First it was Mitt Romney, and now two more aspiring public servants are in the spotlight for questionable tax maneuvers – Penny Pritzker, President Obama’s Commerce Secretary Nominee, and Massachusetts Republican Senate candidate, Gabriel Gomez.  The complex tax avoidance strategies exercised by both these two candidates for federal office demonstrate the stunning extent to which wealthy individuals of all stripes can play by a different set of tax rules than everyone else.

Avoiding Every Last Penny of Taxes

While many wealthy families go to great lengths to avoid taxes, the Pritzker family (most famous for it’s ownership of the Hyatt hotel chain) is unique in its role as “pioneers” in the use of offshore tax shelters. Many of its existing offshore trusts were set up as long as five decades ago, and some have allowed the family to continue benefitting from tax loopholes that have long since been closed.

As the graphic below from a 2003 Forbes story details, one of the primary ways the Pritzker family uses offshore trusts to avoid taxes is by having income from their businesses funneled into offshore trusts. Those trusts then pay debt service to a bank, owned by the family trust, that loans that money right back to the business. The upshot is that all the taxable profits disappear and the family wealth accumulates unabated. A more recent Forbes article looking at the Pritzker family fortune notes that these trusts were not at the margin but rather “played a substantial role in the growth of the Pritzker fortune.” The same article notes that this fortune makes up the vast majority of Pritzker’s $1.85 billion empire and has allowed 10 members of the Pritzker family to earn a spot on the list of Forbes 400 richest people in America.

When the New York Times asked Penny Pritzker for her thoughts on the ethical implications of her family’s use of offshore trusts, she remarked that the trust was set up when she was only a child, after all, and that she does not control how the offshore trusts are administered. Her continued vagueness on these issues makes it likely that she will face more questions about her views of offshore tax avoidance more generally next week when she goes before the Senate for her confirmation hearing.

While Pritzker’s personal involvement with her family’s most infamous tax avoidance legacy is unclear, it is clear that she has actively used tax avoidance strategies in her own professional and private life. For example, a family member in this Bloomberg News profile from 2008 recounts one of her very first assignments working for Hyatt, which was to set up a like-kind property exchange to help avoid taxes on a property owned by Hyatt.

It turned out Penny was a natural at this particular tax avoidance scheme, in which a company takes deductions for the purported depreciation of their property and then sells the property at an appreciated price, but avoids paying capital gains tax by swapping the property for another like-kind property. (Originally created for use by farmers trading acreage, this tax break is a perfect example of a loophole in the tax code that is abused by companies and should be eliminated (PDF).)

In her personal finances, Penny Pritzker has run into criticism for making 10 appeals to lower the property tax assessment for her mansion in Chicago’s Lincoln Park. Like many wealthy taxpayers, Pritzker is able to retain lawyers who, through repeated appeals, have been able to save her an estimated $175,905 (PDF), even though their appeals have only succeeded half the time.

Gabriel Gomez and the Façade of Charitable Donations

While not on the same scale, according to the Boston Globe, U.S. Senate candidate Gabriel Gomez claimed a $281,500 income tax deduction in 2005 for “pledging not to make any visible changes to the façade of his 112-year-old Cohasset home” because the value of such an agreement is considered a charitable deduction by federal law. The only problem is that local laws already prohibit he and his wife from making any changes to the exterior of their home, meaning that his “agreement” to leave the façade alone is more like complying with local laws rather than a choice, so it may not have an actual “value” that is deductible.

In fact, just five weeks after Gomez claimed this deduction, the IRS listed the abuse of historic façade easements as one of its “Dirty Dozen” tax scams. Moreover, the organization with which Gomez made the agreement, the Trust for Architectural Easements, has been criticized by the IRS, Department of Justice, and Congress for encouraging tax avoidance. Altogether the IRS estimates that the Trust cost American taxpayers $250 million in lost revenue.

Fortunately for Gomez, the IRS did not challenge his use of this deduction, as it has with hundreds of others. If they had done so, they likely would have rejected the deduction and Gomez would have had to pay thousands in back taxes and an additional penalty. For his part, Gomez’s lawyer argues that the restrictiveness of the agreement goes further than local zoning laws, but it appears unlikely that the additional restrictions are so great as to justify such a substantial deduction.

Senator Rand Paul of Kentucky, an opponent of efforts to crack down on offshore tax havens, is stepping up his efforts by introducing FATCA repeal, and is extending his help to tax-dodging corporations by proposing a repatriation amnesty.

Senator Paul’s Campaign for Individual Tax Cheaters: Repeal of FATCA

A year ago we explained that Senator Paul was blocking an amendment to a U.S.-Swiss tax treaty designed to facilitate U.S. tax evasion investigations:

The US and Swiss governments renegotiated their bilateral tax treaty as part of the 2009 settlement of the UBS case. That case charged the Swiss mega-bank UBS with facilitating tax evasion by US customers. Under the settlement agreement, UBS paid $780 million in criminal penalties and agreed to provide the IRS with names of 4,450 US account holders.

Before it could supply those names, however, UBS needed to be shielded from Swiss penalties for violating that country’s legendary bank-secrecy laws. The renegotiation of the US-Swiss tax treaty addressed that problem by providing, as most other recent tax treaties do, that a nation’s bank-secrecy laws cannot be a barrier to exchange of tax information.

Today Senator Paul is still blocking such treaties. Taking his efforts a step further, he has introduced a bill to repeal a major reform that clamps down on offshore tax evasion. That reform is the Foreign Account Tax Compliance Act (FATCA), which was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. Senator Paul says he opposes it because of “the deleterious effects of FATCA on economic growth and the financial privacy of Americans.”

His arguments are entirely unfounded and the only thing he is accomplishing is to help those illegally hiding their income from the IRS. FATCA basically requires taxpayers to tell the IRS about offshore assets greater than $50,000, and it applies a withholding tax to payments made to any foreign banks that refuse to share information about their American customers with the IRS.

For a country with personal income tax (like the U.S.), that kind of information-sharing is indispensible to tax compliance, as the IRS stated in its most recent report on the “tax gap”:

Overall, compliance is highest where there is third-party information reporting and/or withholding. For example, most wages and salaries are reported by employers to the IRS on Forms W-2 and are subject to withholding. As a result, a net of only 1 percent of wage and salary income was misreported. But amounts subject to little or no information reporting had a 56 percent net misreporting rate in 2006.

So why shouldn’t foreign banks that benefit from the business of U.S. customers report the assets they deposit to U.S. tax enforcement authorities? Without such reporting, people who have the means to shift assets offshore are able to evade U.S. income taxes, while the rest of us are left to make up the difference.

Senator Paul’s Repatriation Amnesty Would Help Corporations That Use Tax Havens

The same week he proposed repeal of FACTA, Senator Paul introduced a bill that would reward corporations for shifting profits overseas. What the corporations are doing is not actually illegal, but in some ways that is exactly the problem, and the Senator’s tax amnesty proposal would make it worse.

The general rule under current law is that U.S. corporations are allowed to “defer” paying U.S. taxes on their offshore profits until those profits are “repatriated” (until they are brought back to the U.S.). A significant tax benefit to corporations, “deferral” actually encourages them to disguise their U.S. profits as foreign profits generated in a country that has no corporate tax or a very low corporate tax — in other words, a tax haven.

Whereas now U.S. corporations do have to pay the U.S. corporate tax on those profits upon repatriation (minus whatever amount they paid to the other country’s government, to avoid double-taxation), a repatriation amnesty would temporarily call off almost all the U.S. tax on those offshore profits. Paul’s proposal would subject the repatriated profits to a tax rate of just five percent.

A similar repatriation amnesty was enacted in 2004 and is widely considered to have been a disaster. A CTJ fact sheet explains (PDF) why proposals for a second repatriation amnesty should be rejected:

■ Another temporary tax amnesty for repatriated offshore corporate profits would increase incentives for job offshoring and offshore profit shifting... One reason why the Joint Committee on Taxation concluded that a repeat of the 2004 “repatriation holiday” would cost $79 billion over ten years is the likelihood that many U.S. corporations would respond by shifting even more investments offshore in the belief that Congress will call off most of the U.S. taxes on those profits again in the future by enacting more “holidays.”

■ The Congressional Research Service concluded that the offshore profits repatriated under the 2004 tax amnesty went to corporate shareholders and not towards job creation. In fact, many of the companies that benefited the most actually reduced their U.S. workforces.

Completely ignoring JCT’s findings, Senator Paul claims that the tax revenue generated from taxing the repatriated profits (even at a low rate of 5 percent) could be used to fund repairs of bridges and highways.

We’d like to assume that Senators know you can’t use a tax proposal that loses revenue to pay for something. We would like to assume that, but, sadly, we can’t.  

Photo of Rand Paul via Gage Skidmore Creative Commons Attribution License 2.0

Washington, DC – Today, the U.S. Senate is expected to pass the Marketplace Fairness Act, a bipartisan bill that would finally let state governments enforce their sales tax laws on purchases made over the Internet. Currently, retailers are only required to collect sales taxes from their customers if they have a store, warehouse, sales force, or other “physical presence” in the same state as the customer. In all other cases, online shoppers are required to pay the sales tax directly to their state government, but this requirement is unenforceable and routinely ignored. President Obama has indicated that he will sign the bill if it also passes the House of Representatives.

In anticipation of the vote, Carl Davis, senior analyst at the Institute on Taxation and Economic Policy (ITEP), issued the following statement:

“State lawmakers across the country will be celebrating today’s Senate vote aimed at ending the fiscal nightmare that online shopping has become. This vote begins to untie states’ hands in the fight against online sales tax evasion.

“Billions of dollars of revenue go uncollected every year because a court ruling from the days of floppy disks and dial-up allows online merchants to dodge their responsibility.

“We are not talking about a new tax here, these taxes are due by law. For the sales tax to work, retailers – no matter where they’re located – have to participate in collecting the tax from customers.

“State and local governments would have an additional 23 billion dollars a year to invest in education, infrastructure, law enforcement and other public services if they could collect online sales taxes due. Today they are one step closer to being able to make those investments.”

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The Institute on Taxation and Economic Policy (ITEP) is a non-profit, non-partisan research organization, based in Washington, DC, that focuses on federal and state tax policy. ITEP's mission is to inform policymakers and the public of the effects of current and proposed tax policies on tax fairness, government budgets, and sound economic policy. More at www.itep.org.

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.

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.

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 15^th 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 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.

For years, groups like the US Chamber of Commerce and the National Federation of Independent Business (NFIB) succeeded in portraying the consensus position of the “small business community” as staunchly favoring lower tax rates on top income earners and corporations. The tax debate surrounding the so-called “fiscal cliff” has exposed the myth that these groups actually represent small businesses and shows that many of these large national groups have very different interests at stake.

The biggest pushback in recent days against the anti-tax agenda represented by the Chamber and NFIB has come from groups of small business owners who are fed up with having the position of “small business owners” misrepresented. In recent days, thousands of business owners and executives have signed on to a letter calling for the expiration of the Bush tax cuts for those making over $250,000 and arguing that only a small fraction of the wealthiest small business owners would even be affected by allowing this to occur. In addition, many small business leaders have signed on to a letter calling for corporations to contribute more to reduce the deficit as part of the fiscal cliff deal. The letter also calls for an end to the offshore tax loopholes that give larger multinational corporations a tax advantage over small businesses.

The reason so many small business owners are raising their voices is because they believe that raising revenue is critical to stopping spending cuts in education, health care, and infrastructure that are crucial to building a strong economy. Backing this up, a poll of small business owners by the Small Business Majority found that, by a 2 to 1 margin, small business owners believed that spending cuts would do more harm to the economy than higher taxes on the wealthy. As Brian McGregor, owner of the Silver Dollar Saloon in Montana and a supporter of allowing the tax cuts for the wealthiest to expire, put it, “What my business needs is customers – not more tax cuts for the rich.”

The growing opposition of small business owners has not done much to change the position of NFIB and the Chamber, which continue to push for more tax cuts for the wealthy and corporations. This is not all that surprising, since both groups have historically been more interested in promoting the Republican Party than the real preferences of the small business community. In fact, during 2012 the Chamber spent over $32 million (98% of its total spending on electioneering communications) supporting Republican candidates, while the NFIB spent $4 million (100% of its total spending on electioneering communications) supporting Republican candidates. This is especially striking considering that less than half of small business owners identify as Republican.

The intransigence of the NFIB and Chamber has become even more clear as other big business backed groups like the Business Roundtable and Fix the Debt have begun calling for a fiscal cliff deal that includes revenue increases. To be fair, however, many critics suspect that the Business Roundtable and Fix the Debt groups messaging may have more to do with cutting a backroom deal to lower corporate taxes, than in protecting small businesses. In fact, one recent study using data from Citizens for Tax Justice found that the companies backing the Fix the Debt campaign could directly benefit to the tune of $134 billion if such a deal included a move to a territorial tax system, while at the same time further disadvantaging small businesses that do not have offshore earnings.

The more small business owners speak out for themselves, rather than allowing corporate-backed national organizations to speak for them, the more lawmakers will realize that small businesses demand robust government investments and are hurt when multinational corporations are allowed to escape paying their fair share in taxes.

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?

As President Obama and Governor Romney discuss foreign policy in their final debate, there’s a major issue that they will, unfortunately, probably ignore: the tangle of international tax rules that allow offshore tax dodging.

The U.S. tax system is already in a mess when it comes to the rules we use to determine how profits of multinational companies are taxed. President Obama has proposed some steps to rein in the worst abuses, but most of these are relatively timid or vague. Meanwhile, Romney proposes that the U.S. follow the example of other countries that have a “territorial” system, which has facilitated high-profile tax avoidance schemes by major multinational corporations. On this issue, the U.S. needs to show leadership that has been lacking so far.

Here are the basics: The U.S. could either have a “worldwide” tax system, in which we tax the offshore profits of our corporations (but provide a credit for foreign taxes paid, to prevent double-taxation) or the U.S. could have a “territorial” tax system, which exempts the offshore profits of our corporations from U.S. taxes. What we have now is a hybrid of the two systems. The U.S. does tax the offshore profits of U.S. corporations and provides a credit for foreign taxes paid, but also allows the corporations to “defer” (delay indefinitely) those U.S. taxes, until the profits are brought to the U.S.

Under the current rules, U.S. corporations have a reason to prefer offshore profits over U.S. profits, because they benefit from the rule allowing them to “defer” U.S. taxes on offshore profits indefinitely. So they may shift operations (and jobs) to a country with lower taxes, or engage in convoluted transactions that make their U.S. profits appear to be earned by subsidiaries in countries with no (or almost no) corporate tax (i.e., offshore tax havens).

The offshore subsidiary may be nothing more than a post office box in the Cayman Islands. CTJ recently explained that Nike, Microsoft, Apple and several other companies essentially admit in their public documents that they engage in these tricks.

If allowing corporations to “defer” U.S. taxes on offshore profits causes them to prefer offshore profits over U.S. profits, then eliminating U.S. taxes on offshore profits would logically increase that preference, and increase these abuses. And that’s exactly what a territorial system, which Romney supports, would do.

CTJ has explained in a fact sheet and a more detailed report that we should move in the opposite direction by simply repealing “deferral” so that we have a true “worldwide” tax system. A CTJ report on options to raise revenue explains that repealing deferral would raise $583 billion over a decade.

President Obama has proposed far more limited steps. His most recent budget blueprint proposes to raise $148 billion over ten years with a package of provisions to crack down on the worst abuses of deferral. (The official revenue estimators for Congress projected that the provisions would raise a little more, $168 billion over a decade.)

These proposals would do some good. For example, one would end the practice of companies taking immediate deductions against their U.S. taxes for interest expenses associated with their offshore operations while they defer (not pay) the U.S. taxes on the resulting offshore profits indefinitely. Another would help ensure that the foreign tax credit, which is supposed to prevent double-taxation of foreign profits, does not exceed the amount necessary to achieve that goal. Still another would reduce abuses involving intangible property like patents and trademarks, which are particularly easy to shift to tax haven-based subsidiaries that are really no more than a post office box.

But none of these reforms proposed as part the President’s budget really addresses the underlying problem with a deferral system or a territorial system: The IRS cannot figure out which portion of a multinational corporation’s profits are truly generated in the U.S. and which portion is truly generated overseas. If a U.S. corporation tells the IRS that a transaction with an offshore subsidiary wiped out its profits, the IRS cannot challenge the company unless it can prove that the transaction was unreasonable. And that’s difficult to do, especially when the transaction involves some product or service that is not comparable to anything else in the market (like a new invention, pharmaceutical, or software program).

President Obama has also proposed, as part of his “framework” for corporate tax reform, a minimum tax on offshore corporate profits. Because he has not yet specified any rate for this minimum tax, it’s impossible to say whether it would be effective. If the rate is set extremely low, then it would change very little. In theory, if the rate was set high enough, it would almost have the same effect as ending deferral — but no one in the administration is talking about anything that dramatic. (Read CTJ’s response to the President’s “framework” for corporate tax reform.)

There are some members of Congress looking very seriously at offshore tax dodging by corporations (like Senator Carl Levin). But serious leadership is unlikely to come from the presidential candidates anytime soon.

Photo of Barack Obama, Mitt Romney, and Cayman Islands Flag via Austen Hufford, Justin Sloan, and J. Stephen Con Creative Commons Attribution License 2.0 

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.

In last night’s presidential debate, Governor Romney pointed out that President Obama’s pension holds investments in Chinese companies and even in a Cayman Islands trust. Unlike Romney’s self-directed Individual Retirement Account, the President’s pension is in a system over which the President has absolutely no control; it’s an account with the Illinois General Assembly Defined Benefit Pension Plan. To somehow compare that with the vast wealth that Romney has personally placed offshore is ludicrous.

While Romney was at the helm of Bain Capital, the private equity firm began forming all of its new funds in the Cayman Islands through labyrinthine structures that allow investors to legally avoid – and illegally evade – tax. In addition, Gov. Romney has a Bermuda corporation which has never been explained and, of course, there is that famous Swiss bank account. Over 250 of the 379 pages of Romney’s 2011 tax return are devoted to disclosing transactions with offshore corporations and partnerships.

If Romney was trying to make the point that most investors have some holdings in companies outside of the U.S., we buy that. But if Romney’s point was that facilitating tax avoidance and evasion through complicated offshore structures is both normal and acceptable or in any way ordinary, we could not disagree more.

A hearing on offshore profit shifting last week exposed aggressive tax planning strategies employed by Microsoft and Hewlett-Packard (HP) and illustrated the critical need for more disclosure.

On September 20, the Senate Permanent Subcommittee on Investigations held a hearing on “Offshore Profit Shifting and the U.S. Tax Code.” Witnesses from academia, the Internal Revenue Service, U.S. multinational corporations, international tax and accounting firms and the nonprofit Financial Accounting Standards Board (FASB) answered questions from the Senators about how tax and accounting rules allow U.S. multinationals to shift profits offshore using dubious transactions and complicated corporate structures.

The committee looked at two case studies investigated by the committee staff. In the Microsoft case, the committee investigation found that 55 percent of the company’s profits were “booked” (claimed for accounting purposes) in three offshore tax haven subsidiaries whose employees account for only two percent of its global workforce. Microsoft did that by selling intellectual property rights in products developed in the U.S. (and subsidized by the research tax credit) to offshore tax haven subsidiaries, then creating transactions to shift related profits there.

Hewlett-Packard used a loophole in the regulations to use offshore cash to pay for its U.S. operations without paying any U.S. tax on the repatriated income.  Rather than having offshore subsidiaries pay taxable dividends to the U.S. parent company, HP had two subsidiaries alternately loan funds to the parent in back-to-back-to-back-to-back 45-day loans. In the first three quarters of 2010, there was never a day that HP did not have an outstanding loan of $6 to $9 billion from one of its foreign subsidiaries.

In the tax footnote to their public financial statements, companies disclose the amount of their foreign subsidiaries’ earnings which are “indefinitely reinvested.” They do not record U.S. tax expense on these profits, ostensibly because they don’t plan to bring them back to the U.S. anytime soon. But they must disclose the total amount of their unrepatriated profits and estimate the U.S. tax that would be due if the earnings were repatriated.

The FASB representative, in a conversation with CTJ Senior Counsel Rebecca Wilkins after the hearing, noted that the accounting standards require disclosure. If companies do have a reasonable estimate and are not disclosing the amounts, that would be an “audit failure” by the accounting firm auditing the financial statements and subject to possible disciplinary action by the Public Company Accounting Oversight Board (established by Congress in 2002).

Most companies have not disclosed the potential U.S. taxes they would owe, but they must know it’s enough that they don’t want to repatriate the earnings and pay it. Chances are, they know those amounts down to the dollar.

It's outrageous that many of the companies who are lobbying hardest for a repatriation holiday won’t tell Congress whether these foreign earnings are sitting in a tax haven right now or how much U.S. tax they would owe on them. Lawmakers should demand to know.

Bradley Birkenfeld, a former banker at the Swiss banking giant UBS, received a record-setting reward of $104 million from the Internal Revenue Service (IRS) for blowing the whistle on the bank’s systematic efforts to woo wealthy Americans investors and then help them evade taxes. Birkenfeld’s revelations resulted in UBS paying a $780 million fine to the US government, and the recovery of more than $5 billion from American taxpayers took part in the IRS’s amnesty program to avoid criminal charges for their own offshore tax evasion.

Birkenfeld participated in the UBS scheme (he served jail time and is now under house arrest). His insider disclosures led the IRS to other UBS bankers who had persuaded wealthy Americans to place $20 billion of assets in UBS in order to facilitate tax evasion that -- obviously -- boosted those clients’ returns. The IRS has charged two dozen offshore bankers and 50 American taxpayers with crimes, and at least 11 banks are still under criminal investigation.

The record payout to Birkenfeld is part of the IRS Whistleblower program that provides a substantial financial incentive, up to 30 percent of the taxes recovered, to encourage tipsters to come forward with information about tax evasion. This program is a smart piece of the IRS’s larger strategy to combat the estimated $40 to $70 billion in individual offshore tax evasion each year.

While the effort to combat offshore tax evasion has revved up over the past couple years, the IRS still lacks the tools it needs to fully confront evasion. To help fix this, Senator Carl Levin has proposed the Stop Tax Haven Abuse Act, which, among other things, would allow the Treasury to put more pressure on financial institutions that don’t cooperate with US tax enforcement. In addition, the Senate still needs to override Senator Rand Paul’s block and ratify the US-Swiss tax treaty so that the IRS can begin collecting critical information from Swiss banks about US tax evaders.

Even with the many hurdles the IRS faces, Stephen Kohn, the Executive Director of the National Whistleblowers Center, said that it had been a good day in the fight against tax evasion because the IRS sent “104 million messages to banks around the world – stop enabling tax cheats or you will get caught.”

More and more people are asking if Bain Capital’s tax avoidance strategies are more than merely aggressive. On August 23, Gawker.com released a staggering 950 pages of documents related to Bain, the private equity firm that Mitt Romney founded, that confirm a lot of what we had previously surmised, including the fact that the Bain private equity funds set up “blocker” corporations to help tax-exempt investors avoid the unrelated business income tax and help foreign investors avoid tax in the U.S. and in their home countries.

CTJ senior counsel Rebecca Wilkins summarized it for Huffington Post: “The Bain documents posted yesterday show that Bain Capital will go to great lengths to help its partners and its investors avoid tax. Beyond simply putting their funds offshore, the Bain private equity funds are using aggressive tax-planning techniques such as blocker corporations, equity swaps, alternative investment vehicles, and management fee conversions.”

The management fee conversions, detailed in several of the fund documents, do what they sound like they do: they convert some of the private equity firms’ annual management fees from clients, which would be taxed as ordinary income, into increased shares of partnership profits known as “carried interest”.  Carried interest is how these firms have structured their performance-based compensation from managing their clients’ investments, and carried interest is taxed at the special low rate at which capital gains are taxed. The management fee conversion is an effort to get yet another form of client compensation taxed at the capital gains rate, which is less than half the rate at which it would be taxed if it were ordinary income. These conversions save private equity firms’ partners millions of dollars in income taxes (the Bain partners alone have saved an estimated $220 million).

Colorado Law Professor Vic Fleischer, an expert on the taxation of private equity, quickly branded the management fee conversions as improper. “Unlike carried interest, which is unseemly but perfectly legal, Bain’s management fee conversions are not legal.”

It looks as though the New York Attorney General agrees. In July, weeks before the Gawker document dump, AG Eric Schneiderman served subpoenas on more than a dozen private equity firms, including Bain Capital.  The AG’s office is seeking documents related to whether the firms improperly converted management fees into additional carried interest, and running the investigation through its Taxpayer Protection Bureau. 

As controversial as private equity firm tax practices have become (thanks to Mitt Romney’s candidacy), we are likely to be hearing more about this investigation soon. Stay tuned.

Presidential candidate Mitt Romney has been doing a lot of media interviews lately, and when the editors at Politico wrote up their sit-down with the GOP nominee, they characterized Romney’s answers to their questions as “the clearest window yet into how the lessons he gained in the corporate world would be applied to the presidency.

So what did he say? Romney told Politico “I learned leadership by watching people,” and named J.W. “Bill” Marriott, a fellow Mormon and the CEO of the hotel chain of the same name, as one of the people from whom he’s learned a lot about leadership. He put Marriott right up there with his mentor, Bill Bain.

While we can’t speak to Bill Marriott’s management style, we can tell you that during his 40-year tenure as CEO of Marriott International, the company engaged in aggressive tax avoiding – so aggressive that it later got them into trouble with the IRS.

The company used a tax shelter known as “Son of BOSS,” generating capital losses that a federal court deemed “fictitious,” “artificial” and a “scheme.” The government criminally prosecuted the promoters of this particular tax shelter and people are now serving federal prison sentences for it. In fact Romney himself, as a member of Marriott’s audit board, most likely signed off on this tax evasion strategy. The company has used other aggressive tax planning vehicles, too, even claiming a questionable tax credit for synthetic fuels.

Marriott also shows an ever-increasing ability to shift and shelter its profits offshore. While 3,122 of its 3,718 hotel properties are in the United States, the company pays more income tax in foreign jurisdictions than in the US, even though the majority of its profits must surely be generated here.

Marriott has over a hundred subsidiaries in known tax haven countries. For example, while it has only one hotel in the Cayman Islands, Marriott has 15 subsidiary companies there.  And in Luxembourg, where it has nine subsidiaries but zero hotels, Marriott uses one of its subsidiaries to collect royalties on its various brand names which the US cannot tax.

Does Romney admire and endorse these kinds of shenanigans? Hard to say for sure. But given his widely recognized use of some pretty aggressive (though legal, far as we know) strategies to avoid paying his personal taxes, we now have a glimpse into the values that inform his views on corporate tax policy.  We are beginning to sense a pattern in this presidential candidate, and it looks a little like disdain for our nation’s tax laws.

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.

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.

A new study from the Internal Revenue Service confirms your worst fears about the tax code: it’s riddled with loopholes and Congress isn’t doing anything about it.  Year after year since 1977, the IRS has dutifully issued its “data on individual income tax returns reporting income of $200,000 or more, including the number of such returns reporting no income tax liability and the importance of various tax provisions in making these returns nontaxable” because Congress mandates it. And year after year, it shows that some of the very richest Americans are finding entirely legal ways to avoid federal income taxes altogether.

The new (and most recent) IRS data show that in 2009, more than 35,000 Americans* with incomes over $200,000 paid not a dime in federal income tax. For this group—less than one percent of all the Americans with incomes over $200,000, according to the study— itemized deductions and tax-exempt bond interest are among the main tax breaks that make this tax-avoiding feat possible. 

And, as if to illustrate how loopholes never die, these two tax breaks are among the oldest on the books; the exemption of bond interest dates to the century old statute establishing the income tax itself!

Sensible tax reforms could close (or at least shrink) these holes in the tax code.  The president, for example, has proposed a limit on the value of itemized deductions for the wealthiest Americans, and to extend the “Build America Bonds” program which keeps revenues flowing to cities but phases out the tax shelter the current system provides for the bond holders.

Of course, these wealthy taxpayers avoiding all their federal income tax responsibilities don’t even include the ones paying zero or low federal taxes because of the low rates at which investment income is taxed.

There is no excuse for hundred-year-old loopholes in a tax code: it’s time for Washington to clean up the tax code and take a brave stand against unwarranted exemptions that drain revenues and reward the rich.

* Others have focused on a smaller number of taxpayers, 21,000, who have an adjusted gross income (AGI) of over $200,000. But simple AGI excludes many types of income, such as tax exempt bond interest which is key to the low tax liabilities.

Facebook® co-founder Eduardo Saverin is facing mounting public scorn for renouncing his US citizenship, presumably to save some tax money (which he says is not the case). There are even two US Senators after him! He left in September but the pile-on is happening this week because of Facebook’s Initial Public Offering (IPO) of its stock: Saverin’s share will be worth somewhere in the neighborhood of $4 billion.

Saving Capital Gains Taxes
If Eduardo Saverin were a US citizen and sold his stock, most of that income would be subject to special low rate capital gains taxes of 15 percent (or 20 percent in future years if the new rate goes into effect January 1 as scheduled). By renouncing his citizenship, Saverin avoids paying those current and future capital gains taxes (and he would never have to pay the full income tax rate that Facebook employees exercising their stock options will be paying), but he does have to pay an "exit tax" (see below). Saverin now lives in Singapore, which doesn’t have a capital gains tax. 

Lowering the “Exit Tax”
When wealthy Americans give up their citizenship, they must pay an “exit tax” which treats all of their assets as if they’d been sold for fair market value (the actual tax payment can be deferred until the assets are sold). The fair market value of publicly-traded stock is what it traded for that day; privately-held stock must be appraised.

A spokesman for Saverin said that he renounced his citizenship last September, well ahead of this week’s Facebook IPO. Therefore, the stock’s valuation for “exit tax” purposes was likely substantially below its expected $38 IPO value, allowing Saverin to reduce his exit tax cost.

Not Tax, But Financial Decision
According to a spokesman, Saverin is expatriating for financial, not tax reasons. He doesn’t mind paying tax, he says, he just dislikes the complicated rules. He claims that the US rules, like the recently enacted Foreign Account Tax Compliance Act (FATCA), are preventing him from making some foreign investments he’d like to make.

Why It Feels Like Treason
Saverin emigrated to the US with his family at age 13 when his name turned up on a list of potential kidnap victims in his native Brazil where criminal gangs target the children of wealthy citizens and hold them for ransom. In the US, not only was Saverin safe from such violence, but he benefited enormously from government investment in education, the court system, and the Internet. Would he be a billionaire today if his family had relocated somewhere else?

Farhad Manjoo, a fellow immigrant, wrote a brilliant post (one of many, including this one) on the IT blog PandoDaily about what Eduardo Saverin owes America (nearly everything) including, quite possibly, his life. Taxes are the least of it.

Republican leaders in the Senate claim that they agree with the Democrats’ goal of extending a temporary reduction in interest rates on student loans, but oppose the Democrats’ proposal to offset the costs. But this proposal, which would close the “Newt Gingrich/John Edwards Loophole” used by owners of “S corporations” to avoid payroll taxes, is a reason to support the Senate Democrats’ bill, which was filibustered by Senate Republicans on Tuesday.

CTJ’s recent report on revenue-raising options explains the loophole (on pages 17-18) and explains a proposal from Congressman Pete Stark to close it. The Senate Democrats’ proposal to close the loophole is a little weaker (as explained below) but still certainly deserves support.

Income from work, including wages and salaries, is subject to federal payroll taxes (Social Security taxes and Medicare taxes). Some wealthy individuals, including (at one time) former presidential candidates John Edwards and Newt Gingrich, have used a loophole to make their earned income appear to be unearned income, in order to avoid payroll taxes. (This is particularly true of the Medicare tax because there is no cap on the amount of earnings subject to the Medicare tax.)

The scheme involves a type of business called an “S corporation,” which is distinguished from other corporations in that its profits are not subject to the corporate income tax but are simply included in the taxable income of the owners and therefore subject to the personal income tax. These profits should also be subject to payroll taxes when they are income from work, but an odd feature of S corporations allows some “active income” (income a business owner receives as a result of being involved in the operations of the business) to be characterized as income that is not earned and thus not subject to payroll taxes.

This is an invitation for abuse, and John Edwards accepted the invitation when he was a trial lawyer. He claimed that his name was an asset and that this asset (rather than his labor) was generating the income for his firm (which was an S corporation). Newt Gingrich’s recently released tax returns demonstrated that he, too, took advantage of this loophole.

To be sure, the Senate Democrats’ proposal doesn’t go as far as it should. It would apply the Medicare tax to this income only when the S corporation is “a professional service business in which more than 75% of its gross revenues come from the service of 3 or fewer shareholders.” The proposal is more restrictive than Congressman Stark’s bill in that it would apply to S corporation owners only if their adjusted gross income exceeds $250,000. It’s hard to see why anyone at any income level should be allowed to get away with this.

Nonetheless, the Senate Democrats’ proposal certainly sounds like it would, if in effect, have prevented John Edwards and Newt Gingrich from using this loophole to avoid payroll taxes. And that’s a reason to support the legislation, which may come up for a vote again according to Democratic leaders.

Photo of Newt Gingrich and John Edwards via Gage Skidmore and SS Kennel Creative Commons Attribution License 2.0

Remember the Tea Party? Well, freshman Kentucky Senator Rand Paul is living up to his reputation as the darling of the Taxed Enough Already movement that shook the 2010 elections. 

Rand Paul, son of Libertarian firebrand and GOP presidential candidate Ron Paul, is currently blocking the Senate’s ratification of an amendment to the US-Swiss tax treaty, apparently worried about the right of tax evaders to financial privacy. He says the language is too “sweeping” and might jeopardize US constitutional protections against unreasonable search and seizure. But as one former Treasury Department official said, Paul's move “smacks of protecting financial secrecy for those who may have committed criminal tax fraud in the US.”

The US and Swiss governments renegotiated their bilateral tax treaty as part of the 2009 settlement of the UBS case. That case charged the Swiss mega-bank UBS with facilitating tax evasion by US customers. Under the settlement agreement, UBS paid $780 million in criminal penalties and agreed to provide the IRS with names of 4,450 US account holders.

Before it could supply those names, however, UBS needed to be shielded from Swiss penalties for violating that country’s legendary bank-secrecy laws. The renegotiation of the US-Swiss tax treaty addressed that problem by providing, as most other recent tax treaties do, that a nation’s bank-secrecy laws cannot be a barrier to exchange of tax information.

Many tax haven countries were hiding behind their bank secrecy laws to deflect requests for account holder information, and the IRS and Justice Department have been investigating 11 Swiss financial institutions on criminal charges of facilitating tax evasion.

The Senate must ratify the treaty changes – which is normally a routine procedure.

By blocking the ratification, Senator Paul is holding up the exchange of information in the UBS case (and others) and hampering IRS efforts to crack down on tax evasion by Americans.

Tax evasion by individual taxpayers is estimated to deprive the US Treasury of as much as $70 billion per year (corporate offshore tax avoidance is estimated to cost the Treasury an additional $90 billion per year).

Given Senator Paul’s obvious concern about the deficit, he might have a hard time explaining to honest American taxpayers how he justifies protecting tax evaders with Swiss bank accounts as the deficit grows ever larger.

Photo of Rand Paul via Gage Skidmore Creative Commons Attribution License 2.0

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. 

On Tuesday, advocates for transparency scored a victory while tax evaders suffered a loss. The Treasury Department issued final regulations requiring banks to report to the IRS any interest payments made to foreign account holders in the same way they must report interest payments made to U.S. resident account holders. You’d think this sort of regulatory issue would be a pretty dull affair, but sparks flew over the last several months as opponents of the new rule accused Citizens for Tax Justice and the Obama administration of supporting dictators, kidnappers and terrorists.

The U.S. government taxes interest payments made to U.S. residents but not those made to foreigners, so before now it never bothered to require banks to report those interest payments made to foreigners. But the IRS proposed to change that rule in order to reduce tax evasion by Americans, both directly (by helping to identify Americans who evade U.S. taxes by posing as foreign account holders) and indirectly (by helping other countries enforce their tax laws so that they’ll help us enforce ours).

CTJ and the Financial Accountability and Corporate Transparency (FACT) Coalition continually expressed support for the regulations as they worked their way through the process, and CTJ’s Rebecca Wilkins testified before the Internal Revenue Service and the House Financial Services Committee in support of the rule. Sen. Carl Levin, a long-time crusader against tax haven abuse and chair of the Senate Permanent Subcommittee on Investigations also submitted comments. Levin’s committee has done ground-breaking investigative work on offshore tax evasion issues and chief counsel Elise Bean also testified in support of the proposed regulations.

At the House Financial Services Committee hearing in October, Republican Chairman Spencer Bachus read a letter from the Florida House delegation, which apparently is protective of its banks even when they facilitate tax evasion. Many people who live in unstable countries and have U.S. bank accounts, the letter argues, are “concerned their personal bank account information could be leaked to unauthorized persons in their home country government or to criminal or terrorist groups upon receipt from U.S. authorities, which could result in kidnapping or other terrorist actions…”

Wilkins explained that the IRS would only hand over information to foreign governments in response to a careful, limited request under a tax information exchange agreement. Even more important, Wilkins explained, is that the rule in effect until now actually helped criminals, corrupt government officials, terrorists and money launderers by allowing them to hide their money in the U.S.

The hearings made clear that supporters of the regulations were greatly outnumbered by the tax cheaters’ lobby, the politicians, and the bankers who benefit from facilitating tax evasion. We’re really glad that the IRS didn’t rewrite the regulations to please them.

Today we’re celebrating this rare win in our long fight for good tax policy and robust enforcement. But the real winners today are honest taxpaying citizens all over the world.

Millions of Americans will spend part of this upcoming weekend trying to navigate tax preparation software or filling out the actual paper forms to file their income tax returns before the Tuesday deadline. For those wishing they could pay less tax, outlined below are some tax planning ideas taken from a review of presidential candidate Mitt Romney’s tax returns.

Read the report.

Presidential candidate Mitt Romney took some heat this winter for delaying release of his tax returns and then, in January, released only one year’s worth (and an estimate for 2011). Now the calls for more disclosure are heating up again since the Washington Post reported that Romney is using an obscure ethics rule loophole to limit the disclosure of his Bain Capital holdings. An earlier Los Angeles Times article reported that Romney’s financial disclosure did not list many of the funds and partnerships that showed up in his 2010 tax returns, eleven of which are based in low-tax foreign countries such as Bermuda, the Cayman Islands and Luxembourg.

While it’s Romney’s offshore holdings that are making news, the fact is any government official using offshore tax havens right now is allowed to keep that a secret.

But that’s about to change. On March 29, Senators Dick Durbin (D-IL) and Al Franken (D-MN) introduced a bill that would require members of Congress, candidates for federal office, and high-ranking federal government officials to identify which of their assets are located in tax havens when they file their required financial disclosures. The Financial Disclosure to Reduce Tax Haven Abuse Act of 2012 (S. 2253) would amend the Ethics in Government Act of 1978.

Although there’s nothing illegal about having an offshore account, estimates are that abuses facilitated by these accounts cost the U.S. Treasury over $100 Billion per year in lost tax revenue. And while the Durbin-Franken bill won’t make it illegal, it would have the effect of limiting that sort of tax dodging among public officials – or weed out candidates unwilling to tolerate a little sunshine.

In his floor statement introducing the bill, Sen. Durbin stated “it might seem ridiculous that we don’t already know whether candidates and Members of Congress are using offshore tax havens.” Sen. Franken, in the press release, said “Americans deserve transparency from public officials.” We could not agree more.

Photo of Mitt Romney via Gage Skidmore Creative Commons Attribution License 2.0

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.

On Monday, Apple™ announced that it will distribute tens of billions of its cash holdings as dividends to shareholders, ending speculation over how the company will use the large pile of cash it has been sitting on. CFO Peter Oppenheimer went out of his way to point out that the dividends would be paid entirely from Apple’s U.S. cash, which means the $54 billion Apple has stashed in foreign countries will stay there. Oppenheimer explained that “repatriating cash from overseas would result in significant tax consequences under U.S. law.”

He’s not kidding! CTJ has estimated that Apple has paid a tax rate of just over three percent on this stash of “foreign” earnings, a clear indicator that much of this cash is likely parked in offshore tax havens and has never been taxed by any government. If Apple brought this cash back to the U.S., they’d likely pay something close to the 35 percent corporate tax rate that the law prescribes. The resulting $17 billion tax payment would be more than double the $8.3 billion in federal taxes that Apple has paid on its $83 billion in worldwide profits – over the last 11 years.

Apple is part of the Win America Coalition that’s been lobbying hard for a repatriation holiday (a.k.a. tax amnesty) which would allow them to bring back those unrepatriated profits at a super-low tax rate. But that would only encourage U.S. multinational corporations to shift even more profits offshore in anticipation of the next holiday.

Apple’s CFO was astonishingly blunt: “we do not want to incur the tax cost.”  Rather than shirking its basic obligation to help pay for the public goods that contribute to its extraordinary success, Apple’s executives might want to “think different” about its tax dodging ways before its devoted consumers start thinking differently about their favorite high-tech brand.

Photo of Apple Logo via Marko Pako Creative Commons Attribution License 2.0

For Immediate Release: February 27, 2012 (rev. 4/12)

Contact: Anne Singer, 202-299-1066, ext. 27

General Electric Paid Only Two Percent Federal Income Tax Rate Over the Past Decade, Citizens for Tax Justice Analysis Finds; Actual Payments Were Probably Lower

Washington, DC – General Electric’s (GE) annual SEC 10-K filing for 2011 (filed February 24, 2012) reveals that the company paid at most two percent of its $80.2 billion in U.S. pretax profits in federal income taxes over the last 10 years.

Following revelations in March 2011 that GE paid no federal income taxes in 2010 and in fact enjoyed $3.3 billion in net tax benefits, GE told AFP (3/29/2011), “GE did not pay US federal taxes last year because we did not owe any.” But don’t worry, GE told Dow Jones Newswires (3/28/2011), “our 2011 tax rate is slated to return to more normal levels with GE Capital’s recovery.”

As it turns out, however, in 2011 GE’s effective federal income tax rate was only 11.3 percent, less than a third the official 35 percent corporate tax rate.

“I don’t think most Americans would consider 11.3 percent, not to mention GE’s long-term effective rate of 1.8 percent, to be ‘normal,’ ” said Bob McIntyre, director of Citizens for Tax Justice.  “But for GE, taxes are something to be avoided rather than paid.”

Citizens for Tax Justice’s summary of GE’s federal income taxes over the past decade shows that:

O From 2006 to 2011, GE’s net federal income taxes were negative $3.1 billion, despite $38.2 billion in pretax U.S. profits over the six years.

O Over the past decade, GE’s effective federal income tax rate on its $81.2 billion in pretax U.S. profits has been at most 1.8 percent.

McIntyre noted that GE has yet to pay even that paltry 1.8 percent. In fact, at the end of 2011, GE reports that it has claimed $3.9 billion in cumulative income tax reductions on its tax returns over the years that it has not reported in its shareholder reports — because it expects the IRS will not approve these “uncertain” tax breaks, and GE will have to give the money back.

GE is one of 280 profitable Fortune 500 companies profiled in “Corporate Taxpayers and Corporate Tax Dodgers, 2008-2010.”  The report shows GE is one of 30 major U.S. corporations that paid zero – or less – in federal income taxes in the last three years.  The full report, a joint project of Citizens for Tax Justice and the Institute on Taxation and Economic Policy, is at http://ctj.org/corporatetaxdodgers/. Page 24 of the report explains “uncertain” tax breaks.

###

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).

Founded in 1980, the Institute on Taxation and Economic Policy (ITEP) is a 501 (c)(3) non-profit, non-partisan research organization, based in Washington, DC, that focuses on federal and state tax policy. ITEP's mission is to inform policymakers and the public of the effects of current and proposed tax policies on tax fairness, government budgets, and sound economic policy (www.itepnet.org).

Note: GE’s profits and taxes for 2009 and 2010 have been slightly revised from an earlier version of this release. The earlier version inadvertently used GE’s restated 2009 and 2010 figures from GE’s 2011 annual report. Those restated figures excluded the half of NBC that GE sold to Comcast in 2011, and did not reflect GE’s actual results for those two years.

(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.

Photo of Facebook Logo via Dull Hunk and photo Mark Zuckerberg via KK+ 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.

As we explain in this fact sheet, the real answer is not to adopt a territorial tax system but to end “deferral.” Here’s a report making the same case in much more detail.

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

A new report from the IRS estimates that individuals and businesses failed to pay $385 billion of the taxes they owed in a single year — a figure that many experts believe is an understatement. This comes just months after Congress cut funding for IRS enforcement activities that could recoup those dollars.

The IRS report estimates that taxpayers paid $450 billion less than was owed in 2006 and that the IRS eventually recovered $65 billion of that, leaving a net "tax gap" of $385 billion — which is roughly 14.5 percent of all taxes due.

As CTJ director Bob McIntyre explained in his testimony before the Senate Budget Committee a few years ago, he and other tax experts have long thought that the tax gap is actually larger than what the IRS estimates, particularly the portion that results from income hidden in offshore tax havens.

The IRS is less able to counter this type of tax evasion than it was in the past. Congress drastically slashed the IRS budget in the 1990s with the rationale that the agency was a bother to taxpayers. But another report released today by the National Taxpayer Advocate (a Bush appointee) concludes that the paltry budget for the IRS is itself the source of irritation for taxpayers who are affected by the various short-cuts the IRS must take in administering the tax system with fewer staff.

The more fundamental problem with the tax gap is that it means the vast majority of Americans, who pay the taxes they owe, are effectively subsidizing those who do not.

Most middle-income working people don't have many opportunities to evade taxes because their employers report their wages to the IRS and withhold a portion of them for taxes. On the other hand, corporations and business owners are responsible for a majority of the tax gap.

For example, underreporting of business income, corporate income, and compensation by self-employed individuals together make up a majority of the tax gap, according to the IRS report.

Congress's cuts to IRS funding are bizarre because this is one type of government spending that pays for itself several times over. In some cases a dollar of additional IRS funding can generate $200 of revenue. In other words, lawmakers have forced cuts to the IRS budget knowing full well that this is one type of spending cut that actually increases the budget deficit.

In addition to restoring IRS funding, there are other measures that Congress can take to increase income reporting and crack down on institutions that facilitate offshore tax evasion, as McIntyre called for in his testimony. Most of those proposals have still not been enacted, partly because they're opposed by the Tax Cheaters Lobby.

Photo of Tax Preparation via Money Blog Creative Commons Attribution License 2.0

On Thursday, a subcommittee hearing on a proposed IRS rule veered towards the absurd when Citizens for Tax Justice and the Obama administration were accused of supporting dictators, kidnappers and terrorists.

CTJ’s Rebecca Wilkins testified before a House Financial Services subcommittee in favor of a proposed rule that would require U.S. banks to report to the IRS any interest payments made to foreign account holders in the same way they report interest payments made to U.S. resident account holders.

Read Rebecca Wilkins’s Written Testimony

Watch Rebecca Wilkins’s Testimony

The U.S. government taxes interest payments made to U.S. residents but not those made to foreigners, so it never bothered to require banks to report those made to foreigners. But the IRS has proposed to change that rule in order to reduce tax evasion by Americans directly (to help identify Americans who evade U.S. taxes by posing as foreigners) and indirectly (by helping other countries enforce their tax laws so that they’ll help us enforce ours).

Wilkins faced off against three witnesses opposed to the proposed rule and a panel of lawmakers controlled by bank supporters. Chairman Spencer Bachus read a letter from the Florida delegation, which apparently is protective of its banks even when they facilitate tax evasion. Many people who live in unstable countries and have U.S. bank accounts, the letter argues, are “concerned their personal bank account information could be leaked to unauthorized persons in their home country government or to criminal or terrorist groups upon receipt from U.S. authorities, which could result in kidnapping or other terrorist actions…”

In other words, Bachus and the Florida delegation believe we should help all foreign individuals break their home countries’ tax laws because some of those countries have corrupt governments.

Never mind that the IRS would only hand over information to foreign governments in response to a careful, limited request under a tax information exchange agreement, as Wilkins calmly explained. Even more important, Wilkins explained, is that the rule in effect now actually helps criminals, corrupt government officials, terrorists and money launderers by allowing them to hide their money in the U.S.!

“America should not be a tax haven,” Wilkins told the panel.

Towards the end of her opening statement, Wilkins addressed her opponents directly:

"Chairman Bachus said, ‘Do we want to have blood on our hands, as a result of these rules?’ I want to tell you, the U.S. already has blood on its hands. For every dollar of tax revenue that is taken out of the governments of developing countries, it impairs the ability of those countries to provide health and safety measures, to feed its citizens, to provide sanitation, to provide health care, to provide military and police that are not corrupt. Every time we facilitate a dollar coming out of those economies, we have blood on our hands."

Perhaps the most remarkable comment came at the end of the hearing from Bill Posey of Florida, who said to Wilkins, “Your advocacy for the government of Venezuela and, um, ultimately someday maybe Iran, North Korea and Cuba and the like, startles me, quite frankly. Most of us here try to put America first.” Posey then went on, not about putting Americans first, but about the plight of the people living under these dictatorships who hide their money in American banks. 

Wilkins had already explained that the IRS would not be required to provide foreign governments with the information it collects, but would be able to respond to a limited request under a tax information exchange agreement. Perhaps if Wilkins had been allowed to respond to Posey’s comments, she might have addressed some of his confusion, starting with his apparent belief that the United States has tax information exchange agreements with North Korea, Iran and Cuba.

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

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

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:

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.”

Call on Congress to Oppose the Amnesty for Corporate Tax Dodgers

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

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.

Read the report

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?

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

Levin-Grassley Incorporation Transparency Bill Would Help Identify Mysterious $1 Million Contribution to Romney Campaign

Today, NBC News reports that a Delaware company made a $1 million contribution to a PAC supporting Mitt Romney about six weeks after it was formed, and then dissolved two months later. This ripped-from-the-headlines story of a corporation that was created for the sole purpose of laundering massive political contributions highlights the need for a bill that was just introduced this week in the U.S. Senate.

The company, called W Spann LLC, filed a certificate of formation on March 15 with no information about the owners or the business purpose of the entity. On April 28, the LLC made a $1 million contribution to a political action committee supporting Mitt Romney.

The company then dissolved on July 11, leaving no trail of the real people behind the political mega-donation. Lawrence Noble, former general counsel of the Federal Election Commission, called it a "roadmap for how people can hide their identities" and disguise their political contributions.

This technique would be blocked if Congress enacts a bipartisan bill introduced this week to require states to collect information about who really controls corporations and limited liability companies (LLCs) that are formed in their jurisdictions. Senators Carl Levin (D-MI) and Chuck Grassley (R-IA) introduced the Incorporation Transparency and Law Enforcement Assistance Act (S. 1483) on August 2.

The bill's provisions are vital to law enforcement who are trying to investigate crimes ranging from arms dealing to money laundering and tax evasion. But it will also help combat another problem - the clandestine funding of politics.

Last year, a Senator from a certain state known for its loose incorporation laws blocked this bill from moving forward. (See Criminals, Inc.: Delaware's Fight to Keep Opaque Incorporation Rules is Helping Tax Cheats and Terrorists, June 25, 2010.)

The reasons for supporting this law continue to multiply. Lawmakers on both sides of the aisle should be lining up to cosponsor the Incorporation Transparency Act.

Photo via Gage Skidmore Creative Commons Attribution License 2.0

On July 27, Congressman Lloyd Doggett (D-TX) introduced the Stop Tax Haven Abuse Act (H.R. 2669) in the House of Representatives with 53 cosponsors. The Senate version was introduced July 12 by Sen. Carl Levin.

The U.S. Treasury loses an estimated $100 Billion in tax revenues annually due to tax havens. Many believe the actual revenue loss could be much higher.

A key provision would tax corporations where they are located and do business instead of where they are incorporated, say, a post office box in the Cayman Islands. Another important provision would require companies that file with the SEC to report certain financial information on a country-by-country basis so that investors and tax authorities could see where operations are located and where profits are ending up.

Most of the Stop Act provisions are aimed at the foreign financial institutions and foreign jurisdictions that facilitate offshore tax evasion and avoidance. The bill also targets some other types of tax dodging, as well as the bankers, lawyers, and accountants who facilitate these abuses by their clients.

A new report by CTJ explains the bill's provisions.

Congress, the Internal Revenue Service, and the Department of Justice continue the attack against tax dodging, including schemes using offshore tax havens.

Congress

In Congress, Senator Carl Levin (D-MI) has introduced the Stop Tax Haven Abuse Act, which would strengthen the disclosure rules for foreign accounts and impose harsh penalties on taxpayers and tax shelter promoters who facilitate tax evasion.

Also in Congress, Sen. Charles Grassley (R-IA) has offered an amendment that would crack down on the use of offshore tax havens by charities. In a hearing last year, Senators learned that the Boys and Girls Club of America was holding more than $50 million in offshore investments in order to avoid paying the tax that is usually imposed when charities engage in business activities that are not related to their mission.

Justice Department and IRS

Meanwhile, Zurich-based Credit Suise confirmed that the U.S. Department of Justice was investigating its role in helping U.S. clients evade their tax obligation. The bank is the target of a criminal investigation prompted in part by information supplied to the Internal Revenue Service in its offshore account voluntary disclosure program.

Today, a Manhattan federal court unsealed an indictment charging a Swiss financial adviser with helping U.S. customers hide $184 million in assets from the IRS. The Swiss banking giant UBS is one of the banks where the adviser helped his clients hide their accounts.

In Virginia, a federal judge permanently barred HedgeLender LLC from promoting a tax shelter scheme called the HedgeLoan transaction. The Justice Department's Tax Division challenged the deals where clients purportedly pledged their appreciated stock for a "loan" to realize the cash without paying capital gains taxes.

In other tax dodging news, a U.S. Magistrate handed down a 28-month sentence to Rapper Ja Rule for failing to pay $1.1 million in taxes on the more than $3 million he earned in 2004-2006.

Small Business Owners

Some small business owners are also taking aim at tax dodging and tax havens. A recent op-ed from Business for Shared Prosperity argues that the opportunities that large corporations have for tax avoidance puts small businesses at an unfair disadvantage. It also points out that some of the most egregious corporate tax dodgers are those benefiting the most from public services and public investments that the rest of us pay for.

Photo via Mzrr1970 Creative Commons Attribution License 2.0

On Tuesday, Senator Carl Levin (D-MI) introduced the Stop Tax Haven Abuse Act (S. 1346) to help stem the tide of the estimated $100 billion annual tax revenue loss connected to the use of offshore tax havens. In his press conference and floor statement Sen. Levin stated that offshore tax abuses undermine public confidence in the tax system, increase the tax burden on middle America, create and unfair disadvantage for small business, and encourage the movement of jobs offshore.

The bill would give the IRS new enforcement tools to detect and prosecute these abuses. The bill is being championed by a wide spectrum of supporters including small business and the Financial Accountabiltiy and Corporate Transparency (FACT) Coalition.

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

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.

Read about how you can call your Senators and Representatives toll-free and urge them to oppose the amnesty for corporate tax dodgers. 

Photo via Steve Wilhelm Creative Commons Attribution License 2.0

Despite the fact that the move would actually increase the deficit by an estimated $3.4 billion, House Republicans voted to slash the IRS’s budget by $600 million.

Unlike most types of public spending, increased funding of the IRS actually reduces the deficit. In some cases a dollar of additional IRS funding can generate $10 of revenue. Because of this, the non-partisan National Taxpayer Advocate noted in her recent report to Congress that the IRS should be viewed as not part of the deficit problem, but rather “as part of the solution.”

Taking this perspective, the Obama Administration proposed earlier this year to increase the IRS’s budget from $12.1 billion to $13.3 billion, in a move that was expected to actually reduce the deficit.

A $1.1 billion increase in funding would help the IRS reduce the “tax gap,” the difference between the amount of taxes owed and the amount of taxes actually paid on time. The tax gap is estimated to be between $400 to $500 billion each year.

One recent article points out that “the biggest losers” in the failure to stop tax evasion “are America's wage earners and salaried workers, who pay an estimated 99 percent of their taxes on time because their taxes are automatically withheld from their pay and reported by a third party, their employers.” These working people — the vast majority of Americans — must pay even more in taxes when others evade theirs.

Other than tax evaders, it’s unclear who the decrease in funding is supposed to benefit. It’s certainly not law-abiding businesses or individuals, who according to a report by the law and lobbying firm K&L Gates would actually face higher compliance costs if the cut in funding is enacted.

CTJ’s director, Bob McIntyre, addressed IRS enforcement a few years ago before the Senate Budget Committee. Just returning the IRS to the staffing levels of a decade ago, he said, would require a 50 percent increase in the IRS enforcement budget. Taking this a step further, McIntyre noted that, given the increase in tax sheltering in recent years, it may be necessary to double the resources for tax enforcement in order to keep up with tax evasion.

If lawmakers are serious about reducing the deficit, then reforming and dramatically increasing (rather than decreasing) funding for the IRS is one place to start.


Photo via alykat Creative Commons Attribution License 2.0

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.

1-888-907-8574


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:

Questioning on Repatriation Holiday by taxjustice

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

With the Iowa Caucuses almost 8 months away, the Republican primary was in full swing on Monday night as 7 of the Republican contenders battled it out during a debate on CNN. Tax policy took center stage as every single one of the Republican contenders promoted lower taxes as central to their economic platform.

Predictably however, the candidates stayed relatively vague about their specific tax plans.

Former Minnesota governor Tim Pawlenty is the only candidate so far to release an official tax plan, which, among other things, proposes to eliminate the capital gains tax, create only two income tax brackets, and reduce the corporate income tax rate from 35 to 15%. Citizens for Tax Justice estimates that the plan would result in a 73% income tax cut for the Top 400 Taxpayers and cut taxes 41% for millionaires generally.

Even without getting into too many specific plans, the Republican contenders made a few curious claims about tax policy that are in dire need of fact checking:

Representative Michele Bachmann, Minnesota: “What we need to do is today the United States has the second highest corporate tax rate in the world…We've got to bring that tax rate down substantially so that we're among the lowest in the industrialized world.”

While Bachmann would be correct in claiming the United States' statutory tax rate of 39% (the federal income tax rate is 35 percent and the average state corporate income tax rate is about 4 percent) is on paper the second highest in the industrialized world, she fails to take into account the effect of special tax breaks and loopholes which make the effective rate paid by companies relatively low. According to a 2007 study by the Bush Treasury Department, between 2000-2005 US corporations paid only 13.4% of their profits in corporate income taxes, well below the Organization of Economic Cooperation and Development (OECD) average of 16.1%. The OECD is what Bachmann means by "industrialized world."

Demonstrating how big the difference between statutory and effective rates can be, a recent CTJ study showed that 12 US corporations together paid an effective corporate income tax rate of (negative) -1.5%, while earning $171 billion in profits over 3 years.

Former House Speaker Newt Gingrich: “The Reagan recovery, which I participated in passing…raised federal revenue by $800 billion a year in terms of the current economy, and clearly it worked. It's a historic fact.”

Rather than telling a ‘historic fact’, Gingrich is weaving a complete fiction. In claiming that Reagan’s tax cut efforts raised federal revenue $800 billion, Gingrich is assuming that all economic growth was due to Reagan’s efforts, while simultaneously ignoring the effect of inflation and population growth.

Citizens for Tax Justice’s internal estimates put the real cost of lost revenue due to the Reagan tax cuts at 3.97% of GDP or the equivalent of $581.2 billion today. Even former Reagan White House Senior Policy Analyst Bruce Bartlett admits that the Reagan tax cuts DECREASED revenue, adjusting for inflation, by $473.7 billion. In addition, it’s odd that Gingrich would point to the Reagan era to establish his fiscal credentials considering that the national debt tripled during Reagan’s two terms.

This is not Gingrich’s first foray into rewriting historic fiscal realities and it probably will not be his last.

Herman Cain, Godfather Pizza CEO: “We need an engine called the private sector. That means lower taxes…suspend taxes on repatriated profits, then make them permanent.”

Herman Cain’s call for an end to taxing repatriated profits puts him in good company with Republican establishment figures like Republican Speaker of the House John Boehner, who believe that moving the United States toward a territorial system of taxation would stimulate the economy by bringing home offshore capital.

In reality however, such a move would be disastrous for the US economy. Rather than encouraging investment in the United States, US corporations would have a much greater incentive to shift actual operations and jobs offshore because they would not have to pay US taxes on these profits. A better approach would be to end deferral, which would stop these current tax incentives pushing jobs offshore while also encouraging companies to bring more than a trillion dollars in offshore capital back to the US.

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.

Last week, former partners in the law firm of Jenkens & Gilchrist, the former head of accounting firm BDO Seidman, and a former Deutsche Bank broker, were convicted on criminal charges related to a tax shelter scheme that reportedly generated fake tax losses of more than $7 billion. The case illustrates the sort of tax cheating that often goes undetected and which would become less common under a proposal supported by Citizens for Tax Justice.

In December, Deutsche Bank entered into a related non-prosecution agreement with the Department of Justice, admitting criminal wrongdoing and agreeing to pay a $554 million fine in connection to its involvement in tax shelter cases that generated $29.3 billion in bogus tax benefits for their clients.

Five other defendants, former partners at the law firm or the accounting firm, previously pled guilty to criminal charges in the case.

The charges of tax evasion and conspiracy carry possible prison terms of more than 20 years and multi-million dollar fines. DOJ Tax Division attorney John A. DiCicco said that the verdict "sends a loud and clear message that dishonest tax professionals will be held accountable for their crimes."

In the next few weeks, Senator Carl Levin is expected to introduce a new version of the Stop Tax Haven Abuse bill, which would increase civil penalties for promoting tax shelters. The maximum penalty for knowingly aiding or abetting a taxpayer in understating their tax liability would be 150 percent of the aider-abettor's gross income from the activity.

That kind of civil penalty, and the possibility of a criminal conviction, should give tax shelter promoters reason to think twice about helping the wealthy dodge their taxes.

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.

"I'm here to tell you that the sky is not falling," began CTJ Senior Counsel for Federal Tax Policy Rebecca Wilkins as she testified Wednesday before Treasury and IRS officials in favor of new bank regulations to prevent tax evasion by foreigners.

Ten of the twelve witnesses were opposed to the regulations and predicted far-fetched consequences if the regulations are finalized, including massive outflows of capital from the U.S., failing banks, lost jobs, and even murder, extortion, and kidnapping.

The hearing was on proposed regulations that would require banks to report the interest income earned on deposit accounts held by nonresident alien individuals to the IRS in the same way that they report on U.S. customers.

The purpose of the new rules is to allow the IRS to collect information that may be turned over to foreign governments if requested under a Tax Information Exchange Agreement.

Although Wilkins addressed all of the arguments of the opponents, she concluded by saying, "This is really about tax evasion. Those who are opposed to the proposed rules have a vested interest in facilitating tax cheating. The stakes in tax evasion are very high and the forces in favor of maintaining the status quo are well-financed and very politically connected. But it's the money of honest, tax-paying citizens of all countries that the tax cheats are stealing."

See the complete testimony and our earlier report.

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.

In the days leading up through Tax Day (which is on Monday, April 18 this year) there are several things you can do to promote tax fairness. US Uncut plans direct actions targeting particular corporations that have dodged their taxes. U.S. PIRG and other organizations will have activities outside post offices in several states to create awareness about tax dodging by corporations and to press Congress to act.

US Uncut Demonstrations

US Uncut protests corporations like Verizon and FedEx which have dodged all or most of their U.S. income taxes at a time when lawmakers are cutting basic public services to address federal and state budget gaps.

Find US Uncut events near you.

In D.C., US Uncut will host a creative direct action on April 15 at the Verizon store at Union Station with best-selling author of Treasure Islands, Nick Shaxson, who will do a book-signing. On April 17. US Uncut DC and organizers from Power Shift will target a corporate tax dodger and relate tax avoidance to cuts to the EPA's budget. This event is said to have a beach party/tropical tax haven theme.

Events like these will take place all over the country. Find US Uncut events near you.

U.S. PIRG Events at Post Offices

The U.S. PIRG acitivities will take place April 15 and April 18 in at least a dozen states. 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 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.

Locations:

Portland OR, April 15th. Contact Jen Lavelle at jlavelle@ospirg.org, 503.231.4181

AnnArbor MI, April 15th. Contact Megan Hess at mhess@pirgim.org, 734.662.6597

Chicago IL, date TBD. Contact Brian Imus at brian@illinoispirg.org, 312-544-4433 x 210 (federal plaza, outside of main post office)

Hartford CT, April 15th, Contact Jenn Hatch at jhatch@connpirg.org, 860.233.7554

Albuquerque NM, date TBD, Contact Erin Eckelson at erin@nmpirg.org, 505.254.1244

Philly area, date TBD. Contact Megan DeSmedt at mdesmedt@pennpirg.org, 215.732.3747

Phenoix AZ, April 15th. Contact Seren Unrein at sunrein@arizonapirg.org, 602.252.9227

Des Moines IA, Date TBD, Contact Sonia Ashe at sashe@iowapirg.org, 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.

Locations:

Trenton NJ, April 18th. Contact Jen Kim at jkim@njpirg.org, 609.394.8155

Seattle WA, April 18th, Contact Lindsay Jacobson at ljacobson@washpirg.org, 206.568.2854 (either at post office downtown, or in front of Microsoft).

Boston MA, April 19th, Contact Dee Cummings at dcummings@masspirg.org, 617.292.4805

Baltimore MD, April 18th, Contact Johanna Neumann at Johanna@marylandpirg.org, (410) 467-9389

St. Lois MO, TBD

The Open Society Foundation is hosting a briefing on tax havens Thursday morning, which will be followed by a Hill briefing that afternoon. The details are below.

April 14, 2011

10:00 a.m.

Event: Civil Society Organization Briefing/Panel.
Location: Open Society Foundation, 1730 Pennsylvania Ave. NW, Washington, D.C.
Summary: Panel discussion to brief civil society organizations on the impact of tax havens on the global economy and the developing world. The panelists will include Mr. Shaxson, author of Treasure Islands, and Rebecca Wilkins, Senior Counsel, Federal Tax Policy, at Citizens for Tax Justice
Refreshments will be served
Please come and invite your friends/colleagues
Contact: Sarah Pray at spray@osi-dc.org

2:30 pm

Event: Hill Briefing
Location: S-115 of the Capitol
Summary: Panel discussion to brief Hill staffers on the impact of tax havens on the American economy, businesses and budgets. The panelists will include Mr. Shaxson, Rebecca Wilkins and Frank Knapp, President and CEO of South Carolina Small Business Chamber of Commerce
Refreshments will be served
Contact: Bonnie Rubenstein at bonnie@ctj.org

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.

Read the op-ed

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.

There's been a lot of talk lately about how much U.S. corporations actually pay in federal income taxes, and a lot of it has been wrong. This is not surprising, since corporations go to a lot of trouble to obscure what they pay in the financial reports that they must file with the Securities and Exchange Commission (SEC) each year.

For example, the New York Times recently reported that General Electric paid 14.3 percent of its profits in taxes over the 2005-2009 period. While this is surprisingly low (compared to the statutory corporate income tax rate of 35 percent) it is incorrect, and the real effective rate is much lower.

GE's effective tax rate for its U.S. profits was actually just 3.4 percent over that period. Our figure is based on what GE says that it paid in U.S. corporate income taxes (called "current" taxes) divided by what GE says its pretax U.S. profits were (all from GE's annual 10K reports to shareholders, filed with the SEC).

There are several reasons for confusion over the effective tax rates paid by corporations. First, the U.S. only taxes corporate profits generated in the U.S. (or repatriated to the U.S.) so that it is mostly up to foreign countries to tax the profits these corporations generate offshore, and yet some people are referring to worldwide taxes U.S. corporations pay on their worldwide profits when they discuss the U.S. corporate tax system. The worldwide effective tax rate includes taxes that a corporation pays to all governments in the world. But to understand how the U.S. corporate income tax is working, one must focus on U.S. taxes paid on U.S. profits. No one expects Congress to do much about taxes that U.S. corporations pay to the governments of France, Germany, or Japan!

Second, to get a sense of what a corporation pays each year, we should include the current U.S. taxes paid, but not the deferred U.S. taxes. "Deferred" is a euphemism for "not paid." Corporations can defer (delay) paying taxes if, for example, they enjoy tax breaks for accelerated depreciation, which allow them to take deductions for capital investments sooner than they would if the rules were simply based on the actual life of the investment. A company could eventually pay taxes that it has "deferred." But that doesn't happen very often.

A post on the New York Times Economix blog, which received a lot of recent attention, uses data that includes the worldwide taxes, both current and deferred, paid by U.S. corporations on their worldwide profits, and tries to use this to make a point about the U.S. corporate tax system.

(The NYU scholar who created this data set recently introduced another measure which rightly focuses only on profitable corporations, but the problems identified above still remain.)

The point the New York Times article was trying to make is that effective corporate tax rates vary widely among companies and industries, which is true (and is a bad thing). But the worldwide tax information cited doesn't shed much light on the U.S. corporate tax system's role in these disparities.
 
More important, as our lawmakers contemplate reforming the corporate income tax, the place to start is to have an accurate understanding of the effective tax rates that companies pay to the U.S. government. Mistakenly mixing in foreign data just muddies the waters.

The "Center for Freedom and Prosperity," an organization that CTJ long ago dubbed the "Tax Cheaters' Lobby," has come out against new regulations proposed by the IRS to require banks to report interest paid to foreign account-holders. The Tax Cheaters Lobby claims that cracking down on tax evasion by foreigners and Americans posing as foreigners would break U.S. laws, cause a collapse of the American financial system, and result in kidnapping and deaths of people all over the world. A new report from CTJ addresses and refutes these incredible arguments.

Read the report.

If you have a lot of investments or savings, your mailbox is starting to fill up (or will soon fill up) with copies of all those forms that your bank, your employer, and your brokerage firm send to the Internal Revenue Service to report the income paid to you last year. Banks are required to report the amount of interest paid on deposit accounts. Right now, they are only required to file those reports on U.S. and Canadian account holders.

On January 6, the Internal Revenue Service (IRS) proposed new rules (REG-146097-09) requiring banks to report interest paid to nonresident foreign individuals just as they report interest on U.S. citizens and residents. The IRS will use this information to respond to foreign governments' requests for information about their citizens' U.S. income.

As the IRS stated in its notice, we have seen in the last few years "a growing global consensus" about how important it is for countries to cooperate in exchanging tax information to protect their tax revenues and catch tax cheats. Many significant agreements have been reached recently, including eliminating the use of bank secrecy laws as a reason for refusing to share information.

The new reporting rules will also help the IRS catch U.S. tax cheats that are currently avoiding the reporting rules by posing as foreigners.

On the same day the proposed regulations were announced, the Center for Freedom and Prosperity, which CTJ long ago dubbed the "Tax Cheaters' Lobby," came out against the new rules and promised to lead the fight to "derail or kill this misguided regulation." The Tax Cheaters' Lobby works hard to preserve tax havens and the ability of wealthy people to hide their assets and avoid paying their taxes.

CTJ, on the other hand, applauds the IRS for taking this important step against tax evasion by citizens of all countries.

BACKWARDS BOEHNER

House Minority Leader Says that Loophole-Closing Provisions in Jobs Bill Would Push Jobs Offshore — When the Exact Opposite Is True

Speaking before business leaders in Cleveland on Tuesday, House Republican Leader John Boehner proposed a five-point "plan" to help the economy that mainly consisted of continuing George W. Bush's tax and spending policies, not enacting any new reforms, and firing the President Obama's economic advisers. He also claimed that deviating from the Bush tax policies would hurt small businesses, which has already been refuted by CTJ and other experts.

Near the beginning of his speech, Boehner said that the $26 billion jobs bill recently enacted, H.R. 1586, "is funded by a new tax hike that makes it more expensive to create jobs in the United States and less expensive to create jobs overseas."

That is literally the opposite of what the tax provisions in H.R 1586 do. The provisions in this jobs bill close existing loopholes that, to use Mr. Boehner's words, "make it more expensive to create jobs in the United States and less expensive to create jobs overseas."

In fact, these loopholes can result in U.S. corporations enjoying a negative effective tax rate on their offshore investment income. This creates a strong incentive for U.S. corporations to shift profits offshore, either through accounting gimmicks or by moving actual operations and jobs offshore.

The Foreign Tax Credit

The loopholes that were shut down relate to the foreign tax credit, which U.S. taxpayers take against their U.S. taxes for any foreign taxes they pay. The idea is that if an American earns some income in, say, the U.K. and pays taxes to the U.K. on that income, he or she should not have to pay all of the applicable U.S. taxes on that income also. In other words, the foreign tax credit is meant to avoid double-taxation of Americans' foreign income. U.S. corporations use the foreign tax credit for income they generate abroad, but the problem is that many have found ways to take foreign tax credits in excess of what they need to avoid double-taxation.

For example, U.S. corporations don't even have to pay U.S. taxes on any of their foreign income until they bring that income back to the U.S. (until they "repatriate" that income), which in many cases they never will. But many have found ways to take foreign tax credits on this foreign income — even though it's not even taxed in the U.S. Obviously, this has nothing to do with avoiding double-taxation.

This means the foreign tax credits are being used to reduce the corporations' U.S. taxes on its U.S. income. The corporations are taking more foreign tax credits than they even need to wipe out their U.S. taxes on that foreign income. This also means the offshore profits are effectively subject to a negative rate of taxation in the U.S.

It's hard to imagine a stronger incentive to shift investments — and in some cases, actual jobs — offshore. This incentive to shift investments offshore has been greatly reduced by H.R. 1586, the law Boehner criticizes.

Predictably, business associations representing multinational corporations oppose the provisions to prevent these abuses. A previous report from CTJ addressed their arguments, one of which focused on the provisions' supposed retroactivity (which is addressed by the version of the provisions in H.R. 1586). Another of the multinational corporate community's arguments was that the practices in question are necessary to keep U.S. corporations abroad competitive with foreign companies, which seems like an admission that the foreign tax credit is being used for more than just preventing double-taxation.

The corporate community has been remarkably effective at confusing everyone about this issue, partly because so few people understand it. Even the Peter G. Peterson Institute, named after and funded by the man who has become famous for lecturing America on budget deficits, issued a report opposed to the provisions that close these loopholes in the foreign tax credit. (See CTJ's response to the Peterson Institute.)

The Jobs Bill, H.R. 1586

The law that Congressman Boehner is criticizing, H.R. 1586, the Education Jobs and Medicaid Assistance Act, provides $26 billion to states to continue funding Medicaid programs and to avoid teacher layoffs. The non-partisan Congressional Budget Office (CBO) has found that aid to states is one of the most effective measures to create jobs. (The income tax cuts that Boehner endorses, particularly income tax cuts for the rich, are the least effective measures for creating jobs, according to CBO's findings.)

Since the bill included the most effective possible job creation measures and offset the costs by closing tax loopholes that encourage U.S. corporations to shift profits and jobs offshore, it's about as close as Congress ever comes to a win-win proposal. We're glad that President Obama has signed it into law.

On Thursday, the Senate approved, by a vote of 61-39, H.R 1586, providing $26 billion to states to continue funding Medicaid programs and to avoid teacher layoffs. House Speaker Nancy Pelosi announced that she would bring her chamber back into session next week to approve the bill. 

The bill includes revenue-raising provisions to offset the $26 billion cost, including the set of provisions that would clamp down on abuses of the foreign tax credit and which were originally part of the ill-fated "tax extenders" bill (H.R. 4213). (Some other revenue-raising provisions included in the bill are not ideal.)

The foreign tax credit ensures that a U.S. individual or corporation with income generated in a foreign country is not double-taxed on that foreign income. These taxpayers are allowed a credit against their U.S. taxes for any foreign taxes they pay on the foreign income. The problem is that many corporations have found ways to receive foreign tax credits in excess of what would be necessary to avoid double-taxation.

Predictably, business associations representing multinational corporations oppose the provisions to prevent these abuses. A previous report from CTJ addressed their arguments, one of which focused on the provisions' supposed retroactivity (which is addressed by the version of the provisions in H.R. 1586). Another of the multinational corporate community's arguments was that the practices in question are necessary to keep U.S. corporations abroad competitive with foreign companies, which seems like an admission that the foreign tax credit is being used for more than just preventing double-taxation.

In June, the Peter G. Peterson Institute (funded by, and named after, the billionaire who is ostensibly concerned with the federal budget imbalance) released a remarkable report opposing the provisions to prevent abuses of the foreign tax credit. Another CTJ report responds to the Peterson Institute's arguments.

Democrats in the House of Representatives have introduced a bill that includes several provisions to crack down on abuses of foreign tax credits that had been included in H.R. 4213, the ill-fated jobs and "extenders" bill that Senate Republicans successfully blocked. The revenue would be used offset the cost of repealing a reporting requirement for businesses that was included in the health care reform law and which some business owners and lawmakers feel is too burdensome.

Meanwhile, the Senate is scheduled to take up a bill on Monday that would also use these provisions, mainly to help offset the costs of Medicaid funding for states and education funding to prevent teacher layoffs.

See the previous analyses from Citizens for Tax Justice that explain why these provisions to stop abuses of the foreign tax credit are good policy.

Key Provisions in H.R. 4213 Would Prevent Abuses of Foreign Tax Credits

Peter G. Peterson Institute's Misguided Defense of Offshore Tax Loopholes

After days of wall-to-wall media coverage of its grotesquely misleading, edited clip of USDA official Shirley Sherrod speaking about race, Andrew Breitbart’s blog Big Government is targeting Citizens for Tax Justice.

Breitbart’s bizarre and extraordinary claim is that CTJ, ACORN, The New York Times, the Center for American Progress and a group called Clean Energy Works (of which we were previously unaware) are colluding to deceive the public about tax policies affecting oil and gas companies.  

Breitbart’s argument goes something like this. On July 3, the New York Times published an article saying that oil and gas companies get a whole lot of tax breaks. Then on July 9, CTJ published a report saying that oil and gas companies get a whole lot of tax breaks. Also on July 9, Clean Energy Works sent someone a strategy memo saying that the public needs to know that oil and gas companies get a whole lot of tax breaks.

As Breitbart sees it, surely this can be no coincidence! It doesn’t seem to occur to him that the tax breaks available for fossil fuel production have grown so outrageous — at a time when the world is concerned about carbon emissions and climate change — that hardly a week goes by without somebody somewhere criticizing them. Heck, even President George W. Bush criticized them.

To fill out the conspiracy a little more, Breitbart assumes that any organization that is associated with any of CTJ’s 21 board members, and any progressive organization with an employee cited in the New York Times article, is also involved in this coordinated plan to deceive the public.

Finally, Breitbart is simply wrong about the tax loopholes in question. He writes:

“The same day that Di Martino [of Clean Energy Works] released his memo, Citizens for Tax Justice (CTJ) released their own defective and dishonest hit piece, titled “What Oil and Gas Companies Extract from the American Public.”   The tax breaks referred to by Di Martino and the CTJ memo, in reality, are the same credits that every American company receives for taxes paid overseas to foreign governments on income earned abroad.”

Wrong. The CTJ report titled What Oil and Gas Companies Extract—from the American Public discusses the top 5 tax loopholes enjoyed by oil and gas companies. These breaks are not “the same credits that every American company receives for taxes paid overseas to foreign governments,” which seems to refer to the foreign tax credit. One of the five loopholes our report criticizes allows oil and gas companies to take the foreign tax credit for what are really royalties (not taxes) paid to foreign governments.

The other four loopholes discussed in the report are not related to the foreign tax credit. They include the deduction for “intangible” costs of exploring and developing oil and gas sources, “percentage depletion” for oil and gas properties, Congress’s decision to redefine “manufacturing” so that oil and gas companies can receive a deduction for domestic manufacturing, and another break for writing off the costs of searching for oil.

Now it’s true that there are some huge problems with the international tax system generally and it’s true that we are more than happy to use the energy industry as an example of those problems, even though they are not confined to the energy industry. CTJ’s recent report on oil drilling and taxes uses the example of Transocean to illustrate the problems with corporate inversions, transfer pricing schemes, and payroll tax avoidance, since Transocean has exploited all three. But this report makes clear that Transocean is just one example of many types of companies that are abusing the rules in these ways.

And, to be fair (although it’s not clear why we should be fair to Andrew Breitbart) the New York Times article did discuss both problems — tax breaks that are specific to oil and gas companies and tax avoidance schemes that are not limited to any particular type of company. But that doesn’t change the fact that oil and gas companies are particularly adept at finding ways to get out of paying their fair share to maintain the society that makes their enormous profits possible.

Given Breitbart’s track record, we’re not particularly surprised that we're being attacked by the blog Big Government. As Franklin D. Roosevelt once said, "I ask you to judge me by the enemies I have made."

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.

This week, efforts to crack down on offshore tax evasion and illegal flows of money were stymied by the U.S.'s own tax haven, Delaware. The Financial Secrecy Index ranks Delaware as the world's number one secrecy jurisdiction and this week one of the state's Senators fought to maintain its ranking.

Last year, Senators Levin, Grassley, and McCaskill introduced a bill (S. 569) 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. A summary of the bill's provisions can be found here. The Senate Homeland Security and Government Affairs Committee (HSGAC) had scheduled a markup of the bill this week, but that was postponed when an alternative bill was proposed by Sen. Carper (D-DE). In addition to other problems, Carper's bill would allow the beneficial owner on record to be a shell company, rather than requiring it to be an actual human being. This would defeat the whole purpose of the bill.

In hearings last year on S. 569, Senator Levin told of a single Utah company that had been engaged in suspicious wire transfers of $150 million. When Immigrations and Custom Enforcement (ICE) investigated, they discovered a web of over 800 companies formed in all 50 states, all controlled by the same Panamanian entities involved "in a massive shell game in which U.S. companies were being used to disguise the movement of funds and mask suspicious activity." The Utah company had been set up by a Delaware corporation, and the investigation hit a dead end when ICE was unable to discover who the beneficial owners of the corporations actually were.

Or, take the case of Viktor Bout, which Senator Levin described in another hearing last year. Bout, an indicted Russian arms dealer who was the inspiration for the book Merchants of Death (and the Nicholas Cage movie), used Florida, Texas and Delaware companies to carry out his activities, including moving millions in dirty money. In 2008 he was indicted for conspiracy to kill United States nationals, the acquisition and use of anti-aircraft missiles, and providing material support to terrorists.

As Senator Levin explained:

In July 2009, Romania filed a formal request with the United States for the names of [Bout's] company’s owners and other information.  But it is unlikely that the United States can supply the names since, as this Committee has heard before, our 50 states are forming nearly 2 million companies each year and, in virtually all cases, doing so without obtaining the names of the people who will control or benefit from those companies. The end result is that a U.S. company may be associated with an alleged arms trafficker and supporter of terrorism, but we are stymied in finding out, in part because our States allow corporations with hidden owners.

Shell companies — as they are called because they don't do any real business — are used for all kinds of illegal purposes, including laundering money from illegal activities and financing terrorists. They are also used extensively for tax evasion. S. 569 would help law enforcement authorities combat these illegal activities and many law enforcement agencies have voiced support for the bill.

Sen. Carper is obviously concerned about his state's ability to maintain its status as the incorporation capital. But that can hardly take priority over addressing criminal activities and threats to national security. Let's hope his colleagues on HSGAC are less myopic than he is.

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.

Federal benefits for the long-term unemployed have been expired for over a week and the Senate still has not approved a bill (H.R. 4213) that would extend these and other vital measures. The bill also includes badly needed Medicaid funding for states and other provisions that would stimulate the economy. (See CTJ's recent reports on this legislation).

Call your Senators and urge them to vote for H.R. 4213.

Use this toll-free number provided by AFSCME to make your call: 888-340-6521

Part of the consternation among some Senators is that the spending provisions in the bill would add (modestly) to the deficit. Economists have explained that short-term deficit-financed spending measures can be used to effectively boost consumer demand, and thus job creation, during a recession, without adding to the long-term budget crisis.

Many of the Senators who have supported tax cuts that created long-term deficits (the kind of deficits that actually do lead away from fiscal sustainability) now oppose this bill out of their concern about "fiscal responsibility." Other Senators are more genuine in their concern about deficits but have wildly misplaced fears about a bill that has little, if anything, to do with our long-term budget situation.

A number of Senators are still concerned about the tax provisions in the bill. It includes an assortment of small tax cuts (mostly for business), which are often called the "tax extenders" by members of Congress and their staffs. While these tax breaks probably accomplish very little, the good news is that their cost would be offset with provisions that close unfair tax loopholes.

It's the Senators' devotion to maintaining these loopholes that is another factor slowing down progress on this bill.

Battle Continues Over "Carried Interest" Loophole for Investment Fund Managers

The most controversial tax provision would clamp down on the "carried interest" loophole, which allows investment fund managers to treat their earned income as capital gains and thus benefit from a much lower income tax rate. Over the past few weeks, some honest investment fund managers have spoken up to tell Congress that their loophole really is unjustified, and it was also reported that two Republican Senators favor closing the loophole.

The draft of the bill proposed by Senate Majority Leader Reid already watered down this reform a great deal (compared to the version that passed the House) by allowing the lower capital gains rate to continue to apply to a larger portion of carried interest. As a new report from the Center on Budget and Policy Priorities explains, the last thing Congress should do is weaken this provision any further.

Senators Defend the "John Edwards" Loophole

Another controversial reform would close the "John Edwards" loophole for "S corporations." Payroll taxes apply to wage income, but not other types of income. So, some people want to disguise their wage income as non-wage investment income to avoid payroll taxes. People who own S corporations have to determine (and tell the IRS) how much of their income is wage income and how much of it is other income, and of course there is a huge incentive to underestimate the amount that is wage income.

John Edwards famously played this trick by saying that his name was an asset and this asset, rather than his work, was generating most of the income of his S corporation.

Some Senators have expressed concern about the effect this reform would have on small businesses. But none have explained coherently why we should allow this type of scheme to continue.

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.

As discussed in the previous article, Congress may close the "carried interest" loophole to help pay for the "tax extenders," which are provisions extending several expiring tax breaks that mostly benefit business. Another measure that Congress may also use to help pay for the tax extenders is a provision that would stop corporations from manipulating tax treaties between the U.S. and other countries to avoid withholding taxes before shifting their income into a tax haven.

U.S. subsidiaries of foreign corporations don’t have to pay withholding taxes on passive income if they are based in a country that has a treaty with the U.S. allowing that country to have the sole taxing power. But corporations based (on paper at least) in a non-treaty country can shift profits from a U.S. subsidiary to another subsidiary in a treaty country and then shift them to the parent corporation in the non-treaty country, ensuring that they are never taxed.

Congress may adopt a provision (which was originally proposed by Rep. Lloyd Doggett of Texas) that would simply impose the withholding tax that would apply if the payment was made directly to the parent company in the non-treaty country in that situation. This would prevent treaty shopping and raise $7.7 billion over ten years.

Read CTJ's 2007 report explaining the proposal when it was proposed by Rep. Doggett.

Americans know that taxes are necessary to fund the services government provides like roads, schools, and social security. We contribute so that our country can build and maintain the necessary infrastructure and public goods and provide a safety net for all of us. At the same time, Americans think that the wealthiest among us aren't paying their fair share.

And yet those who support the previous administration's policies of slashing taxes for the rich will be very effective in making their voices heard on Tax Day. They have a message that sounds appealing (usually involving lower taxes with no negative repercussions) and a network of supporters with plenty of cash to amplify their message.

The following list describes how you can cut through the nonsense and stand up for tax fairness this April 15.

CTJ: Obama Cut Taxes for 98 Percent of Working Americans
CTJ has a new fact sheet showing that President Obama has cut taxes for 98 percent of working Americans in 2009. State-by-state reports are included. Polls show that the vast majority of people think that Obama either raised their taxes or left them the same for 2009, and these publications aim to clear up that widespread misunderstanding. 

US PIRG: How Much Tax Havens Cost Ordinary Americans
The U.S. Public Interest Research Group reminds taxpayers that, while we do our duty and file our taxes, there are corporations and individuals out there who shirk this responsibility by using offshore tax haven countries to hide assets. On April 15, U.S. PIRG is sponsoring post office demonstrations and releasing a new report Tax Shell Game: What Do Tax Dodgers Cost You? They are encouraging folks to send in post cards to their Members of Congress to send a message to Washington that the American people deserve a better system.

Jobs with Justice: Tax Wall Street Day of Action
Jobs with Justice is organizing a Tax Wall Street Day of Action on April 15th. They are calling on supporters to deliver letters to national banks and collect petition signatures at local post offices as Americans stop by to mail their tax returns. The petition will ask Congress to tax Wall Street speculation.

UFE: Take the Tax Fairness Pledge
United for a Fair Economy has created the Responsible Wealth Tax Fairness Pledge where you can estimate your savings from the Bush tax cuts and pledge them to an organization that works for tax fairness. By the end of 2010 the Bush tax cuts will have cost more than $2.5 trillion in revenue that could have been used for critical investments in education, infrastructure or to reduce the deficit.

Are You Tired of the Tea Party? Join the Other 95%
President Obama cut taxes for 95 percent of working Americans (or 98 percent, if you count AMT relief) in 2009. But only 12 percent know it. Join the "other 95 percent" and say "Thanks for our tax cut, President Obama."

Or Join the Coffee Party
Tired of the tempest in a teapot, Coffee Party USA was started to encourage folks to "get together and drink cappuccino and have real political dialogue with substance and compassion." You can join the movement or start your local chapter here. Their motto: Wake Up and Stand Up.

IPS: More About the Way the World Is
The Institute for Policy Studies offers an analysis of the federal income tax system that seems more like two different systems: one for the wealthy and powerful and another one for the rest of us. Their paper includes analyses of the "flat tax," the national debt, and the myths about tax cuts for the wealthy allegedly spurring the economy.

CBPP on the Tax Foundation Tax Freedom Day Report: If Only We Were Rich
The Center on Budget and Policy Priorities has published a report refuting the oft-quoted numbers from the Tax Foundation about how many days people work each year just to pay their federal income taxes. As CBPP points out, the analysis is heavily skewed by the amount of income tax paid by the wealthy. Eighty percent of U.S. households pay tax at a lower rate than the Tax Foundation's estimated "average" federal obligation.

Wealth for the Common Good: Shifting Responsibility
Wealth for the Common Good has released a report Shifting Reponsibility: How 50 Years of Tax Cuts Have Benefited America's Wealthiest Taxpayers detailing how America's highest earners have seen their taxes drop by as much as two-thirds over the last 50 years. The trend of "asking less from those with more" has contributed to perhaps the greatest income inequality the U.S. has ever seen. The report calls for various measures to mitigate this dangerous trend and restore revenue to the federal treasury.

NPP: Where Did Your 2009 Federal Income Tax Dollars Go?
The National Priorities Project has released a report Where Do Your Tax Dollars Go - Tax Day 2010 showing how federal tax dollars were spent in 2009. Out of every dollar, 26.5 cents goes for military-related spending, 13.6 cents goes to pay interest on the debt, and only 2 cents goes towards education.

CAP: Why Cutting Discretionary Spending Won't Solve Our Budget Imbalance
The Center for American Progress has developed an interactive pie chart to help you learn about the federal government's discretionary spending, including whether cuts in those programs will really help reduce the federal deficit. Look at What is Non-Defense Discretionary Spending here.

UFE: How Will the States Close Their Budget Gaps?
United for a Fair Economy's Tax Fairness Organizing Collaborative just published a report Solutions that Work for Main Street: Progressive Guidelines for Closing Recessionary State Budget Gaps."  The report identifies pragmatic principles for closing state budget gaps in ways that enhance economic recovery, ongoing stability, and more widely shared prosperity. Also see their report Leaving Money on the Table showing that residents in states that rely heavily on the sales tax instead of an income tax pay much more federal income taxes as a result.

CTJ: Don't Believe the Hype About the Rich Paying All the Taxes
On Tax Day, you'll hear anti-tax people say that the rich are paying a disproportionate share of taxes. They're wrong. When you look at the tax system as a whole, including federal, local, and state income, payroll, excise, and sales taxes, the system is just barely progressive. A CTJ analysis shows that when you include those taxes, effective tax rates are almost flat.

A new report from Citizens for Tax Justice explores the tax proposals included in the federal budget outline that President Obama submitted to Congress on February 1. Like the budget he submitted last year, it is a vast improvement over the policies of the Bush years and continues to outline a progressive reform agenda.

But, also similar to last year, the President’s budget could be greatly improved with more aggressive policies to raise revenue. Over the coming decade, the President proposes to cut taxes by $3.5 trillion. We include in this figure the cost of extending most of the Bush tax cuts and relief from the Alternative Minimum Tax (AMT) as well as additional tax cuts that President Obama proposes.

His budget would offset a portion of this cost with provisions that would raise $760 billion over a decade by limiting the benefits of itemized deductions for the wealthy, reforming the U.S. international tax system and enacting other reforms and loophole-closing measures.

The report concludes that the federal government should collect at least as much revenue as the President proposes in order to avoid larger budget deficits. There are two bare minimum requirements for Congress to achieve this. First, Congress must not extend any more of the Bush tax cuts than President Obama proposes to extend. Second, Congress must raise at least as much revenue as President Obama has proposed ($760 billion over ten years) through loophole-closers and new revenue measures.

Read the full report.

"From some on the right, I expect we'll hear a different argument -– that if we just make fewer investments in our people, extend tax cuts including those for the wealthier Americans, eliminate more regulations, maintain the status quo on health care, our deficits will go away.  The problem is that's what we did for eight years."  (Applause.)  "That's what helped us into this crisis.  It's what helped lead to these deficits.  We can't do it again."

President Obama spoke these words in his State of the Union address on Wednesday night, after pledging to enact an agenda that will create jobs and tackle our long-term budget deficit. He did a good job of explaining that the budget deficits that exist today are the result of deficit-financed tax cuts, two deficit-financed wars, and a major recession all occurring before he entered the White House.

But one has to wonder if President Obama is gently bearing left at a time when any sensible directions would call for a sharp left turn.

The Bush Tax Cuts

He remains committed to extending the Bush income tax cuts for the 98 percent of taxpayers who have adjusted gross income (AGI) below $250,000 (or below $200,000 for an unmarried taxpayer). The budget document released by the administration last year showed, in a convoluted way, that this would cost $1.88 trillion between now and 2019. His proposal to partially extend the Bush cut in the estate tax (making permanent the estate tax rules in effect in 2009) would cost another $576 billion over the same period, for a total of about $2.45 trillion.

The estimated costs of these proposals may be different in the budget to be released next week (since all the projections change at least somewhat in response to developments in the economy). But make no mistake, the cost of extending most of the Bush tax cuts far exceeds the savings the President hopes to achieve with his proposed spending freeze (which will actually cut spending if one accounts for inflation and other factors).

Cutting Non-Security Discretionary Programs

The administration is reported to believe $250 billion can be saved from the spending freeze, which would last three years but would not apply to national security, Medicare, Medicaid, or Social Security. The first problem is that these exempt categories of spending, along with interest payments on the national debt that cannot be avoided, make up 70 percent of the federal budget. Americans love to complain about wasteful government spending, but few realize that, once you eliminate those categories of spending that are very popular with the public, there's not a whole lot left to cut. The non-security discretionary spending that is left has come under increasing pressure in recent years since it's the only part of the budget lawmakers feel comfortable attacking.

The second problem is that cutting back spending when the economy may still be weak could prolong our downturn. Progressive observers have warned that the Roosevelt administration's decision to stop stimulating the economy and focus on deficit-reduction plunged the country back into a deeper depression in 1937.

For their part, administration officials have explained that they are not proposing an across-the-board freeze. Rather, they will identify particular types of spending that represent wasteful giveaways to special interests rather than public services that people depend upon.

Even if that's true (and the jury is still out on that), it's still peculiar that taxes aren't getting more attention. This is the third problem with the President's approach. The need for higher taxes is like an 800 pound elephant in the room that everyone is trying to ignore, even if they vaguely acknowledge that Bush's tax cuts got us into this mess. Does a family with an income of $190,000 really need every cent of their Bush tax cuts? Do families with $7 million in assets really need to be fully exempt from the estate tax? The President's tax proposals would have us believe so.

Steps in the Right Direction

The President certainly wants to move in the right direction, as was evident in various parts of his speech. He reiterated his proposal to charge a fee on risk-taking by the largest banks, which would raise $90 billion over a decade according to the administration. We've argued before that this is entirely reasonable. The institutions affected know they have an implicit guarantee from the government and are prone to put the entire economy at risk as a result. It makes sense to demand that they pay up in proportion to their risk-taking.

The President also reaffirmed his desire to do something about offshore profit-shifting by corporations. The proposals he made last year along these lines would raise $200 billion over a decade and would be extremely important, as we have explained in detail, in preventing U.S. corporations from shifting their profits to other countries.

Sometimes this shifting means companies actually move jobs and operations offshore, but other times it involves accounting gimmicks and transactions that exist only on paper. Either way, Americans lose tax revenue for no good reason other than that Congress is afraid to take on the lobbying power of multinational corporations.

America has a budget problem that is long-term in nature. The money we spend this year or next year to stimulate the economy has little impact on the long-term deficit. Reforming our tax system permanently, however, is an important part of the long-term solution.

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. 

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 Tuesday, the Senate Committee on Foreign Relations considered proposed tax treaties with France, New Zealand, and Malta. CTJ director Robert McIntyre and Wayne State University law professor Michael McIntyre submitted written testimony to the Committee arguing that the treaties are based on standards that are widely recognized as obsolete and ineffective in catching offshore tax cheating. They point out that it makes no sense for the U.S. to wrap up major litigation over Switzerland's UBS and then enter into treaties with other countries that would not help us find the sort of cheating that took place in the UBS case.

Read the testimony.

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.

Economic Substance

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.

Read CTJ's Suggested Principles for Tax Reform (2 pages)

Senator Levin to Offer Tax Haven Legislation to Help Pay for Health Care Reform

This week, Senator Carl Levin of Michigan indicated that he will offer a measure to crack down on offshore tax evasion as a revenue-raiser to help pay for health care reform.

The Stop Tax Haven Abuse Act

The measure Senator Levin plans to offer is one he introduced earlier this year, along with four co-sponsors, as a stand-alone bill called the Stop Tax Haven Abuse Act (S.506). It would enact important new rules to deter offshore transactions designed to evade U.S. income tax.  Rep. Doggett introduced the same measure in the House the next day, with 59 co-sponsors (H.R. 1265). A description of the bill’s provisions is available here.

When the bill was originally introduced, Sen. Levin said “our bill provides powerful tools to end offshore tax haven and tax shelter abuses [which] contribute nearly $100 billion to the…annual tax gap.” Sen. Levin said, “With the financial crisis facing our country today and the long list of expenses we’re incurring to try to end that crisis, it is past time for taxes owing to the people’s Treasury to be collected.  And it is long past time for Congress to stop tax cheats from shifting their taxes onto the shoulders of honest Americans.

Paying for Health Care Reform with the Tax Haven Bill

A preliminary projection by the Joint Committee on Taxation estimates that the legislation would raise $29.8 billion in revenue over ten years. The ultimate amount of revenue may be many times that. Because these assets and income are not reported to the IRS, the true magnitude of the revenue loss is a mystery.

Attaching the Stop Tax Haven Abuse Act would be a progressive way to help pay for health care reform because it is generally wealthy Americans that are able to take advantage of tax havens. (See CTJ's additional suggestions for progressive ways to pay for health care reform.)

The Tax Haven Problem

It is estimated that the international tax gap — the amount of taxes American companies and wealthy Americans evade through offshore tax activities — is as much as $100 billion per year.

U.S. citizens and residents are taxed on all their income, whether it is earned here or abroad. If a foreign government also taxes the income, that tax may be credited against their U.S. tax.

Wealthy taxpayers are able to avoid paying U.S. taxes that they legally owe by moving assets and income offshore to what are known as “tax havens.”  Tax havens are offshore jurisdictions that have low or non-existent income taxes as well as bank secrecy laws that they use to justify being uncooperative with investigations by tax authorities from other countries. Evading U.S. income tax by using tax havens is illegal and U.S. citizens that do it are subject to civil and criminal penalties, including possible prison terms.

The U.S. government’s investigation of banking giant United Bank of Switzerland (UBS) revealed that as many as 52,000 accounts there are owned by Americans. That’s just one bank in one of the dozens of offshore financial centers. Several UBS account owners have already pled guilty to tax evasion.

The latest plea came Tuesday when a Seattle area man, a former sales manager for Boeing, appeared before the court in connection with his plea agreement. Roberto Cittadini faces possible criminal penalties of three years in prison and a maximum fine of $250,000. He has already agreed to a civil penalty for failure to file a Foreign Bank Account Report (FBAR) of up to one-half of the maximum balance of his offshore accounts which at one time contained as much as $1.9 million dollars. The great irony of this particular case is that since Boeing is a multi-billion dollar contractor for the U.S. government, part of Cittadini’s salary was paid by the U.S. government. He moved that money outside of the country to invest it and avoid paying U.S. income tax on the investment earnings.

Yesterday a federal bankruptcy judge approved Sam Zell's Tribune Co. sale of the Chicago Cubs and Wrigley Field to the Ricketts family, of TD Ameritrade, for $845 million. Everyone, including the bankruptcy judge, is calling it a "sale" except Sam Zell and his tax advisors. They're calling it a "leveraged partnership transaction," wherein Zell will retain a 5% interest and avoid paying the tax on the sale. Reporter Allan Sloan called Zell out on the tax dodge in Tuesday's Washington Post.

The Zell structuring of the Cubs sale is just another example of why we need the "economic substance" doctrine in the tax code. The economic substance doctrine has been developed over the years by the courts to disallow losses or deductions that have no economic substance apart from their tax benefits. In other words, if the only reason someone would do a deal a certain way is to avoid taxes, then the court ignores it and looks at the real underlying transaction. Clearly, a court looking at the Zell deal would find that it was, in substance, a sale of the Cubs to the Ricketts family. And Zell would owe millions of dollars of tax on the deal.

Unfortunately, different courts have developed different interpretations of the rule and courts do not apply the doctrine uniformly. That's why there have been repeated calls for strengthening the doctrine's basis in statute, including in President Obama's budget proposal. Tax avoidance transactions rely upon the interaction of highly technical provisions of the Internal Revenue Code to produce a tax result not contemplated by Congress. In developing the tax laws, Congress cannot possibly foresee all the ways the rules might be abused.

But tax lawyers figure it out for their wealthy clients -- at fees upwards of $500 per hour. If the economic substance doctrine is codified, taxpayers would be required to show that a transaction had a substantial non-tax purpose and had real economic consequences apart from the federal tax benefits. It would give the IRS a way to fight any tax avoidance scheme, whether or not the law specifically addressed it.

The American Society of CPAs recently wrote a letter to the Assistant Treasury Secretary for Tax Policy, Michael Mundaca, arguing against the rule's enactment (subscription required). To be fair, the letter raised a few good points that should be considered in crafting the final legislation. The letter is nonetheless a study in how self-interest can cloud one's perception. The big accounting firms might have a little more trouble selling their tax shelter deals if an economic substance rule is enacted into law. The IRS would be able to quickly challenge the next abusive tax shelters that tax professionals are surely already dreaming up.

As we have reported in recent weeks, the IRS is taking much-needed action to crack down on Americans who hide their income in offshore tax havens to illegally evade their U.S. taxes. One of the biggest developments is a settlement with the Swiss bank UBS, under which it will hand over to the U.S. information about 4,450 of its American clients who may be evading U.S. taxes.

But the IRS is giving these possible tax evaders plenty of opportunities to avoid punishment. The IRS implemented the six-month IRS Offshore Income Reporting Initiative, which is a voluntary disclosure program for foreign financial accounts that started on March 23, 2009 and was supposed to end on September 23.

This week, just two days before the voluntary disclosure program was scheduled to end, the Internal Revenue Service pushed back the deadline until October 15, 2009. The IRS said it had received numerous pleas from tax practitioners and attorneys around the country to extend the program so that they would be able to deal with the last-minute rush of taxpayers wanting to disclose.

Don't think these tax cheats suddenly got religion and want to become virtuous taxpayers. By using the streamlined procedures of the voluntary disclosure program, taxpayers are able to limit their penalties and avoid criminal prosecution. See the previous CTJ report with more details and the IRS guidance. The IRS stressed that no more extensions would be granted.

This week, governments around the world continued to turn up the heat on taxpayers who hide their income in offshore tax havens, as fallout from the settlement between the U.S. government and the Swiss mega-bank UBS continued.

Tax haven issues were prominent at the Organization for Economic Cooperation and Development (OECD) meeting earlier this week in Mexico City. The OECD has a monitoring program tasked with addressing offshore tax abuses, and its president-elect suggested a "system of sanctions" may be implemented against countries not living up to certain accepted standards for the exchange of tax information to catch tax evaders.

At the meeting, the Mexican finance minister urged the 70 delegations at the OECD meeting to look at other methods of tax evasion besides bank secrecy. For example, he noted that corporate dividends often escape taxation. He urged the representatives to include money laundering and other opaque financial practices in their investigations, especially in developing countries.

Countries that want to at least put some effort into preventing offshore tax evasion continue to sign tax information exchange agreements (TIEAs) with each other. Several new agreements were signed on the first day of the conference. Also that day, Austria, a long-time defender of bank secrecy, passed legislation allowing it to implement the new global tax standards after the European Investment Bank threatened to withdraw loans to Austria if it did not reform its bank secrecy laws.

In Switzerland last week, the government formally approved six of the 13 TIEAs that have been drafted with other countries. The agreement initialed with the U.S. in June was not approved, possibly because of the ongoing U.S. investigation of Swiss banking giant UBS.

UBS, the Swiss government, and the U.S. government reached agreements in the UBS case last month which anticipate that UBS will turn over approximately 4,450 names of account holders to the U.S. government. The U.S. government made its first formal request under the agreements and the first 500 names are to be provided within 90 days. The Connecticut attorney general has written Treasury and the IRS requesting that the names be provided to the state when they are received from the Swiss government so that his office can investigate whether state income taxes have also been evaded.

Noting the US/UBS agreement, last week a European Commission official stated that European Union members would expect the same cooperation from the Swiss. This week, the French minister of budget announced that the French government had compiled a list of 3,000 French-held Swiss bank accounts from audits and information provided by French banks on money transfers to tax havens. "Some are certainly tax evaders," he said.

The details of last week's settlement of the U.S. government's case against Swiss mega-bank UBS, which is accused of helping wealthy Americans hide their incomes from the IRS, were released on Wednesday. Under the agreement, UBS will disclose information regarding approximately 4,450 American taxpayers with current or former accounts at UBS. In exchange, the U.S. government will withdraw its legal action to compel UBS to disclose all of its 52,000 American customers. A related agreement with the Swiss government will provide a new treaty process to facilitate the release of the information.

This is both good news and bad news for law-abiding Americans who pay their taxes and who are tired of subsidizing those who don't. The good news is that the 4,450 Americans' accounts at one point in time totaled $18 billion in assets, approximately 90% of the estimated $20 billion in American-owned accounts at UBS. So, the IRS is perhaps going to be able to catch most of the tax-cheating, at least in dollar terms.

The IRS will use this information to investigate the offshore accounts of those 4,450 taxpayers, with hopes of collecting back taxes, interest, civil and possibly criminal penalties if those accounts have not been previously reported to the IRS.

Of course the bad news is that the 4,450 names expected to be released to the IRS make up less than 10% of the estimated 52,000 American-owned accounts. Without 100% disclosure, American taxpayers may in the future be tempted to play the "audit lottery," assuming they have only a 10% chance of getting caught.

Another piece of bad news is that the criteria used to select the UBS account holders to be disclosed to the IRS will not be released. But there is a strong indication that the size of the account has some importance. Taxpayers might avoid this danger in the future by spreading their offshore funds among several accounts and numerous banks so that they can "fly under the radar."

What also seems like bad news is that under the settlement, UBS will pay no civil penalties. It has already paid $780 million in criminal penalties for the actions of certain bank employees facilitating illegal tax evasion.

What's even more alarming is that the IRS will withdraw its "Notice of Default" that was issued to UBS for violating the agreement it entered into with the U.S. government. This agreement, which made UBS a "Qualified Intermediary" or "QI," is one that foreign banks enter into with the U.S. in order to get favorable treatment in return for complying with certain reporting standards. Given that UBS bankers came into the U.S. to solicit illegal business from Americans with the express purpose of helping them evade taxes, it's hard to believe UBS is not in default of such an agreement. If this egregious behavior can't get a bank kicked out of the QI program, what in the world can?

So the settlement certainly does not mean that the offshore tax evasion problem is resolved. If anything, it shows how badly we need legislation to deal with the problem, since there are apparently limits to how far the U.S. government will go, using existing laws, to crack down.

Fortunately, members of Congress seem to understand this. Senator Carl Levin, sponsor of the Stop Tax Haven Abuse Act, said in a statement that, "The UBS settlement is at most a modest advance in the effort to end bank secrecy abuses, tax haven bank misconduct, and the tax haven drain on the U.S. treasury. It will take a long time before we know whether this settlement will produce meaningful gains due to treaty procedures which are complex, depend upon the Swiss government to carry out, and open the door to potentially lengthy appeals."

In case you are starting to feel sorry for all those wealthy taxpayers who might go to prison because the Swiss bank where they hid their money (UBS) is about to turn them over to the IRS, rest assured that they will avoid prison if they have any common sense whatsoever. That's because the IRS is temporarily allowing Americans who've hidden their income in offshore accounts to come clean now and face almost no chance of prosecution.

In his statement on the UBS settlement (see related story), IRS Commissioner Doug Shulman reminded taxpayers that the six-month IRS Offshore Income Reporting Initiative, which started on March 23, 2009, will end on September 23. That gives taxpayers only five more weeks to come clean with the government about their offshore accounts.

As a Forbes columnist put it so well: "What's a wealthy tax cheat to do?" According to Commissioner Shulman, they'd better come in to the IRS and disclose their accounts voluntarily before the IRS gets their names some other way.

If taxpayers take advantage of the voluntary disclosure program, they must:
- pay six years of back taxes and interest on any unreported income;
- pay a 20%-25% penalty on those taxes;
- and pay a penalty of 20% of the highest balance of their offshore accounts during the past six years.

By doing so, offshore account owners will avoid much harsher penalties. For example, taxpayers would avoid the penalty for not filing a Foreign Bank Account Report (FBAR), which is 50% of the balance of the account every year, and the fraud penalty, which can be as much as 75% of the tax. In addition, voluntary disclosure will avoid criminal prosecution and possible prison terms.

Once a taxpayer's name is turned over by UBS, it is too late to take advantage of the voluntary disclosure program and "all bets are off." Also, the related agreement with the Swiss government would allow the IRS to get names of taxpayers using Swiss banks other than UBS when the pattern of facts and circumstances is similar to that of the UBS case.

Commissioner Shulman indicated that the IRS currently has no plans to extend the voluntary disclosure program beyond September 23. He urged anyone with undisclosed offshore accounts to contact their tax professional immediately. He noted that the agreement demonstrated that " the world of international taxes has dramatically changed, and people hiding assets and income offshore and from the IRS need to get right with the government now."

On August 12, the U.S. government and Swiss banking giant UBS announced that they had reached an agreement settling the dispute over whether the Internal Revenue Service can enforce a "John Doe summons" against the bank. The summons would have required UBS to turn over information on its 52,000 U.S. customers.

In a statement issued the same day, IRS Commissioner Doug Shulman said that the details of the agreement would not be available until after the Swiss government has signed the agreement, possibly as early as next week. But rumors have it that the IRS will get only a fraction of the information sought, perhaps on just 8,000 to 10,000 accounts.

Anything less than full disclosure of all U.S. customers is unacceptable. A federal court agreed with the IRS that there was a reasonable basis for concluding that the 52,000 includes people evading their U.S. taxes. The case against UBS exposed especially egregious behavior by the bank's employees. They came to the U.S. soliciting illegal business from U.S. citizens, and helped Americans hide their income and assets from the IRS by setting up accounts in the name of foreign shell companies. These private bankers committed crimes on U.S. soil, with the full knowledge and support of the bank's management. UBS should not be allowed to hide behind arguments about Swiss sovereignty or the country's bank secrecy rules.

If the agreement does not provide for full disclosure, it sets a terrible precedent for future investigations. Some Americans will continue to evade taxes by using offshore financial institutions and hope that, when the bank gets prosecuted, their names will be among the 80% that aren't turned over to the IRS.

Foreign governments and financial institutions should not be able to facilitate the evasion of U.S. taxes by its citizens.

On July 30, Rep. Jim McDermott (D-WA), along with six cosponsors, introduced the Taxpayer Responsibility, Accountability, and Consistency Act (H.R. 3408) which is aimed at stopping the misclassification of employees as independent contractors.

For each worker that a company "employs," it must withhold income and payroll taxes, pay benefits and unemployment insurance, and comply with labor laws. But companies do not have these expenses when they use "independent contractors" rather than "employees." Independent contractors are themselves responsible for paying the employer half of payroll taxes, as well as the employee half, and they generally don't receive other benefits like health insurance from companies that hire them.

As a result, some employers intentionally misclassify workers as "independent contractors" to avoid these costs.

It's unclear exactly how much misclassifying employees costs the U.S. Treasury. In theory, it would not matter to the Treasury whether payroll taxes are entirely paid by workers (as is the case for independent contractors) or half paid by employers (as is the case for employees) but the reality is that workers misclassified as independent contractors may be unable to shoulder the payroll taxes and are often unaware of this responsibility until the taxes are due. Or the income to independent contractors is simply not reported at all. 

A Government Accountability Office (GAO) report issued earlier this year found that only 8 percent of small businesses with assets under $10 million submitted 1099-MISC forms that are due whenever independent contractors are used. It seems pretty unlikely that only 8 percent of those companies are really hiring independent contractors. When income is not reported to the IRS by a third party, the income is correctly reported only 46 percent of the time.

Many employers use a loophole created by Sec. 530 of the Revenue Act of 1978 which is commonly referred to as "Sec. 530 relief." It allows employers to classify workers as independent contractors if they have historically done so, or if it is the industry practice. H.R. 3408 would repeal Sec. 530 and replace it with a new test which would be more difficult to meet. The old "Sec. 530 relief" would continue to be available for one year after the new bill is enacted.

On July 24, three organizations, Global Financial Integrity, the Tax Justice Network, and Citizens for Tax Justice, briefed Congressional Hill staff on proposals to crack down on offshore tax abuses. The speakers from the three organizations explained the types of offshore tax abuses that are costing Americans billions in tax revenue: tax evasion (which is illegal) by individuals and tax avoidance (which is not necessarily illegal) by corporations.

Speakers from Global Financial Integrity and the Tax Justice Network discussed developments related to offshore tax evasion and the ways in which some financial institutions facilitate it.

The strongest legislation proposed so far to crack down on offshore tax evasion is the tax haven bill introduced by Senator Carl Levin and Congressman Lloyd Doggett (S.506/H.R.1265). (See the letter that CTJ and several other organizations signed in support of this bill.) Congressman Doggett himself made a surprise appearance at the briefing and expressed his determination to keep pushing for action on the bill.

Speakers also explained that as the U.S. prods other governments to comply with our tax enforcement efforts, some respond that the U.S. itself is a tax haven for foreigners trying to escape paying taxes to their own governments. The problem is that certain U.S. states allow people to set up shell entities that can be used to hide income from whatever government they're supposed to be paying taxes to. The Incorporation Transparency and Law Enforcement Assistance Act, introduced by Senator Levin (S.569) would address this problem. (See a letter that Citizens for Tax Justice and other organizations signed in support of this legislation).

CTJ director Bob McIntyre discussed offshore tax avoidance by corporations. (See a summary of his remarks.)

Read CTJ's summary of pending legislation to address offshore tax evasion.

Read the complete materials from the briefing: Tax Evasion and Incorporation Transparency.

Did tax avoidance schemes contribute to the tragic subway crash in the nation's capitol on June 22? For us to know for sure, the District's transit agency should make public the details of leasing agreements it entered into purely to facilitate tax avoidance.

The Washington Metropolitan Area Transit Authority (WMATA or "Metro") has, like many other transit agencies, engaged in so-called sale-in, lease-out (SILO) deals with financial institutions that don't actually have any real substance and do not change anyone's behavior -- except perhaps that Metro was obligated to keep train cars in service longer than was advisable.

Here's how SILOs work. When a company buys assets like equipment, it takes depreciation deductions over a period of years to reduce its taxable income. Cities and transit agencies are not subject to federal income tax, so they can't use the deductions. A SILO basically allows transit agencies to sell the benefits of those deductions, which they cannot use anyway, to a private investor. A city or transit agency sells assets such as train cars to a private investor (usually a bank). The sale gives the city immediate cash for other investments. The bank, which now "owns" the train cars and can take depreciation deductions, "leases" the train cars back to the city. So the investor gets depreciation deductions on the equipment and deductions for interest, if it borrowed money to make the purchase. The city gets the cash it was paid for the train cars, which exceeds the lease payments it must make.

But notice that the deal has no economic substance whatsoever. The train cars obviously never are possessed by the bank, which is in no way involved in operating mass transit systems. Both the transit agency and the bank are in the exact same position as they were before the deal, except they've made some money by manipulating the tax code in a way that Congress obviously never intended, at a cost to U.S. taxpayers. In 2004 alone, SILO deals were estimated to cost the Treasury $4.4 billion.

Metro has $889.1 million of these deals in place. In a statement that the agency has recently backed away from, Metro told federal inspectors in 2006 that it could not retire its 1000 Series Rohr railcars (which are suspected of being a significant contributor to the deaths and injuries) because "tax-advantaged leases" required that the cars be kept in service "at least until the end of 2014. The National Transportation Safety Board had previously recommended that the 1000 series cars be retired or retrofitted, after its investigation of a 2004 crash.

Federal transit officials encouraged these deals as a way to provide much-needed funds to transit agencies. But the Treasury Department fought them and, beginning in 2004, denied depreciation deductions for SILO deals.

Sarah Lawsky, a law professor at George Washington University, posted one of the many SILO agreements the Metro has entered. This agreement is available to the public because of a court settlement, but the other agreements are not. What details are in the other agreements is unclear, but Metro has said that the agreements did not bar it from replacing the cars and were not a factor.

But there's only one way we can know for sure. Metro should make the rest of the agreements public.

A column by Kevin Hassett on Bloomberg.com this week suggested that if President Obama's international tax policy proposals are enacted, Microsoft will move out of the country.

Actually, quite the opposite is true. The President's proposals would reduce the perverse incentives in our tax code that currently reward companies for moving plants, profits, and people offshore. If they are enacted, Microsoft would have less, not more, reason to leave. The President's proposals would limit multinational companies' ability to reduce their U.S. tax by using deductions and tax credits attributable to their foreign income before the foreign income is taxed. The proposals would require matching of the income and deductions. (See the CTJ report explaining the President's international tax proposals.)

Hassett's assertions were based on Microsoft CEO Steve Ballmer's comments last week while in Washington, that "it makes U.S. jobs more expensive...we're better off taking lots of people and moving them out of the U.S." This strikes us as a lot of hot air designed to scare Americans and their lawmakers.

In support of his argument against changing the tax rules, Hassett also cites a study that shows for every 10 dollars U.S. companies invest offshore, their investment in the U.S. increases by about two dollars, and that foreign investment is therefore good for the U.S.

We might begin by pointing out that every ten dollars that U.S. companies invest in the U.S. result in at least, well, ten dollars of investment in the U.S. But this is largely beside the point. Many of the administration's proposals really address corporate tax avoidance practices that involve investments that only exist on paper anyway (think of Citigroup and its 90 subsidiaries in the Cayman Islands, which cannot possibly be conducting much real business). These are practices that serve only to reduce the U.S. taxes that corporations pay on the profits that are really generated in the U.S.

And as far as incentives to genuinely move real operations offshore, the current system of allowing tax deferral on foreign income encourages that. The President's proposals would begin to reduce that incentive (we wish they'd go farther).

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

Assistant U.S. Trade Representative Everett Eissenstat told the Senate Finance Committee yesterday that the administration has put the Panama Free Trade Agreement on hold while the administration develops a "new framework" for trade. Some Democratic members of Congress have been pressuring the administration and Speaker Pelosi to delay approval of the agreement until a Tax Information Exchange Agreement (TIEA) has been completed with Panama, a known tax haven. TIEAs enable two countries' governments to exchange information necessary to prosecute offshore tax evasion (although arguably many of the existing TIEAs are so weak as to be useless). Panama and the U.S. began negotiations on a TIEA back in 2002, but Panama has never finalized it. The administration and Congress should, at very least, refuse to reward countries that are uncooperative with U.S. tax enforcement efforts with enhanced trading relations.

The national advocacy group Public Citizen issued a report on April 29th explaining the issues. Lori Wallach, director of Public Citizen's Global Trade Watch division said, "Members of Congress wouldn't vote to let AIG not pay its taxes or to give Mexican drug lords a safe place to hide their proceeds from selling drugs to our kids, but that's in essence what the Panama FTA does." She argued that the trade agreement directly conflicts with the goals of regulating finance and closing tax havens. Thankfully, the Obama administration seems to be listening.

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.

Read the report.

On May 4, President Obama proposed several measures to address overseas tax avoidance and tax evasion. As explained in two new reports from Citizens for Tax Justice, these proposals are steps in the right direction but could be stronger.

For example, the President proposes to limit the rules allowing corporations to "defer" their U.S. taxes on foreign income, but he would largely exempt technology and pharmaceutical companies from even the weak limits he proposes, instead of simply repealing "deferral" altogether. He proposes sensible steps to reduce abuses of the foreign tax credit and the "check-the-box" rules that allow multinational corporations to cause their subsidiaries' income to "disappear." His proposals to crack down on the use of secret accounts in offshore tax havens are also positive steps but could be stronger.

Read the two new reports:

Obama's Proposals to Address Offshore Tax Abuses Are a Good Start, but More Is Needed

Myths and Facts about Offshore Tax Abuses

Senate Votes to Include Offshore Transfers to Avoid Tax in Money Laundering Criminal Statute

On Tuesday the Senate passed the Fraud Enforcement and Recovery Act of 2009 (S. 386). The bill makes several amendments to the International Money Laudering Statute, including one which places steep criminal penalties on transfers of money offshore for the purpose of evading federal income tax or committing tax fraud.

Violators of the criminal statute would face a fine of up to $500,000 or twice the value of the funds transferred (whichever is greater), or imprisonment for up to twenty years, or both. The Internal Revenue Code already provides for criminal penalties for tax evasion but the penalties are much lower (a maximum fine of $100,000 and imprisonment for up to five years).

The House has its own version of the money laundering legislation, the Fight Fraud Act of 2009 (H.R. 1748), which has been approved by the House Judiciary Committee. It does not contain the tax provision.