January 2012 Archives

The President's Speech: Right about Stopping Offshore Tax Dodgers, Wrong about Cutting Taxes for Other Corporations

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Read the PDF of this report.

During his State of the Union address, President Obama said that “no American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas.” We couldn’t agree more. However, his proposed solutions, which the administration fleshed out with a fact sheet[1] on Wednesday, fail to raise revenue, retain and expand the loopholes that allow corporations to avoid taxes, and mark a further retreat from earlier, stronger proposals.

Raising Revenue Should Be the Main Goal of Corporate Tax Reform

The administration says it will unveil a corporate tax reform plan in February and that this plan will be “revenue-neutral,” meaning any revenue saved from closing loopholes will be given back to corporations in the form of a reduction in their tax rate or in the form of new tax loopholes. The proposals presented during the President’s speech are just a few reforms that he says Congress can act on “immediately” and are also revenue-neutral when taken together.

In a revenue-neutral reform, Congress could close loopholes that allow companies like G.E. to avoid federal taxes, but could cut taxes for a company like Walmart that currently has an effective tax rate of 30 percent. But what’s the point of getting G.E. to pay taxes if we’re just going to give the money to Walmart?

The U.S. is in desperate need of revenue to fund public services and public investments that create jobs, so any “reform” of the corporate tax that fails to raise revenue would be largely pointless.

In May, 250 organizations, including groups in every state, sent a letter urging Congress to enact a revenue-positive reform of the corporate income tax.[2] The letter explains,

Some lawmakers have proposed to eliminate corporate tax subsidies and use all of the resulting revenue savings to pay for a reduction in the corporate income tax rate. In contrast, we strongly believe most, if not all, of the revenue saved from eliminating corporate tax subsidies should go towards deficit reduction and towards creating the healthy, educated workforce and sound infrastructure that will make our nation more competitive.

CTJ also published a one-page fact sheet and a detailed report explaining why Congress should enact a revenue-positive corporate tax reform.[3]

The President Is Retreating in the Battle Over Tax Dodging

Each year, President Obama has scaled back his proposals to limit the tax break that encourages U.S. corporations to shift jobs and profits offshore.

This tax break is the loophole that allows U.S. corporations to “defer” U.S. taxes on their offshore profits until those profits are brought to the U.S. (i.e., until those profits are “repatriated”). Often these profits remain offshore for years and many U.S. corporations say they have no plans to repatriate those profits 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.

The only true solution is to repeal deferral,[4] but President Obama never went that far. His first budget included proposals to limit the worst abuses of deferral.[5]

The following year, the President’s budget included a scaled back version of these proposals. He notably dropped one idea to limit the arcane-sounding “check-the-box” rules that allow U.S. corporations to route profits through different countries and present conflicting information to different governments in order to avoid paying taxes to any government.

This year, the President seems to have narrowed that list just to one proposal: Prevent U.S. corporations from using “intangible” property to shift their profits into tax havens. This is a step in the right direction, but it’s certainly not sufficient.

U.S. multinational corporations can often use intangible assets to make their U.S. income appear to be “foreign” income. For example, a U.S. corporation might transfer a patent for some product it produces to its subsidiary in another country, say the Cayman Islands, that does not tax the income generated from this sort of asset. The U.S. parent corporation charges an artificially low price for the asset and will then pay artificially high fees to its subsidiary in the Cayman Islands for the use of this patent.

When it comes time to pay U.S. taxes, the U.S. parent company will claim that it’s subsidiary made huge profits by charging for the use of the patent it holds, and that because those profits were allegedly earned in the Cayman Islands, U.S. taxes on those profits are deferrable (not due). Meanwhile, the parent company says that it made little or no profit because of the huge fees it had to pay to the subsidiary in the Cayman Islands.

Part of the President’s proposal would crack down on the first step of this scheme by requiring a U.S. company to charge a more realistic price for the intangible property that it transfers to an offshore subsidiary.

Another part of the proposal would crack down the second step of this scheme by barring deferral on the income generated by the offshore subsidiary in certain circumstances. The U.S. parent company would not be allowed to defer the “excess” profits generated from the intangible asset by an offshore subsidiary in a low-tax country. Obviously, the effectiveness of this reform will depend an awful lot on how “excess profits” and “low-tax country” are defined.

Giving the Revenue Back to Corporations

Under the President’s proposals, the revenue raised from cracking down on “intangibles” would be used to offset the cost of new tax breaks. One would extend a temporary “stimulus” rule allowing companies to immediately deduct (“expense”) all investments in plants and equipment. Another would reward investment in communities hit by major job losses. Another subsidizes so-called “research” and still another cuts taxes on clean energy projects.

Some of these are among the loopholes that allowed 30 of the Fortune 500 companies to completely avoid paying corporate taxes over the past three years.[6]

A big problem with all of these breaks is that they don’t result in investment or job creation. Businesses make investments and hire people when they think that doing so will result in profit. A tax break cannot help a business to profit, because a business does not even pay taxes if it has no profits.

Taxes are a percentage of profits, so a tax cut won’t make a unprofitable company become profitable, and taxes don’t make a profitable company become unprofitable.

Tax cuts for certain activities certainly can affect decisions. For example, if we want investors to focus more on clean energy than fossil fuels, then tax breaks for clean energy are a step in that direction, although the same goal could be accomplished through direct spending instead of a tax cut.

A Minimum Tax for Offshore Corporate Profits?

The fact sheet released from the White House says that the President proposes “ensuring that all American companies pay a minimum tax on their overseas profits, preventing other countries from attracting American business through unusually low tax rates.”

The simplest way to get U.S. multinational corporations to pay taxes and end tax breaks for outsourcing would be to repeal deferral. Why does the President want these companies to pay a “minimum tax” when we could instead just require them to pay the full U.S. corporate tax that they are now avoiding through deferral?

Perhaps the most alarming possibility is that such a minimum tax could be a cover for moving in quite the opposite direction. A “minimum tax” on offshore income could describe the plan released in October by Republican House Ways and Means chairman Dave Camp to exempt almost all offshore profits of U.S. corporations from U.S. taxes. (This is often called a “territorial” tax system.)

Camp’s proposal includes a tiny tax of just 1.25 percent on offshore profits. Hopefully, this is not the “minimum tax” the President is thinking about.

 


[1] White House, “President Obama’s Blueprint to Support U.S. Manufacturing Jobs, Discourage Outsourcing, and Encourage Insourcing,” January 25, 2012. http://www.whitehouse.gov/the-press-office/2012/01/25/fact-sheet-president-obama-s-blueprint-support-us-manufacturing-jobs-dis

[2] Letter to Congress, May 18, 2011. http://www.ctj.org/pdf/corptaxletter.pdf

[3] Citizens for Tax Justice, “Fact Sheet: Why Congress Can and Should Raise Revenue through Corporate Tax Reform,” November 3, 2011. http://ctj.org/pdf/corporatefactsheet.pdf; Citizens for Tax Justice, “Revenue-Positive Reform of the Corporate Income Tax,” January 25, 2011. http://www.ctj.org/pdf/corporatetaxreform.pdf

[4] Citizens for Tax Justice, “Congress Should End ‘Deferral’ Rather than Adopt a ‘Territorial’ Tax System,” March 23, 2011. http://www.ctj.org/pdf/internationalcorptax2011.pdf

[5] Citizens for Tax Justice, “Obama’s Proposals to Address Offshore Tax Abuses Are a Good Start, but More Is Needed,” May 20, 2009. http://www.ctj.org/pdf/offshoretax20090508.pdf

[6] Citizens for Tax Justice, “Corporate Taxpayers & Corporate Tax Dodgers, 2008-2010,” November 3, 2011. http://ctj.org/corporatetaxdodgers

GOP Presidential Candidates' Tax Plans Favor Richest in South Carolina

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The cost of the tax plans proposed by Republican presidential candidates would range from $6.6 trillion to $18 trillion over a decade. Of the tax cuts going to South Carolina residents, almost half or more would go to richest five percent under these plans. The average tax cut received by the richest one percent of the state’s residents would be up to 163 times as large as the average tax cut received by middle-income residents of the state.

Read the report.

What the President's Council on Jobs and Competitiveness Got Wrong about Corporate Taxes

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Read the pdf of this report.

President Obama’s jobs council has released a report full of recommendations, including somewhat misguided points on the federal corporate income tax. The report rightly points out that the corporate income tax is full of loopholes that should be closed, but fails to call for a reform that actually raises revenue to support under-funded public services and investments. The report also perpetuates some misunderstandings about the effects of the U.S. corporate income tax on our economy and on working people.

What the Council Got Right: There Are Too Many Corporate Tax Loopholes

The report does make valuable points. For example, it explains that

…the business tax system—which often applies to non-corporate businesses as well as corporate businesses—has numerous provisions for special deductions, credits, and other tax expenditures that benefit certain activities. These provisions reduce the effective tax rate below the statutory rate. In addition, these provisions also result in very different marginal tax rates applying to seemingly similar types of business activities.

The report also explains that “because certain assets and investments are tax-favored, tax considerations can drive overinvestment in those assets at the expense of more economically productive investments.” In other words, companies and investors are making decisions to get special tax breaks instead of just providing whatever goods or services people actually want.

Missing the Most Important Point: Corporations Need to Pay More in Taxes

Unfortunately, the report proposes, at least implicitly, the wrong solution, when it says, “Reducing the corporate tax rate and broadening the base would reduce these distortions and create a more level playing field among alternative investments.”

Reducing the statutory corporate income tax rate slightly might be acceptable, but only if Congress also closes so many loopholes that corporations altogether pay a lot more in taxes than they do today. In other words, corporate tax reform should be revenue-positive.

Presumably, the council is following the lead of President Obama and many Congressional leaders and calling for a corporate tax reform that is revenue-neutral. In other words, President Obama would close corporate tax loopholes, but he would use all of the resulting revenue savings to offset a reduction in the corporate income tax rate.

In May, 250 organizations, including groups in every state, sent a letter urging Congress to enact a revenue-positive reform of the corporate income tax. The letter explains,

Some lawmakers have proposed to eliminate corporate tax subsidies and use all of the resulting revenue savings to pay for a reduction in the corporate income tax rate. In contrast, we strongly believe most, if not all, of the revenue saved from eliminating corporate tax subsidies should go towards deficit reduction and towards creating the healthy, educated workforce and sound infrastructure that will make our nation more competitive.

CTJ also published a one-page fact sheet and a detailed report explaining why Congress should enact a revenue-positive corporate tax reform.

The Myth of America’s “Uncompetitive” Corporate Tax

The report makes much of the fact that the U.S. has one of the highest statutory corporate income tax rates, even though it later admits that the effective corporate tax rate (what corporations actually pay as a percentage of their income after accounting for all the tax loopholes) is much lower.

The report declares that the U.S. must reduce its corporate income tax rate so that U.S. and foreign corporations will want to invest in America.

The increased mobility of capital and the rise of multinational companies suggest that the appropriate corporate income tax rate is likely to be lower today than in the past. This is broadly consistent with the downward trend in corporate tax rates around the world during the last three decades.

If this is true, how exactly would the council explain the finding in CTJ’s major study on corporate taxes that most profitable U.S. multinational corporations are actually taxed at higher rates by foreign governments than by the U.S.?

A section of the CTJ study, starting on page 10, focuses on most of the Fortune 500 corporations that were profitable for each of the last three years and received at least 10 percent of their profits from overseas. Of these 134 corporations, 87 of them paid a lower effective tax rate in the U.S. than in the other countries where they had profits, while just 47 paid a higher effective tax rate in the U.S.

Who Ultimately Pays Corporate Income Taxes? The Shareholders, Not Workers

The report from the President’s jobs council also claims that “workers bear a rising share of the burden of the corporate income tax in the form of reduced employment opportunities and lower wages.”

This is certainly wrong. Corporate income taxes, when they are paid, are ultimately borne by corporate shareholders in the form of reduced stock dividends, and by the owners of business assets generally when the price of those assets are affected.

Corporate leaders sometimes claim publicly that corporate taxes are really borne by workers because these taxes drive the companies to move jobs offshore to lower-tax jurisdictions. But corporate leaders would not lobby for Congress to lower these taxes if they did not think their shareholders were the people ultimately paying them.

Several researchers have concluded that the owners of stock and other capital do bear most of the burden of corporate taxes.

Jobs Council Divided Over “Territorial” System (Exempting Offshore Profits)

The report explores a shift to a “territorial” tax system, but also acknowledges that members of the council were in disagreement over the issue. A “territorial” tax system is a euphemism for exempting offshore profits from taxes, and it would only increase the existing incentives for corporations to shift their profits into tax havens.

This section of the report begins:

Many members of the Council believe the United States should move to a territorial system of taxing corporate income akin to the practices of the other developed economies. Territoriality would eliminate the so-called “lock-out” effect in the current worldwide system of taxation that discourages repatriation and investment of the foreign earnings of U.S. companies in the United States.

Translation: The corporate CEOs on the President’s jobs council want Congress to exempt their companies’ offshore profits from U.S. taxes. The “lock-out” effect is actually the result of an existing tax break for corporations that shift investments offshore — a tax break that should be repealed.

This 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. The solution to end the “lock-out” effect is to repeal “deferral.”

As the report acknowledges, “Some members of the Council, however, disagree with this point of view [that the U.S. should adopt a territorial system], arguing that a territorial system of taxing corporate income would strengthen incentives for companies to move investment and employment to lower-tax jurisdictions.”

In October, when there were rumors that the Congressional “Super Committee” might propose a corporate tax reform, several national organizations and labor unions sent a letter to the committee members urging them to reject any proposal for a territorial tax system.

A CTJ fact sheet explains why Congress should repeal deferral rather than adopt a territorial system, and this CTJ report makes the same argument in more detail.

Representation Without Taxation: Fortune 500 Companies that Spend Big on Lobbying and Avoid Taxes

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Marking the second anniversary of the Supreme Court’s decision in the Citizens United vs. Federal Election Commission case, this report takes a hard look at the lobbying activities of profitable Fortune 500 companies that exploit loopholes and distort the tax code to avoid billions of dollars in taxes.

Full Report Here

Press Release Here


We identify the “Dirty Thirty” companies that were especially aggressive at dodging taxes and lobbying Congress. These companies so deftly exploited carve outs and loopholes in the tax code that all but one of them enjoyed a negative tax rate over the three year period of the study, while spending nearly half a billion dollars to lobby Congress on issues including tax policy. Altogether they collected $10.6 billion in tax rebates from the federal government.

Ordinary American taxpayers and small businesses must pick up the tab when major corporations avoid their taxes. Spread out over every individual tax filer in America, the taxes avoided by the Dirty Thirty break down to an average of $481 per taxpayer over the three years.

A total 280 profitable Fortune 500 companies collectively paid an effective federal income tax rate of 18.5 percent, about half of the statutory 35 percent corporate tax rate, while receiving $223 billion in tax subsidies.

These corporations include most of the Fortune 500 companies that were consistently profitable from 2008 through 2010. Collectively they paid $250.8 billion in federal income taxes on a total of $1,352.8 billion in U.S. profits. If they had paid the statutory 35 percent tax on their profits, they would have paid an extra $223 billion. There are thousands of perfectly legal ways that corporations, with the help of armies of high-paid lawyers and accountants, can reduce their tax burden

These 280 companies spent a total of $2 billion lobbying on tax and other issues between 2008 and 2010.

The report explains why exploiting offshore tax havens is an example of tax dodging at its worst and that at least 22 of the Dirty Thirty reported subsidiaries in offshore tax havens like the Cayman Islands. Since profit artificially shifted offshore is often counted as “foreign” profits, the data likely underestimates the amount lost due to tax havens.

To stop the abusive use of tax havens, we lawmakers must end rules allowing U.S. companies to defer taxes on their offshore profits. In the meantime, there are concrete steps Congress can take that would stop the worst of the abuses by requiring more honest rules and reporting.

To limit corporate money in elections, lawmakers should:

  • Require full and honest disclosure – the public should know who is funding what candidates
  • Empower shareholders – the shareholders that own corporations should have a say in how corporations spend their money on elections
  • Reverse Citizens United

Full Report Here

GOP Presidential Candidates' Tax Plans Favor Richest 1 Percent

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State-by-State Figures Included
The cost of the tax plans proposed by Republican presidential candidates would range from $6.6 trillion to $18 trillion over a decade. The share of tax cuts going to the richest one percent of Americans under these plans would range from over a third to almost half. The average tax cuts received by the richest one percent would be up to 270 times as large as the average tax cut received by middle-income Americans.

Read the report.

GOP Presidential Candidates' Tax Plans Favor Richest in New Hampshire

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The cost of the tax plans proposed by Republican presidential candidates would range from $6.6 trillion to $18 trillion over a decade. Of the tax cuts going to New Hampshire residents, the share going to the richest one percent would range from a third to 43 percent under these plans. The average tax cuts received by the richest one percent of the state’s residents would be up to 200 times as large as the average tax cut received by middle-income residents of the state.

Read the report.


GOP Presidential Candidates' Tax Plans Favor Richest Iowans

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Three Republican candidates for president have released tax proposals with enough detail for CTJ to estimate their effects, and all three would give greater tax cuts to Iowa's highest earners, whether measured in dollar terms or as a percentage of taxpayers’ income.  Under any of these three plans - Romney's, Gingrich's or Perry's - the richest one percent of Iowa’s taxpayers would receive the largest share of the tax cuts.

CTJ's new analysis is here.



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