the benefit of the credit appears to go to large firms in high turnover, low-wage industries, many of whom use intermediaries to identify eligible workers and complete required paperwork. These findings suggest very high levels of windfall costs, in which employers receive the tax credit for hiring workers whom they would have hired in the absence of the credit.
It’s Time for Congress to Change How It Does Business
For Congress to enact unnecessary tax cuts for businesses without closing any business tax loopholes would be very problematic under any circumstances. To do so now, after making clear that help will not be provided to the unemployed unless the costs are offset with spending cuts, is simply outrageous.
Hidden in the footnotes of the financial report released last week by Netflix is an admission that the company reduced its taxes by $80 million in 2013 by deducting the “cost” of executive stock options. This means that as a result of this single tax break, the company didn’t pay a dime of federal or state income tax on its $159 million in US profits last year.
Last year CTJ reported that a dozen emerging tech firms, including Twitter, Facebook and Priceline, were poised to shelter as much as $11 billion in profits from tax using this arcane loophole. For some of these companies, the stock option tax break can singlehandedly wipe out all income tax liability, as it did for Facebook last year.
Stock options are rights to buy stock at a set price. Corporations sometimes compensate employees (particularly top executives) with these options. The employee can wait to exercise the option until the value of the stock has increased beyond that price, thus enjoying a substantial benefit. The problem is that poorly designed tax rules allow corporations to deduct the difference between the market value of the stock and the amount paid when the stock option is exercised. In practice, corporations are often able to deduct more for tax purposes for stock options than they report to shareholders as their cost.
The defenders of this tax break sometimes argue that when companies pay their employees, it shouldn’t matter whether the pay takes the form of salaries and wages or stock options. But this argument glosses over the fact that while paying salaries imposes a dollar-for-dollar cost on employers, issuing stock options simply does not. As we have argued elsewhere, a sensible analogy is airlines giving employees the opportunity to fly free on flights that aren’t full, which costs the airlines nothing. It would be ludicrous to argue that airlines should be able to deduct the retail value of these tickets.
Senator Carl Levin (D-MI) has introduced legislation that would pare back (but not repeal entirely) the stock option tax break. Levin’s legislation (the Cut Unjustified Tax Loopholes Act) would address situations in which corporations take tax deductions for stock options that exceed the cost they report to their shareholders. It would also remove the loophole that exempts compensation paid in stock options from the existing rule capping companies’ deductions for compensation at $1 million per executive.
Allowing high-profile tech companies to zero out their taxes using phantom costs erodes the public’s faith in the tax system; any meaningful attempt to reform our corporate tax should remedy this situation.
Last week, CTJ published its finding that International Business Machines (IBM) has paid U.S. federal corporate income taxes equal to just 5.8 percent of its $45.3 billion in pretax U.S. profits over the five year period from 2008 through 2012. Today IBM responded by trying to change the subject to what it paid in one single year, and what it may or may not pay in future years.
To understand IBM’s evasive argument, first remember that CTJ’s corporate tax numbers are from the form 10-K, the document corporations file with the Securities and Exchange Commission (SEC) to disclose relevant information to shareholders. We report what are recorded on the 10-K as “current” U.S. income taxes (the federal income taxes paid by the corporation in a given year) and the profits earned by the corporation in the U.S. that year. The current taxes paid over a five-year period divided by the U.S. profits earned over a five-year period is the effective federal corporate tax rate over a five-year period.
Here the description from Politico’s “Morning Tax” of what happened when IBM was asked about CTJ’s analysis:
IBM argues that the CTJ analysis does not take into consideration the fact that the tech company heavily relies on deferrals to lower their year-to-year income tax bill noting that, according to its calculations, the company paid more than $2.5 billion in taxes for its 2012 domestic operations. That comes out to a tax rate of 27 percent, a spokesperson for the company told Morning Tax.
First, IBM focuses only on its U.S. effective tax rate in 2012, which our own figures show was in fact higher than in the previous four years. But IBM’s federal tax rate wasn’t 27 percent; it was only 14 percent. In the previous four years, IBM’s federal tax rate was only 3.5 percent, which is why IBM’s five-year effective rate is 5.8 percent.
Second, IBM seems to think that we should give the company credit for taxes that it did not pay, specifically the “deferred” taxes that it may or may not pay in the future. But quite reasonably, we count such “deferred” taxes only when and if they are actually paid.
“IBM is happy to minimize its federal tax bill, but apparently not so happy for the public to know just how little it pays to support our country,” said CTJ director Bob McIntyre. “If and when IBM starts paying its fair share in taxes, we’ll be pleased to report it. But that hasn’t been the case for at least the past 12 years.”
Over the weeks leading up to the Super Bowl, the National Football League (NFL) has found itself increasingly under scrutiny for its extraordinary extraction of lavish tax breaks and subsidies from state and local governments throughout the country. In fact, one recent study estimated that the National Football League (NFL) receives as much as $1 billion in subsidies annually.
While state and local governments find themselves still struggling with austerity budgets, the NFL had revenues of $9 billion during 2013 and analysts expect its revenue to only rise in the years to come. In addition, the NFL's overall profitability is rising and its operating margin is "head and shoulders above other sports."
Given their lack of funds and the league's high profits, why do state and local lawmakers feel the need to give extravagant subsidies to NFL teams? One of the main reasons is that NFL teams have frequently threatened to leave a given city if they do not receive the subsidies they want, typically for constructing or maintaining a stadium, and many lawmakers fear that voters will blame them for "losing" the team if they do ultimately move.
On top of this, proponents of the subsidies often produce studies purporting to show that the city or county's economy will substantially benefit from the team and its stadium, even when accounting for the cost of the subsidies. According to Gregg Easterbrook, an expert on these deals, such claims simply do not "stand up to scrutiny." The reality is that stadiums are a particularly poor economic investment because NFL teams only play about 8 regular season home games a year, whereas roads and bridges or even other businesses help the economy of a region all year round.
While many lawmakers are taken in by the arguments for the subsidies, the good news is that the general public now understands that subsidizing the NFL is simply not worth it in terms of "keeping” the teams or the economic benefits. In fact, a recent poll found that 71% of Americans opposed using tax breaks to attracts or keep a football team in town and 69% oppose the use of public funds to build and support stadiums for NFL teams.
On the federal level, there has been a lot of attention paid to a push by Senator Tom Coburn to remove the NFL's (and other sports associations’) tax exempt status, which he claims allows the league to receive millions in unwarranted tax breaks. In truth, the tax exempt status only applies to the league's organizing entity, which actually reported losses in recent years and is not currently being utilized as a "tax avoidance mechanism" according to tax experts.
Even if changing its status would cause the league to pay some additional taxes in the future, this amount will be a pittance compared to how much it receives in tax breaks from state and local governments, where the real tax avoidance is taking place.
Citizens for Tax Justice has long argued that offshore tax avoidance by corporations will never be fully addressed until Congress reforms our laws to tax the domestic profits and the offshore profits of our corporations at the same time and at the same rate. Only then will corporations have no incentive to make their U.S. profits appear to be generated in tax havens like Bermuda and the Cayman Islands. But a new report from US PIRG explains that state governments can at least protect state corporate income taxes from the worst offshore abuses with reforms newly adopted by Montana and Oregon.
As PIRG explains, these two states
“simply treat profits that companies book to notorious tax havens as if it were domestic taxable income. This simple loophole closing uses information that multinational companies already report to states. The reform could be introduced anywhere, but is readily available to the 24 states and District of Columbia that have already modernized their tax codes by enacting “combined reporting,” which requires companies to report on how profits are distributed among jurisdictions so that they are taxed based on how much business activity they do in those places. All told, closing this tax haven loophole could save the remaining 22 states and District of Columbia over a billion dollars annually.”
In his State of the Union address, President Obama touched on tax issues a few times, most prominently in connection to business tax reform.
“Both Democrats and Republicans have argued that our tax code is riddled with wasteful, complicated loopholes that punish businesses investing here, and reward companies that keep profits abroad. Let’s flip that equation. Let’s work together to close those loopholes, end those incentives to ship jobs overseas, and lower tax rates for businesses that create jobs here at home.”
Which companies does President Obama think should get these tax breaks for creating jobs here in the U.S.? In 2012, President Obama told a crowd at a Boeing plant in Washington State that companies that use tax breaks to shift operations and profits offshore ought to pay more U.S. taxes and the revenue “should go towards lowering taxes for companies like Boeing that choose to stay and hire here in the United States of America.” At that time CTJ pointed out that over the past ten years, Boeing had paid nothing in net federal income taxes, despite $32 billion in pretax U.S. profits.
Here’s the uncomfortable truth: A lot of the corporations doing business in the U.S. already are paying little or nothing in taxes, as demonstrated by CTJ’s 2011 study of consistently profitable Fortune 500 corporations – a study that examined the U.S. taxes paid on the corporations’ U.S. profits. Even for those companies that do pay a reasonable effective tax rate in the U.S., there is no real economic evidence that lowering their tax rate will lead to economic growth for America.
In fact, the U.S. corporate tax is far lighter than the corporate taxes imposed by other countries. According to the Department of the Treasury and the Congressional Budget Office, federal corporate tax revenue in the U.S. was equal to 1.2 percent of our economy in 2011 (1.5 percent if you include state corporate taxes). The average for other OECD countries (which include most of the developed countries) in 2011 was 2.9 percent.
While the President did say that savings from closing tax loopholes could be used to lower tax rates, he immediately followed that by saying:
“Moreover, we can take the money we save with this transition to tax reform to create jobs rebuilding our roads, upgrading our ports, unclogging our commutes – because in today’s global economy, first-class jobs gravitate to first-class infrastructure.”
But notice the fine print – he says this is revenue that would be raised in the “transition to tax reform,” rather than a permanent, sustainable increase in tax revenue. As we have explained before, some revenue that would be raised if business tax loopholes were closed would be permanent, sustainable revenue – but the President wants to use that revenue to offset reductions in the corporate tax rate. But closing these tax loopholes would also produce some revenue that is temporary, meaning it would only show up in the first few years or so. This temporary revenue increase cannot be used to pay for anything that is permanent (like the reductions in tax rates). Instead, the White House argues, reasonably, that a temporary revenue increase should be used to pay for something that is temporary, like a boost in infrastructure investments.
But the main goal of tax reform should be to raise revenue on a permanent basis from both the personal income tax and the corporate income tax. When budget cuts have literally led to children being kicked out of Head Start and reductions in investments like medical research, the need for revenue is obvious. The need to lower Boeing's effective tax rate further below zero is not.
On January 17, Senators Michael Bennet (D-CO) and Roy Blunt (R-MO) and nine of their colleagues introduced the Senate version of Congressman John Delaney’s proposal providing a tax amnesty for profits that corporations officially hold offshore on the condition that they purchase bonds to fund an infrastructure bank.
Instead of tapping corporate profits that are “locked” offshore as supporters claim, this proposal would provide an enormous tax break for profits that already are in the U.S. economy but which are booked in offshore tax havens in order to avoid taxes, a practice that will be more common if this proposal is enacted. In fact, the net effect of this bill could be to reduce employment.
Background of Delaney Bill
In the spring of 2013, Congressman John Delaney, a Democrat from Maryland, proposed to allow American corporations to bring a limited amount of offshore profits to the U.S. (to “repatriate” these profits) without paying the U.S. corporate tax that would normally be due. This type of tax amnesty for repatriated offshore profits is euphemistically called a “repatriation holiday” by its supporters. The Congressional Research Service has found that a similar proposal enacted in 2004 provided no benefit for the economy and that many of the corporations that participated actually reduced employment.
Rep. Delaney and the 50 House cosponsors to his bill seem to believe they can avoid that unhappy result by allowing corporations to repatriate their offshore funds tax-free only if they also fund a bank that finances public infrastructure projects, which they believe would create jobs in America. How much a corporation could repatriate tax-free would be determined through a bidding process, with a maximum cap of six dollars in offshore profits repatriated tax-free for every one dollar spent on the bonds. Unfortunately, as explained below, the proposal is designed to give away two dollars in tax breaks for every one dollar spent on infrastructure.
So-Called “Offshore” Corporate Profits Are Largely Invested in the U.S.
Many lawmakers seem to mistakenly believe that the $2 trillion in “permanently reinvested profits” that American corporations officially hold abroad are locked out of the American economy. This has led many to support proposals to exempt American corporations’ offshore profits from U.S. taxes, either on a permanent basis (through a so-called “territorial” tax system) or a temporary basis (with a tax amnesty for repatriated offshore profits).
But the premise is wrong. As a recent report from the Center for American Progress explains, American corporations’ offshore profits are actually invested in the U.S. economy already because they are deposited in U.S. bank accounts or invested in U.S. Treasury bonds or even corporate stocks. The real problem is that our tax system traps badly needed revenue out of the country by allowing American corporations to “defer” (delay) paying U.S. taxes on profits characterized as “offshore” — even if they are really earned here in the U.S.
A study from the Senate Permanent Subcommittee on Investigations (chaired by Carl Levin of Michigan) that examined the corporations benefiting the most from the repatriation amnesty enacted by Congress in 2004 found that almost half of their offshore profits were actually in U.S. bank accounts, Treasury bonds, and U.S. corporate stocks. Corporations are, in theory, restricted by law from using their offshore profits to pay dividends to shareholders or to directly expand their own investments. But even these rules can be circumvented when the corporations borrow money for these purposes, using the offshore profits as collateral.
Biggest Benefits Would Go to Corporations Disguising their U.S. Profits as Tax Haven Profits
The proposal would provide the biggest benefits to the most aggressive corporate tax dodgers. Often, an American corporation has offshore profits because its offshore subsidiaries carry out actual business activity. But a great deal of the profits that are characterized as “offshore” are really U.S. profits that have been disguised through accounting gimmicks as “foreign” profits generated by a subsidiary (which may be just a post office box) in a country that does not tax profits (i.e., an offshore tax haven). These tax haven profits are the profits most likely to be “repatriated” under such a proposal for two reasons.
First, offshore profits from actual business activities in foreign countries are often reinvested into factories, stores, equipment or other assets that are not easily liquidated in order to take advantage of a temporary tax break, but profits that are booked as “foreign” profits earned by a post office box subsidiary in a tax haven are easier to “move” to the U.S.
Second, profits in tax havens get a bigger tax break when “repatriated” under such a tax amnesty. The U.S. tax that is normally due on repatriated offshore profits is the U.S. corporate tax rate of 35 percent minus whatever was paid to the government of the foreign country. Profits that American companies claim to generate in tax havens are not taxed at all (or taxed very little) by the foreign government, so they might be subject to the full 35 percent U.S. rate upon repatriation — and thus receive the greatest break when the U.S. tax is called off.
Not a Way to Create Infrastructure Jobs
While infrastructure spending is economically stimulative, this plan is an absurdly wasteful and corrupt way to fund job creation. First, the proposal is designed to give away two dollars in tax breaks for every one dollar spent on infrastructure (and the jobs to build infrastructure) — to give away up to $105 billion in corporate tax breaks in order to raise $50 billion to finance the infrastructure bank. Because up to six dollars could be repatriated tax-free for every one dollar corporations spend on the bonds, up to $300 billion would be repatriated tax-free to raise $50 billion for the infrastructure bank. As already explained, the profits most likely to be repatriated have not been taxed at all by any government so under normal rules the full 35 percent U.S. tax rate would apply, and 35 percent of $300 billion is $105 billion.
Second, this proposal would be the second tax amnesty for offshore profits (the first was enacted in 2004), and once Congress signals its willingness to do this more than once, corporations could be encouraged to shift even more profits (and even jobs) offshore in hopes of benefitting from another tax amnesty in the future. In other words, the proposal’s net effect on U.S. job creation could be negative.
Today Citizens for Tax Justice submitted comments to the Senate Finance Committee on the discussion draft that the committee recently published under the direction of its chairman, Max Baucus of Montana. Tax reform seems to be on hold, with Baucus’s expected departure to serve as ambassador to China being just one of many complications. But the discussion draft may nonetheless be a starting place for future debates on how the corporate tax should be overhauled.
And that would pose problems because, as CTJ’s comments explain, Baucus’s discussion draft fails to accomplish what should be three goals for tax reform:
1. Raise revenue from the corporate income tax and the personal income tax.
2. Make the tax code more progressive.
3.Tax American corporations’ domestic and offshore profits at the same time and at the same rate.
As CTJ’s comments explain, the discussion draft would, in a proclaimed revenue-neutral manner, impose U.S. corporate taxes on offshore corporate profits in the year that they are earned. But it would do so at a lower rate than applies to domestic corporate profits.
The goal of revenue-neutrality causes the discussion draft to fail the first goal of raising revenue as well as the second, because any increase in corporate income tax revenue would make our tax system more progressive. The discussion draft also fails to meet the third goal. Although it would tax domestic corporate profits and offshore corporate profits at the same time, it would subject the offshore profits to a lower rate, preserving some of the incentive for corporations to shift investment (and jobs) offshore or to engage in accounting gimmicks to make their U.S. profits appear to be generated in offshore tax havens.
A new report from the Center for American Progress (CAP) explains that, despite the well-known complaints of America’s largest multinational corporations, our tax system is not trapping corporate profits offshore. In fact, the profits characterized as “offshore” are invested in the U.S. economy already because they are deposited in U.S. bank accounts or invested in U.S. Treasury bonds or even corporate stocks. The real problem is that our tax system traps badly needed revenue out of the country by allowing American corporations to “defer” (delay) paying U.S. taxes on profits characterized as “offshore” — even if they are really earned here in the U.S.
Many lawmakers seem to mistakenly believe that the $2 trillion in “permanently reinvested profits” that American corporations hold abroad are locked out of the American economy. This has led many to support proposals to exempt American corporations’ offshore profits from U.S. taxes, either on a permanent basis (through a so-called “territorial” tax system) or a temporary basis (with a tax amnesty for repatriated offshore profits).
But nothing restricts corporations from investing these profits in the U.S. The CAP report cites a study from the Senate Permanent Subcommittee on Investigations (chaired by Carl Levin of Michigan) that examined the corporations benefiting the most from the repatriation amnesty enacted by Congress in 2004 and finding that almost half of their offshore profits were actually in U.S. bank accounts, Treasury bonds, and U.S. corporate stocks.
American corporations continue to designate these profits as “permanently reinvested earnings” offshore (to use the technical term) because these profits will be subject to U.S. corporate taxes when they are officially “repatriated” (brought to the U.S.).
Corporations are, in theory, restricted by law from using their offshore profits to pay dividends to shareholders or to directly expand their own investments. But even these rules can be circumvented when the corporations borrow money for these purposes. Because these companies have so much accumulated profits (offshore and often in the U.S. also) they are effectively able to borrow money at very low or even negative interest rates. The report explains how Apple and Microsoft both borrowed in this way to finance dividends and share buybacks.
Apple and Microsoft are also examples of another problem, which is that much of these “offshore” profits are actually U.S. profits that the companies characterize, using accounting gimmicks, as earned in countries like Bermuda or the Cayman Islands that do not tax them (offshore tax havens). The existing rule allowing American corporations to “defer” U.S. taxes on their offshore profits already encourages companies to engage in these tricks. Rather than expanding that break into a bigger one (a territorial system or a repatriation amnesty), the CAP report suggests either repealing deferral or cracking down on the worst abuses of deferral, as Senator Carl Levin has proposed.
How worried should we be that Boeing argues it should get a tax break for performing safety tests on its new planes? This is the argument the corporation seems to have made at an IRS hearing on January 8 and in comments submitted (sorry, subscription only) to the agency about proposed regulations governing tax breaks for research.
Tax breaks designed to encourage research can only be said to be effective if they result in their recipients conducting research that they would not otherwise conduct. Boeing seems to argue that this includes safety testing of airplanes. But isn’t this something that Boeing must do anyway?
On one hand, if Boeing is not naturally inclined, in the absence of a tax incentive, to make its planes safe, you might want to consider that before you book your next flight. On the other hand, if we trust that the FAA and comparable foreign agencies have stringent safety requirements, then why does Boeing need a tax incentive to do what is required by law?
In its comments on the regulations, Boeing criticizing a proposed “shrinking-back rule” that would provide the research tax break only for companies that develop and test individual components of an aircraft rather than those who put together and test the entire aircraft (which is what Boeing does). Another issue Boeing raises is whether it can receive the break for multiple pilot models (prototype planes, for example) for safety testing.
Boeing argues that “in the aerospace industry, companies such as Boeing that have built tens of thousands of aircraft through the years know from experience that they need multiple pilot models for testing. Indeed, without multiple pilot models, a failure may not be correctly identified as a design problem or a unique problem encountered by the pilot model because of, for example, a defect in materials.”
To which the sensible response seems to be, so what? Are we supposed to believe that Boeing will not do the appropriate safety testing if it does not receive a tax incentive for doing so? Indeed, Boeing goes on at length about the FAA safety standards it must meet through testing.
Firms are allowed to deduct their business expenses each year, except that capital expenses (expenditures to acquire assets that generate income in the future) must usually be deducted over a number of years to reflect their ongoing usefulness. In 1954, Congress enacted section 174 of the tax code, which relaxed the normal capitalization rules by allowing firms to deduct immediately their costs of research. This immediate deduction is the specific tax break addressed by the proposed regulation that is causing Boeing so much angst.
But that’s not all that’s at stake. Businesses must meet the requirements of section 174 (and some additional requirements) to get an even bigger break, the research tax credit, which was first enacted in 1981. Of those corporations that make public how much they claim in research tax credits, Boeing is near the top of the list. This is illustrated in the table, which was published in our recent report on the many problems with the research tax credit.
You really have to hand it to Boeing. The company has managed to have billions in profits for a decade while paying nothing in federal or state corporate income taxes over that period. Yet, President Obama argues that companies that use tax breaks to shift operations and profits offshore ought to pay more U.S. taxes and that the revenue “should go towards lowering taxes for companies like Boeing that choose to stay and hire here in the United States of America.” Likewise, after Washington State recently gave Boeing the biggest state tax break in history, other states like Missouri still seem to think they can lure the corporation by lavishing it with even more tax breaks. At this rate, Boeing could probably threaten that its planes will explode midair if it doesn’t get more tax breaks, and the Treasury Department and Congress probably would provide them.
Several reports released by the Congressional Research Service (CRS) in the first week of January refute claims that tax rate reductions will boost the economy and even pay for themselves by generating economic growth.
Changes in Personal Income Tax Rates
A report released on January 2 “summarizes the evidence on the relationship between tax rates and economic growth” and finds “little relationship with either top marginal rates or average marginal rates on labor income.” It also finds that work effort and savings are “relatively insensitive to tax rates.”
While many advocates of tax cuts claim that a high top marginal personal income tax rate hinders investment by the wealthy, the report finds that “periods of lower taxes are not associated with higher rates of economic growth or increases in investment.”
The January 2 report also concludes, “Claims that the cost of tax reductions are significantly reduced by feedback effects do not appear to be justified by the evidence.” Many advocates for tax cuts claim that reducing tax rates will cause so much growth of income and profits that the additional taxes collected (the “revenue feedback effects”) will replace much of the revenue lost from the rate reduction.
But the report explains that “the models with responses most consistent with empirical evidence suggest a revenue feedback effect of about 1% for the 2001-2004 Bush tax cuts,” meaning the effects that the tax cuts had on the economy and on behavior of taxpayers offset just 1 percent of their total cost. And much of this effect may have taken the form of taxpayers changing how many deductions they take, and other tax planning changes, rather than actual economic growth.
Even cuts in tax rates for capital gains, which are often argued to have the most significant “revenue feedback effects,” don’t come close to paying for themselves.
“Capital gains taxes have been scored for some time as having a significant feedback effect through changes in realizations, one that had a revenue offset of around 60 percent,” the report explains. In other words, some analysts have claimed that a tax cut for capital gains increases those gains to such an enormous degree that up to 60 percent of the lost tax revenue is ultimately regained.
But the report explains, “More recent estimates, however, have suggested a feedback effect of about 20 percent.” CRS’s descriptions of these more recent estimates have been used in CTJ’s analyses of capital gains tax changes and are explained in the appendix to this report. (Another CTJ report proposes coupling higher capital gains tax rates with a policy change that would largely eliminate any negative effect on revenue.)
Changes in the Corporate Income Tax
The idea of changing the corporate income tax rate has received so much attention that the topic apparently warranted a separate report, which CRS released on January 6.
“Claims that behavioral responses could cause revenue to rise if rates were cut do not hold up on either a theoretical basis or an empirical basis,” the report explains. It also shoots down the argument that the corporate tax is a regressive tax because it chases investment offshore in a way that ends up hurting American workers.
This report goes into great detail about some of the problems with the studies that advocates of reducing corporate tax rates rely on. Much of the report details how CRS, using the same data and methods found in these studies, found that the results either disappeared or became insignificant after correcting for various errors
For example, the CRS report cites an op-ed published by R. Glen Hubbard, chairman of President George W. Bush’s Council of Economic Advisers. In it, Hubbard cites a study by Kevin A. Hassett and Aparna Mathur that was rife with methodological problems.
As the CRS report explains, Hassett and Mathur conclude that “a 1% increase in the corporate tax causes manufacturing wages to fall by 0.8% to 1%. These results are impossible, however, to reconcile with the magnitudes in the economy... corporate taxes are only about 2.5% of GDP, while labor income is about two thirds. These results imply that a dollar increase in the corporate tax would decrease wages by $22 to $26, an effect that no model could ever come close to predicting.” A later report by Hassett and Mathur “continued to produce implausible estimates” because it “implies a decrease of $13 in wages for each dollar fall in corporate taxes.”
To take another example, the CRS report also examines a cross-country study concluding that corporate taxes reduce investment. But CRS finds that some of the results seem to be affected by countries that are outliers, like Bolivia, for which a transaction tax is mistakenly counted as a corporate income tax. When such mistakes are corrected, the results are found to no longer be statistically significant.
This CRS report is particularly helpful because advocates of cutting the corporate income tax rate often rely on econometric studies that they claim support their case. These studies are often mind-numbingly complicated and it is rare that policymakers or their aides have the time and ability to go through these studies to understand whether or not they actually make sense. Thankfully, the Congressional Research Service has done that job for everyone.
General Electric has long been a flashpoint in corporate tax reform debates. As long ago as 1984, CTJ’s revelation that GE and other large companies had managed to avoid paying even a dime of tax on billions in US profits prompted President Ronald Reagan to push for loophole-closing tax reform. And as our more recent research has shown, GE remains a topflight tax avoider, paying about two percent of its profits in US federal income taxes over the decade between 2002 and 2011.
So anytime one of the biggest tax dodges available to GE disappears, it should be seen as a victory for tax reform.
Why, then, is there so little excitement about the expiration, on December 31 of 2013, of the “active financing exception” that GE relies so heavily on to reduce its tax bill? Perhaps it’s because its expiration was an accidental byproduct of lawmakers’ inaction, and because Congressional tax writers have every intention of bringing this lamentable tax loophole back from the dead, as they have multiple times in the past decade. Repealed as part of the loophole-closing Tax Reform Act of 1986, the active financing loophole was temporarily reinstated in 1997 after fierce lobbying by GE and other multinational companies, and has been extended numerous times since them, usually for one or two years at a time.
The active financing exception is usually extended as part of the so-called “extenders,” the legislation that Congress enacts every couple of years to extend a package of (ostensibly temporary) tax breaks for business interests. The last extenders package was enacted as part of the fiscal cliff deal at the start of 2013, and it extended the active financing break retroactively into 2012 and prospectively through 2013. The two-year extension cost over $11 billion, making it the third most expensive of the extenders.
American corporations are allowed to indefinitely “defer” paying U.S. taxes on their offshore profits, but there is a general rule (often called “subpart F” in reference to the part of the tax code that spells it out) that corporations cannot defer U.S. taxes on dividends, interest or other types of “passive” income because these types of income are easy to shift around from one country to another to avoid taxes. The “active financing exception” is an exception to subpart F. As a result of this ”exception,” companies like GE can indefinitely avoid paying taxes to any nation on their financing income, simply by claiming that their US-based financing income is actually being earned in offshore tax havens.
GE won’t disclose just how valuable the active financing rule is to their bottom line. But when the tax break was set to expire in 2008, the head of the company’s tax department infamously went down on one knee in the office of the Ways and Means Committee chairman Charles Rangel to beg for its extension. And the company’s 2012 annual report’s discussion of risk factors facing the company’s bottom line says that “[i]f this provision is not extended, we expect our effective tax rate to increase significantly.”
And GE’s not the only company that is chomping at the bit to bring this tax break back. The active financing exception also plays a significant role in the ability of other large U.S.-based financial institutions to pay low effective rates. As a group, the financial industry has one of the lowest effective rates of all industries, averaging only 15.5% for the years 2008-2010.
With the lobbying power of GE and the financial services industry at their doors, it’s sadly no surprise that Congressional lawmakers are likely to ride to the rescue of these low-tax multinationals once again. But the $11.2 billion two-year price tag of the active-financing giveaway should be a good enough reason for Congress to sit on their hands and let this tax giveaway stay dead.
Another year, another campaign to give even bigger breaks to corporations and claim that this will create jobs. In 2014, the campaign opened with a January 5 op-ed by Laurence Kotlikoff in the New York Times titled, “Abolish the Corporate Income Tax.”
Before getting into Kotlikoff’s argument, let’s just remember a few reasons why we have a corporate income tax.
First, the personal income tax would have an enormous loophole for the rich if we didn’t also have a corporate income tax. A business that is structured as a corporation can hold onto its profits for years before paying them out to its shareholders, who only then (if ever) will pay personal income tax on the income. With no corporate income tax, high-income people could create shell corporations to indefinitely defer paying individual income taxes on much of their income.
Second, even when corporate profits are paid out (as stock dividends), only a third are paid to individuals rather than to tax-exempt entities not subject to the personal income tax. In other words, if not for the corporate income tax, most corporate profits would never be taxed.
Third, the corporate income tax is ultimately borne by shareholders and therefore is a very progressive tax, which means repealing it would result in a less progressive tax system.
This last point deserves emphasis. Proponents of corporate tax breaks argue that in the long-term the tax is actually borne by labor — by workers who ultimately suffer lower wages or unemployment because the corporate tax allegedly pushes investment (and thus jobs) offshore. But most experts who have examined the question believe that investment is not entirely mobile in this way and that the vast majority of the corporate tax is borne by the owners of capital (owners of corporate stocks and business assets), who mostly have high incomes. This makes the corporate tax a very progressive tax.
For example, the Department of the Treasury concludes that 82 percent of the corporate tax is borne by the owners of capital. As a result, the richest one percent of Americans pay 43 percent of the tax, and the richest 5 percent pay 58 percent of the tax.
But Kotlikoff argues that our corporate income tax chases investment out of the U.S. and his simplistic answer is to repeal the tax altogether. He writes that, “To avoid our federal corporate tax, they [corporations] can, and often do, move their operations and jobs abroad,” and cites the well-known case of Apple booking profits offshore.
But Apple is a perfect example of a corporation that does not actually move many jobs offshore but rather is engaging in accounting gimmicks to make its U.S. profits appear to be generated in offshore tax havens. These gimmicks take advantage of the rule allowing American corporations to “defer” (delay indefinitely) paying U.S. corporate income taxes on the profits they claim to earn abroad. Lawmakers will end these abuses when they see that voters’ anger over corporate tax loopholes is even more powerful than the corporate lobby.
Kotlikoff has constructed a computer model that purports to prove that the economy would benefit greatly from cuts in the corporate income tax. But any such model relies on assumptions about how corporations would respond to changes in tax policy. Economists have failed to demonstrate a link between lower corporate taxes and economic growth over the past several decades that would justify the assumptions Kotlikoff uses.
In fact, Kotlikoff’s assumptions are at odds with the historical record. As former Reagan Treasury official, J. Gregory Ballentine, once told Business Week, “It’s very difficult to find much relationship between [corporate tax breaks] and investment. In 1981 manufacturing had its largest tax cut ever and immediately went down the tubes. In 1986 they had their largest tax increase and went gangbusters [on investment].”
In any event, the U.S. corporate tax is effectively already among the lowest in the developed world because of its many loopholes. According to the Department of the Treasury, federal corporate tax revenue in the U.S. was equal to 1.3 percent of our economy in 2010 (1.6 percent if you include state corporate taxes). The average for OECD countries (which include most of the developed countries) besides the U.S. was 2.8 percent.
Murray-Ryan Budget Deal Avoids Government Shutdown but Does Not Close a Single Tax Loophole, Leaves Many Problems in Place
The latest budget deal in Congress seems to indicate that anti-government, anti-tax lawmakers will not force a costly shutdown of the federal government in 2014 as they did in 2013, although they still threaten to cause the U.S. to default on its debt obligations if some yet-undefined demands are not met. In today’s dysfunctional Congress, that’s considered a great achievement. Congress could have replaced all of the harmful sequestration of federal spending for next year and the year after by closing the tax loopholes used by corporations to shift jobs and profits offshore, as recently proposed by Reps. Lloyd Doggett and Rosa DeLauro. Sadly, the deal negotiated by Senate Budget Chairman Patty Murray and House Budget Chairman Paul Ryan does none of that.
Deal Replaces Some Sequestration, Further Reduces the Deficit
On Wednesday the U.S. Senate approved the Murray-Ryan budget deal, which was negotiated by Senate Budget Chairman Patty Murray and House Budget Chairman Paul Ryan and approved last week by the House. It would undo $63 billion of the $219 billion sequestration cuts scheduled to occur in 2014 and 2015 under the Budget Control Act of 2011 (the deal President Obama and Congressional Republicans came to in one of the previous hostage-taking episodes).
Most mainstream economists believe that governments should not cut spending when their economies are still climbing out of recessions, but that’s pretty much exactly what Congress did by approving the 2011 law resulting in sequestration of about $109 billion each year for a decade.
The Murray-Ryan deal would reduce that by $45 billion next year and by $18 billion in the following year. While the deal replaces $63 billion of sequestration, the total savings in the deal add up to $85 billion, which means the deal technically reduces the deficit compared to doing nothing. But about $28 billion of the savings come from simply extending some of the sequestration cuts longer than they were originally intended to be in effect (extending them into 2022 and 2023). This enables Rep. Ryan to claim that the deal further reduces the deficit. But this has no real policy rationale except for those who believe that shrinking government is good in itself, regardless of the impacts.
Any major budget deal approved during a recession ought to provide an increase in unemployment insurance, which is the sort of government spending that puts money in the hands of the people most likely to spend it right away, thus enabling local businesses to retain or create jobs. But under the Murray-Ryan deal, the extended unemployment benefits that were enacted to address the recession would run out (at the end of this month for many people). As the Center on Budget and Policy Priorities explains, in the past Congress has not allowed these benefits to run out until the rate of long-term unemployment was much lower than it is today.
Tax Loopholes Left Untouched, but Revenue Raised through Fees
The Murray-Ryan deal does not close a single tax loophole for corporations or individuals. A bill recently introduced by Reps. Lloyd Doggett and Rosa DeLauro demonstrates exactly how this could be done. The DeLauro-Doggett bill basically borrows the loophole-closing provisions from Senator Carl Levin’s Stop Tax Haven Abuse Act and uses the revenue savings to replace sequestration for two years.
To take just one of many examples of how it would work, the DeLauro-Doggett bill would close the loophole allowing corporations to take deductions each year for interest payments related to the costs of offshore business even though the profits from that offshore business will not be taxable until the corporation brings them to the U.S. years or even decades later. This reform is estimated to raise around $50 billion over a decade. Another provision would reform the “check-the-box” rules that allow corporations to tell different governments different things about the nature of their subsidiaries and whether or not their profits have been taxed in one country or another, resulting in profits that are taxed nowhere. This reform is estimated to raise $80 billion over a decade.
These two reform options appear on a list of potential loophole-closing measures released by Senator Murray’s committee (as well as in the DeLauro-Doggett legislation). The committee’s list also included others that Citizens for Tax Justice has championed, like closing the carried interest loophole to raise $17 billion over a decade, closing the John Edwards/Newt Gingrich loophole (for S corporations) to raise $12 billion, closing the Facebook stock option loophole to raise as much as $50 billion, and several others. (Many of the reforms on the budget committee list are explained in this CTJ report.)
Instead of closing tax loopholes, the Murray-Ryan deal raises revenue through fee increases that are not technically tax increases but would probably feel like tax increases to the people experiencing them. For example, fees on airline tickets that pay for the Transportation Security Administration (TSA) would increase to $5.60 per ticket, raising $12.6 billion over a decade. The premiums paid by companies for the Pension Benefit Guaranty Corporation (to guarantee employee’s pension benefits) would increase, raising $7.9 billion over a decade. Another provision would increase federal employee pension contributions, raising $6 billion over a decade. These are just a few examples.
These measures do raise revenue, but it would seem more straightforward to remove the loopholes that complicate the main taxes we rely on to fund public investments and that eat away significantly at the amounts of revenue they can raise. Members of Congress can only run for so long before facing the need for tax reform.
Congress should end its practice of passing, every couple of years, a so-called “tax extenders” bill that reenacts a laundry list of tax breaks that are officially temporary and that mostly benefit corporations, without offsetting the cost. A new report from Citizens for Tax Justice explains that none of the tax extenders can be said to help Americans so much that they should be enacted regardless of their impact on the budget deficit and other, more worthwhile programs. It is entirely inappropriate that lawmakers refuse to fund infrastructure repairs or Head Start slots for children unless the costs are offset, while routinely extending these tax breaks without paying for them.
The tax breaks usually considered part of the “tax extenders” were last enacted as part of the deal addressing the “fiscal cliff” in January of 2013. At that time most of the provisions were extended one year retroactively and one year going forward, through 2013. As these tax breaks approach their scheduled expiration date at the end of this year, they are again in the news.
Read the report.
American Express's Tax Avoidance Opposed by Most Small Businesses
Since 2010, American Express has boosted itself as a supporter of small businesses, by promoting “Small Business Saturday” as a counterpart to Black Friday. But American Express is no friend of American small business. Not only does it charge merchants high swipe fees, but it also uses and wants to expand offshore tax loopholes that most small businesses can’t use and want to close.
A short report from CTJ explains that the company's SEC filings indicate it is holding $8.5 billion in low-tax offshore jurisdictions, including at least 22 offshore subsidiaries in 8 jurisdictions typically identified as “tax havens.” By its own estimates, American Express has avoided paying $2.6 billion in U.S. taxes by holding these profits offshore. To give some perspective, this amount is two and half times the budget of the entire Small Business Administration.
Even on the $21.3 billion in pretax profits that American Express officially earned in the U.S. over the past five years, the company has paid only half the 35 percent federal statutory tax rate.
Read the CTJ report.
Read the report.
Business lobbyists are pushing Congress to enact tax “extenders” — a bill to extend several temporary tax breaks for business that expire at the end of this year. A new report from Citizens for Tax Justice examines the largest of those provisions, the federal research and experimentation tax credit, a tax subsidy that is supposed to encourage businesses to perform research that benefits society. The report explains that the research credit is riddled with problems and should be either reformed dramatically or allowed to expire.
Created in 1981, the credit immediately became the subject of scandals when it was claimed by businesses that no ordinary American would consider deserving of a tax subsidy (or any government subsidy) for research — like fast food restaurants, fashion designers and hair stylists.
Reforms enacted in 1986 were supposed to prevent these abuses, but there is evidence that corporate tax planners have often out-maneuvered the reforms.
The report explains that many of the problems it describes are the work of accounting firms that wrote the book on abusing the credit — and quite literally wrote the credit regulations as well. The credit’s rules are so lax thanks in large part to Mark Weinberger, a Bush top Treasury appointee who had previously lobbied for a broader definition of “research” while he was at Ernst and Young and, after he left the Treasury, returned to a grateful Ernst and Young where he was eventually promoted to CEO.
Another firm behind abuses of the credit is Alliantgroup, a tax consulting firm with former IRS Commissioner Mark W. Everson serving as its vice chairman and Dean Zerbe, former senior counsel to former Senate Finance Committee Chairman Charles Grassley, as its managing director.
Members of Congress have pushed to remove what reasonable restrictions remain on the research credit. For example, the report explains that Senators Charles Grassley and Amy Klobuchar have both called on the Treasury Department to make it easier for businesses to claim the credit on amended returns for research done in previous years, which cannot possibly achieve the goal of providing an incentive to do research. (A business’s research cannot possibly be the result of a tax incentive that the business was unaware of until years after the research was carried out.)
Meanwhile, a report coauthored by former Clinton adviser Laura D’Andrea Tyson argues that Congress should simply repeal the reforms of 1986 and make legal the abuses that the IRS is trying to stop.
The CTJ report explains that even when the credit is claimed by companies doing legitimate research, it’s difficult to believe that the research was a result of the credit.
Congress should let the research credit expire, and redirect the billions of dollars that it costs into true, basic, truly scientific research, which businesses rarely engage in because the payoffs often take years to arrive.
The report explains that if lawmakers insist on extending the research credit once again when it expires at the end of 2013, they should address three broad problems. If these problems are not addressed, then the credit should be allowed to expire.
Read the report.
Max Baucus, the Senator from Montana who chairs the committee with jurisdiction over our tax code, has made public a portion of his ideas for tax reform. Multinational corporations that have lobbied Baucus for years are unhappy because his proposal would (at least somewhat) restrict their ability to shift jobs and profits offshore. Citizens for Tax Justice and other advocates for fair and adequate taxes are unhappy because his proposal would not raise any new revenue overall — at a time when children are being kicked out of Head Start and all sorts of public investments are restricted because of an alleged budget crisis.
The Need for Revenue-Raising Corporate Tax Reform
Materials released from Senator Baucus’s staff explain that this part of his proposal is “intended to be revenue-neutral in the long-term.” The idea behind “revenue-neutral” corporate tax reform is that Congress would close loopholes that allow corporations to avoid taxes under the current rules, but use the savings to pay for a reduction in the corporate tax rate.
Among the general public, there is very little support for this. The Gallup Poll has found for years that more than 60 to 70 percent of Americans believe large corporations pay “too little” in taxes.
There is almost no public support for the specific idea of using revenue savings from loophole-closing to lower tax rates. A new poll commissioned by Americans for Tax Fairness found that when asked how Congress should use revenue from “closing corporate loopholes and limiting deductions for the wealthy,” 82 percent preferred the option to “[r]educe the deficit and make new investments,” while just 9 percent preferred the option to “[r]educe tax rates on corporations and the wealthy.”
Of course, Baucus also says that he “believes tax reform as a whole should raise significant revenue,” which would mean that reform of the personal income tax would raise revenue. But there are questions about how that can work, given that he also wants to reduce personal income tax rates.
A growing number of consumer groups, faith-based groups, labor organizations and others have called on Congress to raise revenue from reform of the corporate income tax, as well as from reform of the personal income tax. In 2011, 250 organizations, including groups from every state, signed a letter to lawmakers calling for revenue-positive corporate tax reform, and a similar letter in 2012 was signed by over 500 organizations.
CTJ has repeatedly demonstrated that most corporate profits are not subject to the personal income tax and therefore completely escape taxation if they slip out of the corporate income tax. We have also explained that the corporate income tax is a progressive tax, which is needed in a tax system that is not nearly as progressive as most people believe.
The Need to Stop Corporations from Shifting Jobs and Profits Offshore
While CTJ and other tax experts are still going through the fine print of Baucus’s proposal to understand its full impact, it is clear to us that the proposal would stop some American corporations from using offshore tax havens to avoid U.S. taxes as successfully as they do today. Some multinational corporations are upset by this, but that doesn’t in itself mean that Baucus’s proposal is extremely strict.
CTJ has demonstrated that several very large and profitable corporations — like American Express, Apple, Dell, Microsoft, Nike and others — are making profits appear to be earned in offshore tax havens so that they pay no taxes on them at all. Any proposal that makes the code even slightly stricter will cause these companies to pay more and, naturally, cause them to complain bitterly.
These companies are taking advantage of the most problematic break in the corporate income tax, which is “deferral,” the rule allowing American corporations to “defer” (delay indefinitely) paying U.S. corporate income taxes on the profits of their offshore subsidiaries until those profits are officially brought to the United States. Deferral is really a tax break for moving operations offshore or for using accounting gimmicks to make U.S. profits appear to be generated in a country with no corporate income tax (like Bermuda or the Cayman Islands or some other tax haven).
CTJ has long argued that the best solution is to simply repeal deferral and subject all profits of our corporations to U.S. corporate taxes in the year they are earned, no matter where they are earned. (We already have a separate foreign-tax-credit rule that reduces U.S. corporate taxes to the extent that companies pay corporate taxes to other countries, to prevent double-taxation.) Barring this, Congress could at least curb the worst abuses of deferral with the type of reforms proposed by Senator Carl Levin.
The big multinational corporations lobbied Baucus and others to expand deferral into an even bigger break, an permanent exemption for offshore profits, often called a “territorial” tax system, which CTJ and several small business groups, consumer groups and labor organizations have always opposed.
Baucus did not propose either approach. His proposal is somewhat like a territorial tax system except that he would place a minimum tax on the offshore profits of American corporations, which would take away much of the advantage that the corporations thought they might obtain after their years of lobbying. American multinational corporations would be required to pay a minimum level of tax on their offshore profits, during the year that they are earned.
But if a corporation is paying corporate taxes to a foreign government at a rate as high or higher than the U.S. minimum tax, there would never be any U.S. taxes on the profits generated in that country. This means that offshore profits of American corporations would still be subject to a lower tax rate than domestic profits, which may preserve some incentive to shift jobs and profits offshore.
Baucus proposes two different versions of a minimum tax. One would require that profits generated in other countries be taxed at a rate that is at least 80 percent of the regular U.S. corporate tax rate. Baucus has not yet revealed what corporate tax rate he will propose, but if one assumes it is 28 percent, that would mean that the foreign profits must be taxed at a rate of at least 22.4 percent. If they are taxed by the foreign country at a rate of, say, 18 percent, that would mean the corporation would pay U.S. corporate taxes of 4.4 percent. (18+4.4=22.4)
The second option Baucus offers would require that “active” profits generated abroad be taxed at a rate that is 60 percent of the U.S. tax rate while “passive” profits generated abroad be taxed at the full U.S. rate (both before foreign tax credits). The concept of “active” income and “passive” income already is a major part of our tax code, but Baucus would define them differently for this option. The basic idea is that “passive” income (like interest payments, rents and royalties) is income that is extremely easy to move from one subsidiary to another and therefore easily used for tax avoidance if it’s not taxed at the full U.S. rate.
The Baucus proposal has several other innovations that are too numerous to fully explain here. To give one example, the proposal says that if an American corporation has a subsidiary in another country that earns profits by selling to the U.S. market, those profits would be subject to the full U.S. corporate tax rate in the year that they are earned. How well this would work might depend heavily on how easily this can be administered.
Since there are no public estimates of the revenue impacts of the provisions Baucus has proposed, it is not yet clear how important many of them are. Stay tuned as we examine this proposal and learn more.
Statement from CTJ Director Robert McIntyre: Is the Baucus Plan for Multinational Corporations a Prelude to a Middle-Class Tax Increase?
Senate Finance Committee Chairman Max Baucus (D-Mont.) today released a draft proposal for changing the way the United States taxes multinational corporations. Robert McIntyre, the director of Citizens for Tax Justice, made the following statement about the draft:
"Senator Baucus promises that his proposals will not increase the paltry federal income taxes that multinational corporations now pay. He also promises that he will later propose changes to the taxes on domestic corporations, which will also be 'revenue-neutral.' And he also says that he 'believes tax reform as a whole should raise significant revenue.'
"That must mean that Baucus plans to propose 'significant' increases in personal income taxes (or some new tax). Will this mean higher taxes on the rich? That seems unlikely, since Baucus is expected to propose a considerably lower top personal income tax rate. So that apparently will leave the middle class and maybe the poor holding the bag.
"That is certainly not what most Americans think tax reform should be about. Lawmakers should instead reform the corporate income tax in a way that raises significant revenue."
New CTJ Report: Boeing, Recipient of the Largest State Tax Subsidy in History, Paid Nothing in State Corporate Income Taxes Over the Past Decade
On November 12th, Washington Governor Jay Inslee signed into law the largest state business tax break package in history for Boeing. The new law will give Boeing and its suppliers an estimated $8.7 billion in tax breaks between now and 2040. Even before this giant new subsidy, Boeing has already been staggeringly successful in avoiding state taxes. Over the past decade, Boeing has managed to avoid paying even a dime of state income taxes nationwide on $35 billion in pretax U.S. profits.
A newly released study sponsored by General Electric and a corporate lobbying group argues in favor of a “territorial” tax system, which House Ways and Means chairman Dave Camp has proposed as part of comprehensive tax reform. Here’s Citizens for Tax Justice director Bob McIntyre’s take on the study.
General Electric and a corporate lobbying group called ACT have sponsored a “study” arguing that our economy would benefit from a “territorial” tax system — one that permanently exempts from U.S. taxes the offshore profits of American corporations. This flies in the face of overwhelming evidence that today many of these profits are really earned in the U.S. but characterized as “offshore” in order to obtain existing tax benefits that would be expanded under a territorial system. The “study” is hopelessly flawed for several reasons.
For starters, the long-term “improvement” in the U.S. economy that the report predicts is so small that it’s a rounding error. The authors claim that permanently exempting offshore corporate profits from tax would increase U.S. GDP by $22 billion a year. That’s an increase of only 0.1%. So even if one believed this would actually happen (we don’t), one wouldn’t care.
More fundamentally, the authors seem to believe that the trillions of dollars that multinational corporations claim they earn in tax havens are floating in baskets in the Caribbean, and are unavailable for use in the United States. But that’s not true. As we’ve learned from the annual reports of companies such as Apple, most of that money is actually invested in the United States, in the stock market, corporate bonds and government bonds. In other words, most of the money is already here. It just hasn’t been taxed.
The authors brush aside the problem that a permanent tax exemption for “foreign” profits would encourage American corporations to work even harder at making their U.S. profits appear to earned in other countries that don’t tax them. The authors simply assert that they don’t think a permanent exemption would be any worse than our current system of indefinite “deferral” of U.S. taxes on such profits. What they don’t mention, however, is that there is a straightforward way to fix our current system.
As CTJ and others have pointed out, the solution is to repeal “deferral” and make multinationals pay tax on their overseas profits, with a credit for taxes paid to foreign governments. This would make profit-shifting to tax havens useless, and would also end tax incentives to move operations abroad. As a bonus, ending “deferral” would reduce the federal budget deficit by over $500 billion over the next ten years, making it much easier to protect essential public programs such as Social Security and Medicare.
General Electric, one of America’s most notorious tax dodgers, wouldn’t like such a reform, of course. That’s probably why it’s never mentioned by the authors of the study.
On November 1, The New York Times published on op-ed written by John Cassara, formerly a special agent for the Treasury Department tasked with following money moved illegally across borders to evade taxes or to launder profits from criminal activities. The place where the money often disappeared, he explains, was the state of Delaware, which allows individuals to set up corporations without disclosing who owns them.
“I trained foreign police forces to “follow the money” and track the flow of capital across borders.
During these training sessions, I’d often hear this: “My agency has a financial crimes investigation. The money trail leads to the American state of Delaware. We can’t get any information and don’t know what to do. We are going to have to close our investigation. Can you help?”
The question embarrassed me. There was nothing I could do.
In the years I was assigned to Treasury’s Financial Crimes Enforcement Network, or Fincen, I observed many formal requests for assistance having to do with companies associated with Delaware, Nevada or Wyoming. These states have a tawdry image: they have become nearly synonymous with underground financing, tax evasion and other bad deeds facilitated by anonymous shell companies — or by companies lacking information on their “beneficial owners,” the person or entity that actually controls the company, not the (often meaningless) name under which the company is registered.”
Americans might comfort themselves by thinking that all countries have this problem, but Cassara points out that it is particularly bad in the U.S. He explains that a “study by researchers at Brigham Young University, the University of Texas and Griffith University in Australia concluded that America was the second easiest country, after Kenya, in which to incorporate a shell company.”
This creates enormous problems for U.S. tax enforcement efforts. It’s more difficult to persuade foreign governments to help the IRS track down money hidden offshore when several U.S. states seem to be helping people from all over their world evade taxes owed to their governments. Another problem is that much of the money hidden in shell companies incorporated in Delaware or other U.S. states may be U.S. income that should be subject to U.S. taxes, and/or income generated by illegal activities in the U.S.
The good news is that legislation has been proposed to require states to collect information on the beneficial owners (i.e., whoever ultimately owns and controls a company) when a corporation or LLC is formed and make that information available when ordered by a court pursuant to a criminal investigation. The Incorporation Transparency and Law Enforcement Assistance Act has bipartisan sponsorship in the Senate (including Senators Levin, Feinstein, Grassley and Harkin) and has been referred to the Judiciary Committee. This is an improvement over the last attempt to pass this legislation, in 2009, when it was referred to the Homeland Security and Government Affairs Committee (HSGAC), where it was memorably sabotaged by Delaware’s Senator Tom Carper. Last month, a similar bill was introduced in the House by Rep. Maloney.
Of course, enactment of this legislation would not solve all of the problems with our tax code. For example, it would not address the major problem of big, publicly traded corporations like Apple avoiding taxes by using offshore tax havens in ways that are (probably mostly) legal under the current rules. But, the incorporation transparency legislation would be huge progress in clamping down on tax evasion (the illegal hiding of income from the IRS) by individuals, including those engaged in other criminal activities like drug trafficking, smuggling, terrorist funding and money laundering.
In fact, as we have argued before, it is disappointing that the Obama administration has not put any real energy into advocating for this type of comprehensive legislation. This is not too much to ask for. The Conservative Prime Minister of the UK recently announced that his government would go even farther — not just recording names of owners of all UK corporations and making them available to enforcement authorities, but even automatically making those names public.
One question that comes up in debates about the corporate income tax is who pays it. Even though the corporate tax is officially paid by corporations, all taxes are ultimately paid by actual people.
It is clear that the corporate tax is, in the short term, borne by the owners of capital — meaning it’s paid by the owners of corporate stocks and other business and investment assets because the tax reduces what corporations can pay out as dividends to their shareholders. But those who promote corporate tax breaks sometimes argue that in the long-term the tax is actually borne by labor — by workers who ultimately suffer lower wages or unemployment because the corporate tax allegedly pushes production activity offshore.
Most experts who have examined the question believe that investment is not entirely mobile in this way and that the vast majority of the corporate tax is borne by the owners of capital, who mostly (but not exclusively) have high incomes. This makes the corporate tax a very progressive tax.
For example, the Department of Treasury concluded that 82 percent of the corporate tax is borne by the owners of capital. According to Treasury, this results in the corporate income tax being distributed as illustrated in the table to the right, which shows that the richest one percent of Americans pay 43 percent of the tax while the richest 5 percent pay 58 percent of the tax. These figures were used by CTJ to estimate the distribution of tax increases resulting from corporate loophole-closing in our new comprehensive tax reform proposal.
Treasury’s findings are similar to those of other analysts. The Tax Policy Center, for example, has concluded that 80 percent of the corporate income tax is borne by the owners of capital.
Two weeks ago, the Joint Committee on Taxation (JCT), the official revenue estimators for Congress, announced that it would finally include corporate income taxes in its distributional tables showing the effects of proposed tax changes. This will make JCT’s analyses more consistent with other analyses (including CTJ’s), and will mean that lawmakers will no longer get a free pass in JCT’s distributional tables when they enact regressive corporate tax cuts.
In conjuction with its announcement, JCT published a report estimating that in the short-run all of any change in the corporate tax will benefit or burden owners of capital, while in the long-run 75 percent of a corporate tax change will affect owners of capital (and the rest will affect labor income).
JCT’s conclusion is not all that different from the conclusions of others, but some observers seem to think it is “news” and have misinterpreted its importance. For example, Bruce Bartlett, who typically has a lot of insightful things to say about taxes, wildly misinterprets JCT’s conclusion:
Politically, it is now easier to show that a cut in the corporate tax rate will have benefits that are broadly shared, especially by those with incomes below $30,000. Conversely, it means that the Obama administration’s plan to raise new revenue by closing corporate tax loopholes will have a harder time gaining traction, because much of the burden will fall on those with low incomes.
This is all wrong. Bartlett includes some tables from the JCT report in his piece but fails to include the table that actually matters, which is at the top of page 27 and is titled “Distribution of a $10 Billion per Year Increase in Corporate Income Taxes.” This table shows JCT’s estimates of how much taxes would go up for taxpayers at different income levels in each of the next 11 years. JCT’s figures are in millions of dollars, but with some simple arithmetic, we can calculate the share of a corporate tax increase paid by each of the income groups that JCT presents. We focus on the first and last year that JCT analyzes, to show both the immediate and longer-term impacts.
The result is the table below, which shows that under JCT’s assumptions, over half of a corporate income tax increase would be paid by people with income exceeding $200,000. Well over three-fourths would be paid by people with incomes exceeding $100,000. Only about 6 percent would be paid by the 55 percent of taxpayers earning less than $50,000, whose average tax increase from a $10 billion corporate tax hike would be only $7.
In other words, any provision that raises revenue by closing corporate tax loopholes will have a progressive impact, meaning it will increase the share of taxes paid by high-income people.
Low- and middle-income Americans will be hurt by proposals being debated like cuts to Social Security, Medicare and Medicaid and proposals recently put into effect like sequestration of funds for Head Start. It would be far better for lawmakers to achieve whatever savings they think are necessary by closing corporate tax loopholes, because very little of the resulting tax increase would be paid by low- and middle-income Americans.
PricewaterhouseCoopers Report Quietly Confirms Low Effective Tax Rates for Corporations But Directs Attention to Irrelevant Figures
A headline in a publication read widely by tax experts (subscription only) this morning screamed “PwC Study: Effective Corporate Tax Rate Topped Statutory Rate From 2004 to 2010.”
The actual report, which was published in a rival publication this week (subscription only), provides three different ways of measuring effective corporate tax rates, and only one tells us anything about how our corporate tax system is working. That measure — the percentage of worldwide profits paid in worldwide taxes for corporations that were profitable from 2008 through 2010, was 22 percent, the study concludes.
This is not surprising at all. CTJ’s study of most of the Fortune 500 corporations that were consistently profitable from 2008 through 2010 found their effective U.S. federal corporate income tax rate on their U.S. profits to be 18.5 percent over that period. The PwC study finds that worldwide profits (not just U.S. profits) were subject to worldwide taxes (including U.S. federal and state taxes plus foreign taxes) of 22 percent.
These two findings are entirely compatible. The effective worldwide tax rate can be expected to be slightly higher than the effective U.S. tax rate that CTJ calculated because the CTJ study also found most of the corporations to pay higher taxes in the other countries where they did business, and because the worldwide rate includes state corporate taxes.
However, PwC’s report also includes two other, odd measures of corporate tax rates that are irrelevant to the policy debate, and tries to get reporters to focus on these irrelevant figures. One includes companies whether they were profitable are not in the years examined. Of course, corporations that are not profitable are not expected to pay the corporate income tax, which is a tax on profits. But including corporations with losses reduces the total amount of profits and makes the effective tax rate (taxes as a percentage of profits) appear much larger.
Another irrelevant measure used by the PwC study includes all corporations with positive taxable income. This measure leaves out corporations that actually are profitable but avoid taxes because of breaks (like depreciation breaks) that reduce their taxable income to below zero. This measure simply excludes the corporations that are most effective at dodging taxes.
The author of the PricewaterhouseCoopers report, Andrew Lyon, was called out by CTJ in 2011 for a report he wrote for the Business Roundtable claiming that U.S. corporations pay higher effective tax rates than corporations of other countries. It appears that this time around, his better angel compelled him to include a straightforward, relevant statistic even while he tries to divert readers’ attention to his report’s other, meaningless findings.
Responding to growing international pressure over his country’s role in facilitating international tax avoidance, Ireland's Minister of Finance, Michael Noonan, proposed a new measure that would end the ability of companies to avoid taxes by incorporating in his country without declaring any country of residence for tax purposes. The move comes after a Senate investigation in the U.S. that revealed Apple’s massive tax avoidance involving subsidiaries in Ireland.
But this move will not make any difference in the ability of Apple and other companies to avoid Irish, and by extension, other countries’ taxes. The law, as proposed, would continue to allow a company incorporated in Ireland to select any country to be its “residence,” the place where it is technically managed. In other words, a subsidiary company incorporated in Ireland can declare a tax haven as its residence and pay zero taxes on its profits and on profits funneled to it from related companies in other countries.
In fact, this approach is already being used by Google, which reportedly routed $12 billion in royalty payments to Bermuda, an infamous tax haven, using the "Double Irish with a Dutch Sandwich" technique. This strategy involves shifting profits (on paper) through subsidiaries that are shell companies in several jurisdictions until they are officially in an Irish shell company that legally “resides” in a country like Bermuda or the Cayman Islands which has no corporate income tax. The U.S. and many other countries have rules that would immediately tax certain payments made directly into a shell company in Bermuda or the Cayman Islands, so this complicated strategy takes advantage of the treaties between Ireland, the Netherlands, and many other countries that waive those taxes.
While it would fail to block this sort of tax avoidance, Ireland’s new proposal has succeeded so far in generating headlines that suggest the country is taking action and doing its part in international efforts to crack down on tax avoidance. Most reporting does, however, note somewhere in the text of the article, if not the headline, the fact that the change would likely have no material effect on tax avoidance (unlike some of the fumbled reporting on the end of the Securities and Exchange Commission investigation into Apple).
The leaders of the U.S. Senate investigation into Apple's tax practices, Senators Carl Levin and John McCain, noted in a statement that in order for Ireland to demonstrate that it’s truly "ready to close the door on these egregious corporate tax abuses," it must ensure that the new rules truly prevent companies from excluding substantial income from the Irish corporate tax by declaring residency in a tax haven. In other words, unless this recent proposal is followed up with changes that would actually impact tax avoidance, then it may be nothing more than a PR move.
Congress can end Apple's and other U.S. companies’ avoidance of U.S. taxes right now, without waiting for Ireland to do the right thing. The best way is to simply repeal the rule that allows American corporations to defer paying (PDF) U.S. taxes on their offshore profits. American corporations only use gimmicks like the “Double Irish with a Dutch Sandwich” so that they can defer (for years or forever) U.S. taxes on profits they claim are earned offshore. If Congress fails to repeal deferral, it can at least curb the worst abuses of deferral by enacting the Stop Tax Haven Abuse Act which Senator Levin has introduced.
On Wednesday, the New York Times examined the practice of some U.S. corporations inverting (reincorporating in another country) by merging with foreign companies, and the extent to which this is done to avoid U.S. taxes. This problem is probably somewhat overblown, but to the extent that it exists, there are straightforward ways Congress can address it.
It used to be that U.S. tax law was so weak in this area that an American corporation could reincorporate in a known tax haven like Bermuda and declare itself a non-U.S. corporation. (Technically a new corporation would be formed in the tax haven country that would then acquire the U.S. corporation.) In theory, any profits it earned in the U.S. at that point should be subject to U.S. taxes, but profits earned by subsidiaries in other countries would then be out of reach of the U.S. corporate tax.
But what sometimes happened in practice was that even the profits earned in the U.S. were made to look (to the IRS) like they were earned in the tax haven country through practices like “earnings stripping,” which involves loading up the American subsidiary company (the real company) with debt owed to the foreign parent (the shell company). That would reduce the American company’s taxable profits and shift them to the tax-haven parent company, which wouldn’t be taxable. A 2007 Treasury study concluded that a section of the code enacted in 1989 to prevent earnings-stripping (section 163(j)) did not seem to prevent inverted companies from doing it.
This problem was to some extent addressed by the “anti-inversion” provisions of the American Jobs Creation Act (AJCA) of 2004, resulting in the current section 7874 of the tax code. The problem highlighted in the Times article is that American corporations today can sometimes get around section 7874 by merging with an existing foreign corporation.
It’s a safe bet that some of these mergers really are motivated partly by a desire to avoid U.S. taxes on profits earned in other countries and also to avoid U.S. taxes on what are really U.S. profits but which are shifted into tax havens through earnings stripping. This may well be the case in the three examples cited of American corporations merging with Irish corporations, as Ireland has a low corporate tax rate and has featured prominently in tax schemes used by Apple and other companies.
In other cases, tax avoidance may not be the only factor in firms deciding to merge — as in the examples cited in the article of an American company merging with a French firm and another merging with a Japanese firm. But even in both of these cases, the new companies are to be incorporated in the Netherlands, which has also featured in tax avoidance schemes used by companies like Google, which suggests that tax avoidance is certainly a sweetener in the deal.
One question not addressed is the extent to which an Obama administration proposal to crack down on earnings stripping by inverted companies would resolve this problem. This proposal would basically apply a stricter version of section 163(j), the provision that is supposed to stop earnings stripping, to inverted companies that manage to avoid being treated as a U.S .corporation under section 7874, the anti-inversion provision enacted in 2004.
Specifically, section 7874 treats an ostensibly foreign corporation as a U.S. corporation for tax purposes if (1) it resulted from an inversion that was accomplished (meaning the U.S. corporation became, at least on paper, obtained by a corporation incorporated abroad) after March 4, 2003, (2) the shareholders of the American corporation own 80 percent or more of the voting stock in the new corporation, and (3) the new corporation does not have substantial business activities in the country in which it is incorporated.
Section 7874 provides much less severe tax consequences for corporations that meet these criteria except that shareholders of the American company now own between 60 percent and 80 percent (rather than 80 percent or more) of the voting stock in the newly formed corporation. Section 7874 does not treat these corporations as U.S. corporations, and that may allow them to save a lot of money by stripping earnings out of their American subsidiary companies. The President’s proposal would apply a stricter version of section 163(j), the provision that is supposed to prevent earnings stripping, to these companies (and to companies that inverted before 2003).
Tax avoidance by the corporations resulting from the mergers discussed in the Times article might be curbed by the Obama proposal. To be affected, the new corporations need to be at least 60 percent owned by the shareholders of the American company and also have no substantial business activities in the country where they are incorporated. For example, the merger between an American company and a French company and the merger between an American company and a Japanese company both resulted in companies incorporated in the Netherlands. They may be over 60 percent owned by the American shareholders and it’s likely that they have no substantial business in the Netherlands, a notorious tax-haven conduit.
But even if the resulting company does not meet these tests, Congress should subject them to the stiffer earnings stripping rule. In other words, the administration’s proposal is arguably too weak. For example, even if one of these mergers results in a company that does have substantial business activities in the country where it is incorporated, why should that company be allowed to strip earnings from its American subsidiary companies?
For that matter, the stricter earnings stripping standard that would be imposed under the President’s proposal is one that reasonably should apply to any foreign-owned company. Among other things, it would bar an American subsidiary company from taking deductions for interest payments to a foreign parent company in excess of 25 percent of its “adjusted taxable income,” which is defined as taxable income plus most certain significant deductions that corporations are allowed to take.
This seems like a reasonable standard to apply regardless of whether or not an inversion has taken place. In other words, Congress should enact an expanded, stronger version of the President’s proposal.
Following the Securities and Exchange Commission (SEC)’s announcement (PDF) that it had closed its review of Apple's financial disclosures, headlines like "SEC Agrees That There's Nothing Wrong With Apple's US Taxes" started appearing, giving the false impression that what Apple has somehow been exonerated for is its tax avoidance practices. The reality, however, is that the SEC is now satisfied that Apple is not violating the rules in the disclosure of its tax circumstances to the agency, which has nothing to do with the legal validity of its tax avoidance methods more generally. In addition, the SEC only closed its investigation after Apple agreed to disclose more information on its foreign cash, tax policies and plans for reinvestment of foreign earnings; that makes it pretty clear that the SEC did not judge the company’s previous disclosures adequate.
Much of the news coverage took its cues from a story at the Dow Jones tech news site, All Things D. called “SEC Clears Apple’s Tax Strategy.” To that site’s credit, it corrected the story, explaining that the article "was updated to make it clear that the SEC’s review concerned Apple’s tax disclosures, not the legality of its tax practices under U.S. tax law, which is the purview of the IRS." Also relevant is a Los Angeles Times story that ran several days before All Things D’s. It got no significant pick-up from other news outlets because it rather blandly, and accurately, conveyed that this whole thing was simply a step in a bureaucratic process. Unfortunately, the flurry of stories and columns suggesting that Apple had been wrongly convicted in the court of public opinion are still out there, uncorrected, creating an impression that Apple’s tax practices are pure benevolence.
Going beyond just the misleading headlines, articles like the editorial in the Wall Street Journal turned the SEC letter into an opportunity to argue that the Senate investigation into Apple was really just a "three-ring media circus" created by Senators to "please their political masters." (Some believe that corporations like Apple are themselves the political masters, but that’s another matter.) But the WSJ editorial misconstrues… everything. The entire point of the Senate investigation and subsequent hearing is that what Apple does may be legal, but it also allows the company to escape paying its fair share in taxes on its high profits.
As Citizens for Tax Justice (CTJ) noted in a May report, Apple has managed to manipulate the international tax system using tax havens to such an extent that it paid almost nothing in income taxes on over $102 billion in foreign profits. While Apple's abuses of the international tax system are particularly striking, CTJ also found that Apple is joined by companies like Dell, Microsoft and Qualcomm in shifting billions of dollars of profits to tax havens. CTJ was unable, however, to include many other companies engaging in these kinds of manipulations because the SEC is not using its authority to require companies to disclose all the information needed to make these determinations about every company. (Ironically, Apple has been more forthcoming than other notorious tax dodgers like Google and GE.)
Rather than fixating on whether what Apple does is technically legal, the focus needs to be on how lawmakers can put an end to these elaborate tax dodges altogether. The most straightforward way to stop companies from dodging taxes would be to end deferral (PDF), which allows companies like Apple to indefinitely postpone paying taxes on offshore profits. In addition, lawmakers could follow the recommendations from the Senate investigation's report (PDF) on Apple, which proposed tightening transfer pricing rules and reforming the "check-the-box" and "look-through" rules in the Internal Revenue Code.
There is mounting public outrage over the way corporations are avoiding U.S. taxes using offshore tax havens, and one move that would encourage Congress to do the right thing sooner would be for the SEC to tighten its disclosure requirements. The agency should ask for more detail on country-by-country income shifting, in particular, since that’s the direction the world is going anyway. It’s time for the SEC to start exercising the authority it has, and for Congress to stop the revenue hemorrhage that is corporate tax avoidance.
Tax reform is a serious undertaking. The majority party in the House of Representatives now proposes to allow the U.S. to default on its debt obligations — refuse to pay the debts built up by Congress itself — unless it can force through a “tax reform” that raises no new revenue, along with other controversial measures.
Don’t be fooled. Raising the debt ceiling to avoid a default on U.S. debt obligations is a matter that should not require much debate, while tax reform is a completely separate issue that will require a vast amount of discussion and debate. The two do not belong in the same bill.
When lawmakers are serious about tax reform, they should turn to a new report from Citizens for Tax Justice that lays out just what tax reform should accomplish. If Congress is going to spend time on a comprehensive overhaul of America’s tax system, this overhaul should raise revenue, make our tax system more progressive, and end the breaks that encourage large corporations to shift their profits and even jobs offshore.
Senator Carl Levin (D-Mich.) today introduced the “Stop Tax Haven Abuse Act.” The bill, cosponsored by Senators Sheldon Whitehouse (D-R.I.), Mark Begich (D-Alaska) and Jeanne Shaheen (D-N.H), would curb some of the worst tax dodges used by multinational corporations to avoid their U.S. tax responsibilities.
Multinational corporations are currently allowed to indefinitely “defer” paying U.S. taxes on their foreign profits, even when those profits have been shifted out of the United State and into foreign tax havens.
The Levin bill does not go so far as to repeal “deferral.” But its enactment would be an important step in limiting incentives for multinational corporations to shift jobs and profits offshore. The bill is estimated to raise $220 billion over the upcoming decade.
Among the key features of the “Stop Tax Haven Abuse Act” are the following:
■ There are numerous problems with “deferral,” but it’s particularly problematic when a U.S. company defers U.S. taxes on foreign income even while it deducts the expenses of earning that foreign income to reduce its U.S. taxable profits. The Levin bill would defer corporate tax expenses related to offshore profits until those profits are subject to U.S. tax.
■ Individuals or companies with income generated abroad get a credit against their U.S. taxes for taxes paid to foreign governments, in order to prevent double-taxation. This makes sense in theory. But, unfortunately, corporations sometimes get foreign tax credits that exceed the U.S. taxes that apply to such income, meaning that the U.S. corporations are using foreign tax credits to reduce their U.S. taxes on their U.S. profits, not just avoiding double taxation on their foreign income. The Levin bill would address this problem by requiring that foreign tax credits be computed on a “pooled basis” so that no credits would be allowed for tax-haven profits.
■ Current tax rules allow U.S. corporations to tell foreign countries that their profits are earned in a tax haven, while telling the United States that the tax-haven subsidiaries do not exist. This allows corporations to shift profits out of the U.S. and real foreign countries and avoid paying income taxes to any country. The Levin bill would repeal the “check-the-box” rule and the “CFC look-through rules” that allow such tax avoidance.
■ Multinational corporations can often use intangible assets, such as patents and know-how, to make their U.S. income appear to be “foreign” income. For example, a U.S. corporation might transfer a patent for some product it produces to its subsidiary in a tax-haven country that does not tax the income generated from this sort of asset. The U.S. parent corporation will then “pay” large fees to its subsidiary for the use of this patent. The Levin bill would limit the worst abuses of this tax dodge.
For a more detailed description of the reforms discussed above, see our Working Paper on Tax Reform Options.
What could be more lovable than a bipartisan effort to simplify the tax code? A bipartisan effort to simplify the tax code led by a couple of folksy guys in shirtsleeves who call themselves Max and Dave. No matter that they are two of the most powerful members of Congress, they have managed to craft a successful PR campaign playing on the public’s frustration with political partisanship and endemic dislike of the tax code.
Max and Dave, of course, are Senator Max Baucus, chair of the Senate Finance Committee, and Representative Dave Camp, chair of the House Ways and Means Committee. Their aw-shucks, let’s-get-a-beer-and-fix-the-tax-code routine has received friendly media coverage inside the Beltway and outside too, during their recently wrapped up road show, which took the pair to Minnesota, Philadelphia, Silicon Valley and Memphis.
But as we have said many, many times, if these two are serious about reforming the tax code, they need to get serious about revenues. Indeed, they need to get serious period. Stop putting the cart before the horse, quit with the campaign strategy and get down to policy.
Most recently, we made our point on the opinion pages of the Memphis Commercial Appeal, the day before Max and Dave showed up for a friendly roundtable with executives from FedEx, one of the squeakier (PDF) corporate wheels when it comes to tax reform. Our op-ed, “Most of Us Want Corporate Loopholes Shut,” asked why the Senator and Congressman would visit with FedEx for advice about tax reform.
“The venue is apt because FedEx’s taxpaying behavior is emblematic of the challenges facing anyone seeking to fix the United States’ corporate tax system; it’s awkward because FedEx is a heavy feeder on tax breaks enthusiastically supported over many years by bipartisan majorities in Congress.”
We then explained some of what we’d learned in reviewing FedEx’s latest financial statements.
“For example, my organization, the Institute on Taxation and Economic Policy, found that between 2008 and 2010, FedEx paid an effective federal income tax rate of just 0.9 percent on over $4.2 billion in U.S. profits. With two more years of tax filings now publicly available, we know that over the past five years, FedEx paid an average effective federal income tax rate of just 4.2 percent.”
And we took on that worn-out whine about corporations needing a lower corporate tax rate to be competitive.
“FedEx also demonstrates how the U.S. corporate income tax does not appear to make our companies less “competitive,” despite the insistence of legions of CEOs that it does. Between 2008 and 2010, FedEx paid an effective income tax rate of 45 percent in the foreign countries where it does business. That’s about 50 times higher than the 0.9 percent rate they faced in the U.S. In fact, of the Fortune 500 corporations that were consistently profitable and that had significant offshore profits during that same period, we found that two-thirds actually paid higher taxes in the foreign countries where they do business than they paid in the U.S.”
Our op-ed in Tennessee also made reference to FedEx’s vast offshore holdings and how it drives down its taxes using depreciation. You can read the whole thing here. You can also read a small business owner using the Max and Dave visit at FedEx to make a similar point in a Tennessean op-ed.
Our real target, of course, wasn’t FedEx but rather the tax reforming team of Baucus and Camp. We use individual corporations’ tax payments as case studies – little narratives to show what’s wrong with the corporate tax code. As these corporations like to say, their tax avoidance practices are generally legal because Congress made them legal, so we like to show Congress exactly how their laws are working when it comes to corporate tax revenues.
Sometimes, though, companies take it personally when we publicize their actual tax payments, (remember our back and forth with GE last year?). Sure enough, two days after our op-ed ran in Memphis, a FedEx V.P. took to the same opinion page to defend the company, using many of the shell games we’ve come to expect. For example, we had explained that FedEx paid a 4.2 percent effective federal income tax rate on its U.S. profits over five years. FedEx V.P. Michael Fryt retorted with a ten year total tax payments figure in dollars, cited its total bill for state, local and federal taxes over five years, and then wrote that FedEx’s effective tax rate has been between 35.3 and 37.9 percent since 2010 – and was even 85.6 percent in 2009.
Notice how those effective rate figures he cites are all actually higher than the federal statutory rate of 35 percent? There’s a reason for that. While we focused on the company’s federal corporate income tax as a percentage of its U.S. profits, like we always do, Fryt is trying to divert attention to other taxes and taxes that FedEx has not paid yet, as companies often do. It’s like CTJ shows the world an apple and these companies jump up and down demanding the world look at their oranges instead.
We have a full response to those oranges FedEx was pushing last week right here. Among other things, it’s a case of Fryt including taxes that FedEx paid not just to the U.S. Treasury but to every country and locality everywhere it does business, which is not something that Max Baucus or Dave Camp or any member of Congress has any control over. Members of Congress are debating how to reform federal taxes, and we assume that FedEx is lobbying (and lobbying) Congress to influence the shape of that same federal corporate income tax, not the taxes it pays to states or cities or foreign countries.
What Congress can legislate is the federal corporate tax rate and the loopholes, breaks and other special provisions that are increasingly eroding corporate taxes as a share of revenues. Senator Baucus has told his colleagues to assume the tax code will be wiped clean of such expenditures, even as he and Camp continue to meet with corporations who unapologetically defend their favorite tax breaks – and demand lower rates on top of that. Summer is over and with it, Max and Dave’s road trip. When they are ready to get back to work, we are ready to offer constructive ideas for tax reform that generates the revenues we need and delivers the fairness the public wants.
As Senator Max Baucus and Congressman Dave Camp, the chairmen of the tax committees in the Senate and House, took their tax reform road show to the FedEx headquarters in Memphis last week, CTJ released a short report and op-ed concluding that the company had paid just 4.2 percent of its profits over the previous five years in federal corporate income taxes. FedEx’s Corporate Vice President for Tax, Michael D. Fryt, responded with an op-ed of his own (subscription required) that took issue with CTJ but avoided the actual issue raised.
The stakes are high for FedEx when it comes to tax reform. The company’s CEO has called for a lower federal corporate income tax rate and a “territorial” tax system (a tax system that exempts the offshore profits of corporations). FedEx is participating in several coalitions of corporations lobbying to achieve these goals.
The debate before Congress, (which Baucus and Camp are trying to move in a certain direction) is over how to reform the federal corporate income tax, so CTJ’s report and op-ed examined what FedEx pays in federal corporate income taxes as a percentage of its profits. That is FedEx’s effective federal corporate income tax rate, 4.2 percent.
Fryt’s op-ed attempts to confuse the issue by discussing other taxes, like state and local sales taxes, which the corporation does not even pay. A company like FedEx merely collects sales taxes from customers, who do pay them, and then hands the taxes over to whatever state or local government they are owed to.
Fryt goes on to say that FedEx’s effective tax rate was “36.4 percent in 2013, 35.3 percent in 2012, 35.9 percent in 2011, 37.5 percent in 2010 and 85.6 percent in 2009.” These ludicrous assertions are based on accounting practices and gimmicks that corporations like FedEx use when they make their reports to the SEC, but that obscure what they actually pay in taxes.
These figures include taxes paid to other governments as well as deferred taxes — taxes that FedEx has not actually paid but which it might pay at some point in the future. We believe reasonable people would agree that if we want to understand what a corporation pays in federal corporate income taxes as a percentage of profits over certain years, we should divide the federal corporate income taxes actually paid by the company by the profits actually generated by the company.
Fryt then seems to admit that FedEx’s taxes were low during the years we examine, but then explains that this is because of temporary tax breaks for “accelerated depreciation.” Such breaks allow a company to deduct the cost of equipment much more quickly than it actually wears out, and are the reason FedEx can “defer” a lot of its taxes. Fryt argues that there is broad consensus that such breaks create jobs, but this is actually not true.
The non-partisan Congressional Research Service recently reviewed efforts to quantify the impact of these tax breaks and found that “the studies concluded that accelerated depreciation in general is a relatively ineffective tool for stimulating the economy.” Further, we worry that this break is not truly “temporary” because Congress will keep extending it. Bonus depreciation was enacted in 2002 and has only been allowed to expire for two years, 2006 and 2007, since then.
None of this is to say that there is something immoral or evil about FedEx’s corporate tax practices. Members of Congress are responsible for the tax laws, which FedEx is following as far as we know. Of course, FedEx is lobbying to preserve and even expand its breaks, and it is unsurprising that it manipulates facts and figures to further its goals.
In July, a letter signed by thirty national organizations and a report from Citizens for Tax Justice (CTJ) both warned members of Congress about a proposal from Congressman John Delaney of Maryland that would have the effect of rewarding corporations that use offshore tax havens to avoid U.S. taxes. Rep. Delaney’s staff responded with a “rebuttal” that is itself based on misinformation about corporate tax law and about the likely effects of the proposal, which would provide a tax amnesty for offshore profits (often euphemistically called a “repatriation holiday”) for corporations that agree to finance an infrastructure bank.
A new report from Citizens for Tax Justice addresses each point made by Rep. Delaney's "rebuttal" as well as the myth that a huge amount of money is "locked offshore" and waiting for a tax break to lure it back into the U.S. economy.
Read the report.
If Senator Max Baucus and Congressman Dave Camp wanted to know what Intel thinks about the corporate tax code, they didn’t need to fly into Silicon Valley this week on the taxpayers’ dime to find out. They could just have sat down in Washington, DC with a lobbyist from the proliferating number of lobby alliances corporate America is subsidizing in advance of tax reform, including the four that Intel belongs to.
If these two self-appointed Congressional tax reformers, a.k.a. Max and Dave, had just pulled up Intel’s own position paper (PDF) on tax policy, they would have learned that it, like most major U.S. corporations, wants a lower tax rate, and to keep its favorite tax breaks, too.
One tax break Intel says it likes is “deferral.” Deferral – a company’s ability to defer paying U.S. taxes on profits generated and kept abroad – is a preferred loophole for companies with intellectual property. It is relatively easy for them (unlike infrastructure-dependent manufacturers) to rent a post office box and call it a “business” anywhere they like, including in tax havens where no business is actually happening. And based on Intel’s public reports, it has six subsidiaries in that most famous of tax havens, the Cayman Islands. Deferral is also one of the most expensive expenditures in the corporate tax code, and will cost U.S. taxpayers around $600 billion in lost revenues over the coming decade.
Intel’s financial reports tell us that it currently has $17.5 billion in profits held offshore (at least for tax and accounting purposes) which are therefore not taxable by the U.S. This doesn’t make Intel an unapologetic offshore cash hoarding champ like Apple, with its $102 billion parked offshore. Intel is more like Google (and HP and Cisco) in that it’s squirreling away billions but won’t report what that money is doing, or where. If the money is working in an economically developed country, Intel is paying taxes on it that would be deducted from its U.S. tax bill if it brought those billions home; if it’s in a tax haven, (say, in a Caymans subsidiary), Intel has paid no taxes on it to any government.
As it is, Intel has paid roughly a 27 percent tax rate on its reported domestic corporate profits over the last five years (and a mere 0.3 percent in state taxes). And while Intel says its taxes are too high, what should worry Americans is that the two lawmakers campaigning for tax reform seem sympathetic to this common corporate complaint. Both have said that the current corporate tax rate should be cut, and Camp promotes a form of deferral on steroids, a “territorial” system, and Baucus won’t rule that out.
Baucus and Camp went to Silicon Valley as part of their “Max and Dave Road Show” to drum up support for tax simplification, promoting their bipartisan folksiness but consistently dodging serious questions about what tax reform should accomplish for the American public.
A simpler tax code is a good idea and certainly a popular one, but it is also popular for corporations to pay their fair share. 83 percent of Americans say we should close corporate tax loopholes, and then use that money to invest in the economy and pay down our debt (rather than cut the corporate tax rate), and with good reason. The corporate taxes we collect as a share of the economy has rarely been lower, and is well below average for the developed world. The effective federal income tax rate that big, profitable companies pay is actually only about half of the statutory 35 percent rate they complain about.
Baucus and Camp didn’t need to give another CEO another platform to ask for a tax cut. (And now we learn Treasury Secretary Jack Lew is heading to Silicon Valley to visit Facebook. Don’t get us started!) What they need is to ask the public what we want out of tax reform. We want simple, sure, but we also want fair.
Michael McIntyre, an international tax professor at Wayne State University, former consultant to the United Nations, OECD, and several governments, and the brother of CTJ director Robert McIntyre, passed away on August 14 at the age of 71.
An obituary published in Tax Notes allows Michael McIntyre’s colleagues, among them his brother, to share their thoughts:
“My older brother, Mike, was my mentor and best friend,” said Citizens for Tax Justice Director Robert McIntyre. “He's the reason that I've spent my career in tax policy.”
“Over the past four decades, we collaborated on tax reform proposals that ran the gamut from international, to federal, to state and local, to American Indians. We were soul mates both in tax policy and in life,” Robert McIntyre said. “He made the world a better place, not just for me, the rest of his large extended family, and his many friends, but also for the countless people here in the U.S. and around the world who benefited from the tax policies he promoted.”
Michael McIntyre published a multitude of books and articles on a variety of tax topics. He served as a senior adviser to the Tax Justice Network (TJN) and was the editor of a Web page dedicated to taxation and policy issues for developing countries.
“Mike played a major role in shaping TJN's research and advocacy programs,” said TJN Director John Christensen.
“He has been a trenchant critic of the OECD's dismal lack of progress over umpteen decades, while setting out a cogent case for more radical reform, especially in the direction of combined reporting,” said Christensen. “Mike gave his time and expertise generously, and he'll be remembered fondly for his permanent smile and constant good humor.”
The news that Jeff Bezos, the founder and CEO of Amazon.com, is going to buy the Washington Post for $250 million is shining the light on Bezos’ politics and Amazon's corporate behavior for obvious reasons. The Washington Post is the paper of record in the nation's capital and exerts extraordinary influence over political debates. As an organization that follows tax policy, we went looking for the track record on taxes and, as it turns out, Bezos and his company have consistently demonstrated a contempt for taxes and an aggressive interest in avoiding them. Here's what you need to know:
1. Bezos personally donated $100,000 to an anti-income tax initiative group in Washington state.
In 2010, Initiative 1098 would have created a five percent tax on income exceeding 200,000 and a nine percent rate on income exceeding $500,000 for individuals in Washington State. It was designed to pay for a cut in the property and business taxes as well as an increase in education spending, but it was defeated with the help of a $100,000 donation from Bezos to the group Defeat I-1098. Passing I-1098 would have not only helped Washington state get on a more sustainable fiscal footing, but it would have gone a long way to improving the fairness of the nation's most regressive (PDF) state tax system.
2. Amazon bullies states to avoid its responsibility to collect state sales taxes.
In late June, Amazon decided to cut ties with all its affiliates in Minnesota to dodge a new law that would have forced it to begin collecting sales tax in the state. This move made Minnesota just the latest casualty among a whole slew (PDF) of states to feel Amazon’s wrath in its relentless pursuit of preserve its tax advantage over local retailers. Fortunately, the federal Marketplace Fairness Act, which would eliminate this tax advantage by allowing states to require Amazon and other websites collect sales taxes, has passed the Senate and could realistically be enacted in the not-too-distant future.
3. Amazon is a notorious international tax dodger.
Amazon has become infamous for its international tax dodging over the last year since the United Kingdom discovered that it "immorally" paid almost no taxes on over £4.2 billion in sales by routing its operations through Luxembourg (a well-known tax haven country). The happy irony is that Amazon’s audacity helped prompt the recent unprecedented international effort to crack down on this sort of international tax dodging.
4. Bezos could reap substantial tax benefits from the purchase of the Washington Post.
Although it is unclear how much time Bezos plans to spend working at the Washington Post, a report by Reuters notes that if he spends about 10 hours each week on it he could realize substantial tax benefits from the purchase of the newspaper. The reason is that business owners like Bezos are able to deduct any losses (of which the Post has tens of millions) from operating the business they own, thus reducing their overall tax bill.
5. Bezos wanted to start Amazon.com on an Indian reservation to avoid taxes.
Illustrating a particularly brash anti-tax philosophy, in an interview almost 17 years ago, Bezos said that he "investigated whether we could set up Amazon.com on an Indian reservation near San Francisco." He explained the idea was to get "access to talent without all the tax consequences." Bezos went on to lament that this was not possible because, "[u]nfortunately, the government thought of that first." In other words, Bezos wanted to fully exploit all the "talent" of Silicon Valley without having to pay for the public investments that nurture that talent and draw the human and other capital that make businesses profitable and industries blossom.
Front page photo via Dan Farber Creative Commons Attribution License 2.0
A recent court ruling allowing the use of the “manufacturing” tax deduction by a company that places candy bars and bottled wine in gift baskets illustrates a truth that politicians hate to admit: The tax code is a lousy tool for encouraging domestic manufacturing.
In a recent column, gadfly journalist David Cay Johnston berated the federal district judge in the case for his interpretation of section 199 of the tax code, which allows a company to deduct 9 percent of its income that is generated from domestic manufacturing. This law was passed by Congress after the World Trade Organization (WTO) found in 2002 that a U.S. tax break meant to encourage exports violated trade treaties and the European Union began to impose sanctions against the U.S. in 2004. Congress decided to replace the illegal tax break with a new one, which became section 199.
By the time it was enacted, this provision had been hijacked by lawmakers who stretched the term “manufacturing” to include things like drilling for oil, constructing buildings, and the architectural services to design those buildings. A footnote in the conference report in the legislation made clear that a company like Starbucks could claim the deduction for roasting coffee beans used in its beverages.
In fact, the definition of manufacturing seems so unclear that we should not be surprised by the recent court ruling regarding gift baskets. Johnston notes that Greg Mankiw, who was President Bush’s chairman of the Council of Economic Advisers, questioned the whole concept in 2004 when he wrote, “When a fast-food restaurant sells a hamburger, for example, is it providing a ‘service’ or is it combining inputs to ‘manufacture’ a product?”
More Tax Breaks for Companies that Already Avoid Taxes?
President Obama has proposed to increase such tax incentives. His “framework” for corporate tax reform, the vague plan for lowering the corporate tax rate to 28 percent that he made public in February of 2012 and proposed again recently with slight changes, would expand the section 199 deduction.
In theory, the President’s proposal could improve things because it would “focus the deduction more on manufacturing activity,” which is a nice way of saying that oil companies and people who assemble gift baskets are on their own.
But the bigger question is whether American manufacturers actually need tax breaks. In 2012, just before Obama announced his “framework,” he told a crowd at a Boeing plant in Washington State that companies that use tax breaks to shift operations and profits offshore ought to pay more U.S. taxes and the revenue “should go towards lowering taxes for companies like Boeing that choose to stay and hire here in the United States of America.” CTJ immediately released figures showing that Boeing’s effective tax rate over the previous decade was negative. In fact, there had only been two years during that decade when Boeing paid anything in federal income taxes.
Fix the Real Problems
A lot of people in the Obama Administration and in Congress (and, of course, K Street lobbyists) have the idea that our corporate tax is too burdensome on companies and that this pushes them to manufacture products offshore. However, CTJ’s major 2011 study of most of the profitable Fortune 500 corporations found that two-thirds of those with significant offshore profits actually paid higher taxes in the other countries where they did business than they paid in the U.S.
The real problem with our international corporate tax rules is the provision allowing American companies to “defer” paying U.S. taxes on the profits of their offshore subsidiaries until those profits are brought to the U.S. And to a large extent, deferral results in American companies disguising their U.S. profits as tax haven profits rather than moving actual operations. And that problem cannot be solved by any amount of tax breaks thrown at companies that claim to “manufacture” something in the U.S.
If lawmakers and the media are confused about the President’s recent proposal to enact a business tax reform tied to a jobs program, it’s because the White House has not explained it very well. The President’s plan has been depicted by some as a major shift away from his long-held position that tax reform affecting corporations (and possibly other types of businesses) should be revenue-neutral.
That’s all wrong. What the President just proposed is not much different from his previous proposals. If the President really had shifted away from his previous position and declared that corporations should contribute more to fund public investments on a permanent basis, we’d be a lot happier about it. But that’s not what the President has said. If anything, his “new” proposal is more of a clarification than a shift in policy.
(See our previous blog post describing the President’s proposal.)
President Obama has consistently said that business tax reform should be “revenue-neutral,” meaning loopholes and special breaks would be eliminated but the revenue savings would all be used to offset a reduction in tax rates paid by corporations, so that, overall, corporations would not pay more than they do today. The fact sheet released by the White House yesterday still describes his approach to reform as “revenue-neutral.”
All that’s changed is that the President acknowledged that some of the revenue raised from eliminating loopholes and special breaks might be temporary, meaning it would only show up in the first few years or so. This temporary revenue increase cannot be used to pay for anything that is permanent (like the reductions in tax rates). Instead, the White House argues, reasonably, that a temporary revenue increase should be used to pay for something that is temporary. The President proposes to use this temporary revenue to fund a temporary jobs program.
Not counting this temporary revenue increase (which might only appear in the first decade or so after a tax overhaul is enacted) the President’s approach would be revenue-neutral. So the President’s approach still falls short of the “revenue-positive” corporate tax reform that CTJ and others organizations have called for.
The President did not elaborate on possible temporary revenue increases, but here’s an example of how it might work. We have argued that businesses, particularly those set up as corporations, often benefit entirely too much from accelerated depreciation and that this does not help our economy. Accelerated depreciation consists of businesses taking deductions for investments in equipment much more quickly than the equipment actually wears out. If Congress repeals or limits accelerated depreciation, that means businesses will have to take these deductions over a longer period of time. They’ll pay more early on, but less in later years because these deductions are spread out over a longer period of time.
This means that some of the revenue raised by repealing or limiting accelerated depreciation simply represents a timing shift. Taxes are paid during this decade that would otherwise be paid in the next decade. On the other hand, some of the revenue increase we see in the first decade would be permanent, occurring again in the next decade and the decade after.
If lawmakers want to offset a permanent reduction in tax rates, only the permanent part of this revenue increase can be used for that. Otherwise the reform will be “revenue-negative,” meaning it loses revenue, in the second decade or third decade after it’s enacted.
There are other types of changes that can lead to timing shifts, resulting in a larger revenue increase in the first decade than in the second or third decade after reform is enacted. For example, if Congress enacts some sort of tax on profits that corporations have accumulated offshore, then part of the resulting revenue gain would be temporary because some of those profits would have been repatriated and taxed at a later date under the current rules. (Keep in mind that here we’re talking about a mandatory tax of some sort on offshore profits, not the sort that would be paid under a “repatriation holiday” for corporations to choose to bring profits back to the U.S. — that sort of proposal loses revenue.)
None of this was explained in the President’s speech on this topic or in the fact sheet released by the White House, but rather was mentioned when Gene Sperling, director of the National Economic Council, explained to reporters that “That money can’t responsibly be used to lower rates because it doesn’t sustain itself.”
So the only new development is that the White House has acknowledged that some of the revenue increase that comes from closing corporate tax loopholes would be temporary and therefore should be used to fund something temporary rather than permanent rate cuts. CTJ’s longstanding view has been that corporations should contribute more on a permanent basis to support the public investments that make this nation prosperous — and that make their profits possible. That’s why we see the President’s proposal as only a slight improvement over his previous one.
President Obama Clings to His Proposed Business Tax "Reform" that Would Raise No Revenue in the Long-Run
Obama’s Plan Wisely Makes Job Creation the Priority, But Unwisely Lets Corporations Off the Hook
President Obama has once again proposed to reform business taxes without raising any revenue in the long-term. He has shifted his position slightly, however, by proposing to raise some revenue in the very short-term from businesses in order to fund infrastructure and other investments that would create jobs.
While the President’s focus on job creation is laudable, the fact that he still refuses to call for permanently increasing the amount of revenue generated from the corporate tax is a big disappointment. Over the last three years, CTJ has written reports and op-eds explaining why reform of the corporate income tax (as well as reform of the personal income tax) should raise revenue. CTJ also published reports explaining that profitable corporations pay an effective tax rate that is far lower than the statutory tax rate of 35 percent (which corporate lobbyists want to lower), and many pay no taxes at all.
A letter to members of Congress that was circulated by CTJ in 2011 and signed by organizations in every state explains that, “Some lawmakers have proposed to eliminate corporate tax subsidies and use all of the resulting revenue savings to pay for a reduction in the corporate income tax rate. In contrast, we strongly believe most, if not all, of the revenue saved from eliminating corporate tax subsidies should go towards deficit reduction and towards creating the healthy, educated workforce and sound infrastructure that will make our nation more competitive.”
A similar letter was signed by even more organizations at the end of 2012 before being sent to members of Congress.
President Obama’s Same Old Framework, with One Addition
While speaking today at an Amazon facility in Chattanooga Tennessee, President Obama proposed that Congress enact a business tax reform that closes loopholes, “ends incentives to ship jobs overseas, and lowers rates for businesses that create jobs right here in America,” and also simplifies tax filing for businesses. He also proposed to “use some of the money we save by transitioning to a better tax system to create more good construction jobs” and other types of jobs.
A fact sheet released by the White House explains that the tax reform would be “revenue-neutral” in the long-run, because revenue saved from closing loopholes would go towards offsetting the cost of lowering the corporate tax rate from 35 percent to 28 percent (and setting the rate even lower, at 25 percent, for domestic manufacturing).
This is entirely in keeping with the “framework” for business tax reform that the President proposed in February of 2012. CTJ criticized the framework for not calling for increased revenue and for failing to explain which loopholes would be closed to offset the costs of the rate reductions.
The one thing that is new, based on the President's speech in Chattanooga, is his proposal to use a temporary increase in revenue generated from "transitioning to a better tax system" for public investments that create jobs. This new wrinkle is the President's recognition that some of the tax reforms under consideration will raise money in the short run, but will raise far less after they are fully phased in. The President says this short-term revenue should not be counted in calculating whether tax reform is “revenue-neutral,” but should instead be devoted to his “jobs program.”
Such short-term extra revenues could come from changes that alter the timing of tax payments, like limiting accelerated depreciation so that business must wait longer before they can write off the cost of equipment, or from a transition rule for taxing current offshore corporate profit hoards (at an unspecified tax rate). In speaking about this type of timing shift, Gene Sperling, director of the National Economic Council, told reporters that “That money can’t responsibly be used to lower rates because it doesn’t sustain itself.”
Overall, however, the President continues to ignore what should be an essential result of real tax reform: to make corporations pay their fair share of taxes in order to provide the additional revenues we need to provide the public services and investments that our country needs.
On July 19, CTJ’s Steve Wamhoff made a presentation to members of the Alliance for a Just Society on the details of corporate tax reform. Because several of the audience members were small business owners, the presentation partly focused on the offshore tax loopholes that give large multinational corporations an unfair advantage over domestic businesses, which are often smaller businesses.
The presentation makes the following points:
1. The U.S. needs more revenue.
2. New revenue must come from progressive sources.
3. The corporate tax is a progressive revenue source.
4. American corporations are undertaxed.
5. One way to get more corporate tax revenue is to close tax loopholes related to offshore tax havens.
6. We must stop current proposals to expand these loopholes (territorial tax system, repatriation holiday).
Needless to say, corporate lobbyists and many of their friends in Congress and even in the Obama administration disagree with many of these points, so the presentation provides a detailed argument for each.
In response to public outcry in several nations that multinational corporations are using tax havens to effectively avoid paying taxes in the countries where they do business, the Organization for Economic Co-operation and Development (OECD) has released an “Action Plan on Base Erosion and Profit Shifting.” While the plan does offer strategies that will block some of the corporate tax avoidance that is sapping governments of the funds they need to make public investments, the plan fails to call for the sort of fundamental change that would result in a simplified, workable international tax system.
Most importantly, the OECD does not call on governments to fundamentally abandon the tax systems that have caused these problems — the “deferral” system in the U.S. and the “territorial” system that many other countries have — but only suggests modest changes around the edges. Both of these tax systems require tax enforcement authorities to accept the pretense that a web of “subsidiary corporations” in different countries are truly different companies, even when they are all completely controlled by a CEO in, say New York or Connecticut or London. This leaves tax enforcement authorities with the impossible task of divining which profits are “earned” by a subsidiary company that is nothing more than a post office box in Bermuda, and which profits are earned by the American or European corporation that controls that Bermuda subsidiary.
The OECD’s action plan does make several suggestions that would make it harder for corporations to pretend their profits are all earned in Bermuda, the Cayman Islands or other tax havens, many of which echo proposals offered by President Obama and Senator Carl Levin. For example, the plan clearly targets rules allowing corporations to immediately take deductions for expenses of doing business offshore, when they will not pay taxes on their offshore profits for years or ever. The plan seems to target rules like the U.S.’s “check-the-box,” which allow corporations to give different governments conflicting information about the nature of offshore entities so that their profits are not taxed by any government anywhere.
But we will never really end the ability of corporations to pretend their profits are all “earned” in offshore tax havens so long as developed countries continue to rely on “territorial” tax systems or a “deferral” tax system like the U.S. has.
In his comment on the OECD action plan, Professor Sol Picciotto, a Senior Adviser to the Tax Justice Network, sums it up well:
“The Action Plan contains some ambitious measures, which would produce some benefits if implemented. But its approach is like trying to plug holes in a sieve. The OECD has chosen a road that is strewn with obstacles, and leads in the wrong direction. The OECD has missed this big opportunity to crack open the door to the big reform that the world’s citizens need...”
In a July 16 letter, 30 national organizations asked members of Congress to reject a proposal by Congressman John Delaney of Maryland because it rewards the most aggressive corporate tax dodgers with tax breaks and even gives them control of a new bank that would be created to fund American infrastructure. The plan is one in a history of Congressional schemes to hand corporations a massive tax break under the pretense that it will help the U.S. economy.
Delaney’s proposal would allow a “repatriation holiday,” meaning American multinational corporations could bring their offshore profits to the U.S. without paying the U.S. taxes that would normally be due, on the condition that they purchase bonds to finance a new bank that would be set up to fund infrastructure projects.
A CTJ report released in June explains that much (and perhaps most) of the profits that American corporations claim to hold “offshore” are actually already invested somehow in the American economy. So, these profits are not truly “offshore,” and the argument that the U.S. economy is somehow deprived of these dollars doesn’t really hold up.
As the CTJ report explains, the corporations most likely to benefit from Delaney’s proposed “holiday” are not those with actual business activities offshore, because those companies have their offshore assets tied up in things like factories and equipment. The benefits are much more likely to go to those American corporations that have made their U.S. profits appear to be foreign profits by artificially shifting them to subsidiary companies in offshore tax havens. These subsidiaries are often nothing more than a post office box, and the profits they claim to generate are easy to shift around using accounting gimmicks.
Incredibly, Rep. Delaney’s proposal would allow those corporations repatriating the most offshore profits — that is, those corporations that are most aggressive and successful at tax dodging — the right to nominate the majority of the members of the board controlling the infrastructure bank.
As the report and letter point out, the last tax amnesty for offshore corporate profits, enacted in 2004, did nothing to create jobs and actually benefitted many corporations that cut their American workforces. The Joint Committee on Taxation found that a repeat of this type of measure would lose revenue partly because it would encourage American companies to shift (on paper, using accounting gimmicks) even more profits into offshore tax havens where they are not subject to U.S. taxes.
Obama's Treasury Department Prioritizes Interests of Multinational Corporations Over Reducing Tax Avoidance
In the debate over offshore tax avoidance by multinational corporations, one proposal that should not be controversial is country-by-country reporting. The U.S. government does collect information on what profits corporations claim to earn and what taxes they pay in each country, but this information is not available to lawmakers or the public. Some developing countries that suffer the most from outflows of capital into offshore tax havens do not seem to have country-by-country reporting even for the purposes of tax administration.
And so, the declaration issued by the G-8 governments in Northern Ireland last week included a plea that “Countries should change rules that let companies shift their profits across borders to avoid taxes, and multinationals should report to tax authorities what tax they pay where.”
Note that this does not even call for such information to be made public but only available to tax authorities. Given that tax authorities in the U.S. already have this information and corporations like Apple are still able to artificially shift their profits into tax havens, this seems like an awfully small step towards reform. Perhaps if this information was collected and actually made public, then ordinary citizens would find out how many other corporations engage in the same type of offshore tax avoidance and demand reform.
But even a small step in this direction seems to be too much for officials at the U.S. Treasury Department to contemplate, as they rushed this week to assure multinational corporations that their interests would take priority over stopping tax avoidance.
An article appearing Wednesday in Tax Notes Today (subscription required) tells us, “With both the G-8 and the OECD’s base erosion and profit shifting (BEPS) project examining expanded country-by-country reporting by multinationals, Treasury officials say the tax information should not be made available to the public.”
The article quotes Brian Jenn, an attorney-adviser with the Treasury Office of International Tax Counsel, saying “For us it is important that that information be restricted to tax administrations and not be publicly available.”
“Jenn said,” the article informs us, “that in addition to addressing concerns about uncoordinated legislative actions, the BEPS project is meant to ward off aggressive positions by tax administrations that could be ‘disruptive to multinationals.’”
This is an alarming statement because anything that stops offshore corporate tax avoidance would be considered “disruptive” to the companies involved in it. It’s a sure bet that Apple’s CEO Tim Cook would find it “disruptive” if the company had to pay taxes on the profits that it claims are generated by a zero-employee subsidiary that allegedly has no country of residence for tax purposes. This seems to confirm the suspicion that the OECD’s latest talk of working to stop corporate tax avoidance is really an effort to throw a few symbolic bones to the principles of tax fairness in order to prevent any real reform from developing.
Arlene Fitzpatrick, attorney-adviser in the Treasury Office of International Tax Counsel, also commented on the OECD’s BEPS project, saying “We don't want to have a situation where unilateral action is taken and you wind up with a situation where we have double tax rather than double nontax [profits not taxed in any country].” This statement defies belief, as the problem of double-non-taxation (that is, corporate profits being taxed in no country at all) is the defining feature of the current international corporate system and should be the number one focus of international efforts.
Jenn stressed that any solutions would be tailored as narrowly as possible and that solutions could be found in changing the OECD’s “transfer pricing” guidelines, which some countries have adopted for their rules.
But these “transfer pricing” rules are hopeless. They are an attempt to get different parts of a corporation spanning different countries to treat each other as unrelated parties engaging in transactions when they exchange, say, a patent or charge royalties for the use of a patent.
Tax authorities are supposed to apply an “arm’s length” standard, meaning the subsidiaries of a corporate group (the different parts of a multinational corporation) must charge market prices when they engage in these transfers with each other, otherwise (for example) a subsidiary in the U.S. will tell the IRS that it has no profits because it had to pay enormous royalties to its subsidiary in Bermuda (which is probably just a post office box). But what’s the market price for a patent for a brand new invention? Neither the tax authorities nor anyone else has any idea.
As we’ve argued before, the international tax system needs a more fundamental overhaul. But, sadly, the Obama Treasury Department resists fundamental change and resists even telling the public what corporations are claiming to earn and the taxes they pay in other countries so that we can determine how much profit-shifting is taking place.
Congressman John Delaney, a Democrat from Maryland, has proposed to allow American corporations to bring a limited amount of offshore profits back to the U.S. (to “repatriate” these profits) without paying the U.S. corporate tax that would normally be due. This type of tax amnesty for repatriated offshore profits is euphemistically called a “repatriation holiday” by its supporters.
The Congressional Research Service has found that a similar proposal enacted in 2004 provided no benefit for the economy and that many of the corporations that participated actually reduced employment. Rep. Delaney seems to believe his bill (H.R. 2084) can avoid that unhappy result by allowing corporations to repatriate their offshore funds tax-free only if they also fund a bank that finances public infrastructure projects, which he believes would create jobs in America.
A new CTJ report explains why this is a strange and problematic way to fund infrastructure projects. Delaney’s bill will provide the greatest benefits to corporations that are engaging in accounting schemes to make their U.S. profits appear to be generated in offshore tax havens, further encouraging such tax avoidance and resulting in a revenue loss in the long-run. Incredibly, a super-majority of the infrastructure bank’s board of directors would, under Delaney’s bill, be chosen by the corporations that receive the most tax breaks.
Read the CTJ report on Rep. Delaney's proposal.
On Thursday morning, a hearing was held on “Tax Havens, Base Erosion and Profit-Shifting,” by the House Ways and Means Committee, whose chairman, Dave Camp (R-MI), has proposed several types of “territorial” tax systems that CTJ has long argued would make these problems worse.
One of the witnesses, Paul Oosterhuis of Skadden Arps, explained that adoption of one of Camp’s proposals would move the U.S. towards taxing only those profits that come from sales generated in the U.S., which is essentially what Apple accomplished through the complicated tax planning revealed by the Senate Permanent Subcommittee on Investigations (PSI) last month. Oosterhuis argued that this would be a good result. He said that the taxes it avoided were really taxes on profits from foreign sales, and therefore of no importance to the U.S.
While Chairman Camp seemed to be in full agreement with Oosterhuis, some of the other committee members and another of the witnesses, Ed Kleinbard, pointed out the problems with his approach. Apple’s profits are generated by its research and development, and 95 percent of that activity takes place in the U.S. (Apple outsources the actual manufacture of its products to other companies.) Rep. Danny Davis of Illinois pointed out that this research and development, which seems to be the source of Apple’s profits, would not be possible without the public investments funded by U.S. taxpayers, like our patent protection and other legal protections, our educated workforce and infrastructure.
Kleinbard also pointed out that the U.S. must prevent our corporations from avoiding foreign taxes as well as U.S. taxes. Partly this is because much of the profits that are characterized as “foreign” are really U.S. profits that our corporations have dressed up as “foreign” using the type of practices Apple engages in. Another reason is that lax rules facilitating avoidance of foreign taxes makes foreign investment more attractive than investment here in the U.S.
The PSI hearing on Apple revealed the tricks used by the company to make its profits appear to be generated abroad so that it can take advantage of the rule allowing U.S. corporations to “defer” paying U.S. taxes on their offshore profits. As CTJ has explained before, a territorial system would expand deferral into an exemption for offshore profits, which would increase the incentives to engage in these practices.
While Citizens for Tax Justice has been taking a deep dive into offshore-tax sheltering and why the corporate tax is indispensable, some friends and allies have put out a series of reports over the past week on the economic impact (or not) of corporate taxes, the enduring dominance of corporate lobbyists and the need to revisit our fiscal policy debate in light of new evidence. Below we highlight the most crucial findings of these must-read reports.
Economic Policy Institute: Corporate Tax Rates and Economic Growth Since 1947
The Economic Policy Institute's (EPI) most recent report on corporate taxes by Thomas Hungerford (author of that high profile Congressional Research Service report showing income tax cuts create more inequality than jobs) debunks the pervasive myth that the US's corporate tax rate is harmful to the economy. For one, Hungerford notes that although the US has a high on-paper marginal rate compared to other countries, its effective corporate tax rate is just about average compared to other rich, developed countries. In addition, Hungerford notes that despite all the claims about corporate taxes preventing growth, corporate profits in the US are actually at an historic high.
Backing up these points (for our stats-minded readers), Hungerford performed a multivariate analysis comparing GDP growth and corporate tax rates and found that corporate tax rates (including the effective and statutory rate) have no correlation with economic growth. This conclusion even held true when controlling for other economic factors and for a lag effect on growth. In other words, the idea that cutting corporate taxes will increase growth in the US has no basis in the historic evidence.
Public Citizen: Lax Taxes
In it's report Lax Taxes, Public Citizen makes case studies of the lobbying around three pieces of progressive tax legislation to demonstrate the disproportionate firepower of corporate lobbyists versus public interest groups. Appallingly (though not surprisingly), Public Citizen found that 86 percent of the lobbyists who reported lobbying on the Stop Tax Haven Abuse Act (STHA), the CUT Loopholes Act, and the Wall Street Trading and Speculators Tax Act represented corporate clients. Looking at the STHA specifically, the group found that for every one pro-tax reform lobbyist there were 20 lobbyists representing industry interests.
Perhaps even more disturbing, Public Citizen found that of those lobbyists with previous government experience working on these bills, 96 percent of them represented corporate clients rather than ordinary Americans. This dynamic not only means that industry advocates have deeper connections to Congress, but also that current lawmakers and Congressional staffers have an incentive to appease corporate interests if they themselves want to get a job a lobbying gig after they leave Capitol Hill.
Further, Public Citizen also notes that groups opposing these pieces of legislation donated about four times as much in campaign contributions to lawmakers that those supporting them, which may explain why these common sense reforms have failed to move despite overwhelming public support for closing corporate tax loopholes.
Center for American Progress: It's Time to Hit the Reset Button on the Fiscal Debate
The prevailing ethos in Washington over the past few years is that budget deficits are out of control and that austerity measures must be taken in order to prevent economic catastrophe. A new report from the Center for American Progress (CAP) shows that this conventional wisdom is all wrong given recent policy actions and mounting evidence.
Most importantly, CAP points out in their report that Congress and the President have already enacted $2.5 trillion worth of deficit reduction (three-quarters of which took the form of spending cuts) since the start of fiscal year 2011. While many lawmakers and pundits are still warning that without additional and immediate deficit reduction the debt will spin out of control, the reality is that the current level of deficit reduction is already enough to stabilize the debt as a percentage of GDP through 2023.
CAP also notes that a research paper often cited by debt alarmists to argue for immediate deficit reduction has been pretty thoroughly debunked. Specifically, the claim by Carmen Reinhart and Kenneth Rogoff that a debt level over 90 percent of GDP jeopardizes economic growth is based on a calculation error (oops!) and does not take into account that causation can work both ways.
One final important point in CAP’s report is growing evidence from Europe that austerity has actually made the economic situation there worse rather than better. Why? Budget cuts create a downward spiral by increasing unemployment and reducing consumption, which then results in even lower revenues and higher deficits. Some proponents of austerity have tried to counter this evidence by arguing that it's austerity in the form of tax increases that is driving lower growth, but this logic has also been debunked.
Some observers have asked why we need a corporate income tax in addition to a personal income tax. The argument often made is that corporate profits eventually make their way into the hands of individuals (in the form of stock dividends and capital gains on sales of stock) where they are subject to the personal income tax, so there is no reason to also subject these profits to the corporate income tax. Some even suggest that the $4.8 trillion that the corporate income tax is projected to raise over the next decade could be replaced by simply raising personal income tax rates or enacting some other tax. This is a deceptively simple argument that ignores the massive windfalls that wealthy individuals would receive if there was no corporate income tax.
A new fact sheet from Citizens for Tax Justice explains three of the biggest problems with repealing the corporate income tax:
First, a business that is structured as a corporation can hold onto its profits for years before paying them out to its shareholders, who only then (if ever) will pay personal income tax on the income. With no corporate income tax, high-income people could create shell corporations to indefinitely defer paying individual income taxes on much of their income.
Second, even when corporate profits are paid out (as stock dividends), only a fraction are paid to individuals rather than to tax-exempt entities not subject to the personal income tax.
Third, the corporate income tax is ultimately borne by shareholders and therefore is a very progressive tax, which means any attempt to replace it with another tax would likely result in a less progressive tax system.
Recent Congressional hearings on the international tax-avoidance strategies pursued by the Apple Corporation documented the company’s strategy of shifting U.S. profits to offshore tax havens. But a new report from Citizens for Tax Justice (CTJ) documents seventeen other Fortune 500 corporations which disclose information, in their financial reports, that strongly suggests they, too, have paid little or no tax on their offshore holdings. It’s likely that hundreds of other Fortune 500 companies are doing the same, taking advantage of the rule allowing U.S. companies to “defer” paying U.S. taxes on their offshore income.
Read the report, Apple is Not Alone.
Apple is one of eighteen Fortune 500 companies that disclose that they would pay at least a 30 percent U.S. tax rate on their offshore income if repatriated. These 18 corporations have $283 billion in cash and cash equivalents parked offshore.
The report also identifies an additional 235 companies that choose not to disclose the U.S. tax rate they would pay on an almost $1.3 trillion in combined unrepatriated offshore profits.
Taken together, if all of these companies’ offshore holdings were repatriated, it could amount to $491 billion in added corporate tax revenue according to CTJ's calculations.
CTJ concludes that the most sensible way to end offshore tax avoidance of the kind documented in this report would be to end “deferral,” the rule that indefinitely exempts offshore profits from U.S. income tax until these profits are repatriated. Ending deferral would mean that all profits of U.S. corporations, whether they are generated in the U.S. or abroad, would be taxed by the United States – with, of course, a “foreign tax credit” against any taxes they pay to foreign governments to ensure that these profits are not double-taxed.
What Rand Paul Fails to Understand about Apple’s Tax Dodging
During the May 21 Senate hearing on Apple’s tax practices, Senator Rand Paul (R-KY) said lawmakers should apologize for “bullying” the company and holding a “show trial,” and says he’s “offended by the tone” of the hearing. Senator Paul, who took the opportunity to call for a “repatriation holiday,” claims that the debate over tax reform should not include a discussion of the tax avoidance practices of a corporation like Apple.
As CTJ has explained, the hearing uncovered how Apple is shifting profits out of the U.S. and out of other countries and into Irish subsidiaries that are not taxed by any government. Senator Paul’s response is a non-sequitur: What Apple is doing is legal, therefore Congress should not debate whether or not its practices ought to be legal.
Tax Reform Will Go Nowhere Unless We Know How Specific Companies Like Apple Avoid Taxes
Senators Carl Levin (D-MI) and John McCain (R-AZ), the chairman and ranking Republican of the subcommittee that investigated Apple, understand three basic facts that escape Senator Paul. First, our corporate tax system is failing to do its job of taxing corporate profits. Second, virtually no one in America can understand this until someone explains how individual corporations are dodging their taxes. Third, the corporations themselves will, quite naturally, lobby Congress to defend and even expand the loopholes that facilitate their tax dodging.
Once you understand these three facts, it becomes clear that the only path to tax reform is to explain to the public how certain big, well-known corporations are avoiding taxes.
An abstract debate about corporate tax dodging — a debate that doesn’t mention any specific corporations — is not likely to result in reform. Just look at President Obama’s approach. He first made his proposals to tighten the international corporate tax rules in May of 2009. The proposals made barely a ripple in the media at that time, and no one in Congress even bothered to put them in legislation.
On the other hand, the New York Times expose on GE’s tax dodging in March of 2011 was discussed by everyone from the halls of Congress to the Daily Show. CTJ’s big study of Fortune 500 companies’ taxes — including 30 companies identified as paying nothing over three years — was published in November of that year and is still cited today in debates over our broken tax code.
Senator Levin has legislation to crack down on corporate offshore tax avoidance — which includes several of the President’s proposals. Levin’s bill includes an Obama proposal — reform of the “check-the-box” rules — that Obama himself backed away from under pressure from corporations. (CTJ’s explanation of Levin’s hearing and report on Apple explains how the company took advantage of the current “check-the-box” rules.)
Senator Paul’s Solution: Facilitate More Tax Avoidance with a “Repatriation Holiday”
As CTJ explained last week, Senator Paul proposes a tax amnesty for offshore corporate profits, which proponents like to call a “repatriation holiday.” We explained that Congress tried this in 2004, and the result was simply to enrich shareholders and executives while encouraging corporations to shift even more profits offshore in the hope that Congress will enact more “repatriation holidays” in the future.
Senator Paul’s slight of hand during the hearing was impressive. He argued that instead of targeting Apple, the discussion should be about how to fix the tax system (assuming away the possibility that an explanation of Apple’s practices would facilitate that discussion), and then moved on to argue that the necessary fix is a repatriation holiday. In other words, leave Apple alone because its tax avoidance practices are legal, and instead let’s legalize even more tax avoidance.
This has generally been the position of Apple, which has lobbied for a repatriation holiday. Apple CEO Time Cook argued at the hearing that Apple would like a more permanent change to the tax code, one that would slash taxes (if not eliminate taxes) on offshore profits that are repatriated.
The truth is that corporations like Apple lobby for as many tax loopholes and breaks as they can get. We may see them as morally culpable. Or we may think it’s natural for people to ask for the very best deal they can get — just as children naturally argue for the latest bedtime possible and the largest quantity of ice cream possible. Either way, Senator Paul’s claim that America’s interests can be served by simply giving corporations what they ask for is absurd.
Senate Hearing Demonstrates How U.S. Tax Rules Allow Apple (and Many Other Companies) to Use Offshore Tax Havens
On May 21, top executives of Apple Inc attempted but failed to explain to a Senate committee why Congress should maintain or expand the tax loopholes that allow them to avoid U.S. taxes on billions of dollars in profits.
The Senate Homeland Security and Government Affairs Permanent Subcommittee on Investigations (PSI) issued a report on Apple’s tax practices and held a hearing to ask Apple executives and tax experts about the findings. (PSI has the power to subpoena companies to provide information that would otherwise not become public.)
A CTJ report published the day before the hearing explains how Apple’s public documents indicate that its offshore profits are in tax havens. PSI’s report and hearing have uncovered how Apple pulls this off.
Thanks to PSI’s efforts, we now know that Apple shifts U.S. profits to one of its non-taxable Irish subsidiaries through a “cost-sharing agreement” that gives the subsidiary the right to 60 percent of profits from its intellectual property, and that Apple also shifts profits from other foreign countries where it sells its product to its non-taxable Irish subsidiaries.
The Irish subsidiaries have few if any employees and don’t do much of anything, but Apple Inc has a huge incentive to claim that a lot of its profits are generated by these subsidiaries because Ireland is not taxing them. So, Apple uses the “cost-sharing agreement” to convert U.S. profits to non-taxable Irish profits for tax purposes, and likewise manipulates transfer-pricing rules and other tax provisions to turn profits from other countries into untaxed Irish profits.
Avoiding U.S. Corporate Taxes Through “Cost-Sharing Agreement”
Under the cost-sharing agreement, an Irish subsidiary that had no employees until 2012 (it now has about 250) has the rights to the majority of profits from Apple’s intellectual property, even though virtually all of that intellectual property is developed by Apple Inc (the parent company) in the United States. Since almost all of the actual manufacturing of Apple’s physical products is outsourced to other companies, this intellectual property is the real source of Apple’s profits.
It’s absurd to think of the so-called “cost-sharing” as an “agreement,” because the parties are Apple Inc and a subsidiary that it owns and controls — in other words, an agreement between Apple and itself. As the tax experts testifying at the hearing explained, there is no way that Apple would enter into such an “agreement” with an entity that it did not completely control.
Because the Irish subsidiary is controlled and managed by Apple Inc in the United States, Irish tax law treats it as a U.S. corporation not subject to Irish tax. But because the Irish subsidiary is technically incorporated in Ireland, the U.S. treats it as an Irish corporation, on which U.S. taxes are indefinitely “deferred.” Thus, neither nation taxes the profits that Apple has shifted to its Irish subsidiary.
So despite the fact that Apple does virtually all of the work responsible for its global profits in the U.S., it gets to tell the IRS that the majority of its profits are in Ireland, where they are not subject to Irish tax, while indefinitely “deferring” U.S. taxes on those profits.
Avoiding Taxes Outside the Americas by Manipulating Transfer Pricing Rules
The end of PSI’s report informs us that in 2011, Apple’s tax-planning “resulted in 84% of Apple’s non-U.S. operating income being booked in ASI,” which is one of Apple’s Irish subsidiaries. That’s because Apple also shifts potentially taxable profits from other countries into Ireland.
All the Apple products sold outside North and South America are sold by Apple subsidiaries that purchase them, apparently at inflated prices, from the Irish subsidiaries. This aggressive use of “transfer pricing” (on paper) means that Apple’s subsidiaries in these other countries reported only tiny taxable profits to their governments. That explains why Apple reports foreign effective tax rates in the single digits.
Of course, transactions between different Apple subsidiaries are all really transfers within a single company. Transfer pricing rules are supposed to make Apple and other multinational corporations conduct these paper transfers as if they were transactions between unrelated companies. But the tax authorities clearly find these complicated rules impossible to enforce.
The Bottom Line
So despite the fact that almost all of Apple’s profits ought to be taxable in the United States, most of its profits are not taxable anywhere.
Ending the rule that allows a U.S. corporation like Apple to indefinitely defer U.S. taxes on offshore profits would mean that none of Apple’s schemes to avoid taxes would be successful. We have argued before that the only way to completely end the incentives for corporations to shift profits into tax havens is to repeal deferral.
Short of full repeal of deferral, Congress could close some important tax loopholes that Apple and other multinational corporations use to make their schemes work. For example, PSI explains how Apple uses a tax regulation known as “check-the-box” to simply tell the IRS to disregard many of its offshore subsidiaries. This allows Apple to continue deferring U.S. tax on the payments made from one subsidiary to another, which circumvents a general rule that deferral is not supposed to be allowed for such “passive,” easily moved income.
One of the recommendations of the committee is to reform the “check-the-box” rules, which was also a proposal in President Obama’s first budget. (This proposal was left out of subsequent White House budgets, apparently in response to corporate lobbying).
PSI also suggests that the U.S. tax foreign corporations that are controlled and managed in the U.S. (like Apple’s Irish subsidiaries), that Congress strengthen rules governing transfer pricing, and makes several other recommendations to block the type of tax avoidance techniques used by Apple.
Virtually None of Its $102 Billion Offshore Stash Has Been Taxed By Any Government
Apple Inc. CEO Tim Cook is scheduled to testify on May 21 before a Congressional committee on the $102 billion in profits that the company holds offshore. Citizens for Tax Justice has a new analysis of Apple’s financial reports that makes clear that Apple has paid almost no income taxes to any country on this offshore cash.
That means that this cash hoard reflects profits that were shifted, on paper, out of countries where the profits were actually earned into foreign tax havens — countries where such profits are not subject to any tax.
As CTJ explains, the data in Apple’s latest annual report show that the company would pay almost the full 35 percent U.S. tax rate on its offshore income if repatriated. That means that virtually no tax has been paid on those profits to any government.
Read the report.
The Brewers Association, a lobbying group for craft beer brewers, has been trying to make a case for a reduction in the federal excise tax on small U.S. craft brewers. The group supports legislation – the Small BREW Act – introduced earlier this year which would cut in half the excise tax on the first 60,000 cases of beer a craft brewer produces. Significantly, the bill would also quietly redefine what the federal tax code considers a “craft brewer” to include companies producing up to 6 million barrels of beer a year. (Right now, companies making less than 2 million barrels a year are eligible for an already-existing, smaller excise tax break on the first 60,000 barrels.) This would have the effect of giving beer tax breaks to some companies that few Americans would think of as “craft brewers.”
That would make the Boston Beer Company, maker of tasty brews under the Sam Adams label which enjoyed more than $95 million in US profits last year, a craft brewer and take a big bite out of its already low tax bill.
Over the past five years, the Boston Beer Company has claimed $22 million in tax breaks for executive stock options, has cut its taxes by $9 million using a federal tax break for “domestic manufacturing” and it has even enjoyed millions of dollars in federal research and development tax breaks. The company’s effective tax rate on its $330 million in US profits over the past five years has been just 23 percent, well below the 35 percent corporate income tax rate. And in 2008, while it reported $16 million in US profits it managed not to pay a dime in federal income taxes on that income. (In fact, the company reported receiving a tax rebate of $2 million from Uncle Sam that year.)
Boston Beer would become eligible for “craft brewer” tax breaks under the proposed bill (courtesy of the Congressional Small Brewers Caucus). While the Boston Beer Company is certainly smaller than the two multinational giants it competes against (Anheuser-Busch Inbev and SAB Miller), the company with the ubiquitous Sam Adams products enjoys profits on a scale that dwarfs the true craft breweries dotting the American landscape.
At a time when Congress and the Obama administration are critically examining many of the unwarranted tax breaks that have been purchased with lobbying dollars over the years, one has to ask: are new tax breaks for a mid-sized tax-avoider beer company high on our national “to-do” list?
When Congressional tax writers signaled their intention to enact a new tax break for domestic manufacturing income in 2004, lobbyists began a feeding frenzy to define both “domestic” and “manufacturing” as expansively as possible. As a result, current beneficiaries of the tax break include mining and oil, coffee roasting (a special favor to Starbucks, which lobbied heavily for inclusion) and even Hollywood film production. The Walt Disney corporation has disclosed receiving $526 million in tax breaks from this provision over the past three years, presumably from its film production work, and even World Wrestling Entertainment has disclosed receiving tax breaks for its “domestic manufacturing” of wrestling-related films.
But CTJ has now discovered, after poring over corporate financial reports, an example that may trump them all.
Silicon Valley-based OpenTable, Inc. provides online restaurant reservations and reviews for restaurants in all fifty states and around the world, connecting customers and restaurants via the Internet and mobile apps. While members of Congress may enjoy how OpenTable can “manufacture” a last minute seating at their favorite Beltway watering hole, it’s hard to believe the company engages in any activity that most Americans would think of as manufacturing.
And yet OpenTable discloses in its SEC filing that the domestic manufacturing tax break reduced the company’s effective corporate income tax rate substantially recently, saving it about $3 million over the last three years. Even as a small portion of the company’s overall tax bill, that $3 million is emblematic of the scores of absurd loopholes carved out of the corporate tax code.
President Obama has repeatedly proposed scaling back the domestic manufacturing deduction to prevent big oil and gas companies from claiming it, but we have argued that the manufacturing tax break should be entirely repealed. At a minimum, Congress and the Obama Administration should take steps to ensure that the companies claiming this misguided giveaway are engaged in something that can at least plausibly be described as manufacturing.
New from CTJ: Bernie Sanders Is Right and the Tax Foundation Is Wrong -- The U.S. Has Very Low Corporate Income Taxes
Read CTJ's response to the Tax Foundation's claim that the U.S. has a high corporate tax rate.
Senator Bernie Sanders of Vermont recently appeared on Real Time with Bill Maher and disputed the claim by the Tax Foundation that the U.S. has the highest corporate tax in the world. Senator Sanders is right, the Tax Foundation is wrong.
CTJ explains that the effective corporate tax rate (the share of profits that corporations pay in taxes) is what matters, and the effective tax rate for U.S. corporations is quite low. The Tax Foundation relies on flawed studies to argue otherwise. For example, one study cited by the Tax Foundation excludes corporations paying a negative tax rate — in other words, excludes corporate tax dodgers. Obviously this will result in a higher estimated effective tax rate.
Read CTJ's full response.
A revealing new report from the Government Accountability Office (GAO) found that in 2011, the US government spent as much on corporate tax expenditures as it collected in corporate taxes. According to the report, 80 tax expenditures (exceptions, deductions, credits, preferential rates, etc.), cost the Treasury $181 billion in corporate tax revenue, which is the same as the total amount the Treasury collected in corporate taxes in 2011.
While the study looked at 80 corporate tax expenditures, over three-quarters of the revenue loses ($136 billion) were attributed to the four largest expenditures: accelerated depreciation, deferral of foreign income, the research credit, and the domestic production activities deduction. (CTJ has explained before that repealing these provisions would raise massive amounts of revenue.)
Making matters worse, 56 of the 80 tax expenditures that GAO looked at were used by individuals as well as corporations, resulting in an additional loss of $125 billion in revenue from the individual income tax. This happens because many corporate tax breaks can be used by businesses taxed under the individual income tax (the personal income tax), such as partnerships, S-corporations and other “pass-through” entities.
The report also revealed that more is spent on corporate tax expenditures in the budget areas of Commerce and Housing, International Affairs, and General Purpose Fiscal Assistance than is spent in direct federal outlays. For example, GAO found that the government spends only $45.7 billion in direct federal outlays for International Affairs, while spending $50.8 billion on corporate tax expenditures on this same budget function. Similarly, GAO concluded that one-third of the corporate only tax expenditures “appear to share a similar purpose with at least one federal spending program.”
These expenditures account for major U.S. corporations paying an average effective tax rate of half the 35 percent statutory rate, and often even zero in federal income taxes; elimination of these tax breaks should be the top priority for lawmakers looking to replace the sequester or reduce the deficit. In fact, a coalition of 515 groups recently called on Congress to repeal or reduce corporate tax expenditures as a way to raise revenue (as opposed to enacting corporate tax reform that is “revenue-neutral”). As Representative Lloyd Doggett (R-TX), who requested the GAO study, explained, “Corporate America did not contribute a nickel to the fiscal cliff deal that meant higher taxes for many Americans [and] it is reasonable to ask corporate America to contribute a little more toward closing the budget gap and to the cost of our national security.”
These corporate tax expenditures get nothing like the public scrutiny that direct spending is subject to. But tax expenditures for corporations are just like subsidies provided to corporations in the form of direct spending because Americans have to make up the costs somehow. That’s true whether it’s that bundle of earmark-like tax extenders that gets quietly renewed every year or two, or the rule allowing corporations to indefinitely defer taxes on foreign profits, or the massive breaks for depreciating equipment. All this is the spending of ordinary taxpayers’ dollars – and it merits the same critical attention.
Citizens for Tax Justice has been publishing studies of what major U.S. corporations pay in federal income taxes for years. Not just the effective tax rate, but also what they actually pay in federal (and state) taxes on their profits each year. From time to time, however, we hear the critique that there is no way to figure out what corporations actually pay in federal income taxes, based on corporate 10-K annual reports that we use.
Most recently, in the Washington Post of April 12, 2013, Allan Sloan levels this mistaken charge. According to Sloan:
"There are more than a dozen tax metrics disclosed in a 10-K — but not the federal income tax incurred for a given year. . . . The stories you read about disgracefully low corporate taxes are based on the “current portion” of taxes due, disclosed in 10-K footnotes. Many people — including me, years ago, before I learned better — use that number as a proxy for the federal income tax that a company pays. But that’s a mistake. . . . The current-portion number . . . has no connection whatsoever with what a company actually forks over to the IRS for a given year."
As we pointed out in our November 2011 study, Corporate Taxpayers & Corporate Tax Dodgers 2008-10, the “current” federal income taxes that corporations disclose in their annual reports, adjusted for stock-option tax benefits that are reported separately, are the best (and only) measure of what corporations really pay (or don’t pay) in federal income taxes.
To read our full explanation of why this is true, click here.
We wholeheartedly endorse the call, made by Sloan and others, for more transparent disclosure of tax information in corporate annual reports. But the disclosure we already get, if one knows how to understand it, is quite fine. The journalists, lawmakers, policy advocates and the general public who rely on our research can be confident in our findings about corporate taxes.
EVENT ADVISORY/PHOTO-OP FOR APRIL 15, 2013
BILLBOARD TRUCK IN WASHINGTON, DC ASKS, DO YOU PAY MORE TAXES THAN MAJOR CORPORATIONS?
Citizens for Tax Justice Mobile Billboard to Visit Dupont, K Street, Capitol Building and National Capitol Post Office over Eight Hour Day
Washington, DC – “Do you pay more Federal Income Taxes than Facebook, Southwest Airlines, GE, Pepco and other Giant Corporations? Yes You Do!” These words are splashed across a red, white and blue, ten by twenty foot rolling billboard that will be seen by thousands of tourists, food truck customers, pedestrians and commuters on Monday April 15th, courtesy of Citizens for Tax Justice (CTJ). CTJ’s April 11 report, “Ten Reasons We Need Corporate Tax Reform,” supports the billboard’s text that will be circulating around DC between 11 AM and 7 PM on Tax Day.
The billboard route maximizes visibility for passersby and access for news cameras, in particular at its final stop affording a visual of taxpayers visiting the Post Office. The route and schedule is divided into four parts, all times Eastern, primarily in NW DC. Some stops scheduled, others by request.
11 AM – Noon: Circling Dupont Circle and pulling off the Circle onto 19th St. NW (in front of Dupont Metro, Krispy Kreme, Front Page bar) at 11:30 for cameras and as needed.
Noon – 2 PM: Lunch at K Street Parks - Farragut Sq, McPherson Sq, Franklin Park. Route is rectangle of K Street NW to 13th Street to I (Eye) Street to 17th Street. Stops at I (Eye) near 15th/Vermont at 1:00 and 1:30 PM and as needed.
2 – 3 PM: US Capitol Building Loop - 3rd St NW/SW to Independence Avenue to 2nd St SE/NE to Constitution Ave. No stops scheduled but as needed will be on 3rd Street NW between Madison/Jefferson Streets.
3:30 – 7 PM: National Capitol Post Office, 2 Mass Ave, NE at North Capitol Street. Billboard will park kitty corner from Post Office entrance (doors on North Capitol), adjacent to Sun Trust Bank, in sight of Dubliner bar (F Street). Depending on parking, truck’s 5-minute loop passes busy tourist sites as it runs up North Capital, onto Louisiana Ave NE onto New Jersey Ave NW and back on Mass Ave NW for media availability.
Citizens for Tax Justice (CTJ), founded in 1979, is a 501 (c)(4) public interest research and advocacy organization focusing on federal, state and local tax policies and their impact upon our nation (www.ctj.org).
This week, members of Congress will receive a visit from the tax vice presidents of major corporations that have come together in the so-called Reforming America’s Taxes Equitably (RATE) Coalition, a corporate lobbying group pressing lawmakers to reduce the corporate tax rate.
U.S. Corporate Tax Is Actually Lower than What Multinational Corporations Pay Abroad
The first thing you should know about the RATE Coalition is that their rhetoric about the U.S. having a high corporate tax is nonsense. The U.S. statutory corporate income tax rate of 35 percent, which RATE wants to reduce, is not as important as the effective corporate tax rate — the percentage of profits that corporations actually pay in taxes after accounting for all the loopholes and breaks that lower their tax bills.
This is explained in a CTJ report appropriately titled, “The U.S. Has a Low Corporate Tax.” The report also explains that CTJ examined most of the Fortune 500 companies that were consistently profitable from 2008 through 2010 and found that two-thirds of those with significant offshore profits actually paid a higher effective tax rate in the other countries where they did business than they paid in the U.S.
RATE Agrees with CTJ on Closing Tax Loopholes, Disagrees about What To Do with the Savings
The second thing you should know about the RATE Coalition is that they agree with all of the findings of CTJ’s studies documenting corporate tax avoidance due to corporate tax loopholes. They simply disagree with us about what should be done with the revenue savings if Congress ever closes those loopholes.
The RATE Coalition cites CTJ at length in a recent post on its website:
"Because of these reductions [due to corporate tax breaks], the effective tax rate is closer to 18.5 percent on average, according to Washington, D.C. think tank Citizens for Tax Justice (CTJ), making the rate one of the lowest of any developed country…
A 2011 report on 280 corporations conducted by CTJ found that nearly a third paid no federal income tax in at least one of the three previous years, while 30 of those surveyed recouped more federal dollars than they paid in taxes in one of the previous three years…"
The RATE Coalition’s website admits that “corporate tax base-broadeners [provisions to close corporate tax loopholes] should be on the table.” But they seem to believe that all of the revenue saved from such loophole-closing should be given right back to corporations in the form of a reduction of their corporate income tax rate.
Citizens for Tax Justice has explained (in this fact sheet, for example) that most, if not all, of the revenue savings from closing tax loopholes should be used to fund the public investments that build the American economy and the American middle-class.
CTJ is not alone in holding this position. For example, in May of 2011, U.S. Senators and Representatives received a letter from 250 organizations, including organizations in every state, calling on Congress to close corporate tax loopholes and use the revenue saved to address the budget deficit and fund public investments. The 250 non-profits, consumer groups, labor unions and faith-based groups called for a corporate tax reform that raises revenue. In December of 2012, over 500 organizations from around the country joined a similar letter that was sent to each member of Congress.
Tax-Dodging Corporations like Boeing Extremely Influential in Washington
Despite polling showing that most Americans want our corporations to pay more in taxes and despite the evidence that these companies are not paying very much now, Congress and the administration are taking seriously proponents of a “revenue-neutral” reform of the corporate income tax.
Lawmakers of both parties and even President Obama have shown an alarming level of deference to these companies.
For example, CTJ’s figures show that Boeing, one of the corporations that is a member of the RATE Coalition, paid nothing in net federal income taxes from 2002 through 2011, despite $32 billion in pre-tax U.S. profits. In fact, Boeing has actually reported more than $2 billion in negative total federal taxes over that period.
Amazingly, this did not stop President Obama from telling a crowd at a Boeing plant in Washington State that revenue saved from closing offshore tax loopholes “should go towards lowering taxes for companies like Boeing that choose to stay and hire here in the United States of America.”
President Obama has also signed onto the overall goal of the RATE Coalition, a “revenue-neutral” reform of the corporate tax, which CTJ has criticized in detail.
It’s hard to know how much longer members of Congress and the President can ignore the opinions of the majority of Americans who want corporations to pay more in taxes. Perhaps as more people feel the effects of the sequester and other service cuts supposedly necessary to balance they budget, the more they’ll demand to know why their elected leaders are allowing so much corporate tax revenue to go uncollected.
Our report on Paul Ryan’s most recent budget notes that it includes a package of specific tax cuts but claims to maintain current law revenue levels, without specifying how. Our report assumes tax expenditures would have to be limited, as all of Ryan’s previous budget plans propose explicitly, to offset the costs of his tax cuts.
It is possible that Ryan doesn’t believe he would have to make up all of those costs, because he might believe that at least some of his tax cuts pay for themselves. In other words, Ryan might rely, at least partly, on “supply-side” economics.
One of the main ideas behind supply-side economics is that reducing tax rates will unleash so much productivity and investment and so much growth in incomes and profits that the tax collected on those increased incomes and profits will make up for the revenue loss from the reduction in tax rates.
The section of Ryan’s budget plan on tax reform cites, and is nearly identical to, a letter from Ways and Means Chairman Dave Camp and the Republican members of his committee explaining that they seek a tax reform that would “lead to a stronger economy, which would create more American jobs and higher wages. More employment and higher wages would lead to higher tax revenues which would simultaneously address both the nation's economic and fiscal reforms.” The letter goes on to say that they “will continue to oppose any and all efforts to increase tax revenue by any means other than through economic growth.”
Having Failed to Win the Argument Over the Income Tax Cuts and Capital Gains Tax Cuts, Supply-Siders Now Turn to Corporate Tax Cuts
Of course, if there was any possibility that we could actually get more revenue by paying less in taxes, we would all support that. The idea is so appealing that many lawmakers cling to it despite overwhelming evidence that it’s wrong.
Anti-tax lawmakers and pundits have tried to use the supply-side argument for several different types of tax cuts.
For example, the George W. Bush administration had the Treasury investigate whether or not the Bush income tax cuts would pay for themselves, and the Treasury reported back that, sadly, they would not.
To take another example, the editorial board of the Wall Street Journal has been obsessed for several years with the idea that income tax breaks for capital gains (if not other types of personal income tax cuts) pay for themselves. But the evidence shows that revenue from taxing capital gains rises and falls with the stock market and the overall economy, not changes in tax policy.
And yet another example is the apparent campaign underway now to convince Congress and the public that cuts in the corporate tax rate pay for themselves. On the same day as Ryan released his budget plan, the Tax Foundation released a report claiming that reductions in corporate tax rates pay for themselves. Two days earlier, Arthur Laffer, the leading proponent of “supply-side” economics, made the same argument in a U.S.A. Today column. (See ITEP's critiques of Laffer's other work as junk economics.)
The Tax Foundation report is particularly telling. The Tax Foundation explains that their “dynamic” estimates assume that changing the corporate tax rate affects the economy. But stop and think about what this means exactly. They are essentially feeding assumptions into a model and then reporting the result.
The effect of taxes on the economy is complicated, especially when you consider that taxes fund public investments (like infrastructure and education) that enhance economic growth by enabling businesses to profit.
The Tax Foundation has fed their model assumptions about the effects of taxes on the economy and assumptions about how significant those effects are. If they assumed that cutting corporate tax rates had a negative impact or only a small positive impact on the economy, then their model would conclude that these tax cuts do not pay for themselves. But they assume a large positive impact on the economy, and their model therefore concludes that such tax cuts do pay for themselves.
Some Members of Congress Seek “Dynamic Scoring” for Tax Proposals
It is unclear that proponents of supply-side economics will be any more successful with corporate income tax cuts than they have been with other types of tax cuts. But there is a real danger because anti-tax lawmakers often demand that Congress’s process of estimating the revenue effects of tax proposals be altered to take supply-side economics into account.
In other words, some lawmakers demand that the revenue estimating process assume that tax cuts cause economic growth, which can in turn offset at least part of the revenue loss — meaning tax cuts can at least partially pay for themselves.
Using this type of “dynamic scoring,” as it is often called, would be particularly manipulative. For one thing, even if we believed that tax cuts putting money into the economy boosts growth enough to partially offset the costs, then it’s equally logical to assume that spending cuts taking money out of the economy would reduce growth enough to limit the amount of deficit reduction they achieve.
But of course Paul Ryan and Dave Camp, who are championing a budget plan that includes massive spending cuts, do not suggest that the estimating process be altered to assume that such effects on the economy limit the amount of savings achieved. These are not the type of “dynamic” effects they have in mind.
A group of so far undisclosed corporations are forming a lobbying coalition called Let’s Invest for Tomorrow (LIFT) to press Congress to enact a “territorial” tax system. The coalition should be named Let’s Invest Elsewhere (LIE), because that’s exactly what American multinational corporations would be encouraged to do under a territorial tax system.
A “territorial” tax system is a euphemism to describe a tax system that exempts offshore corporate profits from the U.S. corporate tax.
U.S. corporations are already allowed to “defer” (delay indefinitely) paying U.S. taxes on their offshore profits until those profits are brought back to the U.S. This creates an incentive for U.S. corporations to shift operations (and jobs) offshore or just disguise their U.S. profits as offshore profits so that U.S. taxes can be deferred. Completely exempting those offshore profits from U.S. taxes would obviously increase the incentives to shift jobs and profits offshore.
A CTJ report from 2011 explains these problems in detail and concludes that Congress should move in the opposite direction by ending “deferral” rather than adopting a territorial tax system. The stakes are getting higher each year as U.S. corporations hold larger and larger stashes of profits offshore. (A recent CTJ paper finds that 290 of the Fortune 500 have reported their profits held offshore, which collectively reached $1.6 trillion at the end of 2011.)
The Public Opposes Territorial Tax Proposals – But Will Congress Listen?
In a world where politicians actually did what voters wanted, we would not have to worry that this coalition might actually succeed in its goal of bringing about a territorial tax system, which the public would clearly oppose.
For example, a survey taken in January of 2013 asked respondents, “Do you approve or disapprove of allowing corporations to not pay any U.S. taxes on profits that they earn in foreign countries?” 73 percent of respondents said they “disapprove” and 57 percent said they “strongly disapprove.” The same survey found that 83 percent of respondents approved (including 59 percent who strongly approved) of a proposal to “Increase tax on U.S. corporations’ overseas profits to ensure it is as much as tax on their U.S. profits.”
And yet, it’s unclear that lawmakers are paying attention to the interests or opinions of ordinary Americans.
It is true that Vice President Biden went out of his way at the Democratic National Convention to criticize the territorial system proposed by Mitt Romney. And it’s also true that the “framework” for corporate tax reform released by the White House in February of 2012 refused to endorse a territorial system.
But the framework only rejected a “pure territorial system.” CTJ pointed out that the time that probably no country has a “pure territorial system,” so this does not provide much assurance or guidance.
Meanwhile, it has long been rumored that many of the Democratic members of the Senate Finance Committee (the Senate’s tax-writing committee) favor a territorial system.
Republican lawmakers, for their part, have long fully endorsed a territorial system. House Ways and Means Committee Chairman Dave Camp made public his proposals for a territorial system in October 2011. That very day, CTJ released a letter signed by several national labor unions, small business associations and good government groups opposing Camp’s move, but the response from lawmakers was relatively muted.
Perhaps more disturbing, at his recent confirmation hearings, the new Treasury Secretary, Jack Lew, appeared open to the idea of a territorial system.
Similar Corporate Lobbying Coalition Failed to Get a Temporary Exemption for Offshore Profits (Repatriation Holiday)
Some readers will remember that during 2011 and 2012 a group of corporations calling itself WIN America pushed for an tax amnesty for offshore profits (which they preferred to call a “repatriation holiday.”) The coalition was made up of companies who believed that Congress might not be naïve enough to give them the much bigger prize, a territorial system. As explained in a CTJ fact sheet, a repatriation holiday would temporarily exempt offshore profits from U.S. taxes, while a territorial system would permanently exempt those offshore profits from U.S. taxes, and would therefore cause even greater problems.
WIN America did give up and disband. But that could be largely because influential lawmakers like Ways and Means Chairman Dave Camp are indicating that the bigger prize, a territorial system, is within reach.
Complexity Helps the Lobbyists and Lawmakers Who Hope the Public Does Not Catch On
It may be that politicians remain open to tax proposals that the public hates because the issues involved are so complicated that they believe no one is paying attention. This makes it vital to call attention to the effects a territorial system would have on ordinary Americans.
The issues are admittedly complicated. For example, Americans have been presented over and over with a very simple story about how the U.S. has a corporate tax that is more burdensome than the corporate taxes of other countries, and that our companies need new rules that make them “competitive” with global competitors.
The reality is very different and much more complicated. While the U.S. has a relatively high statutory tax rate for corporations, the U.S. corporate tax has so many loopholes that most major multinational corporations seem to be paying a lower effective tax rate in the U.S. than they pay in the other countries where they have operations. CTJ’s major 2011 report on corporate taxes studied most of the profitable Fortune 500 companies and found (on pages 10-11) that among those with significant offshore profits (making up a tenth or more of their overall profits) two-thirds actually paid a lower effective tax rate in the U.S. than in the other countries where they operated.
On the other hand, there are a number of countries that have extremely low corporate tax rates or no corporate tax at all – mostly very small countries with little actual business activity – where U.S. companies like to claim their profits are generated, in order to avoid U.S. taxes. These are the offshore tax havens that exploit the rule allowing U.S. corporations to “defer” U.S. taxes on their offshore profits. If the U.S. completely exempts these profits from U.S. taxes (in other words, enacts a territorial system) these incentives will be greatly increased.
This is confirmed by a recent report from the Congressional Research Service finding that in 2008, American multinational companies reported earning 43 percent of their $940 billion in overseas profits in the five very small tax-haven countries, even though only four percent of their foreign workforce and seven percent of their foreign investments were in these countries. In contrast, the five “traditional economies,” where American companies had 40 percent of their foreign workers and 34 percent of their foreign investments, accounted for only 14 percent of American multinationals’ reported overseas’ profits.
These statistics are outrageous and demonstrate that U.S. corporations are engaging in various accounting tricks in order to make it appear (for tax purposes) that their profits are generated in countries where they won’t be taxed. The LIFT coalition will count on the fact that this is simply too difficult for ordinary people to understand – which makes educating the public about this more important than ever.
The Center for Media and Democracy (CMD), creator of the indispensible wiki, SourceWatch, recently launched a new wiki resource allowing users to explore the funding, leadership, partner groups and lobbyists that make up the Campaign to Fix the Debt. This resource reveals Fix the Debt for what it really is: another coordinated push by large corporations and billionaire Pete Peterson to force Congress to pass large and unneeded cuts to Social Security and Medicare.
We’d be remiss if we failed to also mention Fix the Debt’s naked duplicity in pushing for massive cuts to critical programs while simultaneously pushing for additional tax breaks for its many corporate backers. Using data from Citizens for Tax Justice (CTJ), CMD exposes the audacity of some of 151 corporate backers of Fix the Debt by showing that many of them, such as Boeing, General Electric and Verizon, are already paying less than nothing in taxes.
371 Productions, the creator of the PBS documentary, “As Goes Janesville,” has launched a corporate transparency website and iPhone app called BizVizz, which provides consumers with easy access to financial information about America’s largest corporations. BizVizz uses CTJ’s corporate tax data to reveal that our broken corporate tax system allows the makers of many of our everyday products to get away with paying little – or sometimes nothing – in income taxes. One especially cool feature of the app allows the user to snap a picture of a product logo and get instant information on how much the company paid in federal taxes.
BizVizz includes other data, too. It shows how major corporations obtain their low tax rates because it includes data from the Sunlight Foundation on how much each corporation gave to politicians in campaign contributions. The other category of data BizzVizz includes is from Good Jobs First, listing subsidies corporations get from state and local governments – subsidies that come straight out of the tax dollars the rest of us pay in.
If confirmed, Jack Lew, the President’s nominee for Treasury Secretary, will oversee IRS enforcement of tax laws and will oversee the development and analysis of tax proposals, among other things. It would therefore be reassuring if Lew did not seem unaware of what is going on in tax havens, and unaware of the problems with proposals to exempt corporations’ offshore profits from U.S. taxes.
Much has been made of the fact that Lew, who worked at Citigroup before serving as chief of staff to the President, had an investment in a fund registered in the Cayman Islands, a notorious offshore tax haven.
Lew told the Senate Finance Committee on Wednesday that the fund was set up by Citigroup, that he didn’t know where it was based, and that he lost money on it in any event.
Lew “Unaware of Ugland House” in the Cayman Islands
What’s actually alarming about Lew’s comments before the committee is that he didn’t even seem to understand the crisis in our tax system that the Cayman Islands and other tax havens are taking advantage of.
For example, Republicans on the committee told of how the fund in question was registered in Ugland House, a small five-story building in the Cayman Islands where over 18,000 companies are officially headquartered. Obviously, most of these “companies” consist of little more than a post office box. Profits are shifted from real business activities in countries like the U.S. into these “companies” in Ugland House. The profits can then be designated as Cayman Island profits, because the Cayman Islands has no corporate income tax.
Those of us who follow tax issues know that Ugland House has been discussed for years at Congressional hearings — although Wednesday’s hearing may be the first time that it was brought up by Republicans.
The Washington Post describes the back-and-forth during the hearing on this topic:
Lew argued that “the tax code should be constructed to encourage investment in the United States.”
“Ugland House ought to be shut down?” Grassley asked.
“Senator, I am actually not familiar with Ugland House,” the witness pleaded. “I understand there are a lot of things that happen there.”
Lew Unaware that Offshore Tax Avoidance, Not Just Tax Evasion, Is a Problem
Equally troublesome is Lew’s defense. “I reported all income that I earned. I paid all taxes due.”
This completely misses the point and misses the point of the debate over tax reform. No one has suggested that Lew committed tax evasion — the criminal act of hiding income from the IRS. The Cayman Islands and other tax havens are certainly used for tax evasion, but that’s not the issue here.
The much larger problem is that our tax system allows massive tax avoidance — practices that reduce taxes that are mostly legal, but in many cases should not be legal — and that tax havens like the Cayman Islands are exploiting this weakness.
Lew probably did pay all the taxes that were due under the tax laws as they’re currently written. The same is true of General Electric, Boeing, Pepco, Verizon, Wells Fargo and the dozens of corporations that paid nothing over several years because the tax laws allowed it. The scandal is not that laws were broken, but that the laws actually allowed this.
Is Lew Unaware that the Administration Has Rejected a “Territorial” Tax System — Or Does He Know Something We Don’t?
One Senator at the hearing asked Lew about the possibility of the U.S. shifting to a “territorial” tax system — which is a euphemism for a tax system that exempts the offshore profits of corporations.
Lew said “there is room to work together.” He said [subscription required] “We actually have a debate between whether we go one way or the other [towards a territorial system or a worldwide system], and we have a hybrid system now. It’s a question of where we set the dial.”
This is alarming for those who thought that the administration had already wisely rejected moving to a territorial system. As CTJ has explained in a report and fact sheet, U.S. companies now can “defer” (delay indefinitely) paying U.S. taxes on their offshore profits, which creates an incentive to use accounting gimmicks to make their U.S. profits appear to be “foreign” profits generated in a tax haven like the Cayman Islands. Under a territorial system, they would never have to pay U.S. taxes on offshore profits, which would logically increase the incentive to engage in such tax dodges.
A year ago, the Obama administration stated that it opposes a “pure territorial system.” CTJ pointed out at the time that a little more clarity is needed because probably no country has a “pure” territorial system, and the “impure” ones are facilitating widely reported tax avoidance in Europe and across the world.
That clarification seemed to arrive when Vice President Joe Biden went out of his way to criticize the idea of a territorial tax system at the 2012 Democratic convention, referring to a study concluding that it could cost the U.S. hundreds of thousands of jobs.
We hope that this is simply another case of Lew being uninformed, and not an indication that the administration may shift towards favoring a territorial system.
Last year at this time, CTJ predicted, based on Facebook’s IPO paperwork, the company would get a federal tax refund in 2012 approaching $500 million, and the company’s SEC filing this month tells us we were right: Facebook is reporting a $429 million net tax refund from the federal and state treasuries. And it’s not because they weren’t profitable. Indeed, Mark Zuckerburg’s little company earned nearly $1.1 billion in profits.
Facebook’s income tax refunds stem from the company’s use of a single tax break, that is the tax deductibility of executive stock options. That tax break reduced Facebook’s federal and state income taxes by $1,033 million in 2012, including refunds of earlier years’ taxes of $451 million.
Of course, Facebook is not the only corporation that benefits from stock option tax breaks. Many big corporations give their executives (and sometimes other employees) options to buy the company’s stock at a favorable price in the future. When those options are exercised, corporations can take a tax deduction for the difference between what the employees pay for the stock and what it’s worth (while employees report this difference as taxable wages). On page 12 of our 2011 Corporate Taxpayers and Corporate Tax Dodgers report, we discuss how 185 other large, profitable companies have exploited the stock option loophole.
In recent months, Google, Inc. has come under fire by Britain’s parliament for its alleged use of “immoral” offshore tax dodges as well as by French authorities (Google’s history of shifting income to offshore jurisdictions, aka tax havens, is well documented). But none of this criticism seems to have changed the minds of Google’s executives: the company’s 2012 annual financial reports were released last week, and in them, the company admits to having shifted $9.5 billion in profits overseas in just the past year.
To put this in context, a recent CTJ report identified all 290 of the Fortune 500 corporations that have admitted holding cash indefinitely overseas; this report ranked Google as having the 15th largest offshore cash hoard, with $24.8 billion of offshore cash in 2011. CTJ’s report also showed that the offshore cash holdings of big corporations are highly concentrated in the hands of just a few companies, and the biggest 20 among these 290 corporations represented a little over half of the $1.6 trillion in offshore income we documented. And while we can’t precisely predict the revenue loss this represents, we did calculate that it could be as much as $433 billion in unpaid taxes.
So this fierce debate over whether to offer US multinationals a “tax holiday” for bringing their overseas stash back to the US, or to give them a permanent exemption by adopting a “territorial” tax system, is largely about whether a small number of large companies, including Google, should be rewarded for shipping their cash to low-tax jurisdictions. Given that most of us pay taxes on the money we earn in this country, only seems reasonable that colossally profitable corporations should do the same.
A bill introduced in Congress today called the Corporate Tax Dodging Prevention Act would end “deferral,” the most problematic break in the U.S corporate income tax.
The bill would repeal the rule allowing U.S. corporations to “defer” (delay indefinitely) paying U.S. corporate income taxes on their offshore profits until those profits are “repatriated” (brought to the U.S.).
At an event announcing the proposal this morning, CTJ director Bob McIntyre spoke in favor of the legislation. McIntyre explained:
Because of “deferral,” companies like Apple, Microsoft, Dell and Eli Lilly can shift their U.S. profits, on paper, to foreign tax havens and avoid billions of dollars in taxes that they should be paying. At the end of 2010, just 10 companies, including those just mentioned, report that they had stashed $210 billion offshore, almost all of it in tax havens, and thereby avoided $69 billion in U.S. income taxes.
A recent CRS report found that in 2008, American multinational companies reported earning 43 percent of their $940 billion in overseas profits in five little tax-haven countries, even though only 4 percent of their foreign workforce and 7 percent of their foreign investments were in these countries.
In total, the JCT [Joint Committee on Taxation] estimates that repealing deferral would add $600 billion to federal revenues over the next decade.
The bill was introduced today in the Senate by Bernie Sanders of Vermont and in the House by Jan Schakowsky of Illinois.
CTJ’s recent working paper on tax reform options explains in detail how ending deferral would improve the corporate income tax. It also explains that President Obama has offered several proposals that would address some of the worst abuses of deferral, but would not be as effective or straightforward as simply repealing deferral.
Senator Carl Levin of Michigan has introduced bills to limit some of the worst abuses of deferral, and has been discussing similar proposals with other Senators as a way to raise revenue to replace or delay the automatic spending sequestration that is scheduled to go into effect in March.
The bills introduced by Senator Levin also include provisions targeting offshore tax evasion by individuals, in addition to the offshore tax avoidance by corporations. Offshore tax evasion involves hiding income from the IRS in offshore tax havens in ways that are criminal offenses, whereas the offshore tax avoidance by corporations generally involve practices that are not illegal — but that ought to be.
Ending deferral has become increasingly important as corporations hold more profits than ever offshore. A recent CTJ report finds that public information from 290 of the Fortunate 500 companies indicate that they hold $1.6 trillion in profits offshore. For many of these corporations, the majority of their “offshore” profits are actually U.S. profits that have been artificially shifted to offshore tax havens and then reported as “foreign” profits.
New CTJ Report: Congressional Research Service Finds Evidence of Massive Tax Avoidance by U.S. Corporations Using Tax Havens
A two-page report from Citizens for Tax Justice explains new evidence of offshore tax avoidance by corporations unearthed by the non-partisan Congress Research Service (CRS).
In a nutshell, CRS finds that U.S. corporations report a huge share of their profits as officially earned in small, low-tax countries where they have very little investment and workforce while reporting a much smaller percentage of their profits in larger, industrial countries where they actually have massive investments and workforces.
This essentially confirms that corporations are artificially inflating the share of their profits that they claim to earn tax havens where they don’t really do much real business. Remember that offshore tax avoidance by corporations often takes the form of convoluted transactions that allow U.S. corporations to claim that most of the profits from their business are earned in offshore subsidiaries in a tax haven like Bermuda, and that the offshore subsidiary my be nothing more than a post office box.
And Bermuda is a great example. CRS finds that the amount of profits that U.S. corporations report to earn in Bermuda is 1,000 percent of Bermuda’s GDP! That’s ten times Bermuda’s gross national product — ten times the tiny country’s actual economic output. This is obviously impossible and confirms that much of the profits that U.S. corporations claim are earned there represent no actual economic activity but rather represent profits shifted from the U.S. or from other countries to take advantage of that fact that Bermuda has no corporate income tax.
Sadly, most of the tax dodges practiced by U.S. corporations to shift their profits to tax havens are actually legal. CTJ’s report explains what type of tax reform is needed to address this.
Perhaps the most striking thing about tax policy in 2012 is that it featured a presidential campaign focused on taxes and then ended with major legislation that resolved none of the issues raised in that campaign.
Even after the fiscal cliff deal (the American Taxpayer Relief Act of 2012) takes effect, Warren Buffett and Mitt Romney will still pay a lower effective federal tax rate than many relatively middle-income working people. Their effective tax rate may be five percentage points higher (since the capital gains and stock dividends that wealthy investors live on will be taxed at a top rate of 20 percent rather than 15 percent) but this does not eliminate the unfairness that Warren Buffett highlighted.
Meanwhile, the tax loopholes that allow profitable corporations like General Electric (GE) to avoid taxes were actually extended as part of the fiscal cliff deal. The law includes a package of provisions often called the “extenders” because they extend several special interest breaks for one or two years each. The extenders officially only add $76 billion to the costs of the law, but a recent CTJ report explains how their cost is likely to be far greater because Congress has shown a desire to extend these provisions again each time they expire.
One of the “extenders” is the one-year extension of “bonus depreciation,” which allows companies to write off the costs of equipment purchases far more quickly than those assets actually wear out. When these purchases are debt-financed, the result is that these investments have a negative effective tax rate, meaning the investments are actually more profitable after-tax than before tax. While corporations don’t usually reveal exactly which loopholes facilitate their tax avoidance, this one is certainly among those used effectively by GE and the other corporate tax dodgers identified in CTJ’s reports.
However, another tax break extended in the fiscal cliff deal actually has been identified by GE, in its public filings with the SEC, as having a significant effect in lowering its effective tax rate. This is the so-called “active financing exception,” which was extended through 2013 (and retroactively to 2012, since it had expired at the end of 2011). A CTJ report from 2012 explains that this break essentially makes it easier for U.S. corporations with income from financial activities to shift their profits to offshore tax havens.
The New York Times article from March 2011 that famously exposed GE’s tax avoidance explained that the head of GE’s 1,000-person tax department literally “dropped to his knees” in the House Ways and Means office as he begged for — and won — an extension of the active financing exception.
One thing is clear: Despite what Senator McConnell says, the tax debate is not over. There is a need for real tax reform, which means eliminating loopholes and ending the practice of extending “temporary” loopholes every couple years.
Why the "Extenders" in the Fiscal Cliff Deal Will End Up Costing More than Was Saved by Ending Tax Cuts for the Rich
The recently approved fiscal cliff deal (the American Taxpayer Relief Act of 2012) includes a package of provisions often called the “extenders” because they extend several special interest tax breaks for one or two years each. CTJ’s recent report on the revenue impacts of the fiscal cliff deal highlights a strange thing about the revenue “score” of these provisions from the Joint Committee on Taxation (JCT), the official revenue estimators for Congress.
JCT’s figures show that while the ten-year cost of the extenders is $76 billion, the cost in the first two years would actually be over $100 billion — which is greater than the revenue “saved” in the first two years of the decade by allowing the high-income Bush tax cuts to expire.
This is largely explained by one of the most significant of the extenders: the provision extending “bonus depreciation,” which allows companies buying equipment to take depreciation deductions more quickly than the equipment actually wears out.
The provision will allow companies to take depreciation deductions much earlier than they otherwise would, which will cost the Treasury more than $50 billion over the first two years of the decade, according to JCT. But because those deductions will then be unavailable in later years when they would have otherwise have been claimed, the Treasury will actually collect more revenue during the rest of the decade, so that, according to JCT, the extension of bonus depreciation will have a net cost of just $4.7 billion by the end of the decade.
Of course, in the event that Congress perpetually extends this provision, it will continue to have a large cost each year — and the legislative history makes this result seem likely. Bonus depreciation was enacted in 2002 and has only been allowed to expire for two years (2006 and 2007) since then. In every other year since 2002, Congress made this “temporary” break available. This legislative history is explained in a report from the Congressional Research Service which reviews efforts to quantify the impact of the provision and explains that “the studies concluded that accelerated depreciation in general is a relatively ineffective tool for stimulating the economy.”
Other breaks extended as part of the “extenders” package, like the research credit and the so-called “active financing exception” are officially “temporary” measures but have been extended over and over again for the last several years. Clearly, Congress’s practice of extending these breaks every couple years must end.
Small Business Leaders Call for Ending Offshore Loopholes, Raising Revenues from Corporate Tax Reform
In a press conference this morning with Sen. Calr Levin (MI) and business leaders called for corporate tax reform that raises revenue and closes the loopholes that allow multinational corporations to avoid $100 billion a year in U.S. corporate income tax.
Amid news that corporate tax reform is part of the fiscal cliff talks, 626 small business owners have signed a letter sent by the American Sustainable Business Council, Business for Shared Prosperity, and the Main Street Alliance to Congress and the President today with a call for corporate tax reform that:
—Raises revenue rather than being "revenue-neutral," so that “all businesses – large and small – contribute to the costs of government and the well being of the economy.”
—Ends the current incentives for multinationals to avoid tax by disguising U.S. profits as foreign profits and for shifting jobs and investments overseas.
—Levels the playing field so that multinational corporations aren’t paying lower tax rates than domestic companies and large businesses aren’t paying lower rates than small businesses.
A nationwide poll released earlier this year found that nine out of ten small business owners said offshore profit shifting by U.S. multinational corporations was a problem.
New CTJ Report: Fortune 500 Corporations Holding $1.6 Trillion in Profits Offshore
More Evidence that the Corporate Lobbyists’ Version of Tax “Reform” Should NOT Be a Part of Any Budget Deal
A new report from Citizens for Tax Justice explains that among the Fortune 500 corporations, 290 have revealed that they, collectively, held nearly $1.6 trillion in profits outside the United States at the end of 2011. This is one indication of how much they might benefit from a so-called “territorial” tax system, which would permanently exempt these offshore profits from U.S. taxes.
Just 20 of the corporations — including household names like GE, Microsoft, Apple, IBM, Coca-Cola and Goldman Sachs — held $794 billion offshore, half of the total. The data are compiled from figures buried deep in the footnotes of the “10-K” financial reports filed by the companies annually with the Securities and Exchange Commission.
Read the report.
The appendix of the report includes the full list of 290 corporations and the size of their offshore profits in each of the last three years, as well as the state in which their headquarters is located.
Corporate lobbyists and their allies in Congress are pushing for two changes that would benefit their investors but leave America worse off. Neither one of these should be included in any deal coming out of the so-called “fiscal cliff” negotiations.
Congress Should Reject a Revenue-Neutral Corporate Tax Overhaul
The first goal of the corporate lobbyists is an overhaul of the corporate tax that does not raise any revenue. Some corporations have stated that they would support closing corporate tax loopholes, but only if all the revenue savings is used to reduce the corporate tax rate. This would be a terrible waste of revenue at a time when lawmakers are considering cutting public investments that middle-income people rely on in order to reduce the deficit.
In May of 2011, a letter circulated by Citizens for Tax Justice was signed by 250 organizations, including organizations from every state, calling on Congress to close corporate tax loopholes and use the revenue saved for public investments and deficit reduction rather than lowering the corporate tax rate.
CTJ also has published a fact sheet and a detailed report explaining why corporate tax reform should be revenue-positive rather than revenue-neutral.
Unfortunately, the Obama administration endorsed a revenue-neutral corporate tax overhaul in the vague “framework” it released in February of this year. As lawmakers face real choices about whether to cut programs like Medicare, Medicaid, and education, we believe many will realize that demanding corporations contribute more to the society that makes their profits possible is more sensible.
Congress Should Reject a Territorial Tax System
The second goal of the corporate lobbyists is a transition to a “territorial” tax system, which would call off U.S. taxes on the offshore profits of U.S. corporations. As the new CTJ report explains, many of those profits are truly U.S. profits that have been made to look like “foreign” profits generated in tax havens through convoluted accounting schemes.
Citizens for Tax Justice has published a fact sheet and a detailed report explaining why Congress should reject a territorial tax system.
Thankfully, the administration has not endorsed a territorial tax system and Vice President Biden even criticized it during his speech at the Democratic National Convention. We hope that the President and his allies in Congress hold firm to this position.
While the headlines on the fiscal cliff negotiations are about wrangling over the top individual tax rates, multinational corporations are quietly lobbying for an agreement to move the U.S. international tax rules to a territorial system.
Members of the so-called Fix the Debt Campaign have called for massive cuts to social programs while seeking additional tax breaks for their own companies. A move to a territorial system could give the 63 publicly-held companies in the Fix the Debt campaign an immediate windfall of up to $134 billion and would massively increase their incentives to move even more profits offshore, where they would then be permanently exempted from U.S. taxes. Terrible-torial.
Meanwhile, defense contractors that exhort Congress to find a “reasonable approach” are also lobbying for permanent tax breaks on their offshore earnings. And major corporations complain (perennially) about having to pay U.S. taxes on any foreign cash they decide to bring home.
Moving to a territorial tax system would be a disaster for the U.S. Treasury and an open invitation for multinational companies to intensify their offshore shenanigans. Our fact sheet explains why. For an illustration of why it’s such a bad idea, you only need to look at headlines from the U.K. Because of their territorial tax system, they are unable to collect corporate income tax from U.S. corporate giants Starbucks, Amazon, and Google who are profiting wildly from sales and business in the U.K. Recently, these multinational giants were hauled before Parliament to explain their “immoral” tax-dodging behavior.
The U.S. already collects only a fraction of the taxes corporations owe on their profits; why would we move to a system that makes the problem even worse?
While the presidential candidates debate whether the tax code rewards companies that move operations overseas, a new CTJ report shows that ten companies, including Apple and Microsoft, indicate in their own financial statements that most of their foreign earnings have never been taxed – anywhere. The statements the companies file with the SEC reveal that if they brought their foreign profits back to the U.S., they would pay the full 35 percent U.S. tax rate, which is how we can surmise that no foreign taxes were paid that would offset any of the 35 percent U.S. tax rate.
The most likely explanation of this is that these profits, instead of being earned by real, economically productive operations in developed countries, are actually U.S. profits that have been shifted overseas to offshore tax havens such as Bermuda and the Cayman Islands. This same type of offshore profit shifting was the focus of a recent Senate hearing where Microsoft and Hewlett-Packard found themselves in the hot seat.
In the tax footnote to their financial statements, companies disclose the amount of their foreign subsidiaries’ earnings which are “indefinitely reinvested,” that is, parked offshore. Calling it "indefinitely reinvested" allows them to embellish their bottom lines, on paper anyway, because they don't have to account for the cost of U.S. taxes they'd pay on that offshore income. But, they must disclose the total amount of their unrepatriated profits, and also estimate the U.S. tax that would be due if those earnings were repatriated.
A new CTJ analysis of the Fortune 500 found that, although 285 companies reported unrepatriated foreign earnings, only 47 companies disclosed in their financial statements an estimate of the U.S. income tax liability they would face upon repatriation, although that disclosure is required by accounting standards. The remaining companies hid behind a common dodge that estimating the U.S. tax would be “not practicable.” Legions of lawyers and accountants help these companies avoid taxes but can’t calculate the costs to the U.S. treasury?
Which Fortune 500 Companies are Shifting Profits to Offshore Tax Havens? ranks the 47 companies that do disclose this figure by the tax rate they’d pay if they repatriated their foreign earnings. Seven of the top ten are members, either directly or through a trade association, of the WIN America campaign that is lobbying for a repatriation tax holiday (aka corporate tax amnesty) that would let them bring the foreign earnings home at a super-low rate.
It’s not as though the rest of the Fortune 500 is innocent. CTJ’s report notably says nothing about the 238 Fortune 500 companies that have admitted having offshore hoards but refuse to calculate how much tax they’d pay. These companies include suspected tax dodgers like Google and HP, each of which has subsidiaries in known tax haven countries. In all likelihood, many of these other companies have been as successful in avoiding tax as the ten companies ranked highest in CTJ’s report.
The new CTJ report is another reminder of what U.S.-based multinationals will do to avoid paying tax and why changing the U.S. international tax system to a territorial system is such a bad idea. Moving to a territorial tax system, which is supported by Gov. Romney and Congressman Ryan, would give companies a permanent tax holiday and encourage even more aggressive offshore profit shifting. President Obama has proposed corporate tax reform that would include a “minimum tax” on foreign earnings, although the rate has not been specified. And Congress, it seems, will be taking up overhaul of the corporate tax code next year, so watch this space for the facts about corporate America’s campaign to make dodging taxes even easier.
by CTJ Director, Robert McIntyre
In a speech at the National Press Club on October 9, Senator Chuck Schumer (D-NY) joined with President Obama in calling for revenue-raising tax reform, by closing loopholes and reversing the Bush tax cuts for the wealthy, to help address our nation’s long-term deficit problem.
“We must reduce the deficit, which is strangling our economic growth,” Schumer said. “And we must seek to control the rise in income inequality, which is hollowing out the middle class.”
Schumer added: “It would be a huge mistake to take the dollars we gain from closing loopholes and put them into reducing rates for the highest income brackets, rather than into reducing the deficit.”
Specifically, Sen. Schumer called for restoring the top personal income tax rate on top earners to the Clinton-era 39.6 percent and “reducing but not eliminating” the current huge gap between the extremely low tax rates on high-income investors and the much higher tax rates on working people.
So far pretty doggone good. But then Sen. Schumer stumbles. Here’s what he says about corporate (and other business) taxes:
“Some on the left have suggested corporate tax reform could be a source for new revenue, but I disagree. To preserve our international competitiveness, it is imperative that we seek to reduce the corporate tax rate from 35 percent and do it on a revenue-neutral basis.”
Oops! Despite the fact that U.S. corporate income taxes are almost the lowest in the developed world (PDF) as a share of the economy, Schumer seems to think that the amount we now collect in corporate income taxes is just about perfect. That’s simply ridiculous.
For one thing, the kind of “tax reform” that big corporations and their allies in Congress are promoting would be perverse. Their central goal is to eliminate U.S. taxes on corporations’ foreign profits. Of course, to keep their promise to break even, their version of “tax reform” would have to increase U.S. taxes on profits earned here in the United States.
One could point out that the U.S. already collects almost nothing in taxes on American corporations’ foreign profits. But corporate leaders would like to convert our current indefinite “deferral” of taxes on foreign profits into a permanent exemption.
Why would anyone think this approach would help our “international competitiveness”? Well, you have to understand what corporate leaders mean by that term. They don’t mean making it more attractive to invest and create jobs in the United States. Quite the contrary. They mean making it more attractive for companies to invest and create jobs in foreign countries.
Real corporate tax reform would do the opposite, by ending the indefinite deferral (PDF) of tax on foreign profits. Companies may still invest abroad for economic reasons, but at least we wouldn’t be subsidizing them to do so.
There’s a second point. Due to a plethora of tax subsidies, we also have very low taxes on corporate profits earned in the United States. And a fat lot of good that’s done us economically. So we should be increasing corporate taxes on U.S. profits, too. Not on all companies, to be sure. But on average, Fortune 500 corporations now pay only about half the official 35 percent corporate tax rate on their U.S. profits. A quarter of these giant corporations now pay less than 10 percent in U.S. taxes on their U.S. profits, including many that pay nothing at all.
Closing the loopholes that allow such rampant domestic corporate tax avoidance, including curbing loopholes that allow companies to artificially shift their U.S. profits into foreign tax havens, should be a key part of a balanced deficit reduction strategy. By doing so, we can not only help get deficits under control, we can also afford to make the investments in education and infrastructure that will really make investing and creating jobs in the United States more likely.
So Sen. Schumer, congratulations on pointing out the need for more revenue from wealthy individuals. Now, if you can just appreciate the equally important need to get more revenues from America’s tax-avoiding corporations, well, you’ll be a real tax reform hero for our time.
While most commentators have focused on the back-and-forth between President Barack Obama and former Governor Mitt Romney over tax rates and deficit reduction during the first presidential debate, we paid extra close attention to what the candidates said about corporate and small business taxes. Unfortunately, we found what both candidates had to say really wanting.
Corporate Tax Reform
Early in the debate, Obama noted that he and Romney have something of a consensus over corporate taxes in that they both believe that “our corporate tax rate is too high.” If there's such an agreement, it's based on a fundamental misunderstanding. While the U.S. has a relatively high statutory corporate tax rate of 35 percent, the effective corporate tax rate (the percentage of profits that corporations actually pay in taxes) is far lower because of the loopholes they use to shield their profits from taxes. CTJ has found that large profitable corporations pay about half the statutory rate on average, while some companies like General Electric and Verizon pay nothing at all in corporate taxes.
President Obama proposes to close corporate tax loopholes, but would give the revenue savings right back to corporations as a reduction in the statutory tax rate from 35 percent to 28 percent, resulting in no change in revenue, as outlined in his corporate tax reform framework released earlier this year. (During the debate Obama actually said he’d lower the statutory rate to 25 percent, which seems more likely a misstatement than an intentional policy shift.)
In contrast, 250 non-profits, consumer groups, labor unions and faith-based groups have called for a corporate tax reform that actually raises revenue in order to pay for critical government investments and reduce the budget deficit.
Of course, Governor Romney also proposes a deep cut in the statutory corporate tax rate (to 25 percent) and is far more vague on whether he would bother to offset the costs.
Romney took issue with Obama’s claim during the debate that the tax code currently allows companies to take a deduction for moving plants overseas, saying that he had “no idea” what Obama was talking about and that if such a deduction really exists that he may “need to get a new accountant.” Technically, Obama is right that the tax code currently allows companies to take a deduction for business expenses of moving a plant overseas, but he leaves out the fact that companies are allowed to deduct most business expenses, including those associated with moving facilities. In any case, Romney certainly does not to need to hire a new accountant.
What both candidates missed during this discussion was that our current tax system does in fact encourage corporations to move operations overseas by allowing them to defer taxes on foreign profits. To his credit, Obama proposed, as part of his 2013 budget and in his framework for corporate tax reform, several reforms to the international tax system that would reduce the size of this tax break, although he has not gone as far as to call for an end to deferral entirely. In contrast, Romney wants to blow a giant hole in our corporate tax by moving the US to territorial tax system, under which US companies would pay nothing on offshore profits.
Small Business Taxes
During the debate Romney revived a classic tax myth by claiming that allowing the Bush tax cuts to expire for income over $250,000 will harm small businesses because a lot of businesses “are taxed not at the corporate tax rate, but at the individual rate.” Obama pushed back noting that he had “lowered taxes for small businesses 18 times” and that under his plan “97 percent of small businesses would not see their income taxes go up.”
A Citizens for Tax Justice (CTJ) analysis found that only the 3 to 5 percent richest business owners would be lose any their tax breaks under Obama’s plan. The CTJ report also points out that if you’re a business owner, tax breaks affect how much of your profits you can take home, but not whether or not you have profits. A business owner will make investments that create jobs if, and only if, such investments will lead to profits, regardless of what tax rates apply.
In an attempt to push his small business claim even further, Romney cited a study by the National Federation of Independent Businesses (NFIB) claiming that Obama’s plan will force small business to cut 700,000 jobs. When the NFIB report came out during the summer, the White House did a fine job of pointing out the many, many outrageous distortions in the report. Just to take one, the NFIB report makes assumptions about the relationship between taxes and investment that are far out of line with those of the non-partisan Congressional Budget Office and even the Treasury Department during the Bush administration.
Oil and Gas Tax Breaks
President Obama stated that the oil industry receives “$4 billion a year in corporate welfare” and added that he didn’t think anyone believes that a corporation like ExxonMobil really needs extra money coming from the government. Romney hit back saying that the tax break for oil companies is only $2.8 billion a year and that Obama had enacted $90 billion worth of tax breaks in one year for green energy, which he said dwarfed the oil tax breaks 50 times over.
On the oil company tax break claims, Obama’s figure is much closer to the truth. The President’s 2013 budget has a package of provisions that would eliminate or reduce special tax breaks for the fossil fuel industry and the Treasury estimates this would raise $39 billion over a decade. (See page 80 of this budget document.) A CTJ report explains the arguments for these provisions. Ironically, the oil industry itself puts this number much higher, claiming that the Obama administration’s proposal would eliminate about $8.5 billion in tax breaks it receives annually.
In addition, FactCheck.org points out that Romney’s claims on Obama’s clean energy tax breaks were largely bogus. Just to list some of the problems with Romney’s $90 billion claim, FactCheck.org notes that these breaks were spent over two years not one, that the figure includes loan guarantees not just actual spending, and that many of these “breaks” were spent on infrastructure projects.
It turns out that Mitt Romney’s energy policy adviser, Harold Hamm, is the CEO of an oil company called Continental Resources, and we all know that energy companies get some of the most generous breaks in the U.S. corporate income tax code. When we learned Hamm had submitted testimony to the House Energy and Commerce Committee claiming that his company pays a 38% effective tax rate, we had to fact check it. We reviewed data from the company’s own financial reports and ran the numbers, and it turns out Continental Resources has paid a mere 2.2% federal corporate income tax rate on its $1,872 million in profits over the last five years. Read our one-pager here.
We were not very hopeful that the Democratic National Convention (DNC) in Charlotte would be any more enlightening about tax policy than its Republican counterpart in Tampa. In a previous post we criticized the drafters of the Democratic platform for tripping over themselves to celebrate tax cuts and failing to say much about finding new revenue beyond allowing the Bush tax cuts to partially expire for the richest two percent of Americans.
But the DNC turned out better than we expected. It wasn’t just Obama’s mocking the GOP stance on taxes and smaller government (deservingly) as a cure for everything: “Feel a cold coming on? Take two tax cuts, roll back some regulations, and call us in the morning.” Several DNC speeches were surprisingly specific and brought to light some important issues. The following are some highlights.
Governor Romney believes that in the global economy, it doesn’t much matter where American companies put their money or where they create jobs. As a matter of fact, he has a new tax proposal — the “territorial” tax — that experts say will create 800,000 jobs, all of them overseas.
Biden was citing a study estimating that adoption of a territorial tax system by the U.S. would create 800,000 jobs overseas, and that during a recession those jobs would likely come at the cost of U.S. jobs.
There are many, many reasons to oppose a territorial tax system, which would essentially exempt the offshore profits of U.S. corporations from U.S. taxes. We have explained in a fact sheet and in a more detailed report that a territorial system would increase the already significant incentives for corporations to move operations (and jobs) offshore, or to just disguise their U.S. income as foreign income by using complex transactions involving tax havens.
We have a big debt problem, we got to reduce the debt, so what’s the first thing he [Romney] says he’s going to do? Well, to reduce the debt, we’re going to have another $5 trillion in tax cuts, heavily weighted to upper-income people… Now, when you say, what are you going to do about this $5 trillion you just added on? They say, oh, we’ll make it up by eliminating loopholes in the tax code. So then we ask, well, which loopholes, and how much? You know what they say? See me about that after the election…
This is the defining feature of Mitt Romney’s tax plan — he simply refuses to tell us which loopholes he would reduce or eliminate to make up the cost of his 20 percent reduction of personal income tax rates and the other new breaks he proposes. This makes it impossible for organizations like Citizens for Tax Justice and the Tax Policy Center to say exactly what the impact will be on different income groups — and we’d be naïve if we didn’t think this was intentional.
Clinton went on about the three possible ways Romney would have to fill in the details of his plan.
One, they’ll have to eliminate so many deductions, like the ones for home mortgages and charitable giving, that middle-class families will see their tax bills go up an average of $2,000, while anyone who makes $3 million or more will see their tax bill go down $250,000. Or, two, they’ll have to cut so much spending, that they’ll obliterate the budget for national parks, for ensuring clean air, clean water, safe food, safe air travel. They’ll cut way back on Pell Grants, college loans, early childhood education, child nutrition programs… Or, three… They’ll go and cut taxes way more than they cut spending… and they’ll just explode the debt and weaken the economy.
Our own analysis of Romney’s plan found that people who make over $1 million would get an average tax break of $400,000 if Romney didn’t bother to reduce or eliminate any of the tax loopholes enjoyed by the rich. On the other hand, we found that even if he took away all of the loopholes enjoyed by the rich, the people making over $1 million would still get an average break of $250,000. Millionaires would get huge breaks no matter what because the benefit of Romney’s rate reductions would outweigh all the tax loopholes they enjoy.
For middle- and lower-income families, the loss of these tax loopholes or tax expenditures could exceed the gains from Romney’s promised rate reductions, and this would have to be the case if Romney is to offset the costs of his tax breaks as he promises. Otherwise, the spending cuts or deficit-explosion described by Clinton would occur.
An analysis from the Tax Policy Center, which provided the figures quoted by Clinton, came to the same sort of conclusion.
OK, we know, we know, you don’t normally expect to hear anything enlightening about tax policy from a celebrity best known for her role on Desperate Housewives. But Longoria did articulate a point that hasn’t always been made clearly.
Mitt Romney would raise taxes on middle-class families to cut his own and mine. And that’s not who we are as a nation, and let me tell you why. Because the Eva Longoria who worked at Wendy’s flipping burgers, she needed a tax break. But the Eva Longoria who works on movie sets does not.
That sums up the idea behind progressive taxes. Tax breaks like the Earned Income Tax Credit (and to an extent, the Making Work Pay Credit that was in effect for a couple years) are the types of tax cuts that help people who needed it — people struggling to get by on low-wage work. Sadly most of the tax breaks enacted in recent years are the other type, the tax cuts that go to people like Eva Longoria today.
This is reminiscent of the conversation in 2008 between candidate Obama and Joe Wurzelbacher, aka “Joe the Plumber.” Joe said it was wrong to end the Bush tax cuts for high-income people because he hoped to be one of those people one day. Obama replied that Joe needs a tax cut now, while he’s working to get his business off the ground, and not after he’s making over $250,000 a year.
In its 2012 Platform, the Democratic Party broadly calls for a tax system that asks “the wealthiest and corporations to pay their fair share,” while also taking “decisive steps to restore fiscal responsibility.” The actual policy proposals called for in the platform, however, are wholly inadequate to achieve either tax fairness or fiscal sustainability.
The Bush Tax Cuts
The most important platform plank on the individual side of the tax system is the call to allow the “Bush tax cuts for the wealthiest to expire,” which reflects President Obama’s proposal to allow the Bush tax cuts to expire for income over $250,000. Under the president’s proposal, 98.1% of Americans would continue receiving the entirety of their Bush tax cuts. It’s important to note that while the wealthiest Americans would lose part of their tax cuts under President Obama’s proposal, they would still receive generous tax breaks because any income up to $250,000 (or $200,000 for singles) would continue to be taxed at the low, Bush tax cut rates. As a result, the wealthiest 1%, for example, would get an average tax break of $20,130 in 2013.
It is also important to note that even this partial extension of the Bush tax cuts the president proposes would increase the deficit by an astounding $4.2 trillion over the next decade. To be sure, President Obama’s plan is much more fiscally responsible than a full extension of the Bush tax cuts, which would increase the deficit by $5.4 trillion. But fiscal responsibility will eventually require something bolder than simply extending most of the tax cuts that are responsible for most of the deficit.
Corporate Tax Reform
Turning to corporate taxes, the Democratic platform follows the misguided “Framework for Corporate Tax Reform,” introduced by President Obama earlier this year, which proposes to use the closure of corporate tax loopholes to pay for lower corporate tax rates. It also proposes an expansion of the research and manufacturing tax credits. What this framework gets right is a call to end the egregious loopholes and tax breaks that allow major corporations to pay an average effective tax rate of half the statutory rate, with many corporations paying nothing at all.
The problem is that instead of using the revenue raised by eliminating tax loopholes and breaks to fund desperately needed government investments and reduce the deficit, the Democratic platform, like the president’s framework, squanders the revenue on lower corporate tax rates and/or additional wasteful tax breaks. In other words, this kind of “revenue-neutral” corporate tax reform is not what the US needs; instead, we need revenue-positive reform.
Stuck in the Anti-Tax Mindset
The Democratic Party 2012 platform reveals a party deeply committed to the anti-tax mindset that historically is associated with the Republican Party. Rather than laying out the cold, hard truth about how the US needs to raise a substantial amount of revenue to meet its commitment to future generations, the Democratic platform seems an attempt to one–up Republicans on the virtues of tax cutting by touting the wide variety of cuts Democrats already enacted, and the massive amount they plan to extend. Given the enormous need for revenue to fund public investments and eventually reduce the deficit, a record of tax-cutting should be a source of embarrassment rather than pride or celebration.
New CTJ Report: Congress Should Kill the "Extenders" that Let G.E., Apple, and Google Send Their Profits Offshore
Today, the Senate Finance Committee approved a package of provisions often called the "tax extenders" because they extend several tax cuts, mostly benefiting businesses. A new report from Citizens for Tax Justice identifies two of the "tax extenders" as particular problems, despite having arcane names that are unknown outside of the corporate tax world: the “active financing exception” and the “CFC look-thru rules.”
Read the report: Don't Renew the Offshore Tax Loopholes: Congress Should Kill the “Extenders” that Let G.E., Apple, and Google Send Their Profits Offshore
These two temporary rules in the tax code — which allow U.S. multinational corporations to park their earnings offshore and avoid paying tax on them — expired at the end of 2011. If Congress refuses to extend these expired provisions, many U.S. companies will have much less incentive to send their profits (and possibly jobs) offshore.
► The active financing exception and the CFC look-thru rules make it easy for U.S. multinational companies to move income to offshore tax havens and avoid paying U.S. tax.
► Income shifting by multinational corporations using offshore tax havens, including transactions facilitated by these two rules, cost the U.S. Treasury an estimated $90 billion per year in lost tax revenue.
Read the report for more details.
Top GOP Tax-Writer Proposes Fast-Track for Ryan Plan Tax Changes, Giving Millionaires Average Tax Cut of at Least $187,000 in 2014
On Tuesday, House Republicans released a proposal, H.R. 6169, that would relax some of Congress’s normal procedural rules in order to enact an overhaul of the tax code — so long as the tax overhaul meets the objectives laid out in the House budget plan authored by House Budget Committee Chairman Paul Ryan.
H.R. 6169 was introduced on Tuesday by House Ways and Means Committee Chairman Dave Camp and House Rules Committee Chairman David Dreier and lays out several components that the tax overhaul legislation must have in order to be passed through the easier legislative procedure. All of these components are identical to those laid out in the Ryan Plan
The required components of the tax overhaul, which are also those laid out in the Ryan Plan, include:
- replacing the personal income tax rates with just two rates, 10 percent and 25 percent (or less)
- repeal of the Alternative Minimum Tax (AMT)
- reducing the statutory corporate income tax rate to 25 percent (or less)
- adoption of a “territorial” tax system (exempting offshore profits of corporations from U.S. taxes)
- collecting revenue equal to between 18 and 19 percent of GDP
The “findings” section of the bill states that revenue will “rise to 21.2 percent of GDP under current law,” meaning its proposed revenue target of between 18 and 19 percent of GDP is an explicit cut in revenue.
A Huge Tax Break for Millionaires No Matter How It’s Structured
CTJ issued a report in March concluding that Ryan’s proposed changes to the personal income tax would provide taxpayers with income exceeding $1 million in 2014 an income tax cut of at least $187,000 on average
Like Ryan’s plan, the bill introduced by Camp and Dreier does not say which tax loopholes and tax subsidies should be closed to ensure that the tax system still collects revenue equaling between 18 and 19 percent of GDP even after the plan’s steep rate reductions and the repeal of the AMT are in effect.
We estimated that even if those with incomes exceeding $1 million were forced to give up all the tax expenditures Ryan could possibly want to take away from them — all their itemized deductions, tax credits, the exclusion for employer-provided health insurance and the deduction for health insurance for the self-employed — even then the net result for these taxpayers would be an average income tax cut of $187,000 in 2014. That’s because the income tax rate reductions Ryan proposed are so deep that they would far outweigh the loss of all these tax loopholes and tax subsidies.
Increasing Incentives for Corporate Tax Dodging
The CTJ report on the Ryan plan also explains that reducing the statutory corporate income tax to 25 percent would likely lose revenue when we should be raising revenue from corporate tax reform. (CTJ’s major study last year of most of the profitable Fortune 500 corporations found that their effective tax rate, the percentage of profits they actually pay in taxes, was just 18.5 percent, far less than the statutory rate of 35 percent that Ryan and Camp complain about.)
CTJ’s report on the Ryan Plan also explains that a territorial tax system — exempting offshore profits of corporations from U.S. taxes — can only increase the incentives that U.S. corporations already have to disguise their U.S. profits as “foreign” profits through shady transactions that shift their earnings (on paper) into offshore tax havens.
Photo of Rep. Dave Camp via Michael Jolley Creative Commons Attribution License 2.0
Corning and 3M Call for Tax Exemption for Offshore Profits, but Ford Motor Admits Real Business Abroad Is Not Taxed Less than U.S. Business
At a hearing before the House Ways and Mean Committee today, witnesses from Corning, Inc. and 3M called for a “territorial” tax system, which would exempt offshore corporate profits from U.S. taxes, and which is part of Mitt Romney’s tax plan. Both companies said that their ability to compete internationally is harmed by the current system, in which U.S. corporations pay U.S. taxes on foreign profits when they bring them back to the U.S. (U.S. taxes minus a credit for whatever they already paid in foreign taxes).
As we explain in another post, our 2011 corporate tax study found that both of these companies actually pay higher effective tax rates in the other countries where they do business than they pay in the U.S., raising the question of how our tax system could be making them less able to compete.
Our 2011 study examined most of the Fortune 500 corporations that had been profitable for three years straight and found that two thirds of those corporations with significant foreign profits paid higher taxes to the foreign governments than they paid to the U.S. on their domestic profits.
Despite the U.S. having a relatively high statutory corporate tax rate, the effective U.S. corporate tax rate (the percentage of profits that U.S. corporations actually pay in income taxes) is clearly lower than that of most other countries (not counting tax havens, where companies don’t do any real business).
A refreshing dose of honesty was provided by the witness from Ford Motor Company, who said Ford’s offshore operations are, in fact, in “high-tax” countries and that Ford has no position on whether or not we should adopt a territorial system.
As we explain in a fact sheet and in a more detailed report, adopting a territorial system would mainly increase the incentives to shift operations (and jobs) to a handful of countries that really do have low corporate tax rates, or to simply disguise their U.S. profits as “foreign” profits generated in countries with low (or no) corporate taxes.
As we also explain in our report, the expansion of U.S. corporations’ operations in foreign countries may not be in the interest of U.S. workers.
In some situations those offshore operations may be substitutes for U.S. operations, meaning U.S. jobs are shipped offshore. In other situations those offshore operations may compliment U.S. operations, meaning U.S. jobs are created, particularly in corporate headquarters and research facilities, to support the offshore operations. Data from recent years shows that the former effect is more pronounced than the latter.
But either way, America does not need a tax system that favors offshore operations over U.S. operations — which is exactly what a territorial system would do.
We’re not alone in this view. Last year, several small business associations, labor unions, and good government groups joined a letter opposing a territorial system. And today, the New York Times editorialized that the “corporate tax system needs reform, to raise more revenue, more fairly. The territorial tax system does not meet those criteria.”
Earlier today, the U.S. House of Representatives’ Ways and Means Committee held a hearing on “tax reform and the U.S. manufacturing sector.” With no apparent irony, the Committee invited Susan Ford, a senior official from champion corporate tax-avoider Corning, Inc., to testify on how Congress ought to make the U.S. tax code more friendly for manufacturing.
Ford raised eyebrows with her claim that in 2011, Corning paid a U.S. tax rate of 36 percent and a foreign tax rate of 17 percent.
It’s unclear how Ms. Ford comes up with a 36 percent rate, but clearly one thing she’s doing is counting Corning’s “deferred” U.S. taxes (taxes not yet paid) as well as “current” taxes (U.S. taxes actually paid in 2011). Of course, those “deferred” taxes may eventually be paid. If and when they are paid, they will be included in Corning’s “current” taxes in the year(s) they are paid.
But current taxes are what Corning actually pays each year, and Corning has amassed an impressive record of paying nothing, or less than nothing, in current U.S. taxes. CTJ and ITEP’s November 2011 corporate tax avoidance report found that between 2008 and 2010, Corning didn’t pay a dime in federal corporate income taxes, actually receiving a $4 million refund to add to its $1.9 billion in U.S. profits during this period. And a more recent CTJ report found that in 2011, Corning earned almost $1 billion in U.S. pretax income, and once again didn’t pay a dime in federal income tax. These data paint a dramatically different picture from the “36 percent” claim made by Corning before Congress today.
Ford’s testimony also includes a common but false claim about how U.S. taxes compare to foreign taxes:
“American manufacturers are at a distinct disadvantage to competitors headquartered in other countries. Specifically, foreign manufacturers uniformly face a lower corporate tax rate than U.S. manufacturers…”
In fact, over the 2008-2010 period, Corning paid a higher effective corporate income tax rate to foreign governments than it paid to the US government. (Which wasn’t hard to do, since it paid nothing to the U.S. government.) CTJ’s November 2011 report shows that over the 2008-2010 period, Corning paid -0.2 percent (negative 0.2 percent) of its US profits in US corporate income taxes, but paid 8.6 percent (positive 8.6 percent) of its foreign profits in foreign corporate income taxes.
During the Congressional hearing, 3M executive Henry W. Gjersdal made a similar, and equally misleading, claim, in his testimony before the Committee, arguing that “[i]n an increasingly global marketplace, 3M’s high effective tax rate is a competitive disadvantage.”
But if 3M has a high worldwide effective tax rate, it’s not because the U.S. corporate income tax is high. In fact, like Corning, 3M paid a higher effective corporate income tax rate to foreign governments than it paid to the U.S. government between 2008 and 2010. Specifically, it paid an effective 23.8 percent rate on its US profits in US corporate income taxes and 27.1 percent on its foreign profits in foreign corporate income taxes, according to CTJ’s report.
Let’s remember that Corning also spent $2.8 million on lobbying during the 2008-10 period they spent enjoying a tax-free ride from the federal government. There are companies across the country paying their fair share in taxes and still making enough to grow their business and please their shareholders. Those are the kinds of companies Congress should be hearing from.
In another example of Representation Without Taxation, on Thursday the House Ways and Means Committee reported out a bill that would repeal the medical device excise tax that was enacted as part of the Affordable Care Act and scheduled to go into effect next year. This week it goes to the floor for a vote which, according to the Associated Press, is largely a political maneuver which allows the House GOP to look like they’re fighting for jobs while conveniently unraveling funding for the Democrats’ health care reform; GOP leader John Boehner concedes the latter himself.
The medical device industry successfully lobbied to cut the rate down on the proposed excise tax, and now they are lobbying to repeal the tax entirely, threatening job losses, reduced innovation and higher costs – the usual corporate response to the suggestion of a tax.
And as usual, most of their claims are unfounded, indeed “not credible,” as a Bloomberg analysis concluded. Bloomberg and others cite one fundamental flaw in the industry’s own analysis: it ignores the increased profits from boosted demand for their product that will be created by the health care reform law.
Another (familiar) ploy the industry is using is hiding behind small businesses, communities and entrepreneurs, but the truth is that about 85 percent of the tax will be paid by very large firms like Johnson & Johnson, GE Healthcare, and Medtronic. Of course, it’s no coincidence that Medtronic, with its $16 billion in revenues last year, is located in the congressional district of the House bill’s sponsor, Rep. Erik Paulsen (R-MN).
While many healthcare companies pay substantial federal income tax, there are companies working to repeal the excise tax that happen to be long-time tax dodgers. For example, General Electric, the parent company of GE Healthcare, has paid an average 2 percent federal income tax rate over the last ten years. Our recent Corporate Taxpayers and Corporate Tax Dodgers study showed medical giant Baxter International had a 2008-2010 average federal income tax rate of negative 7.1 percent.
Curiously, Abbott Laboratories, the seventh-largest medical device manufacturer, has 32 offshore tax haven subsidiaries. That might explain why the company reports that it makes a lot of money in foreign countries, but generates losses in the U.S. – even though half of its revenues are here. Boston Scientific’s SEC filings suggest a similar strategy.
The medical device industry, which has been floundering for reasons of its own making, is squealing about a modest tax it’s likely to pass along to customers anyway. Directing more of its budget to innovation rather than lobbying might be a better solution for them, and for America’s health care consumers.
It’s no longer news to most Americans that big, profitable corporations from Apple to General Electric are finding creative ways to zero out their income taxes. Two widely cited recent reports on federal and state taxes from CTJ and ITEP identified dozens of companies that have achieved this dubious goal.
But the big news out of Illinois this week is that at least in the Land of Lincoln, lawmakers are taking positive steps towards doing something about rampant corporate tax avoidance. A bill introduced Wednesday by Senate President John Cullerton would require publicly traded companies to make available some basic information about the amount of state income taxes they pay, and specify which tax breaks reduced their taxes. The bill would also require companies to disclose their profits generated in Illinois, making it easy for lawmakers and the public to know whether these companies are really paying tax at the legal rate.
While the bill was approved by a Senate committee and sent to the Senate floor on Wednesday, its prospects for passage this year remain murky. And identifying the beneficiaries of unwarranted tax breaks is obviously only a first step towards repealing those tax breaks. But this legislation, along with a similar bill championed by the California Tax Reform Association in the Golden State, likely represents the beginning of a shift toward more transparency in corporate taxation—and that can only lead to improvements in the fairness of our overall corporate tax system.
Right now virtually every state (there are a few signs of hope) fails to disclose even the most basic information about corporate tax breaks. The Center on Budget and Policy Priorities’ Michael Mazerov has the dirt on how your state can move in the right direction, as does the encyclopedic Good Jobs First.
Photo from Senator Cullerton's legislative website.
The CEOs of 18 large corporations have published an open letter to the Treasury Secretary seeking to extend tax breaks on investment income that overwhelmingly benefit the very wealthy. Barring Congressional intervention, these special breaks for capital gains and dividends will expire at the end of this year, along with all of the 2001 and 2003 Bush tax cuts.
In an era when fiscal austerity is a reality in America, what makes this request even more obscene is that of these 18 CEOs, four of them head corporations which have paid less than zero in federal income taxes in recent years, in spite of consistent profits. Another two barely paid any, and another five have paid well below the statutory 35 percent corporate tax rate. In fact, among these CEOs is Lowell McAdam of Verizon, one of the most notorious tax dodging companies in the U.S.
The 11 corporations among the 18 that have paid less than the legal federal income tax rate are:
Gale E. Klappa, Wisconsin Energy Corp. — Average Negative 13.2% tax rate 2008-11
David M. McClanahan, CenterPoint Energy — Average Negative 11.3 tax rate 2008-11
Lowell McAdam, Verizon Communications Inc. — Average Negative 3.8% tax rate 2008-11
James E. Rogers, Duke Energy Corp. — Average Negative 3.5% tax rate 2008-11
Benjamin G.S. Fowke III, Xcel Energy — Average 1.0% tax rate 2008-10
Gerard M. Anderson, DTE Energy Co. — Average 0.2% tax rate 2008-11
Gregory L. Ebel, Spectra Energy Corp. — Average 13.6% tax rate 2008-10
Thomas A. Fanning, Southern Co. — Average 17.4% tax rate 2008-10
Glen F. Post III, CenturyLink Inc. —Average 23.5% tax rate 2008-10
Thomas Farrell II, Dominion Resources Inc. — Average 24% tax rate 2008-10
D. Scott Davis, United Parcel Service — Average 24.1% tax rate 2008-10
To bolster their case, these CEO’s are parroting the common claim that ending special preferences for dividends and capital gains (both of which are predominantly held by the wealthy) will depress economic activity. History shows this is not the case.
The fact is, about 85 percent of the expiring tax breaks for capital gains and dividends go to the richest five percent of Americans; most people won’t even notice if they expire.
The fact is, two thirds of all dividends are not subject to any personal income tax because they go to tax exempt entities rather than individuals.
Why is it that when corporate CEOs speak out on tax issues, they are treated like objective financial experts, as if they had no agenda other than job growth? You only have to think for a moment to realize that CEOs, for starters, typically own substantial amounts of stock in the companies they head, so in asking for reduced taxes on investment income, these 18 CEOs are pushing for substantial personal tax cuts for themselves – on top of the huge tax breaks their companies already receive. Futher, the corporate boards who hire and fire these CEOs are populated by the super rich who’d benefit from things like capital gains tax breaks, so they are also serving their bosses.
These 18 captains of industry are part of an ongoing and well financed effort to limit taxes on business and on the rich. Why? Because it serves their interest. Our media and lawmakers need to bear that in mind.
Iowa Governor Fails Again to Win Property Tax Cuts for Business; Tax Credit for Working Poor Is Casualty
Governor Terry Branstad has made “reforming” (cutting) the property taxes paid by Iowa businesses a top priority since taking office. The good news is that his latest proposal to accomplish that goal seems to have fallen short; unfortunately, this one was coupled with an increase in the state’s earned income tax credit (EITC), so it also fell by the wayside.
Last year we explained that Branstad’s first proposal would have allowed businesses to shelter a full 40 percent of their property’s value from the property tax (by assessing commercial property at only 60 percent of its actual value for tax purposes). The plan was estimated to cost as much as $500 million annually, but it ultimately failed.
On Tuesday, a Senate bill which offered a targeted property tax credit aimed at small businesses (and in some cases offering more relief to businesses than the Governor’s original proposal) was also narrowly voted down, 24-23. The Senate refused to even vote on a more costly tax cut proposal that passed the House, which would have assessed commercial property taxes at 90 percent of their actual value for tax purposes, taking effect over five years. Reports point to effective lobbying by cities and towns whose leaders came out against drastic cuts to business property taxes. One county, for example, stood to lose $7.3 million in just one year.
Governor Branstad is not giving up, though, and called on Iowans to vote out any legislator who voted against these business tax cuts. For now, it appears that counties and cities can breathe a sigh of relief. The same is not true, however, for the working poor who rely on the EITC to fill gaps in their household budgets; any increase in their tax credit won’t come around again until next year, either.
Much of the spending that Americans see in their daily lives is the work of state and local governments, which build the roads, bridges and schools, and hire and train the teachers and police officers. In many ways, the most overlooked aspect of the debate over federal tax reform is the ways in which Congress might help — or seriously hinder — state and local governments from raising the revenue needed to pay for these public investments.
In response to a hearing held on this topic by the Senate Finance Committee, ITEP’s executive director Matthew Gardner submitted written testimony exploring this point. The testimony explains, for example, that the federal income tax deduction for state and local taxes has many justifications that do not apply to other tax expenditures. It also explains that President Obama’s Build America Bonds program would improve upon an existing federal subsidy (for state and local governments that borrow to finance capital investments) so that it will no longer provide a windfall to high-income individuals and corporations.
The testimony also addresses proposals to regulate state and local taxing power. Some of these proposals would facilitate efficient and fair tax collection (like the Marketplace Fairness Act, which is geared towards solving the internet sales tax problem). Others would simply restrict taxes and make taxes more complicated at the behest of corporate lobbyists (like the so-called “Business Activity Tax Simplification Act”).
While these proposals and details might sound awfully arcane, they ultimately will influence issues that are very central in our daily lives — like the class size in your neighborhood school or the length of your commute on local roads and highways.
In a span of less than two weeks, commissions in two very different states – Massachusetts and Oklahoma – have issued remarkably similar recommendations on how to deal with the slews of special tax breaks that evade scrutiny and accountability year after year, budget after budget. As CTJ has pointed out, state budget processes are essentially rigged in favor of tax breaks (loopholes, subsidies) and as a result it’s become far too easy for lawmakers to enact (and extend) tax giveaways for virtually any purpose imaginable.
In Massachusetts, the Tax Expenditure Commission just released eight recommendations designed to deal with this very problem. According to the Commission, lawmakers should clearly specify the purpose of all tax breaks (or “tax expenditures”) so that analysts can begin evaluating their effectiveness on an ongoing basis and providing realistic policy recommendations to lawmakers. The Commission further urged that those evaluations be carefully timed to coincide with the state’s normal budget process, and even suggested that some tax expenditures be scheduled to sunset (or expire) so that lawmakers are forced to debate those breaks after the evaluations are complete and the facts are out.
In Oklahoma, the Incentive Review Committee recently released its set of recommendations dealing with one category of tax expenditures in particular: those ostensibly aimed at spurring economic development. As in Massachusetts, the Oklahoma Committee said that lawmakers need to more clearly articulate the purpose of tax breaks, and that evaluations of those breaks should be done in a rigorous and ongoing fashion. One of the Oklahoma Committee’s more important recommendations might sound obvious at first, but it’s actually often overlooked: good evaluations take time and resources, and the state should adequately fund whichever department is charged with completing the evaluations.
Jon Stewart hilariously skewered the phrase “spending reductions in the tax code” as another way of saying taxes need to be raised. These tax commissions (as well those in Minnesota, Missouri, and Virginia), tasked with realistically assessing state budgets, are forcing Americans to recognize that spending through the tax code exists and that it requires the same level of scrutiny as spending through government programs, as previously outlined by CTJ.
The history of states subsidizing professional sports stadiums with taxpayer dollars is long and, increasingly, controversial. Maryland provided nearly one hundred percent of the financing for the Orioles’ and Ravens’ shiny new facilities in the 1990s. In 2006, the District of Columbia subsidized the Washington Nationals’ new stadium at a cost to taxpayers of about $700 million. And even though most stadiums are, in the long run, economic washes at best, losers at worst, there are still politicians willing to throw money at them.
Minnesota legislators, for example, are currently grappling with how to fund a new stadium for the Vikings in response to threats that the franchise may leave the state. But before the legislature gives away nearly a billion dollars, State Senator John Marty raises some excellent points about the math, and morals, behind the proposed taxpayer subsidies for the stadium:
“The legislation would provide public money in an amount equivalent to a $77.30 per ticket subsidy for each of the 65,000 seats at every Vikings home game. That's $77 in taxpayer funds for each ticket, at every game, including preseason ones, for the next 30 years.… Public funds can create construction jobs, but those projects should serve a public purpose, constructing public facilities, not subsidizing private business investors. The need to employ construction workers is not an excuse to subsidize wealthy business owners, especially when there is such great need for public infrastructure work.”
In Louisiana, the House of Representatives has gone ahead and approved a ten-year, $36 million tax subsidy to keep the state’s NBA team, the Hornets, in New Orleans until 2024. Some are asking if the state can really afford it given a $211 million budget gap. Representative Sam Jones noted that while the state has cut health and education spending, it still found a way to come up with millions of dollars to help out the ”wealthiest man in the state.” That would be Tom Benson, owner of not only the Hornets but the legendary New Orleans Saints football team, whose net worth is $1.1 billion dollars.
In California, however, a different scenario is unfolding. Sacramento Mayor Kevin Johnson just abandoned negotiations with owners of the city’s NBA team, the Kings. The Kings organization was unwilling to put up any collateral, share any pre-development costs, or commit to a more than a 15 year contract; this would have left the city shouldering all the costs – and all the risks – for developing the $391 million downtown facility. Mayor Johnson said he’d offered everything he could to the team and it still wasn’t enough, so he pulled the plug.
Given the high cost and low return (including in terms of jobs) that sports facilities generate, more leaders should follow Minnesota’s Marty and Sacramento’s Johnson and stand up for the taxpayers who pay their salaries.
(Thanks to Field of Schemes and Good Jobs First for keeping tabs on these subsidies!)
Representing a remarkable defeat for corporate tax dodgers, a spokesman for the so-called "Win America Campaign" confirmed this week that it has “temporarily suspended” its lobbying for a tax repatriation amnesty. The coalition of mostly high-tech companies pushed for months for a tax amnesty for repatriated offshore corporate profits. The campaign once seemed unstoppable because so many huge corporations, and veteran lobbyists with ties to lawmakers, were behind it.
What supporters call a tax "repatriation holiday," or more accurately, a tax amnesty, allows US corporations a window during which they can bring back (repatriate) foreign profits to the US at a hugely discounted tax rate. The holiday’s proponents argue this would encourage multi-national corporations to bring offshore profits back to the US.
CTJ has often pointed out that the only real solution is to end the tax break that encourages U.S. corporations to shift their profits offshore in the first place — the rule allowing corporations to defer (delay indefinitely) U.S. taxes on foreign profits. Deferral encourages corporations to shift their profits to offshore tax havens, and a repatriation amnesty would only encourage more of the same abuse.
The Win America Campaign and its long list of deep pocketed corporate backers (including Apple and Cisco) spared no expense in pushing the repatriation amnesty, spending some $760,000 over the last year. This sum allowed the coalition to hire a breathtaking 160 lobbyists (including at least 60 former staffers for current members of Congress) to promote their favored policy in Washington.
So what prevented Win America from winning its tax amnesty? It was the steady march of objective economic studies put out by groups from across the political spectrum demonstrating how the holiday would send more jobs and profits offshore and result in huge revenue losses.
One of the toughest blows the repatriation amnesty took came from the well-respected Congressional Research Service’s (CRS) report showing what happened last time: the benefits from the repatriation holiday in 2004 went primarily to dividend payments for corporate shareholders rather than to job creation as promised. In fact, the CRS found that many of the biggest corporate beneficiaries of the 2004 holiday had since actually reduced their US workforce.
On top of this, the bipartisan and official scorekeeper in Congress, the Joint Committee on Taxation (JCT), found that a new repatriation holiday would cost $80 billion, which is a lot of money for a policy that would not create any jobs. Advocates for the tax holiday responded with studies of their own claiming the measure would actually raise revenue, but Citizens for Tax Justice (CTJ) immediately debunked the bogus assumptions underlying these reports.
On top of the solid research there was the incredible and rare consensus among policy think tanks across the political spectrum to oppose the measure. The groups opposing a repatriation holiday included CTJ, Tax Policy Center, Tax Foundation, the Center on Budget and Policy Priorities and Heritage Foundation, to name a few.
The suspension of lobbying for the repatriation amnesty is a victory for ordinary taxpayers. And while the Win America Campaign isn’t dead – one lobbyist promised that "if there was an opportunity to move it, the band would get back together and it would rev up again" – its setback validates our work here at CTJ on corporate tax avoidance in all its forms.
Virginia Governor Bob McDonnell just signed into law the expansion of a tax break meant to support “manufacturing” that has, in fact, been used to subsidize everything from making movies to designing homes to roasting coffee. The break piggybacks on the federal deduction for “Qualified Production Activities Income” (QPAI), which was first proposed in the early 2000’s as a way to benefit US-based manufacturers. As the proposal made its way through Congress, however, it morphed into a loosely defined tax break that Starbucks, for example, has been able to use to get $40 million knocked off its tax bill over the last few years. Walt Disney, Halliburton, Altria and the Washington Post Company are among scores of companies - not known for manufacturing - that have successfully exploited this loophole.
In most cases, state corporate tax law is based on the federal corporate tax, which means that when Congress creates an expensive giveaway like the QPAI deduction, the states go ahead and offer the same break for reasons of simplicity. But 22 states have specifically decided that this break isn’t worth the cost, and have “decoupled” their laws from that part of the federal code. Unfortunately, Virginia is moving in exactly the opposite direction.
The Virginia Department of Taxation estimates that this recent expansion of the state’s QPAI deduction will drain somewhere in the neighborhood of $10 million from the state’s coffers each year. Worse, Virginians can’t expect much of a return on that $10 million “investment.” As the Institute on Taxation and Economic Policy (ITEP) explains:
“The QPAI deduction has little value as an economic development strategy for individual states, because a corporation can use the QPAI deduction to reduce its taxable income for “domestic production” activities anywhere in the United States. That is, a multi-state company that engages in manufacturing activities in Michigan will be able to use those activities to claim the QPAI deduction—and thus cut its taxes—in any state that offers the deduction, even if the company does not have manufacturing facilities in those states.
Eliminating state QPAI deductions was recently proposed in a joint CTJ-ITEP report as a way to improve the adequacy and fairness of state corporate taxes. That report showed that many profitable companies – including some headquartered in Virginia – are paying at a rate equal to less than half the average statutory state corporate tax rate. Loopholes like QPAI are the reason.
Photo of Gov. Bob McDonnell via Gage Skidmore Creative Commons Attribution License 2.0
States are spending untold billions on special tax breaks that are supposed to steer business to behave in ways that lead to economic growth. We’re generally skeptical of these types of so-called incentives, and have long argued that they receive far too little scrutiny. A new report from the Pew Center on the States thoroughly documents just how little most states are doing to figure out if ordinary taxpayers are getting their money’s worth from these deals.
Pew’s Evidence Counts reveals that 25 states and the District of Columbia have done nothing even remotely rigorous in the last five years to determine if even a single one of their business tax incentives is working. Moreover, while Pew identifies 13 states “leading the way” in evaluating their tax breaks, they also note that “no state regularly and rigorously tests whether [tax incentives] are working and ensures lawmakers consider this information when deciding whether to use them, how much to spend, and who should get them.”
After looking at evaluation practices in all 50 states, Pew identified some of the same smart states that CTJ and the Institute on Taxation and Economic Policy (ITEP) have been urging others to emulate. Washington State, for example, is highlighted for undertaking comprehensive and transparent evaluations of all its tax breaks, while Oregon is credited for using sunset provisions to force lawmakers to regularly reconsider tax incentives that might otherwise continue for years without a second thought.
The Pew report urges lawmakers and analysts to ask the right questions when evaluating their incentives. Did the incentive simply reward behavior that would have occurred anyway? Were in-state businesses put at a competitive disadvantage by not receiving the tax break? Did a significant portion of the incentive’s benefit flow outside the state? Could the money have been put to a more productive use elsewhere in the budget?
As Pew explains, “states have to ask the right questions to get the right answers.” But so far, most states don’t bother to ask.
For more on Pew’s findings, and to see how your state stacks up, be sure to read Evidence Counts: Evaluating State Tax Incentives for Jobs and Growth.
Two reports from CTJ demonstrate that the U.S. corporate tax is not the huge burden that corporate lobbyists say it is. The first report explains why claims that the U.S. has the highest corporate tax in the world are false. The second report follows up on the thirty Fortune 500 corporations that CTJ identified last year as paying no corporate income taxes and concludes that most of them have not changed their tax dodging ways since then.
The U.S. Has a Low Corporate Tax: Don’t Believe the Hype about Japan’s Corporate Tax Rate Reduction
America has one of the lowest corporate income taxes of any developed country, but you wouldn’t know it given the hysteria of corporate lobbying outfits like the Business Roundtable. They say that because Japan lowered its corporate tax rate by a few percentage points on April 1, the U.S. now has the most burdensome corporate tax in the world. This CTJ reports explains that large, profitable U.S. corporations only pay about half of the 35 percent corporate tax rate on average, and most U.S. multinational corporations actually pay higher taxes in other countries where they do business.
Big No-Tax Corps Just Keep on Dodging
Last November, Citizens for Tax Justice and the Institute on Taxation and Economic Policy issued a major study of the federal income taxes paid, or not paid, by 280 big, profitable Fortune 500 corporations. That report found, among other things, that 30 of the companies paid no net federal income tax from 2008 through 2010. New information for 2011 shows that almost all these 30 companies have maintained their tax dodging ways.
26 of the 30 companies continued to enjoy negative federal income tax rates. Of the remaining four companies, three paid four-year effective tax rates of less than 4 percent. Had these 30 companies paid the full 35 percent corporate tax rate over the 2008-11 period, they would have paid $78.3 billion more in federal income taxes.
Pennsylvania lawmakers got one step closer this week to closing major corporate tax loopholes. Or did they? The House Finance Committee approved legislation that would, in theory, close the infamous Delaware loophole which allows Pennsylvania companies to shift profits earned in the state to holding companies in other states (most frequently Delaware), thus avoiding paying their fair share of corporate income taxes. However, according to the Pennsylvania Budget and Policy Center (PBPC), the bill as written not only fails to meet its intended goal, but it would in fact create new loopholes and drain the state of much needed revenue. In PBPC’s words, “the bill is a sign that concern is growing about Pennsylvania’s corporate tax avoidance problem. It is a positive start – but in its current form, it is not a solution.”
House Democrats, led by Representative Phyllis Mundy, attempted but failed to amend the bill. She advocated mandatory combined reporting, which makes it harder for companies to move profits around among subsidiaries, as a more effective and comprehensive approach to loophole closing, a proposal Mundy has been championing for the past year.
Pennsylvania is in dire need of a corporate tax overhaul. A recent study by the Institute on Taxation and Economic Policy and Citizens for Tax Justice, Corporate Tax Dodging in the Fifty States, looked at the state corporate income taxes paid (or not paid) by 265 major corporations between 2008 and 2010. The 14 Pennsylvania based corporations in the study, including H.J. Heinz, Comcast and Hershey, paid very little or even negative state income taxes during the time period. And, data from the state’s Department of Revenue shows that more than 70 percent of corporations operating in Pennsylvania paid no corporate income taxes in 2007, likely in large part to their ability to hide profits out of state.
In an attempt to fill in data gaps and get a better picture of what corporations are and are not paying in state income taxes, the Keystone Research Center recently sent Pennsylvania’s 1,000 largest for-profit employers a corporate income tax disclosure survey. The hope is that the companies will respond (it is voluntary) and lawmakers can use this information in their deliberations about the best means to prevent corporate tax avoidance.
Large majorities of Americans, including small business owners, want profitable corporations to pay their fair share in taxes, but none of the major proposals in Washington would make that happen. They will close some loopholes while creating others and, meantime, leave the amount of revenues U.S. companies contribute just about where it is now – at an historic low.
Why the disconnect between public opinion and political action? Could it be because 98 percent of the sitting members of Congress have accepted campaign donations from the country’s most aggressive, successful tax avoiding corporations?
Citizens for Tax Justice and U.S. PIRG’s new report Loopholes for Sale pursues the intersection of corporate campaign contributions to members of Congress and the absence of Congressional action to close corporate tax loopholes and raise additional revenue from corporate taxes.
Loopholes for Sale details how thirty major, profitable corporations (a.k.a. the Dirty Thirty) with a collective federal income tax bill of negative $10.6 billion have made Congressional campaign contributions totaling $41 million over four election cycles. This includes PAC contributions to 524 current members of Congress.
These 30 tax dodging companies specifically targeted the leadership of both political parties, and members of the tax writing committees in the House and Senate. Top recipients of their largesse since the 2006 campaign have been:
1- House Minority Whip Steny Hoyer (D-MD) - $379,850.00
2- Speaker of the House John Boehner (R-OH) - $336,5000.00
3- House Majority Leader Eric Cantor (R-VA) – $320,900.00
4- Senator Roy Blunt (R-MO)Former House Minority Whip 2003-08) – $220,500.00
5- Senate Minority Leader Mitch McConnell (R-KY) - $177,001.00
These companies – including GE, Boeing, Honeywell and FedEx—also gave disproportionately to members of the tax writing committees, including $3.1 million to current members of the House Ways and Means Committee and $1.9 million to members of the Senate Finance Committee.
The “pervasiveness of that money across party lines speaks volumes about why major proposals to close corporate loopholes have not even come up for a vote,” says US PIRG’s Dan Smith.
So if the public is so clearly supportive of closing corporate tax loopholes and making corporations pay more than they currently are, why aren’t our elected officials moving forward on corporate tax reform? This report, along with our earlier Representation with Taxation on corporate lobbying expenditures, exposes how part of the answer may be found by taking a hard look at the way some of America’s largest companies translate wealth into influence.
The latest monthly statement by the Treasury Department contains a startling revelation: the amount that Treasury expects to collect in corporate taxes in 2012 has been slashed by more than 28 percent, from $333 down to $237 billion.
With such a dramatic revision, one might expect that lagging corporate profits or a sudden economic disruption is to blame. In reality however, corporate tax revenue continues to limp in spite of the fact that corporate profits have rebounded to record highs.
If corporate profits are not behind this $96 billion drop in expected corporate tax revenue, then what is?
The Wall Street Journal’s David Reilly suspects that there are two critical drivers: the offshoring of more profits through overseas entities by multi-national corporations; and the continuation of extravagant corporate tax breaks for accelerated depreciation of assets like equipment. Last month, the Congressional Budget Office (CBO) came to the same basic conclusion, explaining that corporate tax breaks and loopholes played an important role in driving the corporate tax rate to a 40 year low in 2011.
In order to prevent the continued decline of the corporate tax, Congress and the President should enact revenue-positive corporate tax reform, rather than their current revenue-neutral approach. Right now, political leaders of all stripes are proposing merely to eliminate some tax breaks but continue or even expand others and possibly reduce the statutory rate. With the federal deficit growing every day, asking profitable U.S. companies to pay something closer to the statutory tax rate is a reasonable (not to mention popular) approach.
Chart from is from the Wall Street article "U.S. Tax Haul Trails Profit Surge"
General Electric Cites its “Deferred” (Not Yet Paid) Taxes and Taxes Paid to Foreign Governments, Offers No Evidence It Paid More in U.S. Corporate Income Taxes
In response to CTJ's recent finding that GE had an effective federal corporate income tax rate of just 2.3 percent over ten years, GE’s press office issued a short statement designed to divert attention from its tax-avoiding ways. GE has nothing to say to contradict the figures we cite from its own annual reports.
A short report from CTJ responds to each of GE's claims and provides all of the numbers used to calculate GE's ten-year corporate income tax rate of 2.3 percent.
After CTJ released its report last week criticizing the President's corporate tax reform "framework" for not raising revenue and leaving key questions unanswered, CTJ staff spent a couple days speaking out about the framework.
Bob McIntyre, CTJ's director, explained on Reuters TV why corporate tax reform is needed, how GE, Google and other companies get unwarranted breaks and why the President needs a better plan.
Rebecca Wilkins, CTJ's Senior Counsel for federal tax policy, spoke on C-SPAN about the President's framework and the need for real reform. Wilkins said that "the administration is leaving a lot of money on the table, and we think there's a lot of room to raise revenue from corporate tax reform."
Steve Wamhoff, CTJ's Legislative Director, wrote in U.S. News and World Report's "Debate Club" that the President's framework “does not include what should be the main goal of reform—raising revenue to fund public investments and address the budget deficit.”
While poll after poll has long confirmed the overwhelming public support for progressive taxation in principle and increased tax revenues for deficit reduction, some polls that pop up every so often seem to contradict these results. Below we deconstruct two common errors seen in recent polls.
Marginal vs. Effective Tax Rates
Some survey questions fail to distinguish between marginal and effective tax rates. A marginal tax rate is the percentage of the last dollar of income received (by a given taxpayer) that will be paid in taxes. An effective rate is the total amount of taxes a person pays as a percentage of his or her entire income.
For example, when we say a person is in the “25 percent income tax bracket” that means that (generally) 25 percent of the last dollar of income received by that person will go towards federal income taxes. This person has a marginal income tax rate of 25 percent. But his effective income rate might only be around 15 percent or less. That’s because some of his income is taxed at lower rates and because some of his income is not included in taxable income at all (because of deductions).
The recent poll from The Hill is a case study in how conflating the marginal and effective tax rate can create bogus poll results. The Hill survey asks what the respondent believes is the most appropriate “top tax rate” for families earning $250,000 or more and corporations, and then lists out percentage options.
The problem is that the survey does not clearly distinguish whether the “top rate” being discussed is the effective or marginal top rate. In their coverage of the poll, The Hill reports that about three-quarters of likely voters support lower taxes on corporations and wealthy individuals, which just doesn’t sync with what the majority of current polling tells us. The Center for American Progress’s Seth Hanlon explains why. He points out that if respondents believed that the ‘top rate’ mentioned in the survey was meant to indicate the effective rate, then most respondents actually came out in favor of higher taxes. For example 67 percent of the respondents favored a 25 percent or higher rate on corporations, which, according to one important measure, is more than twice the current effective rate.
Cutting Government vs. Cutting Specific Programs
Some misleading polls in recent years have concluded that the public prefers spending cuts over tax increases as the best method to decrease the deficit. The most recent example is an AP-GFK poll, which found that 56 percent of people prefer cutting government services, compared to just 31 percent who support tax increases.
As Citizens for Justice explained last year while examining a New York Times-CBS News poll, these questions are misleading because they ask about cutting “government services” more generally, rather than allowing the respondent to consider specific program spending cuts. When faced with a choice between vague service cuts and taxes, it’s not surprising that the public favors cutting spending because it’s not clear how they might lose out. Americans are famously wary of government spending, but ask them if they’re willing to cut, say, Medicare, the answer is a resounding ‘No!’.
When faced with specific choices, tax increases actually become one of the most popular ways to reduce the deficit. For example, a May 2011 Pew Research Poll which gave respondents a list of specific spending cuts and tax increases, found that two-thirds of the public favored raising income taxes on those making over $250,000 and raising the payroll tax cap, whereas nearly 60 percent opposed raising the Social Security retirement age and 73 percent opposed reducing funding to states for roads and education.
Next time you see news about a poll and it doesn’t sound right, it’s worth taking a look at the actual questions. The way they are worded makes the difference between good and bad polling.
Citizens for Tax Justice Responds to President Obama's Corporate Tax Proposal: President's 'Framework' Fails to Raise Revenue
Today the Treasury Department released “The President’s Framework for Business Tax Reform” outlining the Obama Administration’s ideas for corporate tax reform. Citizens for Tax Justice has been generating research on corporate taxes for over 30 years, most recently with its November, 2011 report, Corporate Taxpayers and Corporate Tax Dodgers, 2008-2010. In response to the White House and Treasury Department release today, Citizens for Tax Justice Director, Bob McIntyre, issued the following statement:
“The corporate tax reform ‘framework’ released by the Obama administration today fails to raise revenue that could be used to make public investments in America’s economy and America’s future.
“The President has proposed to reduce the statutory corporate tax rate from 35 percent to 28 percent, make certain temporary tax breaks, including the research and experimentation credit, permanent, and add some new business tax breaks. In total, these tax cuts would cost us about $1.2 trillion over the next 10 years.
“To offset this cost, the President proposed in his fiscal 2013 budget to raise about $0.3 trillion from closing or reducing business tax loopholes. That leaves almost $1 trillion in further business tax reforms that would be necessary for the tax plan to break even, as the President say he wants to do. His 'framework,' however, leaves the sources of this $0.9 trillion in offsetting reforms mostly unspecified.
“We can and should collect more tax revenue from corporations. Right now, America's biggest and most profitable corporations are paying, on average, a ridiculously low amount in federal income taxes, and many of them are paying nothing at all.
“Last year, 250 organizations, including organizations from every state in the U.S., joined us in urging Congress to enact a corporate tax reform that raises revenue. These organizations believe that it’s outrageous that Congress is debating cuts in public services like Medicare and Medicaid to address an alleged budget crisis and yet no attempt will be made to raise more revenue from profitable corporations.
"It's very disappointing that the President has proposed what is at best 'revenue-neutral' corporate tax reform. In 1986, President Reagan and Congress passed a tax reform act that increased corporate tax payments by more than a third. In today's terms, that would be a corporate tax increase of more than a trillion dollars over the next 10 years. The corporate tax reform that we need today should do no less."
New Fact Sheet: Obama Promoting Tax Cuts at Boeing, a Company that Paid Nothing in Net Federal Taxes Over Past Decade
On February 17, the President plans to visit a Boeing plant in Washington state to tout his proposed new tax breaks for American manufacturers. This is an odd setting to discuss new tax cuts, because over the past 10 years (2002-11), Boeing has paid nothing in net federal income taxes, despite $32 billion in pretax U.S. profits. A new fact sheet from CTJ explains.
Read the fact sheet.
Photo of Boeing Plant via Jeff McNiell Creative Commons Attribution License 2.0
A new Washington Post-ABC News poll shows that only nine percent of Americans believe the tax system works for the middle class, with 68 percent saying it actually favors the wealthy. The survey shows a public overwhelmingly convinced that our tax system is unfair and that taxes should be raised on wealthy Americans.
The belief that the tax system is unfair has surely been fueled by the recent revelation of presidential candidate Mitt Romney’s super low 14% tax rate on his $21 million income. In fact, the same poll found that 66 percent of the public generally – and even a near majority of Republicans! – believe that Romney is not paying his fair share in taxes.
Not surprisingly, then, Americans overwhelmingly support increasing taxes on the wealthy, according to this poll, with 72 percent saying that taxes should be increased on millionaires. Of course, time and time again polls have shown the public’s robust support for progressive taxation.
A Growing Gap Between Small and Big Business
In related news, a nationwide survey released by the American Sustainable Business Council, Main Street Alliance and Small Business Majority shows that small business owners are fed up with how our corporate tax system favors big corporations at the expense of small businesses.
Indeed, 9 out of 10 small business owners said that big corporations use loopholes to avoid taxes that small businesses have to pay, with three quarters of the small business owners noting that their business is harmed by such loopholes. The same survey found that 67 percent of small business owners believe big corporations pay less than their fair share.
Even when small and large busineses agree that they want more tax handouts from Congress, they're talking about very different things, according to a new Bloomberg (subscription only) poll. Asked what tax changes would help them most, advisors to smaller businesses prioritize things like reducing payroll taxes on employers and making permanent the deduction for self-employment. Big business priorities included 100 percent expensing (a.k.a. bonus depreciation) of equipment and complete overhaul of the corporate tax code – including a reduced tax rate.
These studies are more reason corporate lobbyists and their patrons in Congress should stop pretending they’re all about small business. They’re not.
(See CTJ director's full explanation of Facebook's use of the stock option deduction here.)
Facebook, Inc.’s upcoming initial public stock offering (IPO) paperwork reveals that it plans to wipe out all of the company’s federal and state income tax obligations for 2012 and actually generate a half billion dollar tax refund. As part of the plan, Facebook co-founder and controlling stockholder, Mark Zuckerberg can expect a $2.8 billion after tax cash windfall.
According to Facebook’s SEC filing, the company has issued stock options to favored employees, including Zuckerberg, that will allow them to purchase 187 million Facebook shares for little or nothing in 2012. Options for 120 million shares (worth $4.8 billion) are owned by Zuckerberg. The company indicates that it expects all of the 187 million in stock options to be exercised in 2012.
The tax law says that if a corporation issues options for employees to buy the company’s stock in the future for its price when the option issued, then if the stock has gone up in value when employees exercise the options, the company gets to deduct the difference between what the employee bought it for and its market price.
When, as Facebook expects, the 187 million stock options are cashed in this year, Facebook will get $7.5 billion in tax deductions (which will reduce the company’s federal and state taxes by $3 billion). According to Facebook, these tax deductions should exceed the company’s U.S. taxable 2012 income and result in a net operating loss (NOL) that can then be carried back to the preceding two years to offset its past taxes, resulting in a refund of up to $500 million.
Senator Carl Levin, who has proposed to limit the stock option loophole, told the New York Times, “Facebook may not pay any corporate income taxes on its profits for a generation. When profitable corporations can use the stock option tax deduction to pay zero corporate income taxes for years on end, average taxpayers are forced to pick up the tax burden. It isn’t right, and we can’t afford it.”
To be sure, Zuckerberg will have to pay federal and state income taxes (at ordinary tax rates) when he exercises his $4.8 billion worth of stock options in 2012. That’s only fair, since that $4.8 billion obviously represents income to him. But even after paying taxes, he’ll still end up with $2.8 billion.
The problem isn’t Zuckerberg’s personal taxes but Facebook’s. Why should companies get a tax deduction for something that cost them nothing? If an airline allows its workers to fly free or at a discounted price on flights that aren’t full (for vacations, etc.) airlines don’t get a tax deduction (beyond actual cost) for that, even though the workers get taxed on the benefit, because it costs the airline nothing.
In the case of stock options, there is also a zero cost to the employer. So it’s more reasonable to conclude that while employees should be taxed on stock option benefits (“all income from whatever source derived” as the tax code states), employers should only be able to deduct their cost of providing those benefits, which, in the case of Facebook and Zuckerberg, is zero.
The bottom line is that there’s something obviously wrong with a tax loophole that lets highly profitable companies like Facebook make more money after tax than before tax. What’s about to happen at Facebook is a perfect illustration of why non-cash “expenses” for stock options should not be tax deductible.
See page 12 of our Corporate Taxpayers and Corporate Tax Dodgers report for more about the 185 other companies we found exploiting the stock option loophole.
Grassroots groups throughout the country have used Citizens for Tax Justice’s report “Corporate Taxpayers & Tax Dodgers,” to pressure lawmakers to clean up the tax code. Here’s a sample of what some groups have done in California, Massachusetts, Minnesota, Texas, and Washington.
California: A coalition of activist groups, including SEIU, the Teamsters, Good Jobs LA, and Occupy LA, rallied in Hollywood to protest FedEx’s less than one percent corporate tax rate over the last three years. Good Jobs LA explained that the $552 million in tax subsidies that FedEx received in 2010 alone could have been used to create over “1,000 jobs, contributed tens of millions for Medicaid and food stamp benefits, and added more than $11 million for education programs.”
Massachusetts: MassUniting and Occupy Boston rallied at the Boston headquarters of General Electric (GE), perhaps the most infamous tax dodger due to its astounding negative 45.3 percent tax rate. Many of the protestors carried signs reading “I Paid More in Taxes than General Electric.”
Minnesota: Minnesotans for a Fair Economy marked the beginning of the state’s legislative session by demonstrating against Wells Fargo, which received a shocking $17.9 billion in federal tax breaks wiping out its taxes for the last three years. The protestors emphasized that Minnesota legislators have continuously prioritized corporate tax breaks over critical investments in education.
Texas: The community group Good Jobs Great Houston took to the streets (and brought a pig along with them) to protest the “Dirty Thirty,” a group of companies that spend hundreds of millions of dollars to lobby Congress, yet pay nothing taxes. The protest took place outside the headquarters of Centerpoint Energy, which earned its place in the “Dirty Thirty” for the $1 billion in tax breaks it received over the past three years.
Washington: The advocacy group Working Washington held a rally against Wells Fargo's corporate tax dodging at the bank’s Seattle corporate offices. To demonstrate their opposition to corporate tax breaks, the protesters brought along a giant check depicting the $17.9 billion in tax subsidies that Wells Fargo has received over the last few years.
Photos via Good Jobs LA and Good Jobs Great Houston
CTJ's Response to SOTU: Right about Stopping Offshore Tax Dodgers, Wrong about Cutting Taxes for Other Corporations
During his State of the Union address, President Obama said that "no American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas." We couldn't agree more. However, a CTJ report explains that his proposed solutions fail to raise revenue, retain and expand the loopholes that allow corporations to avoid taxes, and mark a further retreat from earlier, stronger proposals.
Read the report.
President Obama's jobs council has released a report full of recommendations, including somewhat misguided points on the federal corporate income tax. The report rightly points out that the corporate income tax is full of loopholes that should be closed, but fails to call for a reform that actually raises revenue to support under-funded public services and investments. The report also perpetuates some misunderstandings about the effects of the U.S. corporate income tax on our economy and on working people.
Read CTJ's response.
Photo of Council on Jobs and Competitiveness via NCSU Web Creative Commons Attribution License 2.0
A new report from President Obama’s jobs council reflects a major dispute between corporate and labor leaders over tax reform. According to Reuters, the report “notes disagreement among council members over whether to shift to a ‘territorial’ system that exempts most or all foreign income from corporate taxes when it is repatriated.”
The report is from the President’s Council on Jobs and Competitiveness, which includes labor and business leaders and is chaired by Jeffrey Immelt, CEO of the notorious tax dodger, General Electric.
A “territorial” tax system is a euphemism for exempting the offshore profits of U.S. corporations from our corporate income tax. The bottom line is that our current system already provides a tax break that encourages U.S. corporations to shift investments offshore, and a “territorial” system would expand that tax break.
The existing tax break is the rule that allows U.S. corporations to “defer” U.S. taxes on their offshore profits until those profits are brought to the U.S. (until they are “repatriated”). Often these profits remain offshore for years and the U.S. corporation may have no plans to repatriate them ever.
This “deferral” of U.S. taxes on offshore profits provides an incentive for U.S. corporations to shift operations and jobs to a lower tax country, or just use accounting gimmicks to make their U.S. profits appear to be “foreign” profits generated in offshore tax havens.
These incentives for corporations to shift jobs and profits offshore would only increase if their offshore profits were entirely exempt from U.S. taxes, as would be the case under a territorial tax system.
Labor leaders know this, and labor unions have joined other organizations in opposing a territorial system. In October, when there were rumors that the Congressional “Super Committee” might propose a corporate tax reform, the big unions joined a letter to the committee members urging them to reject any proposal for a territorial tax system.
Corporate leaders, on the other hand, have been calling for a territorial system because of the benefits it would provide for corporations trying to lower their tax bills. The likely “disagreement” cited in the White House report probably was between the labor leaders and corporate leaders on the President’s jobs council.
Ending Tax Breaks for Companies Moving Jobs Offshore
President Obama hosted an “Insourcing American Jobs Forum” last week with business leaders who are bringing jobs back to the United States. During the event, the President announced he’d soon “put forward new tax proposals that reward companies that choose to bring jobs home and invest in America. And we’re going to eliminate tax breaks for companies that are moving jobs overseas.”
As already explained, the most straightforward way to do this would be to end deferral.
Another possibility is that the President could push some of the modest, but still helpful, proposals made early in his administration to limit the worst abuses of deferral. (Here’s a CTJ report explaining these proposals.) Unfortunately, the President immediately started backing away from these and dropped the most significant of these reforms (a change to the arcane-sounding “check-the-box” rules) by the time he made his second budget proposal.
Real tax reform depends on the administration being far more willing to stand up to the corporate CEOs — including those who sit on his jobs council.
Photo of Council on Jobs and Competitiveness via The White House Creative Commons Attribution License 2.0
The release of the corporate tax avoidance study by CTJ and ITEP last week marked a turning point in the debate over the budget deficit and tax reform. Until now, members of Congress and the Obama administration could ignore the 67-73 percent of Americans who think that large corporations pay too little in taxes.
Among other things, our report, Corporate Taxpayers and Corporate Tax Dodgers, 2008-2010 showed that thirty large, profitable companies paid nothing in federal taxes over the last three years, and that seventy-eight had tax rates below zero in at least one of the last three years. We showed that the financial industry is making off with the biggest share of all tax subsidies, that defense contractors pay some of the lowest rates and that these major American companies end up paying about half the official tax rate because of all the loopholes in the tax code.
Indifferent to public opinion and the facts, however, too many lawmakers are caving into corporate lobbyists’ demands to actually cut corporate taxes. President Barack Obama and members of Congress in both parties are considering “revenue-neutral” reform of the corporate income tax. This would close corporate tax loopholes, but it would put the revenue back in corporations’ pockets by reducing the statutory tax rate.
CTJ has responded with a campaign to educate lawmakers about how they can raise revenue from corporations and reject so-called “reforms” that make it easier for corporations to shift investments offshore and avoid taxes. In May, we led 250 organizations in demanding “revenue-positive” corporate tax reform. Large labor unions, including AFL-CIO affiliates and the SEIU, joined public interest organizations in opposing a “territorial” tax system, a “repatriation” amnesty as well as any corporate tax reform that fails to raise significant revenue.
The CTJ-ITEP corporate tax study makes it increasingly difficult for politicians to say with a straight face that fiscal responsibility requires cuts in health care, education, nutrition, environmental protection and other public investments while they do nothing to raise more revenue from profitable corporations.
The following are the stories of some of the most shocking tax dodgers we identify in our report.
TAX DODGER: GENERAL ELECTRIC (GE)
The Corporation Led by Obama’s “Jobs and Competitiveness” Chairman
TAX DODGER: HONEYWELL
The Corporation Led by a Member of Obama’s “Fiscal Responsibility” Commission
TAX DODGER: VERIZON
The Corporation Battling the Communication Workers of America to Cut $1 Billion in Employee Benefits
TAX DODGER: WELLS FARGO
One of the Biggest Bailed Out Banks
TAX DODGER: DUKE ENERGY
The North Carolina Corporation Pushing Senator Hagan and Others to Support a Repatriation Amnesty
TAX DODGER: BOEING
A Major Defense Contractor Lobbying Against Military Spending Cuts
The Corporation Led by Obama’s “Jobs and Competitiveness” Chairman
In March, activists called on Jeffrey Immelt, CEO of GE, to step down from his position as chairman of President Obama’s Council on Jobs and Competitiveness following revelations that GE had a negative corporate income tax rate over the past several years.
The New York Times had just reported that the nearly 1,000-person tax department of GE managed to achieve a negative corporate income tax rate over a 5-year period, partly by lobbying Congress for more tax loopholes. The article included all sorts of details that were damaging for GE. For example, it explained how the director of GE’s tax department literally “dropped to his knees” in the House Ways and Means office as he begged for — and won — the extension of a tax cut for financing through offshore subsidiaries.
A couple months earlier, President Obama had appointed Immelt chairman of his Council on Jobs and Competitiveness, which is to give “advice to the President on continuing to strengthen the Nation's economy and ensure the competitiveness of the United States.” After the Times article was published, former U.S. Senator Russ Feingold launched a petition calling on Immelt to resign from his position as chairman of the council.
GE’s tax avoidance entered the spotlight again in July, when Immelt endorsed a proposed repatriation amnesty. This proposal would call off almost all U.S. taxes on profits that U.S. corporations are currently holding offshore. These profits are normally subject to the difference between the U.S. corporate income tax and whatever foreign corporate income taxes were already paid (if the U.S. tax is greater) when the profits are brought back to the U.S. A recent report from a Senate investigations committee headed by Carl Levin (D-MI) found that a lot of these profits are stashed away in offshore tax havens where the corporations are likely to be doing no real business.
The Corporation Led by a Member of Obama’s “Fiscal Responsibility” Commission
On November 17, the conservative Tax Foundation is presenting its “Distinguished Service Award” to Republican House Speaker John Boehner and Honeywell CEO David Cote, who was appointed by President Obama to serve on the National Commission on Fiscal Responsibility and Reform (often called the “Bowles-Simpson Commission”).
It’s unsurprising that Speaker Boehner’s obstruction of any deficit deal involving revenue has earned him an award from the (Anti-) Tax Foundation. The case of Cote is more interesting. As a member of the fiscal commission, he voted in favor of a broad plan that would rely on spending cuts to achieve two-thirds of its deficit reduction goal and revenue increases to achieve just one-third of that goal, a plan that was panned by CTJ and others. The deal also included “tax reform” that clearly would not raise taxes on corporations overall.
In April, Cote spoke at a public event about the budget deficit where he was asked twice about a press release issued by CTJ that morning explaining that Honeywell did not pay any corporate income taxes in 2009 or 2010 and paid very low taxes over the past several years despite its profits. Within a matter of hours, Honeywell sent a letter to CTJ essentially saying that the company correctly reported large profits to its shareholders for the last two years but used available tax loopholes to report losses to the IRS.
CTJ's director, Bob McIntyre, wrote a letter back to Honeywell that concludes:
“So I think we agree on the following: The reason why Honeywell, despite reporting substantial pretax U.S. profits to its shareholders, paid no federal income tax in 2009 or 2010 (or more precisely, paid less than zero) is that it took advantage of legal tax breaks to wipe out its federal income tax liability. We may disagree, however, about whether these tax breaks should exist.”
The Corporation Battling the Communication Workers of America to Cut $1 Billion in Employee Benefits
In August, 45,000 Verizon employees went on strike to protest the company’s push for employees to give back $1 billion in health, pension, and other contract concessions.
CTJ commented at the time that Verizon's stance is particularly galling given that Verizon is both highly profitable and already a model of poor corporate citizenship. Despite earning over $32.5 billion over the last 3 years, Verizon not only paid nothing in corporate income taxes, it actually received nearly $1 billion (the same amount as the concessions they are seeking) in tax benefits from the federal government during that time.
As Verizon’s tax avoidance again received media attention following the publication of CJT’s major report last week, the company responded that the president of the Communication Workers of America, which organized the strike against Verizon, sits on the board of CTJ.
We’re not entirely sure what this is supposed to prove. If having the CWA president on our board makes our analysis biased, then surely anything said by Verizon’s tax department or spokespersons is even more biased since they actually work for Verizon.
More importantly, Verizon never actually offers any profit or tax figures that conflict with those in the CTJ study. The company’s spokesperson complains that the study does not count “deferred” taxes. (These are taxes that a company may pay in the future but has not paid yet, rendering them irrelevant.) He also says that the company “fully complies with all tax laws and pays its fair share of taxes.” Of course, CTJ has said from the beginning that the tax avoidance techniques used by Verizon and other corporations are (as far as we know) legal, and that’s why we know the tax system needs to be reformed by Congress.
One of the Biggest Bailed Out Banks
Last week a federal court decided against Wells Fargo in an $80 million tax shelter case. In the challenged deal, which government attorneys called a “charade” and an attempted “raid on the federal Treasury,” Wells Fargo claimed a $420 million capital loss from the transfer of “underwater” leases to a subsidiary and a related sale of stock to Lehman Brothers. The transaction had no business purpose other than tax avoidance, the court said, and was a sham tax shelter purchased from the international accounting firm KMPG for $3 million.
Our corporate tax study found that the financial industry as a whole had an average effective federal income tax rate of 15.5 percent for the 2008-2010 period and Wells Fargo’s rate was -1.4 percent. Wells Fargo also topped the list of companies with the largest tax subsidies, receiving $17.9 billion in tax subsidies over that three-year period.
A significant factor in their low tax rate is the deduction of net operating losses (NOLs) that were bought in the Wachovia acquisition. Tax law normally limits the deductibility of acquired NOLs, in order to keep companies from acquiring other companies just to reduce their taxes, but the Bush Treasury Department gave Wells Fargo a one-time exception from those rules. Congress quickly passed a law to prohibit Treasury from granting those exceptions in the future, but the law does not apply retroactively, which means Wells Fargo continues to enjoy the tax savings from Wachovia’s NOLs.
The North Carolina Corporation Pushing Senator Hagan and Others to Support a Repatriation Amnesty
In June, the organization Third Way hosted an event in Washington at which a group of politicians, corporate leaders and others argued in favor of a tax amnesty for profits U.S. corporations hold offshore. (See the transcript of the event.) CTJ and other groups have long opposed a repatriation amnesty, noting that it provides the greatest benefits to those companies that simply shift their profits into tax havens.
Jim Rogers, the CEO and president of the North Carolina company Duke Energy, spoke in favor of a repatriation amnesty, as did North Carolina’s Democratic Senator, Kay Hagan.
Towards the end of the event, the audience members asked a series of questions that the panelists were unable to answer adequately. For example, a CTJ staffer commented to the panelists:
If I understand, I think what you’re saying is that the nonpartisan Congressional Research Service was wrong in issuing a study that said that the last time this was tried it did not create jobs, and that the nonpartisan Joint Committee on Taxation was wrong recently when it had its analysis saying that if we repeat this repatriation holiday, it will cost $79 billion over 10 years, partially because some of those profits would have been brought back anyway; partially because, ultimately, corporations will shift even more profits offshore, meaning even if your only goal is to get more of these profits into the U.S., even in that limited goal, you fail on that. So do I understand correctly that you think that the nonpartisan Congressional Research Service and the nonpartisan Joint Committee on Taxation are incorrect and Congress should ignore these analyses?
We were not entirely surprised that no one had a good response to this. What did surprise us, however, was that Duke Energy is already avoiding corporate income taxes, which we learned as we prepared our major corporate tax study.
Duke Energy had profits of $5.5 billion over the 2008-2010 period but received $216 million from the IRS over that period, for a three-year effective tax rate of negative 3.9 percent.
Despite its already remarkable tax subsidies, Duke Energy now wants to bring its offshore profits back to the U.S. and pay almost no U.S. taxes on them.
A Major Defense Contractor Lobbying Against Military Spending Cuts
In June, James Zrust, vice president of tax for the defense contractor Boeing, testified before the House Ways and Means Committee in favor of a steep reduction in the corporate income tax rate. One member of the committee, Congressman Pete Stark of California, cited a short report from CTJ explaining that Boeing's effective corporate tax rate was already negative.
Boeing made $9.7 billion in profits over the 2008-2010 period but received $178 million from the IRS over that period, for an effective corporate income tax rate of negative 1.8 percent. How much lower does Boeing think its effective tax rate should be? Interestingly, Boeing actually had negative effective tax rates in all three of those years.
Given Boeing’s recent $35 billion deal to build airborne tankers (that is, $35 billion paid by U.S. taxpayers) it’s reasonable for Americans to expect Boeing to pay taxes when it makes a profit.
Defense spending has increased 70 percent since 2001 and many usually hawkish pundits and analysts are now calling for defense cuts. Boeing, of course, is lobbying against any defense cuts and disputing the commonsense notion that cuts in defense should play some role in deficit reduction.
"Territorial" Tax and "Revenue-Neutral" Corporate Tax Reform Opposed by National Organizations, Labor Unions, and Small Business Groups
Labor unions, small business associations and good government groups have lined up to oppose proposals to exempt corporations' offshore profits from U.S. taxes on a permanent basis (by enacting a "territorial" tax system) or temporary basis (by enacting a "repatriation" amnesty). These organizations also oppose any overhaul of the corporate income tax that fails to raise significant revenue.
The organizations spell out their positions on corporate tax reform in a letter sent to members of the Joint Select Committee on Deficit Reduction (commonly called the "Super Committee") today.
Read the letter.
These positions put the organizations at odds with House Ways and Means Chairman Dave Camp, who today proposed a corporate tax overhaul that includes a territorial system and that would be "revenue-neutral."
The letter asks the Super Committee to do four things:
1. Reject any proposal to exempt U.S. corporations’ offshore profits from U.S. taxes permanently (by enacting a “territorial” tax system).
2. Reject any proposal to exempt U.S. corporations’ offshore profits from U.S. taxes temporarily (by enacting a “repatriation” amnesty).
3. Require any overhaul of the corporate income tax to raise significant revenue.
4. Require that the revenue-positive result be estimated using traditional revenue scoring procedures as opposed to controversial alternative procedures (often called “dynamic” scoring).
To learn more, see CTJ's fact sheet about raising revenue through corporate tax reform and CTJ's fact sheet about territorial/repatriation proposals.
Photo of Rep. Dave Camp via Michael Jolley Creative Commons Attribution License 2.0
House Republicans Invite Lobbyists to Write Bill to Exempt Corporations' Offshore Profits from Taxes
New CTJ Fact Sheet Explains Why Congress Should Reject “Territorial” System
House Ways and Means Chairman Dave Camp is planning to release a “working draft” of a plan to adopt a “territorial” tax system, which is another way of saying a permanent tax exemption for corporations’ offshore profits.
On Tuesday, BNA’s Daily Tax Report (subscription required) informed us that
Lobbyists representing U.S. multinationals said they have not heard anything specific related to the timing of the proposal but they have heard that it will not be formal legislation, just a working draft. The idea behind this is that it would allow business interests to weigh in on a proposal before lawmakers turned it into actual legislation, multiple lobbyists said.
That’s about the closest thing we ever see to an admission that corporate lobbyists will decide what the Republican-controlled House tax-writing committee should enact.
Those lobbyists will be in an awfully good mood from the start because the “territorial” tax system that Chairman Camp is offering them will increase opportunities for their companies to lower their taxes by shifting jobs and profits offshore. To understand why, see CTJ’s new fact sheet on the international corporate tax rules.
Photo of Rep. Dave Camp via Michael Jolley Creative Commons Attribution License 2.0
If the following actions were taken, some of the inequity that is driving the Occupy Wall Street and other affiliated protests would be eliminated. Suggestions include making corporations pay their fair share in taxes, ending the tax break for corporations that shift jobs and profits overseas, implementing the "Buffett Rule," and imposing a tax on the "too-big-to-fail" banks...
Read the fact sheet.
Photo of Occupy Wall Street via Eye Wash Creative Commons Attribution License 2.0
CTJ, Heritage Foundation, Tax Foundation and Others AGREE that the 60 Former Hill Staffers Lobbying for Repatriation Amnesty Are Wrong
Bloomberg reports that the corporate coalition promoting a tax amnesty for offshore profits that U.S. corporations repatriate to the U.S. has hired 160 lobbyists, including an astounding 60 people who formerly served as staff to current members of Congress.
This breathtaking chart illustrates how everyone from President Obama’s former communications director to the Democratic Finance Committee chairman’s former chief of staff is now being paid by corporations to promote the repatriation amnesty.
Even more remarkable is that the organizations that study tax policy and agree on nothing have come to a consensus that this proposal should be rejected. Groups like Citizens for Tax Justice and the Center on Budget and Policy Priorities have been joined by the anti-tax Tax Foundation and the extremely conservative Heritage Foundation in opposing the proposal.
Naturally, the consensus ends there. For example, CTJ explains that the way to really fix our international tax rules is to remove the tax break that causes U.S. corporations to shift profits and operations overseas in the first place (“deferral”) while the Tax Foundation argues instead for permanently exempting offshore corporate profits from U.S. taxes. “However,” the Tax Foundation explains, “experience shows that the [repatriation] holiday has been ineffective policy.”
The Heritage Foundation is similarly unimpressed with the proposal, saying:
“The issue here is not whether tax cuts are good or bad per se, but whether this particular tax cut would increase domestic employment and domestic jobs. Again, the answer is that it would not. . . Are these repatriating companies capital-constrained today? No, they are not. These large multinational companies have enormous sums of accumulated earnings parked in the financial markets already.”
Other organizations that have published analyses extremely critical of the proposal include the Economic Policy Institute, the Tax Policy Center, the Center on Budget and Policy Priorities, and the Center for Economic and Policy Research.
The proposed repatriation amnesty, which proponents call a “repatriation holiday,” would temporarily remove all or almost all U.S. taxes on the profits that U.S. corporations bring back to the U.S. from other countries, including profits that they shifted to offshore tax havens using accounting gimmicks and transactions that only exist on paper.
Here’s what we have said about this debate:
“The twenty companies that repatriated the most offshore profits under the temporary repatriation amnesty enacted by Congress in 2004 now have almost triple the amount of profits ‘permanently reinvested’ (i.e., parked) overseas as they did at the end of 2005.”
1. Another repatriation amnesty will cost the U.S. $79 billion in tax revenue according to the non-partisan Joint Committee on Taxation.
2. Another repatriation amnesty will cost the U.S. jobs because it will encourage corporations to shift even more investment offshore.
3. The proposal is an amnesty for corporate tax dodgers because those corporations that shift profits into tax havens benefit the most from it.
4. Congress enacted a repatriation amnesty in 2004, and the benefits went to dividend payments for corporate shareholders rather than job creation, according to the non-partisan Congressional Research Service. Many of the corporations that benefited actually reduced their U.S. workforce.
Here’s more from CTJ on the right way to fix our international tax rules:
Congress Should End “Deferral” Rather than Adopt a “Territorial” Tax System
Obama’s Plan a Massive Tax CUT Despite GOP Claims of “Largest Tax Hike in Modern History”
While House Republican Leader Eric Cantor’s staff and others have called President Obama’s jobs and deficit plan the “largest tax hike in modern history,” the unfortunate truth is that it actually cuts taxes overall and increases the deficit.
There is much to like about the plan, as explained below. Citizens for Tax Justice applauds President Obama’s vow yesterday to, in his words, “veto any bill that changes benefits for those who rely on Medicare but does not raise serious revenues by asking the wealthiest Americans or biggest corporations to pay their fair share.”
Unfortunately, however, President Obama’s proposals would ultimately reduce taxes far more than raise them, compared to current law.
The tables in the back of the President’s 80-page plan quietly remind us that the total cost of making permanent the Bush tax cuts would be $3.867 trillion over the next ten years, but the President says he will “raise revenue” by making permanent “only” $3.001 trillion of these tax cuts. We certainly applaud the President for refusing to extend the $866 billion of these tax cuts that would go exclusively to those with adjusted gross incomes in excess of $250,000, but it’s difficult to call this deficit reduction.
The President’s claims that he is raising revenue are based on the common, but misleading, practice of comparing a given proposal to an alternative “baseline” that assumes Congress has already increased the deficit enormously by making permanent the Bush tax cuts. By this logic, we do not see what stops the President from comparing his plan to a baseline that assumes Congress repealed the federal income tax, in which case his plan would “raise revenue” even more successfully.
Setting aside the $866 billion that the President proposes to “raise” by not extending that part of the Bush tax cuts, the net effect of the other tax provisions in the plan (excluding the parts used to help pay for his proposed new jobs provisions) is to raise only $259 billion over the next decade. That means that, overall, the President is proposing more than $2.7 trillion in deficit-increasing tax cuts through fiscal 2021!
The cost of these tax cuts is even greater when accounting for the additional interest payments on the national debt that will result.
Revenue could be raised by closing corporate tax loopholes, but unfortunately the President’s plan calls for a reform of the corporate income tax that is “deficit-neutral.” We believe that most, if not all, of the revenue-savings resulting from closing corporate tax loopholes should go towards deficit-reduction or job creation and public investments, rather than paying for more breaks for corporations. (See one-page fact sheet on why corporate tax reform can be “revenue-positive.”)
There are some good ideas in the President’s tax proposals that would raise revenue compared to current law and that would ask those whose incomes have grown the most in recent years to pay something closer to their fair share. This includes his proposal to limit deductions and exclusions for the wealthy, which we estimate would affect only 2.3 percent of taxpayers. (See related report.) Certainly Congress should pursue these types of tax provisions and loophole-closing measures.
But ultimately, our nation is going to need significantly increased revenues to pay for essential public programs and services. Starting off with a gigantic tax cut that makes 80 percent of the Bush tax cuts permanent, as Obama proposes, only digs our deficit hole deeper — and makes big reductions in Social Security and Medicare even more likely.
On Monday, September 19, President Obama may offer a corporate tax reform plan along with his deficit reduction proposals. Previous statements from the administration indicate that the corporate tax reform plan would be "revenue-neutral," meaning it would raise no new revenue to reduce the budget deficit or meet the growing needs of the nation.
In May, U.S. Senators and Representatives received a letter from 250 organizations, including non-profits, consumer groups, labor unions and faith-based groups from every state, rejecting this "revenue-neutral" approach to corporate tax reform. These organizations call on Congress to close corporate tax loopholes and use the revenue saved to address the budget deficit and fund public investments.
Read the letter.
As the letter explains, “Some lawmakers have proposed to eliminate corporate tax subsidies and use all of the resulting revenue savings to pay for a reduction in the corporate income tax rate. In contrast, we strongly believe most, if not all, of the revenue saved from eliminating corporate tax subsidies should go towards deficit reduction and towards creating the healthy, educated workforce and sound infrastructure that will make our nation more competitive.”
Citizens for Tax Justice has called for revenue-positive tax reform in a recent op-ed in USA Today, a report explaining why Congress can raise more revenue from corporations, and in CTJ director Bob McIntyre's recent testimony before the Senate Budget Committee.
CTJ also released a report in June focusing on 12 major profitable corporations that collectively paid an effective U.S. tax rate of negative 1.5 percent on their U.S. profits over the past three years.
Data on Top 20 Corporations Using Repatriation Amnesty Calls into Question Claims of New Democrat Network
The twenty companies that repatriated the most offshore profits under the temporary repatriation amnesty enacted by Congress in 2004 now have almost triple the amount of profits “permanently reinvested” (i.e., parked) overseas as they did at the end of 2005. The figures call into question a recent report from the New Democrat Network (NDN) supporting a second repatriation amnesty.
By now everyone has heard about presidential candidate Mitt Romney’s statement that “corporations are people.” “Everything corporations earn ultimately goes to people,” Romney explained to hecklers in Iowa.
Of course, it’s true that corporate earnings eventually go to people and that taxes on corporate earnings are borne by people. Those people are primarily the shareholders, who receive smaller stock dividends and or capital gains because companies pay corporate income taxes. Corporate executive pay is also affected by corporate taxes because so much of it is in the form of stock options and similar vehicles.
The serious problem is that the shareholders who own these corporations are not paying enough, thanks to the loopholes that allow corporations like GE, Boeing, Verizon and others to avoid taxation entirely.
However, some corporate lobbyists and economists who sympathize with them now argue that the people who ultimately pay corporate income taxes are actually the workers. Up to 80 percent of corporate income taxes, they claim, actually fall on labor, rather than the owners of capital. This happens, they argue, because corporations will respond to U.S. taxes by lowering wages or moving operations and jobs to countries with lower taxes, which will also hurt American workers.
They’re wrong. As we have advocated reforms to raise revenue by closing corporate tax loopholes, some have cited these misguided economic models and asked us whether or not higher corporate taxes would ultimately harm the working people we want to help. The answer is absolutely not.
Tax expert Lee Sheppard makes the obvious point that we’ve often made (subscription required): “if labor bore 80 percent of the burden of the corporate income tax, corporations wouldn't care about it at all. They don't fight high value added taxes in Europe, because the burden is clearly borne by consumers.”
Indeed, corporations lobby Congress furiously for reduced corporate income taxes, and they would not bother if they did not believe their shareholders were the ones affected by them.
Higher Taxes Won’t Drive U.S. Corporations Offshore
American corporations certainly have been moving operations and jobs overseas in the past decades. But low labor costs in many foreign countries appears to the main force driving this trend, not lower foreign income taxes.
A recent article explains that GE has shifted operations offshore, but it actually pays higher taxes in those foreign countries than it does in the U.S. (Of course, one feature of our tax system, “deferral,” probably does encourage companies to move jobs offshore and we have urged Congress to repeal it.)
The Debate among Economists
ITEP and other organizations that provide distributional analyses of tax policies, including the non-partisan Congressional Budget Office, assume that corporate income taxes are ultimately borne by the owners of capital (corporate shareholders and owners of other businesses indirectly affected). Since capital is disproportionately owned by the wealthy, corporate income taxes are therefore very progressive taxes.
But in recent years some economists have claimed that corporate taxes simply push investment out of the country, meaning workers in the U.S. lose their jobs or settle for lower-paying jobs (meaning labor ultimately bears the burden of the tax).
But other economists and analysts disagree. For example, a working paper from the Congressional Budget Office suggests that investment cannot move across international borders with perfect ease and that goods produced in one country are not always perfectly substitutable for those produced in another country.
The working paper further suggests a model that takes into account the corporate taxes of other countries, meaning corporations cannot escape taxation so easily because most places where they could reasonably operate will have some level of corporate taxation.
When the economic models take all this into account, they lead to the conclusion that most of the corporate income tax is borne by capital.
The People Who Own Corporations Are Not Paying Enough in Taxes
Once we establish that the owners of capital are ultimately paying the corporate income tax, the next question is whether or not they should be paying more than they do now. Mitt Romney seems to believe they pay more than enough already.
As middle-class Americans are told they must sacrifice some of their public services in order to help balance the federal budget, the obvious question is whether or not the owners of capital, who ultimately pay corporate income taxes, can afford to sacrifice as well. The answer is: absolutely.
Many corporations use loopholes to avoid paying the corporate income tax, as our recent report on 12 corporate tax dodgers demonstrates.
Corporate profits can accumulate tax-free before they are paid out as dividends, and two-thirds of those dividends will go to tax-exempt entities like pension funds or university endowments where they can continue to accumulate tax-free before they reach any individuals. The one-third of corporate stock dividends that do go directly to individuals are currently taxed at a low, top rate of 15 percent. (We have explained before that these are reasons why corporate profits are not double-taxed, as some believe they are.)
So the short answer to Mitt Romney is, yes, corporate taxes are ultimately paid by people, the shareholders, and Congress needs to close the loopholes that currently allow them to avoid these taxes.
Photos via Gage Skidmore and IMF Creative Commons Attribution License 2.0
Verizon Pushes for $1 Billion in Concessions from Workers, While Receiving Nearly $1 Billion in Subsidies from Uncle Sam
On Sunday, 45,000 Verizon employees went on strike to protest the company’s push for employees to give back $1 billion in health, pension, and other contract concessions. What makes these demands particularly galling is that Verizon is both highly profitable and already a model of poor corporate citizenship.
Despite earning over $32.5 billion over the last 3 years, Verizon not only paid nothing in corporate income taxes, it actually received nearly $1 billion (the same amount as the concessions they are seeking) in tax benefits from the federal government during that time.
If Verizon thinks its employees should pay $1 billion more for their benefits, we think Verizon should pay A LOT more for the benefits it receives from the federal government.
In fact, if Verizon paid its corporate income tax at the official rate of 35 percent, it would have owed more than $11 billion (rather than negative $1 billion). This alone is enough to avoid the recent cuts in the debt deal to student loan programs..
For its part, Verizon has disputed the claim that it does not pay enough in taxes. Their math however is misleading because it includes taxes that they will owe in the future, not those they actually pay in a given year.
Verizon’s tax dodging is now so infamous that it has become one of the primary targets of US Uncut, a grassroots organization dedicated to getting corporations to pay their fair share.
The Communication Workers of America (CWA), who is leading the strike along with the International Brotherhood of Electrical Workers (IBEW), also notes that while calling for a benefit cut from workers, the top 5 executives at Verizon received more than a quarter of a billion dollars in compensation over the last 4 years.
Given their record on taxes and compensation, it’s hard to believe Verizon will come around to being a good corporate citizen anytime soon, yet unions and the public alike need to keep up the pressure by asking Verizon: Can you hear us now?
The Worst "Job Creation" Idea Yet: The "Life Sciences" Tax Break to Help Pharma & Biotech Companies Dodge Taxes
A bipartisan group of lawmakers in Congress proposes to help companies that engage in “life sciences” research by combining two terrible tax policies — the research and experimentation (R&E) credit and a tax holiday for repatriated offshore profits — into one monstrosity.
The bill, which has been introduced by Senator Robert Casey (D-PA) in the Senate and Devin Nunes (R-CA) in the House, gives the pharmaceutical and biotech companies, and some companies that make medical devices, two options. They could take a special 40 percent R&E credit (which would be double the value of the existing R&E credit) for up to $150 million in research expenses.
Alternatively, they could repatriate up to $150 million in offshore profits, which would be taxed at just 5.25 percent instead of the normal 35 percent that applies to corporate profits. This would particularly benefit pharmaceutical companies and others who are notorious for using intellectual properties to shift profits to offshore tax havens. The bill would allegedly require the repatriated offshore profits to be used for the research.
A coalition of companies that would benefit is promoting the bill.
Neither of the tax breaks offered under the bill would create jobs.
The R&E Credit Rewards Companies for Research They Would Do Anyway
The R&E credit, introduced during the Reagan administration, has been the subject of many tax scandals as companies have tried, often successfully, to treat activities that are obviously not scientific research — such as developing hamburger recipes or accounting software — as qualified R&E.
The R&E credit has a curious following among politicians who normally style themselves as free-market advocates, but who nevertheless maintain that big business needs to be subsidized to do research. In fact, a 2009 report from the Government Accountability Office found that “a substantial portion of credit dollars is a windfall for taxpayers, earned for spending they would have done anyway, instead of being used to support potentially beneficial new research.”
The Repatriation Holiday that Will Actually Reduce Jobs in the U.S.
A separate coalition of companies has been promoting a repatriation holiday for months, but has lost steam in the face of estimates that their proposal would cost $79 billion, partly because companies would respond by shifting even more of their jobs and profits offshore. Congress tried this type of measure in 2004, and the Congressional Research Service found the benefits went to corporate shareholders and not towards job creation.
The new proposal is different in that it would target the repatriation holiday at companies that engage in “life sciences” research, and couple it with an increased R&E credit. But none of this makes the repatriation holiday any less ill-advised.
The requirement that repatriated funds must be put towards life sciences research simply won’t work because money is fungible. A company can put the money towards research it would have done anyway, which would free up other money to pay larger bonuses or for any other purpose. In fact, Martin Regalia, a senior vice president for the U.S. Chamber of Commerce, said at a panel discussion on March 25 that because money is fungible, you cannot really direct a company to do any particular thing with cash it receives.
It’s Not Enough for Lawmakers to Say They’re Doing “Something” to Create Jobs
Some members of Congress are desperate to appear to be creating jobs while knowing full well that Tea Party-backed lawmakers will block the sort of spending programs that actually can create jobs. Some of them have settled on this proposal, hoping that it includes a large enough tax giveaway to win over the “life sciences” companies (and their lobbyists and campaign contributions).
For these companies, each batch of grim unemployment data must seem like an opportunity. They are increasingly able to request tax breaks in the name of “job creation” that will never happen.
Photo via Wellstone.Action Creative Commons Attribution License 2.0
Blue Dog Research Forum asked CTJ for 500 words on whether the U.S. corporate tax code encourages companies to offshore jobs. Our legislative director leapt at the chance to engage with these thoughtful political centrists. His essay, “U.S. Jobs Hurt by Our International Tax Rules, Not Tax Rates” is here, and says, in part:
“Because the U.S. does not tax profits generated offshore (unless the profits are repatriated), corporations can pay less in taxes by moving production to a country with lower corporate income taxes [and] disguise their U.S. profits as “foreign” profits.”
CTJ’s essay appears alongside competing arguments from Senator Mike Enzi, Rep. Loretta Sanchez and conservative think tanker Alan Viard, and is the only one of the four proposing tax reform that’s revenue-positive.
On Wednesday, the Center for Media and Democracy (CMD) unveiled “ALEC Exposed,” a new website showing how corporations and right-wing politicians have partnered through ALEC to spread anti-tax legislation and other damaging bills. The website includes over 800 model bills released for the first time by CMD.
As CMD points out in their press release:
“ALEC has become the premier institution for crafting and promoting model legislation and resolutions that largely benefit its corporate members. Until today, it has been difficult to trace the controversial and oddly uniform bills popping up in legislatures across the country directly to ALEC. The public can now examine the array of ALEC model bills for the first time and link them to bills being introduced in their own state house.”
Notably, this new tool comes exactly one week after we tore apart one ALEC report purporting to measure states’ economic competitiveness.
Company Accused of Dodging $2 Billion in US Taxes After Calling for Exemption for Tax Haven Profits and Attacking Illinois Tax Hike
A former global tax strategy manager of Caterpillar is suing the company for demoting him after he complained that it was using “tax and financial statement fraud” to avoid $2 billion in U.S. taxes.
Daniel J. Schlicksup’s specific claim is that the company improperly attributed at least $5.6 billion of profits from the sale of spare parts from a plant in Illinois to another unit in Geneva. He alleges that after telling his superiors that he believed the tax avoidance was illegal, they retaliated by transferring him to the company’s information technology division, which is entirely out of his area of expertise.
For their part, Caterpillar representatives have said that the company complies with all laws and regulations, but have not as of yet addressed the specific charges in the lawsuit.
Based on the details released so far, it is unclear how this case against Caterpillar will ultimately pan out. The problem, according to Harvard Professor Stephen Shay, is that a company does not need “much substance” to be considered legal in these circumstances under U.S. law. In other words, even if Caterpillar is using a Swiss subsidiary primarily to avoid billions in taxes, it’s possible that the maneuver could actually be legal depending on the specific details of the subsidiary’s operation.
Caterpillar has long been an especially outspoken critic of corporate income taxes. In May, the company’s CEO called for the US to adopt a territorial tax system, which would be a boon to multinational corporations and a disaster for everyone else.
On the state level, Caterpillar was the first company to protest the recent corporate tax increases in Illinois, where the company is headquartered. They led the opposition to the state increase, despite the fact that their total (all states including Illinois) state and local tax liability represented only a tiny fraction of their costs; a mere 0.7 percent of their global earnings in 2010. In addition, if the accusations prove to have any truth, Caterpillar may have been fraudulently avoiding Illinois taxes as well.
Photo via Cyrillicus Creative Commons Attribution License 2.0
Negative 15.8% Tax Rate Not Low Enough for GE: CEO Immelt Calls for Amnesty for Corporate Tax Dodgers
Jeffrey Immelt, CEO of the company famous for making profits of $26 billion from 2006 through 2010 and receiving tax benefits from the IRS of $4.1 billion over that period, has endorsed the recently proposed amnesty for corporate tax dodgers, called a "repatriation holiday" by its proponents.
Immelt was selected by President Barack Obama in February of 2009 to chair his Council on Jobs and Competitiveness, which is to advise the White House on economic policy. He has been CEO of General Electric since 2000.
In March, the New York Times reported GE's federal corporate income tax bill of negative $4.1 billion over the five-year period in which it earned $26 billion in profits, which is an effective tax rate of negative 15.8 percent. A recent report from CTJ focuses on the three-year period 2008-2010 and finds that GE earned $7.7 billion in profits during this period and had a federal corporate income tax bill of negative $4.7 billion over this period.
Following the New York Times revelations, progressive activists spearheaded a call for Immelt's resignation from the President's Council on Jobs and Competitiveness.
His call for an amnesty for offshore tax dodgers will surely give more ammunition to those demanding that he step down from the Council.
What Does an Infrastructure Bank Have to Do with an Amnesty for Corporate Tax Dodgers? Nothing.
A repatriation holiday is essentially a break from U.S. corporate income taxes on offshore profits that U.S. corporations bring back (repatriate) from foreign countries, particularly from tax havens.
The non-partisan Joint Committee on Taxation (JCT), the official revenue-estimator for Congress, has concluded that a repeat of the repatriation holiday that was enacted in 2004 would reduce revenue by $79 billion over ten years.
Yet Immelt, confusingly, says that a repatriation holiday could be used to fund an infrastructure bank. How can a measure that reduces revenue be used to fund anything?
It's true that JCT finds that the holiday would raise some revenue initially because corporations would repatriate more profits to the U.S. than they normally would, and they would be taxed, albeit at a very low rate, on those profits. (The 2004 measure taxed repatriated offshore profits of U.S. corporations at a super-low rate of 5.25 percent.)
But in subsequent years the measure would cause much larger reductions in revenue, partly because corporations would be encouraged to shift even more profits and investments offshore.
Anything that costs $79 billion and encourages companies to shift even more profits and investments out of the U.S. has nothing to do with the goals of an infrastructure bank and should not be attached to any bill creating an infrastructure bank.
The infrastructure bank is supposed to create jobs, but the non-partisan Congressional Research Service (CRS) found that the repatriation holiday enacted in 2004 failed to create jobs and that the benefits went instead to corporate shareholders.
Photo via Steve Wilhelm Creative Commons Attribution License 2.0
The House Judiciary Committee approved the so-called “Business Activity Tax Simplification Act” (BATSA), H.R. 1439 today.
Corporate lobbyist pushing this bill make the deceptive argument that simplification will result from limiting state and local governments to taxing only those businesses that have a “physical” presence in the state.
The "physical presence" standard doesn't make any sense in the internet age, when we all buy so many goods and services from companies that do not have physical facilities in our state but still benefit from the state and local services that make commerce possible.
In any event, BATSA does not create a "physical presence" standard anyway because it has so many loopholes allowing large corporations with lobbying clout to avoid state and local taxes even though they have what any rational person would call a “physical presence” in the jurisdiction.
In May, CTJ sent a letter to the subcommittee handling the bill, explaining that we oppose BATSA because it would:
1. make state and local taxes on businesses dramatically more complex,
2. increase litigation related to business taxes,
3. increase government interference in the market and
4. reduce revenue to state and local governments by billions of dollars each year.
Read CTJ's letter opposing the misnamed “Business Activity Tax Simplification Act” (BATSA).
Call both your Senators and your member of the House of Representatives at the toll-free number below and tell them:
“Oppose the amnesty for corporate tax dodgers, which corporate leaders call a ‘repatriation holiday.’ This giveaway to corporations should not be part of the deal on raising the debt ceiling or any other legislation.”
Call this number to be connected to your members of Congress.
Here’s why this is important.
A “repatriation holiday,” which has been proposed by some Republicans and Democrats in Congress, would remove all or almost all U.S. taxes on the profits that U.S. corporations bring back to the U.S. from other countries, including profits that they shifted to offshore tax havens using accounting gimmicks and transactions that only exist on paper.
If you want to give your lawmakers’ staffs more information, you can also tell them that:
1. Another repatriation holiday will cost the U.S. $79 billion in tax revenue according to the non-partisan Joint Committee on Taxation.
2. Another repatriation holiday will cost the U.S. jobs because it will encourage corporations to shift even more investment offshore.
3. The repatriation holiday is an amnesty for corporate tax dodgers because those corporations that shift profits into tax havens benefit the most from it.
4. Congress enacted a repatriation holiday in 2004, and the benefits went to dividend payments for corporate shareholders rather than job creation, according to the non-partisan Congressional Research Service. Many of the corporations that benefited actually reduced their U.S. workforce.
For more information, see the recent post from Citizens for Tax Justice on one senator’s repeated flip-flops related to the repatriation holiday.
Thanks to AFSCME for providing the toll-free number to enable constituents to get in touch with their members of Congress regarding this critical issue.
On June 15, 2011, think tank Third Way held the event "The Next Stimulus? Bringing Corporate Tax Dollars Home to Work in America" supporting a tax repatriation holiday. When the panel was opened up for questions, they faced tough questioning from critics of the repatriation holiday, not all of which they could answer adequately.
Listen to an excerpt of the questions and answers here:
Question 1: Steve Wamhoff, Legislator Director, Citizens for Tax Justice (0:00)
I just want to clarify your views on some of the other research that has been done. I think what your saying is that the bipartisan Congressional Research Service was wrong in issuing it’s study that said the last time this was tried it did not create jobs. And that the non-partisan Joint Committee on Taxation was wrong recently when it put out it’s analysis saying that if we repeat this repatriation holiday it will cost $79 billion over 10 years partially because some of those profits would’ve been brought back anyway, partially because ultimately corporation will shift even more profits offshore. Meaning even if your only goal is to get more of these profits to the US, even in that limited goal you fail on that. So do I understand you correctly that you think that the Congressional Research Service and the non-partisan Joint Committee on Taxation are incorrect and that Congress should ignore these analyses?
For the Congressional Research Service Analysis click here.
For the Joint Committee on Taxation Analysis click here.
Question 2: Richard Phillips, Research Analyst, Institute on Taxation and Economic Policy (3:40)
I’d like to ask a question based on this point we’re just talking about. Wouldn’t a better alternative to a tax repatriation holiday be to end deferral of offshore profits and go to a system where all companies have to pay taxes on offshore profits?
For more information on moving to a full worldwide system and ending deferral check out Citizens for Tax Justice's report here.
Question 3: Nicole Tichon, Executive Director, Tax Justice Network USA (6:22)
I think Mr. Rogers you said that we didn’t have as much offshore [then] as we do today in your comments. Doesn’t that speak to the issue that this actually incentivizes companies to keep their money offshore if they think they can just have a holiday every 5 or 6 years?
For more information on Tax Justice Network USA's take on the repatriation holiday see their op-ed in the Huffington Post.
Question 4: Scott Klinger, Tax Policy Director, Business for Shared Prosperity (9:56)
I think one of you noted that some companies are devoting a lot of effort to accounting way of moving profits offshore, through things like regressive transfer pricing. Some of our small business members think that that’s a pretty big loophole that needs closing that’s caused this swelling of offshore assets. Would you be in favor of looking at closing some of the tax haven loopholes and tightening transfer pricing restrictions as part of this repatriation bill?
For more information on Business for Shared Prosperity's take on the repatriation holiday see their website.
Senator Schumer Supported, then Opposed, and Now Supports, Amnesty for Corporate Tax Dodgers
In 2004, Senator Charles (Chuck) Schumer of New York voted in favor of the so-called American Jobs Creation Act, a bill full of so many tax breaks for special interests that one observer called it a “bacchanalia of Caligulan proportions.” The bill, which many Democrats and Republicans supported, prompted one business lobbyist to confess to a reporter that the policy process had “risen to a new level of sleaze.” One of the most outrageous breaks in the bill was an amnesty for corporate tax dodgers, a measure called a “repatriation holiday” by its supporters.
A second “repatriation holiday” was proposed as “economic stimulus” in 2009, but Senator Schumer, like most Senators, voted against it because of data summarized by the Congressional Research Service showing that the 2004 measure did not create jobs. In fact, the research showed that the benefits went to enrich shareholders rather than to job creation.
Now Senator Schumer has switched positions again and is supporting a second repatriation holiday.
How the Repatriation Holiday Would Help Corporations
In theory, U.S. corporations pay U.S. income taxes on their profits no matter where they are generated. But they are allowed to “defer” (not pay) U.S. taxes on their offshore profits until they bring those profits back to the U.S. (until they “repatriate” the profits), which may never happen. (A separate provision ensures that these profits are not double-taxed if taxes are paid to the foreign government.)
A tax holiday for repatriated profits would allow them to bring these profits to the U.S. and pay no taxes, or pay a very low rate. (The 2004 measure taxed offshore profits repatriated during the holiday at a nominal rate of just 5.25 percent instead of the normal 35 percent corporate income tax rate.)
Another Repatriation Holiday Will Cost the U.S. $79 Billion in Tax Revenue
According to the non-partisan Joint Committee on Taxation, a repeat of the 2004 repatriation holiday would raise some revenue during the first few years, but then reduce revenue by a larger amount over the rest of the decade, resulting in a net loss of about $79 billion over ten years.
The analysis also shows that a repatriation holiday that is slightly less generous to corporations (one taxing repatriated offshore profits at 10.5 percent) would cost about $42 billion over ten years.
Another Repatriation Holiday Will Cost the U.S. Jobs
One factor causing the $79 billion revenue loss is the way U.S. corporations will respond when Congress shows itself willing to enact a repatriation holiday more than once. Corporations will likely shift even more profits offshore in the long-run, because corporate leaders will think they can simply wait for Congress to enact the next repatriation holiday allowing them to bring those profits back to the U.S. tax-free or almost tax-free. This means more investment will be made overseas rather than here in the U.S.
Incredibly, the coalition of companies promoting the holiday argue that it will create jobs, even though the non-partisan Congressional Research Service found that the 2004 measure failed to create jobs and that the benefits went instead to corporate shareholders.
The Repatriation Holiday Is an Amnesty for Corporate Tax Dodgers
Corporations would not just shift real investments (real operations and jobs) overseas. They would also respond by increasing the amount of profits they shift to offshore tax havens through sham transactions that exist only on paper. In fact, the proposal would give the greatest benefits to the worst corporate actors, those who shift profits offshore to avoid U.S. taxes.
A U.S. company that is doing real business in another country typically will reinvest those offshore profits in factories, oil wells or other assets, making it difficult to bring those profits back to the U.S. But a company that is engaging in profit-shifting (disguising U.S. profits as “foreign” profits through transactions that exist only on paper) has likely merely shifted profits to a tax haven subsidiary that consists of little more than a post office box. It’s much easier to repatriate these offshore profits than the offshore profits from real business activities.
Also, a U.S. corporation that is doing business in a typical foreign country is already paying some tax to the foreign government, which means they can already repatriate those profits to the U.S. without paying the full 35 percent U.S. corporate income tax rate. But a U.S. corporation that has shifted its profits to a tax haven is typically paying no taxes to the tax haven government, which means they would pay the full 35 percent U.S. rate if they repatriated those profits under current law. U.S. corporations shifting their profits to tax havens therefore stand to gain the most from a repatriation holiday.
Corporate Leaders Are Divided on the Repatriation Holiday
Some corporate leaders have banded together in an extremely well-funded campaign to promote a second repatriation holiday. But other corporate leaders have decided to lobby instead for an even bigger tax giveaway. A repatriation holiday is essentially a temporary tax exemption for corporations’ offshore profits. Some corporate leaders think they can obtain a permanent tax exemption for offshore profits — a territorial tax system, in other words — and they think that enactment of a repatriation holiday would distract from that goal.
The Republican chairman of the House Ways and Means Committee, Dave Camp, agrees with the corporate leaders who prefer a territorial system (the bigger tax giveaway) to a repatriation holiday. But he has not ruled anything out.
Photo via Pro Publica Creative Commons Attribution License 2.0
On Saturday, the organization U.S. Uncut demonstrated at Apple Stores in several cities in protest against the company's lobbying for an amnesty for offshore tax dodging by corporations, also known as a "repatriation holiday."
This video shows what happened in the Apple Store in Washington, DC. U.S. Uncut has more information about the protests that took place in Boston, San Francisco, Chicago and other cities.
U.S. corporations, in theory, pay U.S. corporate income taxes on all of their profits, regardless of where they are earned. But they are allowed to "defer" (to indefinitely delay) those U.S. taxes on foreign profits until those profits are "repatriated" (brought back to the U.S.).
Some corporate leaders have called for a permanent exemption of U.S. taxes on offshore profits (a "territorial" tax system) while others have called for a temporary exemption, which is essentially what the "repatriation holiday" is.
As CTJ has explained before, the "repatriation holiday" is an amnesty for corporate tax dodgers rather than a break for companies doing real business abroad.
Multinational corporations that are conducting real business offshore and paying taxes to a foreign government have much less to gain from a repatriation holiday. Their offshore profits are tied up in offshore investments, making it much less likely that they would bring those profits home in response to a tax holiday. And when they do bring those profits back to the U.S., they can do so under current law without paying the full 35 percent tax rate, because they are likely paying taxes to the government of the foreign country in which they are operating. (The U.S. taxes are reduced for each dollar paid to the foreign government to avoid double-taxation.)
On the other hand, a U.S. corporation that shifts its profits to a post office box in the Cayman Islands or another tax haven is likely to benefit enormously from a repatriation holiday. These profits may not be taxed at all by the foreign government, meaning they would be subject to the full 35 percent rate under current law.
So it's entirely fair for U.S. Uncut and others to be outraged that Apple and other companies are lobbying for a repatriation holiday and claiming that it will help the U.S. economy. Congress tried this in 2004 and it failed to lead to any job creation. In fact, many companies that benefited actually reduced their U.S. workforce.
Congress's official revenue estimators recently concluded that a repeat of the repatriation holiday would cost $79 billion over ten years. That's partly because U.S. corporations are likely to respond to a second repatriation holiday by shifting even more of their profits to offshore tax havens since they will have concluded that Congress is willing to call off almost all U.S. taxes on those profits every few years.
PROTEST AT APPLE STORES ON JUNE 4: Demand Apple Leave the Coalition Promoting Amnesty for Corporate Tax Dodgers
The debate over corporate tax reform is not just about whether corporations overall should pay more, less, or the same as they do now. There is also a debate over how the offshore profits of U.S. corporations should be treated.
Corporate leaders want their offshore profits to be exempt from U.S. taxes. Some corporate leaders hope for a permanent exemption (which would turn our tax system into a "territorial" tax system).
Other corporate leaders, perhaps realizing that the American public would not be receptive to this idea, are hoping they can prod Congress to exempt their offshore profits on a temporary basis. This is basically the goal of a "repatriation holiday," a temporary tax break for offshore corporate profits that are brought back to the U.S.
I can sync my iPhone to my MacBook. Why can't I sync it to my Values?
One corporation lobbying in favor of a repatriation holiday is Apple, which is being targeted by protests in major cities around the U.S. on June 4. The demonstrations, organized by US Uncut, will ask Apple to leave the coalition lobbying for a repatriation holiday.
Find Apple protests in your city, or the information you need to organize your own protest against Apple, on US Uncut's Apple page.
Citizens for Tax Justice has released a preview of its forthcoming major study of Fortune 500 companies and the taxes they paid — or failed to pay — over the 2008-10 period.
The preview details the pretax U.S. profits, federal taxes paid and effective tax rates of (in alphabetical order): American Electric Power, Boeing, Dupont, Exxon Mobil, FedEx, General Electric, Honeywell International, IBM, United Technologies, Verizon Communications, Wells Fargo and Yahoo. CTJ’s full corporate report is scheduled for release this summer.
From 2008 through 2010, these 12 companies reported $171 billion in pretax U.S. profits. But as a group, their federal income taxes were negative: –$2.5 billion.
Read the report in pdf
Read the report in your web browser
Previous CTJ Reports Resulted in Higher Taxes on Corporations Overall
CTJ's reports on corporate taxes have a history of changing the debate in Washington concerning tax reform. One of the news reports published this week puts it this way:
"As a liberal tax-code activist, Robert McIntyre shocked Washington in 1984 when he revealed that General Electric was one of 17 companies that paid no U.S. corporate taxes for three straight years. The finding by McIntyre's organization, Citizens for Tax Justice, sparked national outrage that helped pave the way for The Tax Reform Act of 1986. That landmark legislation eliminated tax loopholes to broaden the tax base while also lowering the corporate tax rate. It also increased corporate tax revenue flowing into the Treasury by 34 percent."
Increasing Clamor for Revenue-Positive Corporate Tax Reform
Meanwhile, 250 organizations, including organizations from every state, have signed a statement calling on Congress to enact a corporate tax reform that raises revenue.
This differs sharply from calls by President Obama and Treasury Secretary Geithner for “revenue-neutral” corporate tax reform. The Obama administration is expected to release a plan for “revenue-neutral” corporate tax reform at some point after the debate over the debt ceiling is resolved.
As the letter explains, “Some lawmakers have proposed to eliminate corporate tax subsidies and use all of the resulting revenue savings to pay for a reduction in the corporate income tax rate. In contrast, we strongly believe most, if not all, of the revenue saved from eliminating corporate tax subsidies should go towards deficit reduction and towards creating the healthy, educated workforce and sound infrastructure that will make our nation more competitive.”
Corporations Attempt to Explain Away Their Tax Avoidance
Corporate leaders are expected to defend the low or negative tax liability of the companies they lead.
When CTJ identified Honeywell as a tax dodger in April, the company wrote to CTJ explaining that its tax avoidance was legal. CTJ replied that this is our point entirely: The laws allowing corporations to avoid tax liability are outrageous and must be fixed by Congress.
Other attempts by corporate leaders to defend their tax avoidance are equally weak. GE, for example, says that its federal taxes are so low because its financing division, GE Capital, lost billions of dollars in recent years.
Of course, this answer is no answer at all. If GE as a whole has profits, why should it pay no taxes because one division had losses?
As one Congressional staffer recently commented to us, "Saying GE would have positive tax liability if we didn't count GE Capital is like saying AIG would be perfectly sound if we didn't count AIGFP." (AIG Financial Products is the subsidiary that brought down AIG by gambling on credit default swaps, trigging the first bailout by the Bush administration.)
What makes GE's explanation even more ridiculous is that GE Capital is the subsidiary that engages in leasing schemes that have the main purpose of lowering GE's overall tax liability.
Influence of Corporate Leaders on Obama Administration Questioned
Tax avoidance by these corporations is bad enough, but it's particularly alarming when the CEOs of the companies in question have such an outsized influence on federal policy.
For example, GE's CEO, Jeffrey Immelt, is the chair of the President’s Council on Jobs and Competitiveness, which is to advise the White House on economic policy.
Honeywell's CEO, Dave Cote, was a member of the National Commission on Fiscal Responsibility and Reform. The plan supported by Cote and a majority of the commission members would reform the tax system but the corporate tax component of the plan is, at best, revenue-neutral.
On Wednesday, U.S. Senators and Representatives received a letter from 250 organizations, including organizations in every state, calling on Congress to close corporate tax loopholes and use the revenue saved to address the budget deficit and fund public investments.
The 250 non-profits, consumer groups, labor unions and faith-based groups call for a corporate tax reform that raises revenue. This differs sharply from calls by President Obama and Treasury Secretary Geithner for “revenue-neutral” corporate tax reform. The Obama administration is expected to release a plan for “revenue-neutral” corporate tax reform sometime in the near future.
As the letter explains, “Some lawmakers have proposed to eliminate corporate tax subsidies and use all of the resulting revenue savings to pay for a reduction in the corporate income tax rate. In contrast, we strongly believe most, if not all, of the revenue saved from eliminating corporate tax subsidies should go towards deficit reduction and towards creating the healthy, educated workforce and sound infrastructure that will make our nation more competitive.”
Read the letter.
Citizens for Tax Justice has called for revenue-positive tax reform in a recent op-ed in USA Today, a report explaining why Congress can raise more revenue from corporations, and in CTJ director Bob McIntyre's recent testimony before the Senate Budget Committee.
Corporate Interests Push Congress to Exempt Offshore Profits Permanently (Territorial System) or Temporarily (Repatriation Holiday)
Republican House Ways and Means Committee Chairman Dave Camp called the Chief Financial Officers of four different corporations to testify in favor of a “territorial” tax system on Thursday.
A territorial system exempts offshore profits of U.S. corporations from U.S. taxes. American corporations can already “defer” their U.S. taxes on offshore profits until those profits are repatriated (brought back to the U.S.). This creates incentives to move operations (and jobs) offshore and also creates incentives to shift profits offshore by disguising U.S. profits as “foreign” profits.
A territorial system would increase these incentives because U.S. taxes on offshore profits would be eliminated (not just deferred).
The hearing occurred just days after Republican House Speaker John Boehner spoke in favor of a territorial tax system. Boehner’s comment came at the same event where he announced that he would prefer the U.S. to default on its debt obligations unless trillions of dollars are cut from spending.
The Problems with a PERMANENT Exemption for Offshore Profits
Among the tax experts who testified before the Ways and Means Committee was Jane Gravelle with the Congressional Research Service. She explained that a territorial tax system is not efficient because it encourages investment to flow to any countries that have lower tax rates rather than creating an even playing field. Reduced investment in the U.S. would result in fewer jobs and lower wages.
A territorial system would also, she argued, worsen the problem of offshore profit-shifting by corporations.
Our tax system can either be “residence-based,” meaning U.S. taxes are paid by any taxpayer (including corporations) that resides in the U.S., or it can be “source-based,” meaning a taxpayer pays U.S. taxes only to the extent that the U.S. is the source of its income.
Gravelle argued that it’s much easier for a company to move its profits to another country (change the “source” of its income) than it is to move its headquarters to another country (change its “residence.”) That means a “source-based” system (a territorial tax system) makes it much easier for U.S. corporations to change their behavior in ways to avoid U.S. taxes than a “residence-based” system would.
The U.S.’s corporate tax system right now is a hybrid between a “residence-based” system and a “source-based” system. To adopt a true residence-based system, Congress would need to repeal the rule allowing U.S. corporations to “defer” U.S. taxes on their offshore profits. This is a reform that has been endorsed by Citizens for Tax Justice, and Gravelle said that it would be simpler to administer.
The Problems with a TEMPORARY Exemption for Offshore Profits
Some corporate leaders have argued that if Congress does not permanently exempt their offshore profits, then lawmakers should temporarily exempt them with the sort of tax holiday for repatriated corporate profits that Congress enacted in 2004.
Several studies of the 2004 effort showed that the repatriated profits went to shareholders and not to job-creation, despite the promises made by corporate lobbyists. An economist with the U.S. Chamber of Commerce recently admitted that any attempt by Congress to attach job-creation requirements to the tax holiday simply will not work.
Rep. Kevin Brady (R-TX) introduced a bill (H.R. 1834) on Wednesday to provide another repatriation holiday. (See related story.)
Not all corporate leaders are willing to give up the fight for a territorial system and settle for a repatriation holiday. The CFO's testifying Thursday said that they did NOT support a repatriation holiday, because they feel that it would distract corporate America from a larger tax policy goal of enacting a territorial system.
On Wednesday, Rep. Kevin Brady (R-TX) introduced a bill (H.R. 1834) to provide a tax holiday for corporations that repatriate offshore profits, similar to the widely panned repatriation holiday enacted in 2004. The holiday is essentially a temporary tax exemption for corporate offshore profits, which some corporate leaders see as a second best alternative to a permanent exemption. (See related story.)
Brady’s bill, like the 2004 measure, would reduce the federal corporate income tax rate on repatriated offshore profits from 35 percent to a token 5.25 percent.
Most companies with offshore profits would not actually have to pay 35 percent even under current law if they repatriated them, because they receive a credit for any foreign taxes that they have already paid. The final section of CTJ’s recent report explains that the repatriation holiday therefore provides the greatest benefits to those corporations that shift their profits to countries with no corporate income tax (tax havens).
A recent report from the Center on Budget and Policy Priorities summarizes the various studies concluding that profits repatriated under the 2004 measure largely went to shareholders in the form of increased dividends or stock buybacks rather than job creation.
Rehashed Trickle-Down Economics
Some business leaders say that increased dividends is itself a positive result because it means increased income in the U.S.
The problem is that this tax cut comes at a huge cost and is funneled to wealthy shareholders. Congress’s Joint Committee on Taxation recently found that a repeat of the 2004 repatriation holiday would cost over $78 billion over the course of a decade. In other words, the argument in favor of a repatriation holiday that boosts dividends is simply a rehash of trickle-down economics.
Encouraging Companies to Shift More Profits and Jobs Offshore
But even if Congress wanted to encourage corporations to repatriate their offshore profits (regardless of what those profits are used for) the repatriation holiday fails at that goal in the long-run.
Enacting a second repatriation holiday will send a signal that Congress is willing to call off almost the entire corporate income tax on offshore profits every few years. This would actually encourage companies to shift even more profits offshore to countries where they are not taxed very much (tax havens) and then simply wait for the next repatriation holiday.
Democrats Supporting Repatriation Holiday Have Long History of Opposing Fair and Responsible Taxes
Brady’s bill has five co-sponsors, and the three Democrats among them are likely to receive the most attention.
One is Jared Polis (D-CO) who famously drafted and circulated a letter in 2009 that was signed by several freshmen House Democrats who opposed the surcharge that the Democratic caucus was considering to help finance health care reform.
The letter, which included factual inaccuracies, argued that higher taxes on the rich hurt small businesses. The Democrats changed their surcharge so that it would only affect millionaires, as a result of this letter.
The other two Democratic co-sponsors are Jim Cooper (D-TN) and Jim Matheson (D-UT). Both signed a letter last year calling for the extension of the Bush tax cuts even for the richest taxpayers. Both also signed a letter calling specifically for the extension of the special low rate of 15 percent on capital gains and dividends, perhaps the most indefensible provision among the Bush tax cuts.
Microsoft’s purchase of Skype for $8.5 billion provides a perfect illustration of why adopting a true worldwide corporate income tax system is critical to our economic future.
According to the Wall Street Journal, the cash for Microsoft’s purchase of Skype (a Luxembourg-based company) will come out of its $42 billion in liquid assets held in foreign subsidiaries.
Because it is purchasing a foreign company with its overseas assets, Microsoft can avoid paying any U.S. tax that would be due if it had repatriated foreign earnings in order to purchase a US company for the same amount. Based on the company's effective foreign income tax rate disclosed in their most recent SEC filings, a repatriation of $8.5 billion dollars would cost Microsoft somewhere in the neighborhood of $1.1 billion in U.S. tax.
As a Forbes commentator opines, the Microsoft-Skype deal demonstrates the harmful incentive created in our current system that encourages companies to invest in overseas companies rather than domestic ones. The fear is that this deal may just be “a harbinger of things to come.”
How can the US stop encouraging companies to invest abroad rather than at home?
By adopting a pure worldwide tax system.
Under a pure worldwide system, any US company's foreign profits would be immediately subject to the US tax rate with a credit for any foreign taxes paid. This is similar to the current system except that the company would not be allowed to "defer," or delay indefinitely, its U.S. taxes by keeping its foreign profits offshore.
A pure worldwide system would mean that Microsoft would face the same tax rate regardless of where it earned its profits. This would remove any incentive for shifting profits offshore and remove any obstacles to repatriating foreign profits.
Spinning the Truth
Never missing an opportunity to toe the line of corporate leaders and their shareholders, the business press tried to spin the news as proof that the US needs to enact corporate tax cuts and a repatriation holiday. They argue that high rates in the US are the cause of US companies like Microsoft holding billions in profits overseas rather than investing them domestically.
They could not be more mistaken in their solution.
First, tax repatriation holidays may actually worsen the situation by encouraging companies to hoard profits abroad in order to wait for the next holiday or even to use them as a hostage in demanding another repatriation holiday.
In fact, Microsoft is part of a coalition lobbying for a repatriation holiday so that it can bring some of its $42 billion in overseas liquid assets back to the U.S. and pay little or no tax.
Second, as CTJ’s Director Bob McIntyre explained in his testimony to the Senate Budget Committee, simply lowering corporate taxes is unlikely to be effective and would encourage a race to the bottom as other countries feel pressure to respond by further reducing their rates.
Finally, lower corporate income taxes would of course deprive us of revenue that we need to reduce our budget deficit.
We hope that the Microsoft-Skype deal can be seen for what it is: another reason for the adoption of a pure worldwide corporate income tax system.
Organizations: Sign Onto Letter Urging Congress to Raise Revenue by Eliminating Corporate Tax Loopholes
Lawmakers and officials in the Obama administration are discussing plans to reform the corporate tax in a way that is "revenue-neutral," meaning we would not collect any more tax revenue from corporations overall than we do today. In other words, while Congress is debating cuts in public services that working families rely on, there would be no attempt to get corporations to contribute more.
Organizations are invited to sign a letter urging Congress to take a very different approach. Congress should repeal corporate tax subsidies as a way to help reduce our budget deficit and protect public investments that create the healthy, educated workforce and sound infrastructure that will make our nation competitive.
See a PDF of the letter with the list of organizations currently signed on.
The deadline to join the letter is May 16, 5:00 p.m. EST.
Sign Letter on Behalf of Your Organization (do not sign if you are not authorized to do so on behalf of an organization)
Send Your Lawmakers a Letter on Your Own Behalf
For more detailed information, see the following:
CTJ's op-ed in USA Today calling for corporate tax reform that raises revenue
CTJ's report explaining why Congress should enact corporate tax reform that raises revenue
CTJ Director Bob McIntyre's testimony on business tax subsidies before the Senate Budget Committee
This week CTJ wrote to ask the House Judiciary Committee to reject the so-called "Business Activity Tax Simplification Act" (BATSA). This legislation would make state and local taxes on businesses dramatically more complex, increase litigation related to business taxes, increase government interference in the market and reduce revenue to state and local governments by billions of dollars each year.
Read CTJ's letter opposing BATSA.
A recent report from the Center on Budget and Policy Priorities goes into more detail about why BATSA is so problematic.
New York Times' Headline, "Americans Favor Budget Cuts Over Raising Corporate Tax" Based on Misleading Poll
People who follow polling have known for some time that Americans tend to support cutting government spending in the abstract but are likely to respond very differently to proposals to cut specific programs. In fact, when faced with a choice between cuts in a particular government program or tax increases, Americans often prefer tax increases.
Sadly, this basic point was lost on the New York Times this week as it sought to gauge public support for increasing corporate taxes as a way to reduce the budget deficit.
Americans Love Cutting Government in the Abstract, Hate Cutting Specific Programs
An Ipsos/Reuters survey in early March demonstrates some of the common problems with polls on this topic. It included the following question: "The two main ways of reducing the budget deficit are to cut existing programs and to raise taxes. If you had to choose, which approach would you prefer?" Fifty-six percent responded that they would prefer to cut programs, while only 30 percent preferred raising taxes.
Of course, Congress does not have to choose between cutting spending or increasing taxes. It can (and is likely to) do both. This question presents a ridiculous hypothetical situation that no lawmaker will actually face. Only three percent of respondents said "both" in answer to this question, which is unsurprising given that "both" was not offered as an option. We know from other surveys that if the options include a mix of spending cuts and tax increases, a majority will choose that option.
The Ipsos/Reuters poll suggests that many of those respondents who chose spending reductions are not comfortable with many specific cuts that Congress could actually make. Those who said they preferred reduced government spending were given various options for programs to cut, and the only one garnering a majority was defense (at 51 percent). Only 28 percent wanted to cut Medicare and Medicaid, just 18 percent wanted to cut Social Security, and four percent chose "Other." (Respondents were allowed to choose multiple options.)
When confronted with a specific proposal to raise taxes and specific proposals to cut any of the significant government programs, people tend to choose tax increases.
For example, an ABC News/Washington Post poll gave respondents several options for addressing the budget deficit. Seventy-two percent supported "Raising taxes on Americans with incomes over 250 thousand dollars a year." Forty-two percent supported "Cutting military spending." Only 30 percent supported "Cutting spending on Medicaid, which is the government health insurance program for the poor." Only 21 percent supported "Cutting spending on Medicare, which is the government health insurance program for the elderly."
The same ABC News/Washington Post poll also asked "Overall, what do you think is the best way to reduce the federal budget deficit — by cutting federal spending, by increasing taxes, or by a combination of both?"
About three-fifths of respondents chose a combination of both.
New York Times' Misleading Article on Corporate Taxes and Public Opinion
None of this should come as any surprise to pollsters and people who write about public opinion and politics. So it's disappointing to see The New York Times publish a distorted story under an even more distorted headline, based on faulty polling about the federal corporate income tax.
Some of the questions were straight-forward. For example, one of the poll questions reads, "Do you think American corporations pay more than their fair share in federal income taxes, less than their fair share, or is the amount American corporations pay about right?" A majority, 56 percent, said they're paying less than their fair share, while only 11 percent said they were paying more. Twenty-two percent said "About right," and 11 percent said "Don't know."
(Other surveys, such as the Gallup Poll, have found that an even larger number of Americans believe that corporations pay "too little.")
Unfortunately, the Times survey also includes questions worded so poorly that they tell us virtually nothing about how Americans would feel about the real trade-offs that lawmakers must make when confronting the budget.
For example, one survey question reads "If you HAD to choose ONE, which would you prefer in order to reduce the federal budget deficit — raising taxes on corporations or cutting government spending?"
Unsurprisingly, survey respondents did what Americans always do — they chose unspecified spending cuts over tax increases.
Thirty-two percent chose "raising taxes on corporations," while 64 percent chose "cutting government spending."
Of course, as noted above, Congress does not have to "choose one" of these options, and we know from other surveys that most people prefer a mix of spending cuts and tax increases of some sort.
The more interesting question, the question not asked in this survey, is whether respondents would favor cuts in Medicare and Medicaid over corporate tax increases, or perhaps cuts in nutrition programs or education programs over corporate tax increases.
Given that most people believe (according to this very survey) that corporations pay less than their fair share, it's very hard to imagine that corporate tax increases would not be more popular than cuts in health care, nutrition or education.
Unfortunately, The Times made this misleading survey question the subject of the article's headline, "Americans Favor Budget Cuts Over Raising Corporate Tax."
Another survey question is quite blatantly a leading question. It reads, "Some people say the taxes on corporate profits should be increased to help reduce the federal budget deficit. Other people say taxes on corporate profits should be decreased to encourage American companies to create jobs and help them to compete globally. What do you think? Do you think taxes on corporate profits should be increased, decreased, or kept about the same?"
This wording presents a choice between increasing corporate taxes to "reduce the federal budget deficit" and decreasing corporate taxes to "create jobs." Of course, Americans care more about creating jobs than they do about reducing the deficit, so the result is predictably skewed. Thirty-seven percent said corporate taxes should be increased (a surprisingly high figure given that the question was leading respondents to the opposite conclusion). Twenty-six percent said corporate taxes should be decreased, and 32 percent said they should stay the same.
We could imagine a question worded in a way that would achieve very different results. For example, a survey question might read, "Some corporate leaders say that reducing corporate taxes will help America's corporations generate profits. Others say that the corporate tax loopholes in place today encourage corporations to shift their profits and jobs offshore and that closing these loopholes can help American workers while also reducing the deficit. What do you think?"
Indeed, respondents' answers to another question in this survey suggest that they would need very little prodding to support raising taxes on corporations. The question reads "As far as you know, when corporations receive tax cuts, do you think the corporations use the savings mostly to create new jobs for American workers, mostly as dividends for shareholders and bonuses for executives, OR do they mostly reinvest it back into the corporation?"
Sixty-one percent said they go to dividends and bonuses, while just 4 percent said new jobs, 23 percent said it's reinvested, and just 3 percent said it goes to a combination of these things.
Given that most people think corporations pay less than their fair share and spend most of their tax breaks on dividends and bonuses, a proposal to raise revenue from corporations by eliminating corporate tax loopholes would likely be popular, New York Times headlines notwithstanding.
Honeywell International has responded to a press release that CTJ posted Tuesday and which explained that the company has paid an effective U.S. income tax rate of just 4.1 percent averaged over the past five years.
The company's CEO, Dave Cote, was a member of the President's National Commission on Fiscal Responsibility and Reform and speaks frequently about his support for cuts in Medicare and Medicaid. Cote spoke on Tuesday at a public event focused on deficit reduction and was asked twice about the CTJ press release.
Within a matter of hours, Honeywell sent a letter to CTJ essentially saying that the company correctly reported large profits to its shareholders for the last two years but used available tax loopholes to report losses to the IRS.
CTJ's director, Bob McIntyre, wrote a letter back to Honeywell that concludes:
"So I think we agree on the following: The reason why Honeywell, despite reporting substantial pretax U.S. profits to its shareholders, paid no federal income tax in 2009 or 2010 (or more precisely, paid less than zero) is that it took advantage of legal tax breaks to wipe out its federal income tax liability. We may disagree, however, about whether these tax breaks should exist."
Read CTJ's press release about Honeywell and the correspondence between the company and CTJ.
Yesterday, the Business Roundtable, a politically conservative group of corporate CEOs, released a report claiming to show that U.S. corporations pay higher effective tax rates than corporations of other countries. CTJ's director Bob McIntyre was quoted in several news articles explaining why the report, which was written by PricewaterhouseCoopers, is nonsensical.
First, it includes both "current" income taxes (i.e., taxes paid) and "deferred" income taxes (i.e., taxes not paid). Because the US allows far more tax breaks in the form of (indefinite) deferrals than do other countries, that makes the US effective tax rate look much higher than it actually is. Second, the report looks at worldwide taxes paid, and attributes all of those taxes to the country where companies are headquartered. So if US companies pay a lot of foreign taxes, the report counts that as high taxes imposed by the United States!
Corporations' public filings divide their tax liabilities into "current" taxes and "deferred" taxes, the deferred taxes being those a company expects to pay in the future. Taxes that are "deferred" are quite often never paid at all. If and when they are paid in the future, they will be recorded as "current" taxes during that year, but usually the company will have more deferrals that will offset any deferred taxes that come due.
Corporations' public filings also provide their worldwide taxes on their worldwide profits. But clearly the U.S. government only has control over U.S. taxes. Many companies actually pay taxes at a higher rate on their foreign profits because other countries do not provide as many breaks for investment as the U.S. does. But surely no one expects Congress to give corporations even more breaks to help them pay their foreign taxes.
The report issued for the Business Roundtable includes current and deferred, worldwide taxes in its calculation of effective tax rates of corporations. Floyd Norris, the chief financial correspondent of The New York Times, calls this "highly misleading." He asked the author of the report how much U.S. corporations actually pay to the U.S. government (how much their current U.S. taxes are in a given year).
The reply from PricewaterhouseCoopers' Andrew Lyon (who happens to be a former assistant Treasury secretary under George W. Bush): “We have not looked at that data.”
Thankfully, Citizens for Tax Justice is looking into that data and hopes to have a report within a few months.
Hundreds of events from coast to coast are being organized to target corporations that fail to pay their fair share in taxes while lawmakers consider slashing public services that working Americans depend on.
MoveOn invites "frustrated taxpayers, underwater homeowners, vilified public servants, job-hunting students, and unemployed veterans—everyone facing cuts or cutbacks, a pink slip or a shrinking paycheck" to join demonstrations to demand that Congress cracks down on corporate tax dodgers and to deliver to these companies the tax bill they should pay. Find a MoveOn event near you.
U.S. Uncut is also organizing demonstrations and events targeting corporations, some of which are in cooperation with MoveOn. Find a U.S. Uncut event in your area.
Finally, U.S. PIRG and other organizations will have activities outside post offices on April 15 and April 18 in several states to create awareness about tax dodging by corporations and to press Congress to act. These events will target people whose minds are very much on taxes as they mail off their federal income tax returns.
See the list below for U.S. PIRG events in your state and contact information.
April 15, 2011
Event: U.S. Public Interest Research Group will be holding events outside of Post Offices across the country to try to get Congress to address tax dodging corporations with report releases and post-carding.
Portland OR, April 15th. Contact Jen Lavelle at firstname.lastname@example.org, 503.231.4181
AnnArbor MI, April 15th. Contact Megan Hess at email@example.com, 734.662.6597
Chicago IL, date TBD. Contact Brian Imus at firstname.lastname@example.org, 312-544-4433 x 210 (Federal Plaza, outside of main post office)
Hartford CT, April 15th, Contact Jenn Hatch at email@example.com, 860.233.7554
Albuquerque NM, date TBD, Contact Erin Eckelson at firstname.lastname@example.org, 505.254.1244
Philly area, date TBD. Contact Megan DeSmedt at email@example.com, 215.732.3747
Phenoix AZ, April 15th. Contact Seren Unrein at firstname.lastname@example.org, 602.252.9227
Des Moines IA, Date TBD, Contact Sonia Ashe at email@example.com, 515.282.4193
April 18, 2011
Event: U.S. Public Interest Research Group will be holding events outside of Post Offices across the country to try to get Congress to address tax dodging corporations with report releases and post-carding. U.S. PIRG is partnering with Citizen Action in a number of states: NJ, OR, IL, MI, MO, CT.
Trenton NJ, April 18th. Contact Jen Kim at firstname.lastname@example.org, 609.394.8155
Seattle WA, April 18th, Contact Lindsay Jacobson at email@example.com, 206.568.2854 (either at post office downtown, or in front of Microsoft).
Boston MA, April 19th, Contact Dee Cummings at firstname.lastname@example.org, 617.292.4805
Baltimore MD, April 18th, Contact Johanna Neumann at Johanna@marylandpirg.org, (410) 467-9389
St. Lois MO, TBD
A USA Today op-ed written by CTJ's Steve Wamhoff argues that we should approach corporate tax reform the way President Reagan did in 1986. He closed enough tax loopholes to raise new revenue from corporations, even while lowering the corporate tax rate.
New Report from CTJ Explains the Right Way to Reform Corporate Tax – and Why the Amnesty Is the Worst Possible Change
Corporate leaders are conducting a massive campaign for what amounts to a tax amnesty for corporate profits shifted out of the United States, especially profits shifted to offshore tax havens.
In 2004, Congress approved this sort of holiday, which allowed U.S. corporations that brought offshore profits to the U.S. to pay U.S. taxes at a rate of just 5.25 percent instead of the normal 35 percent. Corporate leaders claimed they would use the money brought back to create jobs, but several empirical studies found that the holiday did not lead to job creation, and many of the companies that benefited actually reduced their U.S. employment. The money was largely put towards stock repurchases, effectively putting it in the hands of shareholders.
Washington Resists the Repatriation Holiday — But for How Long?
During the debate over the economic recovery act in early 2009, Senator Barbara Boxer offered an amendment to provide another repatriation holiday. Concluding that the 2004 holiday was a corporate giveaway that enriched shareholders without creating jobs, most Senators opposed the Boxer measure, which failed by a vote of 42-55.
The Obama administration reiterated that it opposes a repatriation holiday — unless it is part of a comprehensive corporate tax reform. In another blow to proponents of the holiday, the leading Republicans of the Congressional tax-writing committees said the same thing.
U.S. Chamber of Commerce Admits that Job-Creation Rules Attached to Tax Holiday Won't Work
Some lawmakers who support a repatriation holiday argue that the conditions attached to the 2004 measure could be strengthened in a second holiday so that companies cannot benefit without creating jobs or otherwise directly investing in their U.S. operations.
But this argument is so weak that even the U.S. Chamber of Commerce openly rejects it. At a panel discussion organized by Tax Analysts, Martin Regalia, a senior vice president for the Chamber, said that because money is fungible, you cannot really direct a company to do any particular thing with cash it receives.
Regalia said that the case for a repatriation holiday is that it's good for America when a company brings offshore profits back to the U.S., even if the profits go directly to shareholders.
Regalia did not use the more recognizable terms that describe this type of thinking, perhaps because it is so widely discredited: Trickle-down economics, or supply-side economics.
Democratic Insiders Hired to Promote the Amnesty for Corporate Tax Dodgers
With all this going against the repatriation holiday, why do the corporations think they can win? Because this time they are far more organized and are devoting far more resources to lobbying. They have effectively bought off some highly influential Democratic insiders, as well as Republican insiders. The coalition in favor of the holiday includes Adobe, Apple, Cisco, Google, Kodak, Microsoft, Pfizer, Oracle and others. A Business Week article explains:
The team's chief communications strategist is Anita Dunn, the Democratic media consultant who served as President Barack Obama's interim communications director during his first year in office... The lead lobbyists are former Representative Jim McCrery of Louisiana, who was the ranking Republican on the House Ways and Means committee, and Jeffrey A. Forbes, the former chief of staff to Senate Finance Chairman Max Baucus (D-Mont.).
New Report from CTJ Explains What Congress Should Do Instead
A new report from Citizens for Tax Justice explains that Congress should adopt a system that taxes all profits of U.S. corporations, no matter where they are earned. U.S. corporations would continue to get a credit, as they do now, for any taxes they pay to a foreign government, to avoid double-taxation. (The comprehensive tax reform offered last year by Senators Ron Wyden and Judd Gregg would do this.)
In this system, U.S. corporations would never have a tax-related reason not to repatriate their offshore profits because those profits would already be subject to U.S. taxes anyway.
In theory, the U.S. does have a “worldwide” tax system in which all profits of a U.S. corporation are subject to U.S. taxes, but it undermines this rule by allowing U.S. corporations to “defer” their U.S. taxes on offshore profits until those profits are brought to the United States (until those profits are “repatriated”). Deferral provides an incentive for corporations to move jobs overseas and to shift profits to offshore tax havens.
Many corporate leaders want Congress to permanently exempt offshore profits (adopt a "territorial" system, in other words) but that would only increase the incentives to shift jobs and profits offshore. So would allowing corporate leaders to believe that Congress will call off almost all of the U.S. taxes on offshore profits every few years with a repatriation holiday.
Repatriation Holiday Provides Greatest Benefits to the Worst Corporate Tax Dodgers
The CTJ report also explains that a repatriation holiday provides the greatest benefits to corporations that engage in the very worst tax avoidance. Multinational corporations that are conducting real business offshore and paying taxes to a foreign government have much less to gain from a repatriation holiday. On the other hand, a company that has shifted profits to a Cayman Islands subsidiary that conducts no real business and pays no foreign taxes would benefit enormously.
A New York Times article explains how General Electric has obtained a negative corporate income tax rate on its U.S. profits. Its public filings show that it had $26 billion in U.S. profits over the last five years. Instead of paying federal corporate income taxes, G.E. actually received a net benefit of $4.1 billion from the IRS over that period.
The article quotes CTJ's director:
“'Cracking down on offshore profit-shifting by financial companies like G.E. was one of the important achievements of President Reagan’s 1986 Tax Reform Act,' said Robert S. McIntyre, director of the liberal group Citizens for Tax Justice, who played a key role in those changes. 'The fact that Congress was snookered into undermining that reform at the behest of companies like G.E. is an insult not just to Reagan, but to all the ordinary American taxpayers who have to foot the bill for G.E.’s rampant tax sheltering.'”
Here are some other highlights:
- President Obama has "designated G.E.’s chief executive, Jeffrey R. Immelt, as his liaison to the business community and as the chairman of the President’s Council on Jobs and Competitiveness, and it is expected to discuss corporate taxes."
- G.E.'s tax department includes nearly 1,000 people who are instructed to "divide their time evenly between ensuring compliance with the law and 'looking to exploit opportunities to reduce tax.'”
- G.E.'s tax avoidance played a starring role in convincing Reagan to adopt tax reform in the 1980s. “'I didn’t realize things had gotten that far out of line,' Mr. Reagan told the Treasury secretary, Donald T. Regan, according to Mr. Regan’s 1988 memoir. The president supported a change that closed loopholes and required G.E. to pay a far higher effective rate, up to 32.5 percent."
- "That pendulum began to swing back in the late 1990s" when Congress enacted a tax break for "active financing."
- G.E.'s tax department's director, a former Treasury official, literally "dropped to his knee" when begging Ways and Means Committee staff, then under the leadership of Congressman Charles Rangel, to extend the tax break for "active financing."
- Rangel reversed his opposition to extending the "active financing" tax break that day, after G.E.'s lobbying and after Congressman Crowley of Queens argued that it would help banks in his district.
- Provisions of President George W. Bush's huge corporate tax cut bill in 2004 were "so tailored to G.E. and a handful of other companies — that staff members on the House Ways and Means Committee publicly complained..."
- "Since 2002, the company has eliminated a fifth of its work force in the United States while increasing overseas employment. In that time, G.E.’s accumulated offshore profits have risen to $92 billion from $15 billion."
CTJ Director Robert McIntyre: "President Obama Is Seriously Off Track" on Revenue-Neutral Goal for Corporate Tax Reform
Robert McIntyre, director of Citizens for Tax Justice, testified on March 9 before the Senate Budget Committee on tax subsidies for businesses. He explained that these tax breaks for business (1) are hugely expensive, (2) are often economically harmful, and (3) conflict with fundamental tax fairness.
Eliminating or reducing these tax subsidies can result in revenue that would help us address our long-term budget crisis. McIntyre said that "President Obama is seriously off track in proposing to devote all the savings that can be gained from curbing business tax subsidies not to deficit reduction, but rather to lowering the statutory corporate tax rate."
Here's an excerpt of the testimony:
...Today is the first day of Lent, and I’d like to suggest that members of Congress consider giving something up, not just until Easter, but perhaps until the federal budget is balanced (and even thereafter). What I hope you’ll give up is your enthusiasm for providing subsidies to those who don’t need them, in particular, for business subsidies administered by what seems to have become Congress’s favorite agency, the Internal Revenue Service.
A quarter of a century ago, President Ronald Reagan took on business tax subsidies in the Tax Reform Act of 1986. Among other things, Reagan’s tax act curbed offshore corporate profit shifting, leasing tax shelters and numerous industry-specific tax breaks, and despite a reduction in the statutory corporate tax rate, increased corporate tax payments by 34 percent. Reagan also equalized the personal income tax treatment of wages and realized capital gains, and he made the tax system more progressive overall.
But lobbyists for corporations and wealthy individuals didn’t give up after 1986. They worked hard to regain and expand the tax subsidies that Reagan had taken away. In the 1990s, the lobbyists persuaded the Clinton administration and the Congress to eviscerate the corporate Alternative Minimum Tax (designed to curb the huge tax advantages that go to highly-leveraged activities such as equipment leasing), adopt the so-called “check the box” and “active-financing” rules that vastly expanded offshore corporate tax-sheltering opportunities, and reestablish preferential tax rates on realized capital gains. During the George W. Bush administration, business and investment tax breaks were expanded considerably further. Both political parties are at fault in this sad repudiation of President Reagan’s tax legacy.
By the early 2000s, corporate subsidies had risen so much that the average effective U.S. federal corporate tax rate paid by America’s largest and most profitable corporations on their U.S. profits had fallen to only 18.4 percent — barely over half the 35 percent statutory rate. Those tax subsidies have grown even larger since then.
Our complaints about business tax subsidies fall into three categories. (1) They are hugely expensive. (2) They are often economically harmful. And (3) they conflict with fundamental tax fairness...
Read the full testimony
New from CTJ: Boeing's Reward for Paying No Federal Taxes Over Last Three Years? A $35 Billion Federal Contract
Despite reporting nearly $10 billion in domestic pre-tax profits between 2008 and 2010, the Boeing Corporation, which was granted a contract worth as much as $35 billion to build airplanes for the federal government earlier this week, did not pay a dime of U.S. federal corporate income taxes during this three-year period.
Read the report.
Lawmakers in Congress have been discussing a second tax holiday for U.S. corporations' offshore tax profits, after having sworn that the first such holiday, enacted in 2004, would be a one-time event.
Typically, when multinational U.S. corporations bring overseas profits back to the United States (when they "repatriate" offshore profits) they have to pay U.S. corporate income taxes. The statutory tax rate for corporate income is 35 percent, although corporations of course use many breaks and loopholes to lower their effective rate.
The tax holiday that was enacted in 2004 allowed companies to repatriate their profits and pay taxes at a rate of just 5.25 percent (that is, almost nothing).
The biggest problem is that if Congress shows that it is willing to repeat this "one-time" tax holiday, then corporations will actually have an incentive to shift profits, and perhaps even operations and jobs, offshore. Corporations could then simply wait for the next "one-time" tax holiday to bring those profits back to the U.S.
One of the lawmakers pushing the proposal is the ostensibly progressive Senator Barbara Boxer of California.
The administration decided that the adults needed to intervene. Treasury Secretary Tim Geithner made a public statement this week that the administration does not support the idea. However, even Geithner's statement did include an alarming caveat when he said, "We are not going to look at a [tax] holiday outside the context of comprehensive reform." (Emphasis added.)
Proponents of a tax holiday insist that companies use the money they bring back to the U.S. to create jobs, but data from the last time Congress allowed multinationals to bring back foreign profits at a very low tax rate indicates that the cash primarily ended up in the hands of shareholders through dividends and stock redemptions.
See our earlier report explaining why the repatriation tax holiday is a terrible idea.
During his State of the Union Address last week, President Obama called on Congress to "get rid of the loopholes" in the corporate tax and "use the savings to lower the corporate tax rate for the first time in 25 years — without adding to our deficit."
If the President means that all of the revenue raised by closing tax loopholes should be used to pay for a reduction in the corporate tax rate, then this is the wrong approach.
A report released earlier that day by Citizens for Tax Justice explains several reasons why corporate tax reform should be revenue-positive, not revenue-neutral. Despite what corporate CEO’s and many politicians claim, U.S. corporate taxes are already lower than the corporate taxes imposed by the countries that we compete with. Surveys show that most Americans want large corporations to pay more, not less, in taxes. The arguments lobbyists make to try to justify reducing U.S. corporate taxes — arguments related to “competitiveness” and alleged “double-taxation” of corporate income — don’t add up. The last major corporate tax reform, which was enacted under President Ronald Reagan at a time when corporate loopholes were out of control, as they are again today, resulted in a 34 percent net corporate tax increase.
House Budget Chairman Paul Ryan gave the Republican response to President Obama's State of the Union address, speaking at length about what he sees as the need for greater cuts in government spending.
Anyone interested in learning what sorts of changes Congressman Ryan has in mind can look to the detailed "Roadmap for America's Future" that he proposed last year.
Ryan's "Roadmap" would reduce Social Security benefits and partially privatize the program, replace Medicare and Medicaid with gradually declining subsidies for private health insurance, and dramatically slash other types of non-military spending.
CTJ's report on the tax proposals in Ryan's "Roadmap" found that they would raise taxes on average for the bottom 90 percent of taxpayers, slash taxes on average for the richest 10 percent of taxpayers, and lose $2 trillion over a decade.
A group of small business owners and investors released a report on offshore tax havens this week and launched a campaign to put an end to the tax avoidance that they facilitate.
The group, Business and Investors Against Tax Haven Abuse, explains that tax havens provide an unfair advantage to large chain retailers and financial companies over locally-owned retailers and community banks. Target, Best Buy, Citigroup, Goldman Sachs and other well-known corporations are able to shift profits to their subsidiaries in places like the Cayman Islands (where they do little or no actual business) to reduce or eliminate their U.S. taxes. Independent "mom and pop" retailers are at a huge disadvantage just because they don't have subsidiaries set up in foreign countries solely to reduce their taxes.
It's not just independent and locally-owned businesses that suffer. All honest taxpayers are being cheated, the report explains, because the huge U.S. multinational corporations that use tax havens are actually doing most or all of their actual business in the U.S., meaning they are benefiting from the American education system, legal system, highways and other types of infrastructure even though they are not doing their part to pay for these public goods and services.
A particularly interesting part of the report explains how tax havens also helped facilitate shady financial dealings that contributed to the financial collapse. It cites reports that Goldman Sachs was using subsidiaries in the Cayman Islands when it "peddled billions of dollars in shaky securities tied to subprime mortgages on unsuspecting pension funds, insurance companies and other investors when it concluded that the housing bubble would burst."
For too long, lawmakers have responded to efforts to end offshore tax avoidance as some sort of wild attack on the free market. Now that business people themselves are sounding the alarm, lawmakers should listen.
On July 1st, Representative Bill Delahunt (D-MA) introduced the Main Street Fairness Act, the latest legislative attempt to close the unfair tax loophole that has let internet companies off the hook for tens of billions in unpaid sales taxes.
With so many states facing severe budget deficits, state governments are desperate to collect the unpaid sales taxes on purchases from out-of-state internet and catalogue retailers. According to the definitive study by researchers at the University of Tennessee, the loss in sales tax revenues due to the loophole allowing internet and catalogue retailers to avoid sales taxes could range anywhere from $8.6 to $9.92 billion in 2010 and could shoot up to nearly $34 billion from 2010 to 2012. The NCSL provides a useful interactive map highlighting the revenue loss due to the loophole in each state. Unfortunately, the loss will only increase going forward as internet sales continue to become a larger and larger portion of total sales.
Delahunt’s legislation would fix the loophole by allowing states that join the Streamlined Sales and Use Tax Agreement to collect sales tax and use taxes on out-of-state retailers. Joining the agreement entails simplifying and standardizing state sales and use tax codes in order to make the system less unwieldy for out-of-state retailers. Already 23 states are part of the agreement, with many more taking steps toward standardization. In addition, the bill would exempt many small businesses and provide some funds to help with the cost of compliance.
For decades, state governments have been trying to collect sales taxes from these retailers. A 1992 Supreme Court ruling in Quill v. North Dakota made the task almost impossible by preventing state governments from requiring sellers to collect sales taxes unless the seller has a physical presence in the state. The Court ruled that states can require companies without physical presence within their borders to collect sales taxes only if given permission by a law enacted by Congress. Delahunt's bill would provide that permission.
For Joe Rinzel, Vice President for State Government Relations for the Retail Industry Leaders Association, the issue presented by the loophole is really about “fairness for both businesses and consumers.” As a brief by the Institute on Taxation and Economic Policy explains, the loophole is inherently unfair because it provides a distinct advantage to online retailers over community stores, which have to collect sales taxes. Compounding this, the failure to tax internet sales places a disproportionate burden on consumers who (for economic or other reasons) do not use the internet for shopping.
Despite the need for federal legislation, Mike Zapler reports that states are trying to act on their own. New York attempted to get around the Supreme Court Ruling by redefining what constitutes a physical presence in New York. Taking a different approach, Colorado passed a law requiring out-of-state retailers to provide the states with the names and items bought from residents. In both cases, the laws were immediately met with lawsuits from industry supporters.
The passage of Delahunt’s Main Street Fairness Act would serve to stop the harm done to ‘brick and mortar’ retailers by the ending the loophole while providing desperately needed revenue to state governments.
President Obama wants to sign a jobs bill into law. The majority of members of the House and Senate want the same thing. So do the two million out-of-work Americans who will have lost their unemployment benefits by July because of Congress's inaction. Not to mention the millions of Americans who will see public services like education and public safety slashed because their states have to make up shortfalls in Medicaid funding. And then there are the mainstream economists who conclude that some deficit-spending on measures that pump money immediately into the economy and create jobs are entirely justified when unemployment is hovering around ten percent. In the face of all this, a minority of 42 Senators has managed to block legislative action.
Congress has fought a months-long battle over the bill, H.R. 4213, which includes an extension of emergency unemployment benefits and Medicaid funding to states, two spending measures that economist Mark Zandi has argued are the most effective way to stimulate the economy. These measures result in immediate spending, which leads to a boost in consumer demand, and the retention or creation of jobs to produce the goods and services needed to meet that demand.
The bill also includes a collection of provisions that extend short-term tax breaks for business that Congress enacts every year or so. Members of Congress and Hill staffers often call these the "tax extenders." CTJ has criticized the tax extenders for years. But, we support them this year because they are coupled with provisions that would offset their costs by clamping down on unfair tax loopholes. This is a major step forward for Congress. See CTJ's many reports on these loophole-closing provisions.
To their credit, Democratic leaders have tried every conceivable tactic to win over the so-called "moderates" who are blocking the bill.
For example, the House passed legislation three times to completely eliminate the infamous "carried interest" loophole that allows certain wealthy investment fund managers to treat their compensation as capital gains and thus enjoy a lower tax rate. This time, the House scaled back its provision to close this loophole, and Democratic leaders in the Senate scaled the provision back multiple times in their versions of the bill. Eliminating this loophole, which was proposed by the Obama administration, was estimated to raise about $24 billion over a decade. Democratic leaders in the Senate whittled that down to $13.6 billion. The provision is not so much a loophole-closer any more as a loophole-reducer.
Other compromises made to secure votes were even more alarming. The most recent proposal would have taken over $9 billion of unspent funds from the recovery act that are supposed to be used for food stamps to help offset the costs of this bill. This is preposterous. Food stamps are one of the most effective types of stimulus, along with unemployment insurance benefits and fiscal aid to states, according to Mark Zandi.
The country needs the Senate to pass, some way or another, a jobs bill. Sadly, Democrat Ben Nelson and the 41 Republican Senators have the ability, under the Senate's bizarre rules, to stop that from happening.
As the Senate continues a seemingly endless debate over H.R. 4213, the jobs and "tax extenders" bill, business lobbyists, right-leaning economists and politicians have had more time to shape their arguments in defense of the tax loopholes that the bill would pare back.
To offset the costs of the tax breaks included in the bill, three types of loopholes would be restricted. They include the "carried interest" loophole that allows certain investment fund managers to treat their compensation as capital gains and thus enjoy a lower tax rate, the "John Edwards" loophole allowing people with "S corporations" to avoid payroll taxes, and abuses of the foreign tax credit by U.S.-based multinational corporations.
The debate over the "carried interest" loophole has received the most attention, and CTJ has responded to some of the outlandish arguments made in its defense.
More recently, Senator Olympia Snowe (R-ME) has voiced her opposition to the provisions regarding "S corporations," and filed an amendment to strip them from the bill. A recent report from CTJ explains that this amendment should be rejected because the loophole in question allows people to underestimate the extent to which their income is wages, meaning they avoid payroll taxes.
The report also explains that the main effect of the provisions in H.R. 4213 regarding S corporations would probably be on Medicare taxes. The new health care reform law actually applies Medicare taxes to most non-retirement income, but there is a bizarre exception left for certain non-wage income from S corporations. H.R. 4213 would not even eliminate this exception entirely but would merely target those taxpayers who are most obviously manipulating the tax rules to avoid paying the Medicare tax. This seems like the least Congress could do.
The provisions in H.R. 4213 that prevent abuses of the foreign tax credit have also received more attention lately. A new report from CTJ responds to criticisms of these provisions made by the Peterson Institute's Gary Hufbauer and Theodore Moran.
The purpose of the foreign tax credit is to ensure that American individuals and corporations are not double-taxed on income that they earn in other countries. Hufbauer and Moran seem to acknowledge — and endorse — the common practice of corporations using credits in excess of what is necessary to avoid double-taxation. In these instances, corporations are really using the credit to lower their U.S. taxes on their U.S. income. Or, put another way, it means the credit is being used to subsidize foreign countries by helping U.S. corporations pay their foreign taxes.
Surely, everyone should agree that this is not the purpose of the foreign tax credit. But without the reforms included in H.R. 4213, these practices will continue, and we will have missed an important opportunity to make our tax system fairer and more rational.
A new report from Citizens for Tax Justice explains that the new jobs and "extenders" bill released by the chairmen of the House and Senate tax-writing committees on Thursday contains several long-overdue provisions to close tax loopholes. The bill (H.R. 4213) takes aims at corporations that shift profits offshore, investment fund managers who use the "carried interest" loophole to pay lower tax rates than their secretaries, and business people who use the "John Edwards" loophole to avoid their Social Security and Medicare taxes.
Many people are more familiar with the important spending provisions in the bill geared to speed up the economic recovery, including an extension of unemployment insurance and COBRA health care benefits for the unemployed, Medicaid funding for states, TANF jobs and emergency funding for states and other measures that will help boost the economy.
The tax loophole-closing provisions are used to offset the costs of extending several small tax breaks. The spending portion is mostly considered emergency spending that does not have to be paid for under Congress's budget procedures because it is temporary and necessary to prevent the economy from drifting back towards recession. (The Center on Budget and Policy Priorities explains why the spending portions of the bill are economically necessary and fiscally sound.)
Call your lawmakers now and urge them to vote in favor of H.R. 4213. Visit the website for Jobs for America Now, which makes it extremely easy for you to make a toll-free call to your lawmakers to support this bill.
The U.S. Chamber of Commerce recently said that it will not try to repeal the new health care reform law. Has big business seen the light?
No. Actually, the Chamber is still planning on spending $50 million to defeat lawmakers who voted in favor of reform. And they will work to shape regulations and try to repeal parts of the law that are not in the interest of big business, which presumably includes the health insurance industry. Which means it's hard to see what part of the new law the Chamber does NOT want to repeal.
Business groups are already taking aim at particular provisions. For example, the American Benefits Council is complaining that several large corporations must take write-downs ranging from $50 million to $1 billion on their financial statements because the health care reform law repealed a tax break enacted as part of the Medicare prescription drug law in 2003.
The tax break in question should never have been enacted. The prescription drug law subsidizes companies that provide prescription drug coverage for their retirees, ostensibly to prevent those retirees from shifting over to the government program. On top of this subsidy, the companies were also allowed to continue deducting the entire costs of the drug coverage, including the 28 percent subsidy paid by the government.
The health care reform law leaves in place those 28 percent subsidies but repeals the deductions. Telecommunications giant AT&T announced that it would take a $1 billion charge against its profits to reflect the likely future impact of this tax change. Verizon announced a $970 million charge, and other companies, including Exelon, 3M, Caterpillar and John Deere, announced charges in the millions or tens of millions.
But this is only because they're losing a tax break that was never really justified in the first place. The point of deductions is that they account for expenses that companies pay and that reduce their bottom line, i.e., reduce their profits, because profit is what is ultimately taxed. It makes no sense for a company to deduct a subsidy from the government because it does not reflect an expense paid by the company itself.
It seems that Congress really wanted to give these companies a larger subsidy than just the 28 percent, but decided that it would be easier to do so through the tax code. Whether or not larger subsidies were justified, it's generally poor policy to provide them through the tax code because it creates more tax complexity (causing corporations to pour more resources into figuring out how to lower their tax liability) and is less transparent. At least direct spending on subsidies for corporations show up as "costs" each year in government budget documents and are debated extensively by lawmakers. Corporate subsidies provided through the tax code, however, rarely receive this much attention.
It's also worth pointing out that the charges that the companies are announcing may sound like big numbers, but they're actually costs to the companies over many, many years. They reflect the costs of paying full taxes on those subsidies for retiree drug coverage over the course of the retirees' lives, which will be decades. They do NOT represent costs that they must pay this year.
Also, to the extent that the health care reform law provides any benefits to these companies, those are not going to show up on their financial statements today, which is another reason that they are a poor measure of how reform will affect them. Health and Human Services Secretary Kathleen Sebelius recently said that company executives she has communicated with "admit at the outset that what they will give up in terms of closing that kind of a loophole on tax benefits is well overcome by the kind of savings they're looking at with not only incentives for businesses to keep health insurance for their employees, but the kind of wellness and prevention efforts to lower costs in the long run."
Finally, it's entertaining to see conservatives tie themselves in knots as they try to defend the massive subsidies provided in the Medicare prescription drug law (enacted under President Bush) despite their supposedly "free market" philosophy. The Wall Street Journal, presumably, does not support government subsidies, but their opposition seems to melt when some part of the subsidy takes the form of a tax break.
The paper essentially argues that the subsidy and the tax break are justified because they actually save the government money by keeping retirees off of the Medicare prescription drug program. It may or may not be true that the 28 percent subsidy ends up saving the government money, but there is no reason to think that the double deduction, on top of that subsidy, does so, too. On the contrary, the Joint Committee on Taxation estimates that scrapping this unjustified tax break will save the government $4.5 billion from fiscal 2013 through fiscal 2019.
The Senate approved a bill Wednesday that includes an extension of unemployment benefits and COBRA health benefits for unemployed workers through the end of the year, and a short-term extension of Medicaid funding for states and a Medicare "doc fix" (maintaining payments to doctors under Medicare).
The cost of this spending was not offset since it is considered emergency spending to stimulate the economy. But the costs of other provisions in the bill — extensions for $30 billion worth of business tax breaks often called the "tax extenders" — were offset. The biggest revenue-raiser used to offset this costs is a provision to close the "black liquor" loophole. This loophole allows paper-making companies using a carbon-rich by-product as fuel to use a tax credit that is supposed to encourage the use of environmentally-friendly alternative fuels.
But the "black liquor" provision may be used instead in the final health care reform bill. The health care reform bill approved by the House on November 7 of last year (H.R. 3962) included this revenue provision, and the President's recent proposal to bridge the differences between the House and Senate health bills also includes it.
There is another perfectly good revenue-raising provision that the Senate can use to offset most of the cost of the "tax extenders." The version of the tax extenders bill approved by the House on December 9 was supported by CTJ and several other progressive organizations because it included several good provisions, including one to close the infamous "carried interest" loophole. U.S. PIRG and CTJ issued a joint press release yesterday stating their disappointment that the Senate has not done the same.
The carried interest loophole allows billionaires managing hedge funds and buyout funds to pay taxes at a lower rate than middle-income workers. The House has passed legislation three separate times to close the carried interest loophole (including the recent House-passed extenders bill), and both of President Obama’s budget plans have proposed to close it. Senator Chuck Schumer (D-NY) was quoted in Congress Daily recently saying that closing the carried interest loophole is "on the table."
Until this loophole is closed, the compensation of these fund managers will continue to be taxed at a rate of 15 percent, the preferential rate for capital gains that is supposed to benefit people who invest their own money, not the people who manage it.
You don't know it, but you are probably a tax scofflaw-- because you haven't paid your "use tax." If you purchase, say, a stereo from a store in your state (and your state has a sales tax), you'll pay sales tax on that purchase. But when you buy the same stereo on-line from, say, Amazon.com, odds are that Amazon won't add sales tax to your purchase price. The laws of all sales tax states are quite clear on what is supposed to happen in this situation: you, as the purchaser, are supposed to pay the "use tax", which has exactly the same tax rates and tax base as the regular sales tax. But individual consumers purchasing items online very rarely pay the tax in this situation, and states typically make little effort to enforce it, as least with respect to household purchases (as opposed to business purchases).
If one wanted to make a short list of tax reforms that could lead to effective enforcement of the use tax, two things high on that list would be (a) that when a retailer in state X sells a sales-taxable item to a consumer in state Y, and does not collect sales tax on that item because they have no physical presence in state Y, then the retailer should have to remind the purchaser that they are legally required to pay the use tax, and (b) that under this same scenario, the retailer should have to alert state Y's Dept. of Revenue that these transactions took place.
This is precisely what Colorado did when it enacted House Bill 1193 earlier this year. The new law requires companies like Amazon, which has no physical presence in the state, to send a reminder to purchasers that they are supposed to pay the use tax. It also requires these companies to send an end-of-year statement to the state revenue department summarizing the value of untaxed sales to each customer. The law does NOT require Amazon to collect a dime of additional tax.
Earlier this week, Amazon responded to this law by dropping all its affiliates in the state of Colorado. (Affiliates are individuals or companies who put a link to Amazon on their own website, and earn a share of the take when customers click-through to buy things on Amazon's website.) As the Center on Budget and Policy Priorities' Michael Mazerov notes in a statement on Amazon's actions, this is a purely punitive action that has no relationship to the new law: the new reporting requirements under HB 1193 don't depend on whether a sale was made through a "click-through" affiliate, and even after dropping its affiliates, Amazon will still have to comply with the law. Amazon's actions can only be interpreted as a politically motivated attempt to rile up anti-tax sentiment sufficiently so that Colorado lawmakers will repeal the new law.
The use tax should be enforced by every state. Colorado's approach to doing so is sensible and fair, and does not impose substantial burdens on sellers like Amazon. By hitting its own affiliates in their wallets, Amazon is avoiding an open discussion of why they apparently believe the use tax should be repealed.
The Senate finally passed a 30-day extension of unemployment insurance and health care benefits for the unemployed, but not before benefits had expired for hundreds of thousands of jobless Americans and thousands of others were furloughed from construction jobs as federal funding expired. The legislation had been held up by Senator Jim Bunning (R-KY) who wanted to offset the costs of the bill, while other Republican Senators threatened to block the bill if they were not promised a vote on a measure to reduce the estate tax for millionaires.
The President signed the 30-day extension into law on Tuesday evening, just hours after the bill had passed.
Senators then returned to legislation extending jobless benefits, as well as many expiring tax provisions, through the end of the year. The Senate took up a substitute amendment (S. Amdt 3336) for the House "tax extenders" bill that was passed in December. The Senate version was expected to contain a reinstatement of the estate tax (which is temporarily repealed for 2010), but it was not included. However, many amendments to the bill are being offered and it's still unclear whether any will address the estate tax. President Obama and Democratic leaders want to reinstate the estate tax at the level in effect in 2009 (which was cut down about 50 percent from the pre-Bush level) while Senate Republicans and a few Senate Democrats wish to cut the estate tax even further.
Like the House Democrats, the Senate Democrats plan to offset the cost of the "tax extenders," which is included in the long-term extension of UI and COBRA that they plan to vote on next week. The "tax extenders" are a group of supposedly temporary tax cuts that mostly go to business interests and that Congress extends each year, sometimes retroactively. The extenders themselves are questionable policy, but the fact that Congress wants to pay for them by closing loopholes is a positive development.
The Senate version of the extenders bill would close the "black liquor" loophole, which allows paper companies to take an alternative fuel tax credit for a long-used process that is not environmentally friendly.
The 2005 highway law includes a tax credit for fuel that is a mix of alternative fuel (cellulosic fuel, meaning fuel made from the non-edible parts of plants) and traditional fossil fuel. In 2007, this credit was extended to include fuel used for purposes like manufacturing.
The problem is that certain paper companies already have a process that involves a cellulosic fuel (“black liquor,” a by-product from the pulp-making process), albeit one that is carbon-rich and not something Congress would want to encourage for environmental reasons. These paper companies realized that they could qualify for this new credit if they added fossil fuel to the cellulosic fuel they were already using.
In other words, companies are actually getting paid to add diesel to a relatively dirty fuel that they were already using. This is obviously not what Congress intended when it enacted this tax credit. The Senate is right to close this loophole.
The U.S. House of Representatives adjourned for the year on Wednesday while the Senate hustles to finish legislation on health care. As of this writing, an array of major tax issues are still to be resolved in the next several days or when Congress returns in 2010:
Health Care Reform
On November 7, the House passed its health care bill, (H.R. 3962), which includes a public option. The largest revenue-raising provision in the House health bill is a surcharge of 5.4 percent on adjusted gross incomes over $1 million (or over $500,000 for unmarried individuals).
(See CTJ's previous analysis and state-by-state estimates of the surcharge in the House health care bill.)
The Senate is still working to pass a health care bill, and some reports claim that the chamber could be working on Christmas Eve to accomplish it. While there is a clear majority of Senators willing to support a public option, the rules allowing 41 Senators to filibuster legislation have encouraged a few conservative Democrats to join Republicans in blocking a public option.
While some details remain to be worked out, a majority of Senators seems to have settled on certain revenue-raising provisions to help pay for health care reform. The largest revenue-raiser in the still-developing Senate bill is an excise tax on high-cost health insurance plans. This excise tax is controversial because many analysts conclude that these plans are not particularly generous in the benefits they provide and they are not necessarily enjoyed by high-income workers. Rather, the high costs are often the result of insurers charging more to cover a work force that is older than average or that has high health risks.
(See CTJ's previous analysis concluding that the Senate's proposed excise tax on high-cost health insurance is less progressive than the surcharge in the House health care bill.)
One revenue-raiser in the Senate proposal that is progressive is an increase in the Medicare payroll tax rate on earnings over $250,000 (or over $200,000 for an unmarried individual).
While this tax increase would only affect those who can afford to pay more, an even better proposal would reform the Medicare tax so that it no longer exempts investment income. This idea was included in an amendment that was filed by Senator Debbie Stabenow during the Finance Committee markup, but was not acted on. Such an amendment may be offered when health care reform is debated on the Senate floor.
On December 8, President Obama announced several proposals to create jobs. His best ideas involve direct spending by the federal government (including extending aid to unemployed and low-income people and aid to state and local governments, among other things). His worst ideas involve tax cuts (including eliminating capital gains taxes on small business investment and providing a tax credit for payroll expansion).
(See CTJ's previous discussion of President Obama's job creation proposals and ways to stimulate the economy.)
The House approved a $154 billion jobs bill, as part of a regular appropriations bill (H.R. 2847), before adjourning this week, and thankfully, it focuses on direct spending. One of the few tax cuts included is a provision to remove the earnings requirement (currently set at $3,000) for the refundable portion of the Child Tax Credit, ensuring that low-income families with children can benefit from it. The Senate is not expected to take up jobs legislation until sometime next year.
The tax cut legislation enacted by President Bush and his allies in Congress in 2001 set the estate tax to gradually shrink until disappearing altogether in 2010. But, like all the Bush tax cuts, this estate tax cut expires at the end of 2010, meaning the estate tax will reappear in 2011 at the pre-Bush levels if Congress simply does nothing.
Families who have several million dollars to leave to the next generation have benefited the most from the infrastructure, educated workforce, stability and other public goods that taxes make possible. So it's entirely reasonable that these families pay a tax on the transfer of their enormous estates from one generation to the next, particularly since the majority of the value in these estates is capital gains income that has never been taxed.
One might be tempted to think that allowing the estate tax to disappear would be fine if it reappears at the pre-Bush levels in 2010. Unfortunately, the one-year repeal of the estate tax could tempt some lawmakers to make that repeal permanent, or might tempt them to allow only a very scaled back version of the estate tax to reappear in 2011.
So the House of Representatives approved a compromise that would make permanent the estate tax rules in effect in 2009. This would partially preserve the Bush cut in the estate tax, but prevent the tax from disappearing in 2010.
Key Democratic Senators indicated that they did not want to make permanent the 2009 rules because -- incredibly -- they were interested in reducing the estate tax even more. Democratic leaders in the Senate attempted but failed to get agreement in the chamber to pass a one-year extension of the 2009 rules, which would prevent the estate tax from disappearing in 2010 and allow Congress to debate a permanent solution as part of the broader tax debate that must happen before the Bush tax cuts expire at the end of next year.
Pathetically, the Senate failed last week to prevent the one-year repeal, which they had known was coming ever since the Bush cut in the estate tax was enacted back in 2001. Democratic leaders in the Senate say they will enact the one-year extension of the 2009 estate tax rules retroactively in 2010. While retroactive tax increases may not be the ideal way to do things, this approach should not cause any problems since tax planners have known for years that Congress was likely to act to prevent this one-year disappearance of the estate tax.
Corporate Tax Breaks (aka "Tax Extenders")
On December 9, the House approved H.R. 4213, which would extend a series of tax cuts (mostly breaks for business) but would offset the costs by closing the infamous "carried interest" loophole for buyout fund managers and by cracking down on offshore tax cheats.
The bill would also require the Joint Committee on Taxation (JCT) to issue reports evaluating these tax cuts before the end of next year, when Congress is likely to act on them again.
CTJ joined the AFL-CIO, SEIU, AFSCME and eight national non-profits in signing a letter in support of H.R. 4213 for these reasons.
The provisions extending the tax cuts (often called the "tax extenders") are enacted by Congress every year or so. CTJ and other analysts have often criticized the tax extenders as corporate pork routed through the tax code.
But H.R. 4213 is a major step in the right direction for the reasons spelled out in the letter to Congress.
Democratic leaders in the Senate want to pass the tax extenders retroactively early in 2010. One problem is that the chairman of the Senate tax-writing committee, Max Baucus (D-MT) believes that the carried interest issue is “best dealt with in the context of an overall tax reform,” according to a spokesman. As we've explained before, this is an all-purpose excuse for legislators who want to avoid closing even the most unfair and outrageous loopholes.
On December 9, the U.S. House of Representatives approved H.R. 4213, which would extend a series of tax cuts (mostly breaks for business) but would offset the costs by closing the infamous "carried interest" loophole for buyout fund managers and by cracking down on offshore tax cheats.
The bill would also require the Joint Committee on Taxation (JCT) to issue reports evaluating these tax cuts before the end of next year, when Congress is likely to act on them again. Congress would receive these reports at the same time it is trying to decide which of the Bush tax cuts should be extended, what to do with the President's tax reform proposals, and how to balance the federal budget. In this context, it is hoped that the reports will prod some lawmakers to take a more critical look at corporate tax breaks before extending them again.
CTJ joined the AFL-CIO, SEIU, AFSCME and eight national non-profits in signing a letter in support of H.R. 4213 for these reasons.
The provisions extending the tax cuts (often called the "tax extenders") are enacted by Congress every year or so. CTJ and other analysts have often criticized the tax extenders as corporate pork routed through the tax code.
But H.R. 4213 is a major step in the right direction for the reasons spelled out in the letter to Congress. (See our previous article on H.R. 4213 for the points made in the letter.)
Prospects in the Senate are unclear. One problem is the full agenda the Senate has with health care reform.
Another problem is that the chairman of the Senate tax-writing committee, Max Baucus (D-MT) believes that the carried interest issue is “best dealt with in the context of an overall tax reform,” according to a spokesman. This is, frankly, an all-purpose excuse for legislators who want to avoid closing even the most unfair and outrageous loopholes. They know full well that comprehensive tax reform might not happen for decades. (The last one was in 1986, after all).
The carried interest loophole allows managers of private equity funds (a euphemistic term for buyout funds) to pay taxes at a lower rate than their secretaries. It involves using the tax subsidy (the special top rate of 15% for capital gains) that was intended for people who invest their own money. Whether or not the capital gains tax subsidy is justified is another matter. (We believe it's not.) But private equity fund managers are not investing their own money anyway. They're being paid to manage other people's money, but by calling their compensation "carried interest" they're able to pay income taxes at the low, capital gains rate.
The notion that Congress can tackle tax schemes this blatantly unfair only in the context of comprehensive tax reform (which apparently only comes once every 25 years, if even that often) is ridiculous. Advocates of tax fairness need to call upon the Senate to approve H.R. 4213 as it was written and approved by the House of Representatives.
National Organizations Support House Bill to Close "Carried Interest" Loophole, Crack Down on Offshore Tax Cheats
Citizens for Tax Justice and several other national organizations have come together to support passage of (H.R. 4213), which fairly and responsibly offsets the cost of the "tax extenders." The House of Representatives plans to vote on this bill as early as December 9.
Read the letter in support of H.R. 4213.
To be sure, many of these organizations question the efficacy and fairness of some of the "tax extenders," which are provisions that Congress enacts periodically to extend, for a year or so, various temporary tax breaks. But we nonetheless agree that the core revenue-raising provisions included in this legislation are important reforms to our tax system. We support this bill for the following reasons:
H.R. 4213 would reverse Congress's tradition of increasing the budget deficit every year by extending "temporary" tax breaks without paying for them.
Unlike many previous "tax extenders" bills, this legislation includes revenue-raising provisions that would offset the costs of extending these tax breaks. Enacting corporate tax breaks (which make up the bulk of the "tax extenders") without paying for them contributes to our federal budget deficits and our national debt, which is borne by all Americans. The revenue-raising provisions in this bill prevent an increase in the deficit while also making the tax code fairer and more efficient.
H.R. 4213 would finally close the loophole for what private equity fund managers call "carried interest." (See CTJ's previous analyses of the carried interest loophole.)
A middle-income person typically pays income taxes as high as 25 percent plus payroll taxes. Private equity fund managers can receive millions of dollars (or even billions of dollars, during boom times) in compensation for their work, but by calling this income "carried interest," they pay only income taxes at a 15 percent rate.
The "carried interest" label essentially allows these fund managers to pretend that this income is a return on capital investments (and thus eligible for the exception in the income tax that subjects capital gains to an income tax rate of no more than 15 percent). This pretense clearly contradicts the will of Congress in creating the subsidy for capital gains, which was meant to reward those who invested their own money, not those who are simply being paid to manage other people's money.
H.R. 4213 also includes a proposal introduced by Finance Committee Chairman Max Baucus and Ways and Means Committee Chairman Charles Rangel to prevent wealthy Americans from cheating on their U.S. taxes by hiding their income in offshore tax havens. (See CTJ's analysis of tax haven legislation.)
While this proposal is not as strong as we would prefer, it would be an important step forward to ensure that all Americans pay their fair share in taxes. Middle-income Americans typically have few opportunities to hide their income from the IRS. But wealthy Americans have access to lawyers and accountants who help them hide their income in offshore tax havens. Tax havens are countries that have a very low income tax (or no income tax) and laws that prevent their banks from cooperating with IRS enforcement efforts.
While the vast majority of taxpayers at all income levels do the right thing and pay their fair share, a minority of wealthy Americans are engaging in these activities that are both illegal and unfair. The Baucus-Rangel proposal would create strong incentives for foreign banks to provide information that would help the IRS identify tax cheats without creating any significant burden on the banks or their honest customers.
H.R. 4213 requires that the Joint Committee on Taxation (JCT) conduct studies evaluating the "tax extenders" before the end of next year, when Congress is likely to act on them again. (See CTJ's report calling on Congress and the administration to conduct regular reviews of tax expenditures.)
Providing a special corporate tax break through the tax code has the exact same effect as providing a subsidy through direct spending. Unfortunately, lawmakers have made almost no attempt to evaluate or even think critically about the effectiveness of corporate tax breaks before extending them each year. This contrasts significantly with lawmakers' attitudes towards the discretionary spending that they grapple with annually.
JCT's reports of the effectiveness of tax breaks will at least provide Congress with a basis to judge whether or not these tax provisions are worth their costs. This is a common sense reform that is long overdue.
On November 6, President Obama signed H.R. 3548, the Worker, Homeownership, and Business Assistance Act of 2009, which provides a much-needed extension of unemployment benefits. Around 400,000 workers exhausted their unemployment benefits at the end of September and far more would have exhausted them by the end of this year without this extension. As a report from CTJ explains, it is still unfortunate that the price of providing this necessary help is tax breaks to corporations and to the housing industry.
Sadly, Congress did not think that helping the unemployed during the worst recession in decades was worthy enough to do without larding the bill up a bit with tax cuts. One is a tax cut that will benefit people who buy a residence and who would have done so whether or not a tax cut was offered to them. The second will essentially give unprofitable companies cash with no strings attached.
Read the report.
Chairmen of Senate Finance and House Ways and Means Committees Introduce Watered-Down Legislation to Address Tax Havens
Last year, Senator Carl Levin's Permanent Subcommittee on Investigations reviewed various studies on the fiscal impact of offshore tax evasion and concluded that the resulting loss of revenue annually is in the neighborhood of $100 billion. (Yes, that's $100 billion with a "b" -- every year.)
Senator Levin then introduced the Stop Tax Haven Abuse Act in the Senate, and Rep. Lloyd Doggett introduced the House version. This legislation makes several changes that would make it easier for the IRS to identify and prosecute Americans who illegally stash their income in countries commonly called tax havens, which essentially have no income taxes (or extremely low income taxes) and laws that prevent banks from revealing anything about their clients to the U.S. tax enforcement authorities. It also includes some steps that would prevent corporations from engaging in the most egregious offshore tax avoidance schemes using some of these same tax havens for their low or non-existent income taxes.
Many of us were disappointed when the Congressional Joint Committee on Taxation (JCT) made it's official estimate that the bill would raise less than $30 billion over an entire decade (since the ten-year cost of offshore tax evasion to law-abiding America is probably over a trillion dollars.)
But the low revenue "score" is not surprising. JCT has historically erred on the side of making very low revenue estimates for measures that enhance tax enforcement, since it's hard to predict how effective new enforcement measures will be. And for that matter, it's hard to know exactly how many people are engaging in offshore tax evasion and how much they're cheating. It could cost us less than $100 billion, it could cost more, but we don't know for sure. That's the nature of tax evasion -- the money is hidden from the government, so no one knows for sure how big the problem is.
But even the little bit of revenue that the Levin-Doggett bill would officially raise over a decade seems to be too much for some members of both parties in Congress. Yesterday, the chairmen of the two tax-writing committees, Rep. Charles Rangel and Senator Max Baucus, introduced their own bill to crack down on tax havens (officially called the Foreign Account Tax Compliance Act), which will only raise $8.5 billion over ten years according to JCT.
The Baucus-Rangel bill does include important measures to require more reporting of foreign bank accounts and foreign assets and closing loopholes, and most of these provisions are in the Levin-Doggett bill. But Baucus and Rangel unfortunately left out some key provisions that are in the Levin-Doggett bill, which accounts for a large part of the difference in the revenue "scores" for the two bills.
Presumptions Against Americans Who Use Tax Havens
For example, the Levin-Doggett bill includes a list of countries that meet its definition of an "offshore secrecy jurisdiction," which is generally what we would call a tax haven. The Treasury would be authorized to remove countries from or add countries to the list as circumstances change. In tax evasion cases concerning accounts or assets in one of the listed countries, the IRS would be allowed three presumptions. (This means there would be three things that the IRS would not have to prove in court when prosecuting these cases, so the burden of proof would shift to the defendant.)
The first presumption would be that a U.S. taxpayer who “formed, transferred assets to, was a beneficiary of, or received money or property” from an offshore entity is in control of that entity. For example, this rule would prevent U.S. taxpayers from claiming that the trustee (usually a foreign person or entity) of their offshore trust is not permitted by the trust document to send money back to the U.S. to pay creditors (including the IRS).
The second presumption is that funds or other property received from offshore are taxable income, and funds or other property transferred offshore have not yet been taxed. The taxpayer will have to prove that the funds aren’t taxable income, or else pay the tax. The third presumption is that a financial account in a foreign country controlled by a U.S. taxpayer has a large enough balance ($10,000) that it must be reported to the IRS.
Special Enforcement Measures
Another set of provisions that are in the Levin-Doggett bill but not in the Baucus-Rangel bill would add to existing Treasury authority to impose special requirements on U.S. financial institutions. Under the Patriot Act, Treasury can impose a range of requirements on U.S. financial institutions dealing with certain entities -- from requiring greater information reporting to prohibiting opening accounts. The Patriot Act’s provisions are aimed at combating money laundering. The Levin-Doggett bill would extend that authority to allow Treasury to use those tools against foreign jurisdictions or financial institutions that are “impeding U.S. tax enforcement.” It would also add an additional tool to the Treasury’s arsenal: it would allow Treasury to prohibit U.S. financial institutions from accepting credit card transactions involving a designated foreign jurisdiction or financial institution.
Treatment of Foreign Corporations Managed and Controlled in the U.S. as U.S. Corporations
Yet another provision that is in the Levin-Doggett bill but not the Baucus-Rangel bill would treat foreign corporations as U.S. domestic corporations for tax purposes if 1) the corporation is publicly traded or has aggregate gross assets of $50 million or more, AND 2) its management and control occurs primarily in the U.S.
This provision of the bill deals with a certain type of tax avoidance rather than tax evasion, meaning a practice that may be technically legal even though it's an abuse of the tax system. The provision is particularly aimed at hedge funds and investment management businesses that are structured as foreign entities, although their key decision-makers live and work in the U.S. As Sen. Levin put it in his statement, “It is unacceptable that such companies utilize U.S. offices, personnel, laws, and markets to make their money, but then stiff Uncle Sam and offload their tax burden onto competitors who play by the rules.”
Less Robust Crackdown on Tax Havens Means Less Revenue
These provisions, which are some of the most important in the Levin-Doggett bill but which are not in the Baucus-Rangel bill, would raise $9 billion over ten years according to JCT. There may be many things that make Congressional leaders uncomfortable with these provisions, but surely one major factor is that it would require them to take on financial institutions that have subsidiaries in tax havens.
There are other provisions included in the Levin-Doggett bill, but not the Baucus-Rangel bill, such as a provision codifying the “economic substance doctrine” in the Internal Revenue Code. The doctrine has been developed over the years by courts to disallow losses or deductions that have no economic substance apart from their tax benefits. Unfortunately, different courts have developed different interpretations of the rule and courts do not apply the doctrine uniformly. The bill would put the economic substance doctrine into the tax law, thereby disallowing losses, deductions, or credits arising from “tax avoidance transactions,” for example, where the present value of the tax savings far exceeds the present value of the pre-tax profits.
This particular provision was probably left out of Baucus and Rangel's bill simply because they want to use this as a revenue-raiser for other purposes, since it has already been attached to several bills.
The Path Ahead
The introduction of Baucus and Rangel's bill, the Foreign Account Tax Compliance Act, is certainly a positive development because it means Congress might finally be ready to do something about those who cheat on their taxes at the expense of the rest of us. But Congress tends to take on a controversial issue only once every decade (or longer) so if the legislation that is finally enacted is too weak to make a difference, we're stuck with it for a while. That's why the Baucus-Rangel bill will need to be amended in committee or on the floor of the House and Senate to incorporate some of the best elements of the Levin-Doggett bill.
President Obama’s Economic Recovery Advisory Board (PERAB) recently requested ideas from the public about how the federal tax system could be reformed. The comments submitted by Citizens for Tax Justice yesterday begin "We want a fairer, simpler tax code that raises enough money to pay for public services and promotes economic prosperity for all Americans. Our current tax system falls far short of achieving these goals."
The comments note that:
- On the revenue side, even after the current recession ends, we can expect to be funding about a quarter of all non-Social Security spending with borrowed money (including amounts borrowed from the Social Security trust fund).
- As for simplicity and fairness, well, both parties have been guilty of using the tax code to promote a vast array of favored activities. One result is that taxpayers with similar incomes can be treated wildly differently depending on how they make their money or how they spend it.
- In fact, our current tax system allows many of our biggest and most profitable corporations to pay little or no tax.
The rest of the comments lay out principles for solving these problems.
The Treasury Department has recently issued rulings that to allow a newly bailed out General Motors to avoid part of the 1986 tax reform that is supposed to prevent abusive tax shelters.
Many years ago, Congress enacted rules to keep companies from trafficking in net operating losses (NOLs). Profitable companies were buying companies with NOLs and using the NOLs to offset their income, reducing or completely eliminating their tax liability. In many cases ability to use the NOLs was the only valuable asset the loss company owned. So Congress added Internal Revenue Code Section 382 to limit the amount of NOL "carryforwards" that companies can use when there is a change in ownership of more than 50 percent.
Under the General Motors restructuring, the federal government will own about 60 percent of the stock of the new GM. Generally that would mean that the ability to use the NOLs would be strictly limited (a small portion would be allowable each year). But the Treasury Department has issued a series of rulings that will allow GM to use the NOLs. The rulings basically treat the U.S. government as never having been a shareholder. So if things start looking up for the troubled automaker and the government is able to share some of its stake in the company, the GM stock will be significantly more valuable to a potential investor because of the NOLs that will save GM taxes in the future. Net operating losses can be carried forward 20 years to offset taxable income. They can also be carried back two years, but GM has not posted a profit since 2004.
Coalition of Advocates, Think Tanks and Unions Begins Campaign to Promote Progressive Revenue Options to Fund Health Care Reform and Other Initiatives
Citizens for Tax Justice (CTJ) has joined forces with a broad coalition of organizations called Rebuild and Renew America Now (RRAN) to promote a simple message: Congress has a whole lot of options to raise revenue to pay for health care reform and other initiatives without unfairly impacting low- or middle-income people and without harming the economy.
These progressive revenue options include both the tax changes included in President Obama's fiscal year 2010 budget proposals as well as additional options formulated in a recent report by CTJ and endorsed by Health Care for America Now (HCAN) and the Service Employees International Union (SEIU). (See CTJ's report on the President's tax proposals and CTJ's report on additional revenue options to fund health care reform.)
RRAN is a coalition that engaged in education, communications and lobbying efforts in support of the President's budget and other progressive initiatives earlier this year and has mobilized advocates and activists all over the country. Many of the organizations involved are usually focused on particular public services or progressive reforms, but have realized that all public services and reforms are in danger if Congress can't bring itself to raise the revenue needed to pay for them.
RRAN has invited organizations (both national organizations and state organizations) to sign onto its two-page statement of principles for this new campaign for progressive revenue options. Signing does not commit an organization to do anything (although all are also encouraged to become active in RRAN's activities) but simply states support for efforts to pay for initiatives in progressive ways. Anyone who is authorized to sign on behalf of an organization can visit the website of the Coalition on Human Needs (CHN) or simply click here.
The statement lists three broad principles to guide Congress's efforts to find revenue:
1. Adequacy. The federal tax system should raise sufficient revenue over time to meet our shared priorities and invest in our common future.
2. Fairness. Tax preferences that overwhelmingly benefit the wealthy and corporations should be eliminated, and individuals and businesses should contribute their fair share of taxes, based on ability to pay.
3. Responsibility. We should not saddle future generations with unsustainable levels of debt.
The statement also lists examples of the kinds of tax policies RRAN supports:
- raising revenues from upper-income households;
- assessing a significant tax on large estates;
- reducing abuses among corporations and individuals who shelter income in offshore tax evasion or avoidance schemes;
- closing financial industry, oil and gas, and other inefficient corporate loopholes; and
- reducing tax preferences for unearned as opposed to earned income.
For more information in the coming days, visit RRAN's website: www.rebuildandrenew.org
On May 11, the Treasury Department released its "Green Book" containing new details of the tax changes included in the President's fiscal year 2010 budget proposal. In addition to extending the Bush tax cuts for all but the richest Americans and making permanent many of the tax cuts in the recently enacted economic recovery act, the President would also make many changes that would raise revenue by closing loopholes, blocking tax avoidance schemes and making the tax code more progressive.
A new report from Citizens for Tax Justice examines and describes the significant revenue-raising provisions that are sure to be debated fiercely in the months to come.
New Data from Citizens for Tax Justice Shows that the U.S. Tax System Is Not as Progressive as You Think
Many politicians, pundits and media outlets have recently claimed that the richest one percent of American taxpayers are providing a hugely disproportionate share of the tax revenue we need to fund public services. New data from Citizens for Tax Justice show that this simply is not true. CTJ estimates that the share of total taxes (federal state and local taxes) paid by taxpayers in each income group is quite similar to the share of total income received by each income group in 2008.
- The total federal, state and local effective tax rate for the richest one percent of Americans (30.9 percent) is only slightly higher than the average effective tax rate for the remaining 99 percent of Americans (29.4 percent).
- From the middle-income ranges upward, total effective tax rates are virtually flat across income groups.
House GOP's Alternative Budget: Poor Pay More, Rich Pay Less, Stimulus Repealed and Government Shrinks
When anti-tax activists and lawmakers complain that Congress and the President are pursuing policies that will cause taxes to be too high, the first question anyone should ask is: Compared to what? What exactly is the alternative to allowing the Bush tax cuts to end (at least for the rich) and finding new ways to raise revenue?
This week the House GOP showed us what the alternative is and it's frightening. On Wednesday, the ranking Republican on the U.S. House of Representatives' Budget Committee, Congressman Paul Ryan (R-Wisc.), released a budget plan which he argues is a more fiscally responsible alternative to the budget outline proposed by President Obama and the similar budget resolutions approved by both chambers last night. His proposal is apparently an update of the plan that House GOP leaders introduced last week and is different in some key respects.
The revised House GOP budget plan would move towards cutting and privatizing Medicare, convert Medicaid into limited block grants to states, and even cut Social Security benefits for some retirees. The plan would deeply cut the relatively small amount of government spending devoted to non-military, non-mandatory programs by refusing to adjust the budgets of these programs for inflation and population growth for five years. The House GOP plan would repeal the recently enacted economic stimulus law (the American Recovery and Reinvestment Act of 2009, or ARRA) a year before its expiration at the end of 2010.
A report from Citizens for Tax Justice compares the income tax proposals in the House GOP plan to the income tax proposals in the House Democratic plan in 2010, and finds that:
- Over a third of taxpayers, mostly low- and middle-income families, would pay more in taxes under the House GOP plan than they would under the House Democratic plan in 2010.
- The richest one percent of taxpayers would pay $75,000 less, on average, in income taxes under the House GOP plan than they would under the Democratic plan in 2010.
- The income tax proposals in the House GOP plan, which is presented as a fiscally responsible alternative to the Democratic plan, would cost over $225 billion more than the Democratic plan's income tax policies in 2010 alone.
Yesterday, the ranking Republican on the U.S. House of Representatives' Budget Committee, Congressman Paul Ryan (R-Wisc.), released a budget plan which he argues is a more fiscally responsible alternative to the budget outline proposed by President Obama and the similar budget resolutions working their way through the House and Senate right now. His proposal is apparently an update on the plan that House GOP leaders introduced last week and is different in some key respects.
A new report from Citizens for Tax Justice compares the income tax proposals in the House GOP plan to the income tax proposals in the House Democratic plan in 2010, and finds that:
- Over a third of taxpayers, mostly low- and middle-income families, would pay more in taxes under the House GOP plan than they would under the House Democratic plan in 2010.
- The richest one percent of taxpayers would pay $75,000 less, on average, in income taxes under the House GOP plan than they would under the Democratic plan in 2010.
- The income tax proposals in the House GOP plan, which is presented as a fiscally responsible alternative to the Democratic plan, would cost over $225 billion more than the Democratic plan's income tax policies in 2010 alone.
This week, Citizens for Tax Justice updated its recent report on the tax proposals in the President's budget outline to include estimates of the proposals' impacts on different income groups in every state. The new state figures examine the proposed cuts compared to current law and also compared to the baseline that the Obama administration uses in presenting its budget figures. The figures show that, whichever baseline is used, the vast majority of families in every state will get a significant tax break.
Read the report. (State-by-state figures are in the final appendix.
Citizens for Tax Justice called uponPresident Obama this week to stand by his message of transparency by finally making "tax expenditure" performance reviews a regular part of the OMB's evaluations of government effectiveness.
Simply put, tax expenditures differ from the rest of the tax code in that they focus on encouraging a specific activity or rewarding a particular group of people, rather than on trying to improve the efficiency, simplicity, or fairness of our tax system.Since tax expenditures are usually enacted with primarily non-tax goals in mind (e.g. encouraging investment, encouraging research and development, encouraging home ownership, etc.) it is important that the government make an effort to gauge their effectiveness in achieving those goals.
But despite calls from the GAO, past Congresses, and outside experts in favor of subjecting tax expenditures to regular performance reviews, the most comprehensive performance measure currently in place, the OMB's Program Assessment Rating Tool (PART), continues to focus narrowly on only traditional spending programs.
Encouragingly, language in the President's recently released budget blueprint suggests that a more comprehensive approach for evaluating the government's performance will be used under the Obama Administration (see. pp.39).It's hard to see how anything approaching true comprehensiveness could ignore the hundreds of billions of dollars the government directs toward programs administered via the tax code.Hopefully, the brief language addressing performance reviews that was included in this blueprint is the first signal that an end is coming to the free-ride thus far enjoyed by tax expenditures.
Non-Stimulative Tax Cuts: A Big One Is Kept in the Final Package, But Many Others Were Significantly Scaled Back
On January 28, the House of Representatives approved an economic stimulus bill with an official cost of $819 billion, and $275 billion of that went to tax cuts. One alternative stimulus bill that received quite a lot of support from the House Republicans consisted entirely of tax cuts and included provisions that would clearly not provide an immediate boost to the economy (like making permanent the Bush tax cuts for capital gains and dividends, which do not even expire until the end of 2010). CTJ released state-by-state figures showing that the poorest 60% of taxpayers would receive over half of the benefits of the key tax cuts under the House Democrats' plan and less than 5% of the benefits of the House GOP plan.
House Republicans put forth another plan, this one with strong backing from their leadership, that would reduce the bottom two income tax rates from 10% and 15% to 5% and 10%, and provide more tax cuts for businesses. CTJ released state-by-state figures showing that less than a quarter of the benefits of the individual tax cuts in this House GOP plan would go to the poorest 60% of taxpayers.
The House Democrats' plan was passed without a single Republican vote. Progressives found that the House-passed bill did contain some tax cuts that were basically giveaways for business (as CTJ also argued in its reports). But overall the House-passed bill promised to be an effective boost for the economy.
The Senate took up its bill the following week and managed to lard it up with several ineffective tax cuts. Fortunately, the House-Senate conference that met to work out the differences between the two chambers significantly scaled back many -- but not all -- of the ineffective tax cuts.
Amnesty for Offshore Tax Avoidance: Rejected on Senate Floor
As the stimulus package was being debated on the Senate floor, progressives did score several defensive victories. For example, the body rejected an amendment offered by Senator Barbara Boxer (D-CA) that would provide a tax amnesty for corporations that had moved profits offshore (often only on paper to avoid taxes). Profits that were "repatriated" to the United States would be subject to an almost non-existent 5.25 percent tax rate instead of the usual 35 percent tax rate. As explained in a CTJ report on "repatriation," this idea was tried five years ago and did not lead to any of the job creation that was promised. Worse, repeating this debacle would only encourage companies to move profits offshore, since they would figure that if they waited a few years, Congress would once again be in the mood to enact a tax amnesty. Fortunately, a solid majority of senators saw that this was terrible tax policy and rejected this amendment.
The Senate's Senseless Six
But plenty of ill-advised tax cuts did make their way into the Senate-passed bill, some as provisions included in the bill reported out of the Finance Committee, and others adopted as amendments on the Senate floor. Earlier this week, CTJ ranked several tax cuts included only in the Senate bill (or taking a larger form in the Senate bill) as the "Six Worst Tax Cuts in the Senate Stimulus Bill." (Read the full report here or the two-page summary here.) The largest of those six tax cuts is included in the final package, but several others have been excluded (or mostly excluded) from the deal.
1. One-year AMT "patch": included in conference agreement.
This one-year reduction in the Alternative Minimum Tax will provide essentially no benefit to the poorest 60 percent of Americans -- and unfortunately was included in the final stimulus package. For more details, as well as state-by-state figures showing how taxpayers would be affected, see CTJ's new report on the AMT "patch."
2. Homebuyer tax credit: dramatically scaled back in conference agreement.
The House-passed bill had a version of this provision that waived the repayment requirement for the limited $7,500 first-time homebuyer credit that Congress enacted in its housing bill last year. The Senate adopted an amendment by Senator Johnny Isakson (R-GA) (who voted against the bill itself) to provide a $15,000, non-refundable tax credit with no income limits for any home purchase (not just for first-time home purchases). The Senate version would cost $35 billion more than the House version. Fortunately, this provision is scaled down in the conference agreement to something closer to the House version, with an increase in the maximum credit to $8,000, at a cost of $6.6 billion.
3. Deduction for automobile purchases: dramatically scaled back in conference agreement.
This $11 billion provision was added to the Senate bill as an amendment offered by Senator Barbara Mikulski (D-MD) as an above-the-line deduction for interest payments on an automobile purchase as well as the state and local sales taxes paid on that purchase. Apparently, members of the House-Senate conference decided that subsidizing consumer debt is not such a great idea. This provision has been reduced to a $1.7 billion provision allowing a deduction for just the sales taxes paid, but not the interest, on an automobile purchase.
4. Suspension of taxes on UI benefits: included in conference agreement.
The Senate included in its bill this provision to eliminate federal income taxes on the first $2,400 of unemployment insurance benefits in tax year 2009. The best way to target aid to those who could use some help is to target aid by income level. This provision would target aid to those whose income takes a particular form rather than those whose income is below a particular level, meaning a person whose spouse earns $300,000 a year would still get this tax break if they have unemployment benefits. This provision is included in the conference agreement.
5. Five-year carryback of net operating losses (NOLs): dramatically scaled back in conference agreement.
This provision would put money in the hands of business owners but do nothing to change their incentives to invest or create jobs. The version of this tax cut included in the House-passed bill would cost $15 billion while the Senate version would cost $19.5 billion. Fortunately, the version of this tax cut in the conference agreement is smaller than either of these, with a cost of only $1 billion (officially). The conference agreement would allow this tax cut only for companies with gross receipts under $15 million.
6. Delayed recognition of certain cancellation of debt income: included in conference agreement.
Under current law, any debt forgiveness that you enjoy is considered income subject to the federal income tax. (If it was not, then we would all want our employers to issue us loans and then forgive the debt, rather than paying us salaries.) This provision, which was included in the Senate bill and also in the conference agreement, weakens this essential rule. It allows companies that have debt cancellation income to defer taxes on that income for five years and then pay the tax in increments over the following five years.
Even a Pinch of Tax Reform: Stimulus Package Includes Provision to Rescind the Bush Treasury's "Wells Fargo Ruling"
Congress has, perhaps with good reason, temporarily set aside concerns about balancing the federal budget. Stimulating the economy and stopping the downward spiral of reduced demand and layoffs has become a higher priority than raising enough tax revenue to pay for public services. But one provision in the stimulus bill would raise revenue (albeit a mere $7 billion, officially). This provision would rescind IRS Notice 2008-83, also called the "Wells Fargo ruling" after its largest beneficiary.
In October, the IRS issued this two-page notice declaring, with no authorization from Congress, that banks could ignore a section of the tax code enacted under President Reagan to prevent abusive tax shelters. In December, over a hundred organizations signed a letter to the House and Senate asking them to rescind the Wells Fargo ruling.
An online six-minute video from the American News Project (click here if you need the YouTube version) explains how Treasury officials under former President George W. Bush issued the Wells Fargo ruling with no legal authority and gave banks a hand-out beyond their lobbyists' wildest dreams.
A provision rescinding the ruling was included in both the House-passed bill and the Senate-passed bill and is included in the conference agreement.
Senate Should Reject "Repatriation" Proposal that Will Be Offered as an Amendment to the Stimulus
In 2004, Congress did something that, it claimed, it would never do again. It allowed corporations that had shifted their profits offshore to "repatriate" those profits -- that is, bring them back into the United States -- and pay corporate income taxes on those profits at an almost nominal 5.25% rate instead of the normal 35% rate for corporate income.
In 2004, it was obvious to all that if we provided this sort of tax amnesty more than once, corporations would actually have an incentive to move their profits out of the United States. They would know to simply wait for the next amnesty, when they could bring those profits back and pay almost no taxes on them. So, lawmakers insisted that this wouldn't happen again, no matter how much corporate lobbyists begged.
Well, the corporate lobbyists are back. They argue that repeating the tax amnesty -- which would surely encourage corporations to shift even more profits into offshore tax havens -- will be an effective stimulus for the U.S. economy! When the Senate takes up its economic stimulus bill this week, some members will offer an amendment to include this second amnesty. A new report from Citizens for Tax Justice explains what exactly is meant by "repatriation" and why it's exactly the wrong policy for America right now.
New CTJ Report Compares Most Recent House GOP Stimulus Proposal to House Democratic Stimulus Bill Up for Vote Today -- Includes Updated State-by-State Estimates
On Friday, January 23, House Republican Leader John Boehner (OH) and Republican Whip Eric Cantor (VA) presented their "Economic Recovery Plan" to President Obama. The Republican plan is based on income tax cuts for relatively well-off families and business tax cuts. As a brand new report from Citizens for Tax Justice explains, it is unlikely to provide the needed boost to consumption that economists believe can come from either direct government spending or putting money in the hands of working class people who are likely to spend it quickly.
Less Than a Quarter of the House GOP's Tax Rate Reduction Proposal Would Go to the Poorest 60 Percent of Taxpayers
The House GOP plan proposes to reduce the two lowest individual income tax rates from 15% to 10% and from 10% to 5%. To get the maximum tax cut of about $3,400 from this rate reduction, taxpayers would have to have enough taxable income to reach the start of the third income tax bracket. For example, a married couple with two children would typically need to earn more than $100,000. That's considerably more than most people earn. In fact, only one in five of all taxpayers has enough income to reach the third income tax bracket and receive the full benefit of the proposed tax rate reduction.
On the other hand, the plan proposed by Democrats in the House of Representatives (which is scheduled to come to a floor vote today), delivers tax cuts to working families who don't pay federal income tax but pay a lot in payroll taxes. For example, the "Making Work Pay Credit" would give married couples with $8,100 or more in wages the full $1,000 credit provided in the bill. In order to have an equivalent benefit from the Republican rate reduction, a married couple (with two children) would have to have $46,000 of gross income. The House Democrats' plan would also expand the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC) which are smaller tax breaks in terms of revenue but are even more targeted to working families.
A new report from Citizens for Tax Justice compares the tax cuts proposed as economic stimulus by the House Democrats to the tax cuts proposed by their Republican counterparts. The report includes both national and state-by-state figures showing the average tax cut and the share of total tax cuts that would be received by taxpayers in various income groups under the different proposals.
The report finds that the Democrats' proposal (H.R. 598) includes some tax cuts that are far more targeted to low- and middle-income people than any of the tax cuts included in the Republican alternatives. This is largely because H.R. 598 includes a new refundable credit (the Making Work Pay Credit) and expands two others (the Earned Income Tax Credit and the Child Tax Credit) while the Republican alternatives do not. Working people who pay federal payroll taxes but do not earn enough to owe federal income taxes will only benefit from an income tax cut if it takes the form of a refundable credit. Many economists have argued that any effective stimulus policy would have to boost demand for goods and services by causing immediate spending -- and one way to do that is to put money in the hands of low- and middle-income people who are more likely than wealthy taxpayers to spend it quickly.
The House of Representatives is expected to vote this week on the Democratic proposal, H.R. 598. Many of the provisions of this bill have wide support from progressive advocates. The Coalition on Human Needs is distributing a sign-on letter for organizations in support of the expansion in the Child Tax Credit. If you are authorized to sign on behalf on an organization in support of this provision, click here for more information.
Corporations Get Subsidies Through the Tax Code in the Good Times, Then Ask for Bailout Funds in the Bad Times
Insurance companies and financial institutions have lobbied long and hard for all sorts of loopholes in the federal tax code, and the insurance industry alone has spent almost $1 billion over the past decade lobbying on tax issues. Some folks might say that these corporations are providing important services to help the free market function and that the government should infringe on them as little as possible. Well, here's why they're wrong: The very corporations that have persuaded Congress to grant them numerous loopholes reducing their effective tax rate to negligible levels are now lining up for a handout from the federal Troubled Asset Relief Program, or TARP.
Insurance companies have not received any bailout funds yet, but a recent Wall Street Journal article explains that many are now requesting aid, including several insurers that pay only a fraction of the statutory tax rate on corporate income. The statutory tax rate on corporate income is 35 percent, and many states impose a tax of around 4 or 5 percent as well. But insurance companies have mastered the use of loopholes to reduce their effective tax rate to much less. For example, Prudential Financial, which announced last week that it is seeking aid, received profits of about $25 billion over the past decade but its total effective tax rate was just around 5 percent over that period. Hartford Financial Services, which also seems to think it's eligible for TARP funds, received profits of $18 billion over the past decade and paid taxes at an effective rate of less than 8 percent over that period.
It would almost be a relief if it turned out that the insurance companies had done something illegal to reduce their tax liability in this way. However, the real scandal is that they are mostly using the loopholes that Congress enacted. For example, insurance companies get to immediately deduct the full costs of signing up new policy holders, but in their reports to shareholders they count these costs as being stretched across several years.
Financial institutions do not get to use quite as many loopholes as insurance companies, but they do know how to play the game. Goldman Sachs, which received $10 billion in bailout funds, expects to pay taxes of just 1 percent on its 2008 profits.
Conservatives have been grousing for a while that the corporate income tax rate is high compared to those of other countries, but these companies illustrate that the effective tax rate can be much lower than the statutory tax rate.
The corporate income tax funds many of the services that make corporate profits possible, like roads that make shipping possible, public safety that makes property valuable, even the research that lead to the internet and all of the commerce it facilitates. Now that these corporations are receiving TARP funds, it's more obvious than ever that corporations have a stake in our government and have good reason to help pay for it.
CTJ Report: Auto Industry Bill Would Have Expanded the Infamous "Wells Fargo Ruling" and Provided a Bailout for Illegal Tax Planning
A new report from Citizens for Tax Justice explains that if Congress again takes up legislation to save the automobile industry from collapse, it should exclude (or dramatically revise) two tax provisions that were included in the bill passed by the House and rejected by the Senate this week.
The Expansion of the Wells Fargo Ruling
The first provision waives a section of the tax code (Section 382) that was enacted by President Reagan as part of the Tax Reform Act of 1986 to prevent abusive tax shelters. Section 382 restricts companies from using the losses on the books of companies they acquire to reduce their own tax liability. Before this section was enacted, mergers often took place not because they made economic sense but because they offered a tax shelter.
In October, the IRS issued a two-page notice that simply declared, with no authorization from Congress, that Section 382 does not apply to banks. It has been estimated that this notice (often called the "Wells Fargo ruling" after its largest beneficiary to date) will cost $140 billion. Over a hundred organizations signed a letter that was sent to House and Senate offices on Monday asking Congress to reverse the notice.
Instead, House leaders inserted a provision in the end of the auto bailout bill that actually extends the Wells Fargo ruling to the automobile industry!
Some people knowledgeable about the legislation have argued that this provision is necessary because, under current law, limitations on the use of losses can be triggered by some situations that may occur as a result of the auto bailout but which are not what the section was intended to prevent. As the CTJ report explains, if that's true, then the provision can be dramatically revised to prevent an open-ended giveaway for any company that acquires an automobile manufacturer.
Transit Agencies and Banks Entered into Illegal Tax Plans that Are No Longer Profitable -- and Now They Want a Bailout!
The second troubling tax provision in the auto bailout bill would have the federal government guarantee lease arrangements made between transit agencies and banks as part of tax avoidance schemes -- which have been found illegal!
These schemes were called sale-in, lease-out (SILO) arrangements or lease-in-lease-out (LILO) arrangements. Essentially, some tax-exempt entities, such as public transit systems, abused their tax-exempt status to allow banks and other corporations to get huge federal tax write-offs. The tax-exempt entities were paid large fees for their cooperation in these abusive (and illegal) schemes.
Some of these schemes were banned by Congress in 2004, but the remaining deals are also clearly illegal and the IRS has successfully challenged several of them. Most of the participants in these deals have now agreed to settle with the IRS.
The deals are unraveling now and in some cases the banks may try to declare the transit agencies to be in "technical default" and collect payment. The last thing public transit needs right now is a reduction in available funding. But the approach taken by this legislation would essentially bail out entities when their tax planning schemes are found illegal and no longer profitable. Clearly, this should not be a goal of Congress.
Corporate America is gearing up for the upcoming stimulus by recycling one of its favorite responses to any economic downturn. The plan is to let U.S. companies bring home, tax-free, the billions of dollars they have stashed away in offshore tax havens. Most of this money was actually earned in the U.S. but then deflected to tax havens through artificial accounting schemes.
Congress and President Bush enacted a similar "tax amnesty" program back in 2004, and huge sums were "repatriated" by some giant corporations. As almost everyone concedes, most of the repatriated money was used to buy back corporate shares and for other expenditures favoring management. There is no evidence that the tax amnesty added a single job to the U.S. economy. Anyone who thinks that repeating the 2004 mistake, with supposed new restrictions on the use of the money, might work out better this time is dreaming. After all, the precise reason that corporate executives favor the amnesty is that it provides extra cash to benefit themselves personally.
To be sure, there could be some benefit from unlocking that huge horde of offshore tax-avoidance money. But the approach that Corporate America is pushing is totally backwards. The right answer, from a fairness and economic efficiency perspective, is to impose a one-time 35 percent tax on the entire amount of the tax-sheltered offshore profits.
Taxing those profits and then allowing them to be repatriated without further tax is certainly a fair result -- it would put the tax avoiders in the same position as U.S. companies that dutifully paid their fair share of taxes over the years. Perhaps more important in these troubled economic times, the move would also get high grades on efficiency grounds. A one-time levy on corporate tax-avoidance funds not only would have no undesirable effects on corporate behavior, it also might even discourage companies from shifting profits offshore in the first place.
The suggested tax on offshore tax-avoidance money would raise considerable revenue, perhaps as much as $350 billion. That revenue could be used for domestic public works projects, which could stimulate the domestic economy without resulting in any increase in the federal budget deficit.
Organizations Invited to Join Letter to Congress Urging Reversal of Unauthorized Tax Giveaway for Large Banks
A sign-on letter being circulated to state and national organizations urges Congress to reverse the "Wells Fargo ruling," the $140 billion tax cut for banks that the Treasury created by telling them to simply ignore a law enacted by Congress to prevent abusive tax shelters.
The letter asks lawmakers to cosponsor legislation introduced in the House and Senate to reverse this Treasury notice so that the tax code can once again effectively block abusive tax shelters.
In addition to the $140 billion in federal revenue that will be lost, state governments will also lose revenue, because most states have a corporate tax that is linked to the federal corporate tax. California, for example, will reportedly lose $2 billion if the Treasury notice is allowed to stand. States are already cutting back needed public services and the Wells Fargo ruling will only make matters worse.
If you are authorized to sign this letter on behalf of an organization, please sign online before noon, Monday December 8, by clicking here.
Click here to see a PDF version of the letter and the organizations that have signed on as of December 4.
If you are not authorized to sign on behalf of an organization but you would still like to take action, send an email to your members of Congress by clicking here.
For more information on the Wells Fargo ruling and the legislation that has been introduced in Congress to reverse it, see our previous Digest article on this issue.
Congress Should Approve Bills Introduced in House and Senate to Shut Down Treasury's $140 Billion Give-Away to Banks
Last week, House and Senate offices received a letter signed by Citizens for Tax Justice, the Coalition on Human Needs, and OMB Watch, asking Congress to reverse a Treasury notice that essentially told banks that they could ignore an explicit provision in the revenue code intended to prevent abusive tax shelters. The notice, dubbed the "Wells Fargo ruling," after its largest beneficiary to date, will cost the federal government $140 billion according to one widely-cited analysis.
As the letter was being sent, legislation was introduced in both the House and Senate to reverse the Treasury notice. (In the House, Congressman Lloyd Doggett (D-TX) introduced H.R. 7300. In the Senate, Vermont's Bernie Sanders introduced S. 3692.)
As the letter sent to the Hill explains, IRS Notice 2008-83 essentially repeals, for banks only, Section 382 of the tax code, which bars companies from using the losses of companies they acquire to reduce their own tax liability. Section 382 was enacted by Congress in 1986 to stop companies from sheltering their income by purchasing shell companies with losses on their books. Before that time, many mergers took place not because they made economic sense but merely because they offered a tax shelter. Ever since Section 382 was enacted to end these abuses, corporate lobbyists have been promoting its repeal.
Now it seems those lobbyists have achieved their goal without using the same long and difficult legislative process that lawmakers and advocates face when they want to enact, say, a $3 billion increase in the child tax credit for low-income families. Instead, bank lobbyists achieved their $140 billion goal through an agency action that contradicts the explicit intent of a statute enacted by Congress.
Another alarming aspect of the Wells Fargo ruling is its impact on states. As CTJ's recent report explains, because most state corporate taxes are linked to the federal corporate tax, a cut in the federal corporate tax leads to a reduction in state revenues as well. It has been reported that the total loss in state revenue for California alone will be $2 billion, and $300 million of that will be lost this year.
Many lawmakers and analysts are rightly concerned about the economic effects of any change in tax law enacted by Congress. But that can be no excuse to leave unchallenged a $140 billion tax subsidy for bank mergers created in direct contradiction to a law enacted by Congress. The House and Senate will likely meet in December to consider a bailout for the automotive industry and other legislation to boost the economy. During that time, they should approve legislation to reverse the Wells Fargo ruling.
New IRS Ruling on Bank Acquisitions Imposes Major Federal Corporate Tax Cuts -- And Will Hurt States Too
In late September, while the major presidential candidates debated solutions for reforming the federal corporate income tax, a little-noticed ruling by the Internal Revenue Service (IRS) opened the door for widespread corporate tax avoidance by a few of the biggest, most profitable financial institutions in the country. The IRS ruling, which took Congressional tax writers by surprise, will almost certainly push the federal government -- and many states -- further into the red at a time when they can least afford it.