Medtronic: Still Offshoring

Already facing criticism for its plans to become an Irish company to avoid U.S. taxes, Medtronic, the Minnesota-based medical device maker, disclosed this week that it pays very little in taxes in the foreign countries where it claims to have profits.

The company, which made waves recently with its ongoing effort to “invert” its corporate structure so that it becomes (at least on paper) an Irish corporation, doesn’t appear to be facing major obstacles to this effort.

But it’s not taking any chances. Whether the corporate inversion deal ultimately goes through or not, the company continues to aggressively shift profits and cash offshore to avoid U.S. tax. In Medtronic’s just-released annual financial report, the fine print reveals that the company’s total “permanently reinvested” foreign profits—that is, income they have said they have no intention of bringing back to the U.S.—rose from $18.1 to $20.5 billion in the past year. And the total amount of cash and cash equivalents that the company holds abroad rose abruptly from $10.9 to $13.9 billion in just one year.

The tax implications of Medtronic’s offshore cash—to say nothing of the $2 trillion in permanently reinvested earnings held by Fortune 500 companies overall—could be enormous. The company is supposed to pay the 35 percent U.S. tax rate (minus any taxes already paid to foreign nations) on these earnings when they are “repatriated” to the U.S. In its financial statements, the company declined to disclose whether it has paid any tax at all on its permanently reinvested foreign earnings. It hid behind an accounting standards loophole that allows companies to avoid disclosure if calculating the U.S. tax would be “impracticable.” Only 58 of the 301 Fortune 500 companies that have offshore profits estimated the U.S. tax on those earnings in their most recent annual reports.

But in response to a reporter’s inquiry this week, Medtronic admitted that the U.S. tax due on those foreign profits would be 25 to 30 percent.  We’re willing to bet that just like Medtronic the other profit-shifting U.S. multinational companies know exactly how much it will cost to repatriate those earnings, but don’t want to let the public know of their tax-dodging ways.

Medtronic’s 25 to 30 percent estimated U.S. tax liability tells us that a substantial amount of the so-called offshore profits are accumulating tax-free. The company’s 37 subsidiaries located in known tax havens adds to the suspicion: the company has five subsidiaries in the Cayman Islands alone. Unless the company has identified a huge untapped medical-device market in the Caymans, it’s probable that the main reason why Medtronic owns these subsidiaries is to shelter their cash tax-free.

If, as seems likely, Medtronic’s inversion proceeds as planned, its “foreign” earnings in these tax havens may forever escape tax. But the company potentially stands to benefit from shifting profits, on paper, into tax haven countries even if they are not allowed to renounce their Minnesota citizenship.

Some in Congress continue to float the idea of a repatriation “tax holiday” that would allow companies like Medtronic to pay a sharply reduced tax rate on their tax haven profits upon repatriation.

So Medtronic’s ongoing off shoring effort is a profitable tax dodge no matter what happens to their inversion effort. It’s time for Congress to put a stop to it.

Clinton Family Finances Highlight Issues with Taxation of the Wealthy

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With the release of her new book and the 2016 election just around the corner, Hillary Clinton’s wealth and tax rate have been fodder for talking heads the past couple weeks. Both the report on the Clintons estate tax planning and Ms. Clinton’s comments that she pays “ordinary income tax” provide useful lessons on the problems with the way the United States taxes wealthy individuals.

When Avoiding the Estate Tax Becomes the “Standard”

According to an in-depth report in Bloomberg, Bill and Hillary Clinton transferred the ownership of their New York residence into a pair of Qualified Personal Residence Trusts (QPRT), which tax experts believe could allow them to avoid hundreds of thousands of dollars in estate taxes.

The substantial tax benefit that the Clintons generated is driven by two key aspects of the QPRT. Most importantly, placing the residence into the QPRT locks in its current value as part of the estate, so all the future growth in the house’s value will not be taxable as part of the estate. In addition, because the residence ownership is split in half between two QPRTs, the total valuation of both trusts is discounted because partial ownership stakes are considered by the IRS to have a lower value.

In other words, the Clintons are indeed using a tax dodge. They are using a method that, unfortunately, has become “pretty standard” for wealthy individuals and, also unfortunately, is entirely legal under our broken estate tax system.

Unlike wealthy individuals such as Sheldon Adelson, the Clintons have historically supported strengthening the estate tax rather than dismantling it further. During the 2008 campaign for example, Ms. Clinton supported capping the per-person exemption at $3.5 million, which mirrors President Obama’s current proposal to strengthen the estate tax in his most recent budget (PDF).

Noting the Difference between the Tax Treatment Investment and Wage Income

In a much publicized interview with The Guardian, Ms. Clinton noted that she pays “ordinary income tax, unlike a lot of people who are truly well off.” While she certainly opened her mouth and inserted her foot, her adversaries attacks on her poor phrasing misses the point.  A big part of the problem with our tax code is the preferential treatment it gives to income derived from wealth (e.g. capital gains, stock dividends) versus income derived from work. So, indeed, the Clintons are wealthy by any standards. Between 2000 and 2007 had $109 million in adjusted gross income, and they paid a 31 percent tax rate. Their tax rate is more akin to the rate paid by working people because they derive a significant portion of their high annual income from speaking fees, book royalties and other activities that are classified as work.

A wealthy investor, like Mitt Romney and Warren Buffet, with the same income but all of it derived from capital gains and stock dividends would have paid about half the rate the Clintons paid. This preferential treatment helps to perpetuate income inequality.

Hopefully, Mrs. Clinton’s criticism of these low rates is an indication that she favors substantially curtailing or even ending the preferential rate on capital gains. If so, it would mark a positive shift from her position during the 2008 campaign, when she stated that she would not try to raise the top capital gains tax rate above 20 percent (the level it is today). 

FIFA’s World Cup of Tax Breaks

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All eyes are on Brazil and the World Cup, but Gov. Tarso Genro of Rio Grande do Sul believes the country’s decision to host the World Cup has been “a huge mistake”.

And many of the country’s residents as well as a host of global anti-poverty advocates agree with him. Brazil has been under increasing scrutiny for tax breaks it awarded to the sporting giant FIFA–tax breaks that many believe the country can ill afford given the high concentration of poverty in some of the country’s districts.

According to InspirAction, Christian Aid’s Spanish affiliate, Brazil will give up $530 million in tax revenue to benefit the World Cup’s corporate sponsors such as McDonalds, Budweiser and Johnson & Johnson. The country is allowing corporations to import an array of products from food, medical supplies and promotional materials tax-free, while also exempting seminars, workshops and other cultural activities from taxes.

InspirAction and other advocates have said the millions saved by FIFA and its sponsors through these breaks should be used to benefit the poor, not corporations and their shareholders. Foregone World Cup tax revenue could help lift 37 million people out of extreme poverty and help improve basic services. Instead, FIFA, a supposed non-profit organization, is reporting historic profits while leaving the host country to foot the bill.

The bidding to receive games such as the World Cup or the Olympics is always intense. During the publicity runs surrounding the bidding, potential host countries and the sponsoring organization tout the economic benefits including increased tourism dollars. Unfortunately, economic benefits that arise from the events often are as short-lived as the event itself. The economic burden, however, can be lasting.

In 2010, South Africa hosted the World Cup. FIFA reported that it received $3.8 billion tax-free in revenue and that year was “the most profitable in FIFA history”. However, South Africa had a $3.1 billion net loss from hosting the games. The same year, the number of tourists in South Africa dropped by half compared to previous years. The displacement of usual tourists is a reoccurring event in World Cup-host countries including Germany, China and Korea. Similarly, the European Tours Operations (EOTA) conducted a study in 2006 of countries that hosted the Olympics, which showed tourism declined the year pre and post-Olympics.

Host countries also have the financial burden of maintaining specially built stadiums. German economist Wolfgang Maennig conducted a study which found that the utilization of accommodation actually fell by 11.1 percent in Berlin and 14.3 percent in Munich during the 2006 World Cup. In Brazil’s case, the country spent $300 million in public funds constructing Arena Amazonia, which Brazilian officials portrayed as an investment into the Manaus’ economy and tourism in spite of the research indicating otherwise.  There has been speculation that the 42,000-capacity Arena Amazonia will be turned into a detention centre after the games as sporting events in the small town rarely attract 1,000  people. Neither a huge stadium nor a detention center is likely to boost tourism figures for Manaus, despite what officials are saying.

Mayor of Porto Alegre, Jose Fortunati, defended the corporate tax breaks and said his city would not have been able to take part in the games without them.  This reasoning still doesn’t sit well with much of the Brazilian public. Former Brazilian footballer, manager and now politician with the Brazilian Socialist Party, Romário de Souza Faria, noted that FIFA is projected to make $1.8 billion in profits, which should generate $450 million in tax for public services, but FIFA won’t pay anything.

Hosting the World Cup and other international sporting events surely is a public relations boon. But underneath the games’ hype, there are serious questions about who really benefits—questions that are worth broad public debate.

Two years from now, Brazil is set to do this all over again when it hosts the summer Olympics and offers the same sort of tax breaks to the Olympic Committee. It seems that now is as good a time as any to address these issues.  

Congress, Take Note: More States Are Reforming Antiquated Fuel Taxes This Summer

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Transportation funding in the United States is in trouble. With the Highway Trust Fund set to go broke by late August, Congress has forgone any increase in the grossly inadequate federal gas tax (unchanged at 18.4 cents per gallon since 1993) in favor of plugging recurring funding gaps with general revenues. Currently, Senators Chris Murphy (D-Connecticut) and Bob Corker (R-Tennessee) are floating a proposal to hike the federal tax by 12 cents, but the new revenues would be offset by new tax cuts and its chances of passage are at any rate tenuous before a full legislature that habitually shies away from increasing taxes.

Fortunately, states need not wait for Congress to take action. With an eye toward long-term sustainability, several states will increase their own fuel taxes on Tuesday, July 1.

According to an analysis by the Institute on Taxation and Economic Policy (ITEP), four states will hike their gasoline or diesel taxes next week. The changes generally take two forms – automatic inflationary increases designed to keep pace with the rising cost of building and maintaining transportation infrastructure and hikes resulting from recent legislation.


Four states will see gasoline tax increases on Tuesday. Increases in Maryland and Kentucky are the result of 2013 legislation requiring an annual adjustment to reflect growth in the Consumer Price Index and a quarterly adjustment reflecting an increase in wholesale gas prices, respectively. New Hampshire deserves special kudos after the state legislature passed its first gas tax increase – and the largest of any state this year – since 1991. An additional levy of 4.2 cents per gallon – a decade’s worth of inflationary value – will be added at the pump on Tuesday to support needed transportation projects. Unfortunately, the tax is essentially a fixed rate increase rather than a variable-rate design which could have kept pace with annual increases in infrastructure costs, and it will be repealed in roughly 20 years when bonds for the I-93 project are paid off. Vermont will see a second structural tweak in its tax formula as a result of 2013 legislation overhauling the state’s gasoline and diesel taxes. The imposition of a higher motor fuel percent assessment combined with a decrease in the per gallon tax will result in an overall net increase next Tuesday of 0.6 cents per gallon.


On the diesel tax front, four states will see hikes next week ranging from 0.4 to 4.2 cents per gallon. Changes in Maryland and Kentucky again reflect annual or quarterly price growth. New Hampshire’s diesel tax increase matches that for gasoline (4.2 cents per gallon). Vermont will raise its diesel tax by an additional 1 cent on top of last year’s 2 cent hike as the state’s 2013 tax structure overhaul is fully phased in.

Two more states should have made the list this year, but officials there have actually blocked scheduled fuel tax increases. Georgia Governor Nathan Deal suspended an automatic 15% increase in his state’s variable-rate gas tax by way of executive order earlier this month, citing concerns over the cost burden for families and businesses. North Carolina lawmakers passed legislation during the 2013 session freezing the state’s variable-rate gas tax at 37.5 cents per gallon, effective through June 30, 2015. Officials in these states will likely take credit for enacting “tax cuts” this year as infrastructure projects go underfunded.

Two other states will see their fuel taxes decrease on Tuesday. California will cut its gasoline excise tax from 39.5 to 36 cents per gallon, reflecting a decrease in gas prices. Connecticut’s diesel tax rate is revised each July 1 to reflect changes in the average wholesale price over the past year, and will see a decrease this year of 0.4 cents per gallon.

Fortunately, gasoline tax reform is already on the horizon in Rhode Island, where lawmakers agreed as part of this year’s budget plan to index the tax to inflation, which will mean a roughly 1 cent increase effective July 1, 2015. Michigan’s legislature was expected to come to an agreement this session on a fuel tax increase after voters there expressed a willingness to pay for repairs on badly deteriorating roads and bridges, but proposals to increase the tax by 25 cents per gallon over four years or to index it to keep pace with construction costs stalled. With lawmakers promising to take up the issue again in the fall, another summer construction season is now lost in the state.

Including the budget agreement passed by Rhode Island earlier this month, the total number of states with variable-rate fuel taxes designed to rise alongside the price of gas, overall inflation, or both increases to 19 (plus DC). In the past year, Massachusetts, Pennsylvania, and DC have all switched from fixed-rate fuel tax structures to variable-rate structures.

Given the level of debate and the major changes in states’ fuel tax structures that have taken place in 2013 and 2014, it seems that more states are recognizing the need for a sustainable fuel tax capable of keeping pace with the inevitable increases in transportation infrastructure costs.

NOTE: Differences among states in the direction and magnitude of gas price changes evident in rate revisions reflect states’ use of state-specific price data as the basis for rate changes. In particular, California experienced the largest gasoline price drop of any state over the past year and will, therefore, see a large negative change in their rate.

State News Quick Hits: Regressive Tax Cuts Taking Toll on State Budgets

In an astonishing shift, Kansas Gov. Sam Brownback has moved beyond calling his tax cuts a great “real live experiment” and is instead likening the state to a medical patient, saying, “It’s like going through surgery. It takes a while to heal and get growing afterwards.” Clearly the Governor is feeling the heat of passing two years of regressive and expensive tax cuts. Here’s a great piece from the Wichita Eagle highlighting the state’s fiscal drama.

File this under absurd. Ohio Gov. John Kasich signed his most recent tax cut bill at a food bank touting tax cuts to low-income taxpayers included in the legislation, but in reality the bill actually doesn’t do much to help low income taxpayers. In fact, the poorest 20 percent of Ohioans will see an average tax cut of a measly $4, hardly enough to buy a box of cereal, while the wealthy will be showered with big tax breaks.

Faced with a giant budgetary hole, New Jersey lawmakers are being offered two very different solutions: State Sen. Stephen Sweeney’s proposed “millionaire tax” and Gov. Chris Christie’s plan to renege on earlier promises to adequately fund the state’s beleaguered pension system. Critics of the governor’s plan argue that Christie is failing to honor the state’s promise to make bigger payments to the pension fund as part of a 2010 agreement, which also required beneficiaries to contribute more in an effort to shore up the fund. Sweeney would instead impose higher tax rates on those earning more than $500,000 to bridge the gap – a proposal which Christie has vetoed several times in the past but which is supported by a majority of voters.

The three Republican candidates running to replace Arizona Gov. Jan Brewer (she is not running due to term limits) are campaigning on promises to eliminate the state’s income tax.  But, Gov. Brewer has made it clear she does not support such extreme ideas.  From the Arizona Daily Star:  “I think that you need a balance,” she said in an interview with Capitol Media Services.  Beyond that, Brewer said it’s an illusion to sell the idea that eliminating the state income tax somehow would mean overall lower taxes. She said the needs remain: “It’s going to come from all of us, one way or the other.”

For Education Tax Breaks, Progressivity = Effectiveness

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On Tuesday, when the Senate Finance Committee contemplates the patchwork of tax breaks that are supposed to subsidize postsecondary education, they will likely consider ways to streamline these breaks and make them less confusing. That’s a good idea, but it’s not enough. The bigger problem is that too much of these tax subsidies are going to families who are well-off and would send their kids to college no matter what, and too few are going to lower-income families who are likely to send their kids to college only if they can find sufficient assistance.

The current collection of tax breaks can be confusing. A 2012 report from the Government Accountability Office found that more than a fourth of taxpayers eligible for postsecondary education tax breaks don’t take advantage of them, and those who do use them often don’t use the most advantageous tax break for their situation.

But Congress also needs to make these tax benefits more targeted to those households that actually need them to access postsecondary education. That could mean scaling back or eliminating some poorly targeted breaks and beefing up the American Opportunity Tax Credit, which is the best targeted of the bunch.  

It’s not clear that lawmakers will take up this cause, especially given that they are likely to move in the opposite direction by extending the most regressive of these tax breaks, the deduction for tuition and related fees. The deduction for tuition and related fees is among the temporary tax provisions that would be extended for two years under the “tax extenders” legislation approved by the Finance Committee on April 3, with the support of committee chairman Ron Wyden and ranking Republican Orrin Hatch.

Tax Breaks for Postsecondary Education Are Poorly Targeted, and Deduction for Tuition and Fees Is the Worst

A report from the Center for Law and Social Policy explains that unlike the direct federal spending provided through Pell Grants, the tax breaks for postsecondary education overall favor relatively well-off households, as illustrated in the graph below.

The graph below shows that the most regressive of the tax breaks is the deduction for tuition and related fees, followed by the Lifetime Learning Credit (LLC) and the deduction for interest payments on student loans.

One option would be to simply end the practice of providing these subsidies through the tax code and instead increase spending on Pell Grants or other similar assistance. While this would be logical, Congress may be too politically committed to the concept of tax breaks for education to seriously consider this.

There are certainly ways to make these tax breaks work better. The more regressive tax breaks could be scaled back, and the savings could be put toward expanding the American Opportunity Tax Credit (AOTC). The figures illustrate that the AOTC, first signed into law by President Obama in 2009, is the most progressive of the postsecondary education tax breaks (or perhaps it’s better described as the least regressive of the education tax breaks).

The biggest reason why the AOTC is better targeted to low-income families than the other breaks is the fact that the AOTC is a partially refundable credit. The working families who pay payroll taxes and other types of taxes but earn too little to owe federal income taxes will benefit from an income tax credit only if it is refundable, such as the Earned Income Tax Credit.

Unfortunately, the AOTC is currently scheduled to expire at the end of 2017, when it will revert to a less generous credit that existed before 2009. If lawmakers were serious about making tax breaks for postsecondary education more effective, they would at very least make the AOTC permanent and allow the deduction for tuition and fees to expire as scheduled.

Good and Bad Proposals to Address the Highway Trust Fund Shortfall

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As a result of Congress’s reluctance to raise the gas tax for the past 20 years, the Highway Trust Fund will run out of money in August. That could bring transportation construction and repairs all across the country to a stop and cost 600,000 jobs, according to one estimate. Experts project a nearly $170 billion shortfall over the next decade. Several proposals have been offered to address this, some of them better than others.

Nonsensical “Repatriation Holiday” Proposal

Last week we described a nonsensical proposal from Democratic Senate Majority Leader Harry Reid and Republican Sen. Rand Paul that supposedly would pay for transportation with a “repatriation holiday,” even though this measure would raise almost no revenue even according to their own description of it. The term “repatriation holiday” is essentially a euphemism for temporarily calling off most of the U.S. tax that is normally due on corporations’ offshore profits when they are officially brought to the United States. One of many problems with such proposals is they encourage corporations to shift even more profits offshore.

Increase the Gas Tax… But Give All the Revenue Away with New Tax Cuts?

This week, Democratic Sen. Chris Murphy and Republican Sen. Bob Corker proposed to finally fix the 18.4 cent gas tax and 24.4 cent diesel tax, which are not indexed for inflation and have not been increased since 1993, but unfortunately they also propose to give an equal amount of revenue away with new tax cuts.

Their proposal would raise both taxes by 12 cents over two years and index them to inflation thereafter. ITEP has long called for this type of reform. Of course, attaching tax cuts of equal value to this proposal turns it entirely into a budget gimmick because no revenue would actually be raised overall. The two proponents suggested that the tax-cutting could take the form of making permanent six of the “tax extenders,” the tax cuts that mostly benefit corporations and that Congress extends every couple of years with little debate, without offsetting the costs. 

Close Offshore Corporate Tax Loopholes

If lawmakers cannot bring themselves to fix the gas tax without giving the revenue away with new tax cuts, perhaps they should consider closing corporate tax loopholes. Given that American corporations would be unable to profit without the infrastructure that makes commerce possible, it seems entirely reasonable that they pay their share in taxes to support it, and that Congress close the loopholes corporations use to avoid paying.

Sen. John Walsh of Montana introduced a bill this week to do exactly that with two provisions that close offshore tax loopholes used by American corporations.

The first provision is President Obama’s proposal, which was incorporated into Sen. Carl Levin’s Stop Tax Haven Abuse Act, to bar corporations from taking deductions for their U.S. taxes for interest expenses related to offshore investments until the profits from those offshore investments are subject to U.S. taxes.

American corporations are allowed to defer paying U.S. corporate income tax on their offshore profits until those profits are officially brought to the U.S. (which may never happen). But the current rules allow them to borrow to invest in that offshore business and deduct the interest expenses right away from their U.S. income when they calculate their U.S. taxes. That means that the tax code is essentially subsidizing companies for investing offshore (at least on paper) rather than in the United States. Sen. Walsh (and Obama and Levin) sensibly propose that if the U.S. tax on offshore profits is deferred, then the interest deduction associated with those offshore profits should also be deferred.

The second revenue provision in Sen. Walsh’s bill is the anti-inversion proposal that Sen. Levin and Rep. Sander Levin, the ranking Democrat on the Ways and Means Committee, introduced in May. A corporate inversion happens when a company takes steps to declare itself  “foreign” for tax purposes, even though little or nothing has changed about where its business is really conducted or managed. Given that several corporations have announced plans (or attempts) to do this in recent months, this is a reform Congress should want to enact even in the absence of any immediate revenue need.

Medtronic’s History of Shirking Its Tax Responsibilities

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Defenders of widespread corporate tax avoidance often say the real responsibility lies with Congress for allowing tax loopholes to exist. While partly true, corporate lobbying and political contributions are a significant reason why our corporate tax code is a mess. Some companies pursue tax avoidance schemes so aggressively that it’s clear the people running them lack even a minimal sense of responsibility to the country that makes their companies’ profits and their executives’ huge salaries possible. Medtronic is such a company.

Medical Device Tax

As Congress was debating health care reform at the start of Obama’s presidency, Medtronic had plenty of problems with scandals relating to some of its products and faced diminishing returns from its research. So its leaders decided to make a big deal out of a rather small tax item, the medical device tax, that lawmakers wanted to include in health reform law.

The principle behind the medical device tax was simple enough. All parts of the health care industry, including hospitals, pharmaceutical companies, health insurers, clinical laboratories and others, would benefit from expanded health care coverage provided by health insurance reform. Therefore, such companies should help pay for reform through various types of taxes and cuts in Medicare spending.

After Congress proposed the medical device tax, Medtronic and AdvaMed (the trade association for medical device companies) managed to persuade members to chop it in half before enacting the Affordable Care Act. Medtronic publicly celebrated this victory and lavished praise on lawmakers from both parties who made this happen.

But that wasn’t enough for Medtronic and AdvaMed, which have since demanded full repeal of the tax. The ensuing campaign has included claims by AdvaMed about its potential harmful impacts on the industry, claims that are easily disproven.

Medtronic’s leadership could have joined the honest medical device executives who stated publicly that the 2.3 percent excise tax is not going to hurt their business. As a report from the Center on Budget and Policy Priorities explains:

…Martin Rothenberg, head of a device manufacturer in upstate New York, calls claims that the tax would cause layoffs and outsourcing “nonsense.” The tax, he writes, will add little to the price of a new device that his firm is developing. “If our new device proves effective and we market it effectively, this small increase in cost will have zero effect on sales. It would surely not lead us to lay off employees or shift to overseas production.” Michael Boyle, founder of a Massachusetts firm that makes diagnostic equipment, insists that the device tax is “not a job killer. It would never stop a responsible manager from hiring people when it’s time to grow the business.”

Offshore Tax Havens

Recently, it has become increasingly clear that this is not the only tax that Medtronic has tried hard to avoid. “Offshore Shell Games,” the recent report from Citizens for Tax Justice and US PIRG Education Fund, found that Medtronic has disclosed 37 subsidiaries in countries that the Government Accountability Office has characterized as tax havens. (Companies may have subsidiaries that are not disclosed.) For example, Medtronic has five subsidiaries in the Cayman Islands and one in the British Virgin Islands.

Based on the data available, it’s impossible to know how much of the company’s profits are officially earned in these countries for tax purposes. But it’s clear that little if any of its profits are earned there in any real sense. In the aggregate, the profits that American corporations report to the IRS that they earn in Bermuda are 16 times the size of Bermuda’s economy, and the profits they report to earn in the British Virgin Islands are 11 times the size of that country’s economy. Obviously, corporations use a lot of accounting fictions when they claim to earn profits in these countries, and Medtronic is apparently one such company.

Demonstrating a lot of chutzpah even for a Fortune 500 corporation, Medtronic responded to questions about its offshore schemes by complaining that it would have to pay U.S. taxes on its tax-haven profits if it decided to officially bring them into the U.S.

Corporate Inversion

This week, Medtronic’s leadership went even further to show its distain for the country that makes its profits possible. It announced that it would attempt a corporate “inversion,” which is a euphemism for the practice of American corporations pretending to be foreign companies to avoid U.S. taxes.

The tax laws in this area used to be so weak that American corporations could simply fill out some papers to reincorporate in a country like Bermuda and then declare themselves “foreign” corporations. This had huge benefits. As American corporations, their profits outside the U.S. could, at least in theory, be subject to some U.S. taxes if they were ever officially brought to the U.S. But as “foreign” corporations, their offshore profits would never be subject to U.S. taxes.

A bipartisan law enacted in 2004 tried to crack down on corporate inversions, but a loophole in the law makes it possible for an American corporation to invert if it acquires a relatively small foreign company. The resulting merged company can be considered a “foreign” company even if it is 80 percent owned by the people who owned the American corporation, and even if its business is still mostly conducted and managed in the U.S.

This is exactly what Medtronic aims to do with its bid to acquire Covidien, another device maker, and then reincorporate in Ireland. (Covidien itself is an inverted company, incorporated in Ireland but run out of Massachusetts.)   

Medtronic’s CEO has ludicrously claimed that “this is not about lowering tax rates.” But this is entirely contradicted by the terms of the takeover agreement, which allow Medtronic to call off the deal if Congress changes the tax laws in a way that would treat the merged company as an American corporation for tax purposes.

In fact, legislation to curb inversions has been introduced. Congress should waste no time in enacting it. Otherwise, plenty of other corporations will feel pressure from their shareholders to invert if Medtronic gets away with pretending to be “foreign.”

The Koch Brothers’ Ugly Vision for Tax Deform

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The billionaire brothers Charles and David Koch are in the news once again as they step up their efforts to influence elections and the political process with a new super PAC called Freedom Partners Action Fund. It’s worth thinking about how tax policy could be affected if they succeed.

Last year, the Koch-Brothers-funded Americans for Prosperity released a 37-page report laying out the group’s vision for what it calls “tax reform.”

Read CTJ’s quick take on what that vision would mean.

The Koch Brothers’ Ugly Vision for Tax Deform

June 19, 2014 03:45 PM | | Bookmark and Share

The billionaire brothers Charles and David Koch are in the news once again as they step up their efforts to influence elections and the political process with a new super PAC called Freedom Partners Action Fund. It’s worth thinking about how tax policy could be affected if they succeed.

Last year, the Koch-Brothers-funded Americans for Prosperity released a 37-page report laying out the group’s vision for what it calls “tax reform.”

The paper is vague or incoherent in its details, but the group’s ultimate goal is stated very clearly.

Here are a few quotes from the paper:

■“Taxes should not target individuals based on their ability to pay” (page 13).

■ “[P]rogressive taxation is bad policy from a moral perspective” (page 29).

■ “AFP believes that the tax code should not be used to demonstrate preference to individuals on the basis of their income status” (page 28).

In other words, AFP wants to cut taxes on the wealthy by huge amounts.

Some of the details of how AFP would achieve its goal include: a large, although unspecified  reduction in the top personal income tax rate, lower taxes on capital gains, and what amounts to the virtual elimination of the corporate income tax.

Having called for gigantic tax cuts for the wealthy, AFP also says that it wants its plan to raise the same amount of tax revenues as current tax law (page 1).

Under the laws of arithmetic, there is only one way to reconcile these two goals: AFP wants to increase taxes sharply on the middle- and low-income American families.

That’s the ugly vision that Americans for Prosperity and its wealthy backers are promoting.





The paper: Americans for Prosperity, “Tax Reform: Restoring Economic Growth through Neutrality and Simplicity” (2013).

Corporate tax elimination: When corporations earn profits, there are essentially two things it can do with those profits. It can pay dividends to shareholders or it can reinvest the profits to increase future profits. Under the AFP plan, both of these uses of profits would be tax deductible. So corporations would have no taxable income. Close to half of the corporate tax is ultimately paid by the richest one percent of Americans.

Personal income tax rates: The AFP paper does not specify exactly what income tax rates it favors. But it suggests that a top income tax rate of 25 percent might be a good idea, and it highly praises a flat tax rate of 17 percent. The current top income tax rate, which applies only to the top one percent, is 39.6 percent.

Capital gains: AFP proposes to tax capital gains at lower rate than other income. It does not say how much lower. At one point, however, it endorses indexing the basis of capital assets for inflation, which would amount to a 30-40 percent exclusion for capital gains (on top of the lower capital gains tax rate). Under the 17 percent flat rate tax than AFP praises, capital gains would not be taxed at all. Two-thirds of all capital gains reported on tax returns go to the best-off one percent.

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