As Congress Pursues Tax Reform, FACT Urges Lawmakers to Close Loopholes, Hold Large Companies Accountable, and Refrain from Disadvantaging Wholly Domestic and Smaller Businesses
Corporate tax reform is coming. The central question is: what will it look like? After a campaign in which both presidential candidates pledged to close loopholes that allow corporations to dodge taxes and stop companies from booking their profits overseas, is there the political will to do it?
One current proposal in Congress calls for a 0% tax on profits booked offshore. Yes, the proposal is for 0%. That is not a typo. Given the campaign rhetoric, that seems antithetical to cracking down on corporate tax dodging. But that hasn’t stopped Representative John Delaney (D-MD) from pushing a bill that would do just that. Bad enough that House Speaker Paul Ryan (R-WI) and the President-elect have suggested giveaway-corporate-tax rates of between 8% and 10% on offshore profits — but the new starting point appears to be zero.
Sadly, the rate is only a part of the problem and, in some ways, the lesser of the evils. These proposals leave in place all of the loopholes that enable companies to move money and jobs overseas. They allow multinational companies to continue to defer paying taxes on profits booked offshore until the next giveaway — referred to in policy circles as a tax ‘holiday.’ These ‘holidays’ reward a small number of very large corporations — just 30 Fortune 500 companies hold 65% of the estimated $2.6 trillion in offshore profits — with a special tax rate (or no tax rate). That leaves domestic companies, smaller businesses, and individuals to pick up the tab (and, it’s a large tab: Citizens for Tax Justice estimates that Fortune 500 companies now owe more than $700 billion in unpaid taxes on their earnings booked offshore).
In 2004, Congress passed a tax holiday. Promises were made to invest in jobs, factories, and economic expansion. Promises were broken. The vast majority of the money brought back from overseas was used for stock buybacks, which raised the price of the companies’ stocks. Senior management with stock options cashed in. There were no net new jobs, business expansion, or investments — indeed many of the companies taking advantage of the giveaway ended up laying off thousands of American workers the same year. As Congress considers another tax holiday, new promises are being made by many of the same companies, claiming that ‘this time will be different.’ Call me a skeptic.
There are ways to properly restructure the corporate tax code. First, we need to agree that there should be a corporate income tax. It may seem somewhat pejorative to start here, but Congress is so completely out of step with the public that it needs to be said.
We should close the loophole that allows multinational companies to defer paying taxes on profits they shift offshore. Consider that if I, as a U.S. citizen, make money in Des Moines or Dublin, I pay taxes on those earnings. I cannot create an Irish alter ego to dodge paying what I owe. But large, multinational corporations can create multiple entities and, through accounting gimmicks, manipulate where those earnings are booked. Closing the loophole is not complicated, it is simply a matter of political will. A piece I wrote for Tax Notes last month further details the dangers of policies that double down on incentives to shift U.S. profits overseas. One excerpt explains:
“The problem is that companies are not the same as individuals. Profits can be moved through accounting maneuvers — no plane ticket, visa, or passport is necessary. Companies can divide themselves into multiple parts. They can be legal residents of a dozen countries — or none at all. As we saw in August, Apple was able to create an offshore subsidiary in Ireland — with no employees, premises, or economic activity — and booked profits totaling tens of billions of dollars there, while paying no corporate income taxes on those profits to any national government anywhere in the world. Ignore the headquarters in California. Apple is, through creative legal maneuvers, a company without a country. Thanks to similar approaches to corporate taxation, Chevron paid $248 on $1.7 billion in profits to the Australian government. Google, General Electric, Time Warner, and many of America’s best-known brands engage in aggressive tax avoidance practices. One study found that 15 well-known U.S. companies paid no federal income tax on $23 billion in profits in 2014, and those same companies paid almost no income tax on $107 billion in profits in the preceding five years. The list of jaw-dropping tax avoidance is long.”
Further, we should not reward profit shifting by charging a lower rate on multinational corporate earnings than those of wholly domestic companies. Why would we want to do that? And yet, that is exactly what some in Congress are proposing.
As Congress pursues corporate tax reform next year, we strongly urge members to take the time to get it right. Close loopholes, do not expand them. Hold the largest, best-connected companies accountable, and don’t further disadvantage wholly domestic and smaller businesses.
- FACT Sheet: Questions & Answers about Territorial Corporate Tax Systems
- Op-Ed by Gary Kalman (Tax Notes, Oct. 10, 2016): What Apple Teaches About How Not to Reform Corporate Taxes
Gary Kalman is the executive director of the FACT Coalition in Washington, DC.