Jack Rasmus

COMMENTARY

In our preceding blog entry, “Teapublicans, Timidcrats, and the $14.3 Trillion US Debt”, we provided data showing how the $9 trillion added to the US debt since 2000 was due to accelerating war and defense dept. spending to the tune of $3.3 trillion, Bush’s $3.4 trillion tax cuts for the rich, unfunding prescription drugs, runaway health care costs and their effects on medicare and medicaid, and bailouts of corporations after 2007. But there are additional areas that have contributed to the crisis in federal revenues that have caused the deficits and debt as well. The article below addresses the role of multinational corporations, their offshoring of 2.9 million jobs in the US since 2000, and their major methods of tax avoidance and tax fraud. Their amount adds up to another hefty $1 trillion in federal revenue loss over the past decade. (This article appeared in abbreviated version in the blog, Working In These Times, on April 21, 2011).

“JOBS, OFFSHORING, AND THE US BUDGET DEFICIT” by Jack Rasmus, April 24, 2011

Whats the connection between the 25 million still jobless today, US Multinational Corporations, and the estimated $1.6 trillion 2012 budget deficit?

The deficit and budget cutting have been given massive amount of attention in the public press. At least a dozen different proposals from the Obama administration, Republicans in the House, Democrats in the Senate, deficit commissions, and others are now debated daily. But as proposals and programs for deficit cutting at the expense of social programs proliferate, no one is discussing how creating jobs for the 25 million currently unemployed would essentially resolve the budget deficit and eliminate altogether the need to cut Social Security, Medicare, Medicaid, and other programs.

One of the major causes of current high, chronic levels of unemployment in the US is offshoring by US multinational corporations. Less well known, however, is that these same multinational corporations are a significant cause of not only millions of lost jobs, but of trillions of dollars of lost tax revenue as well, thus contributing significantly to current and future budget deficits.

A recent report by the US Commerce Dept., a pro-business source, indicated that big multinationals like General Electric, Caterpillar, and big tech and drug companies over the past decade reduced their US work forces by 2.9 million while increasing their jobs offshore by 2.4 million. Apart from the harm inflicted on US working families, this development has resulted in the loss of huge amounts of tax revenue to the US federal government, contributing in a major way to the current US budget deficit and rising government debt levels.

For example, if one averages the total 2.9 million jobs lost in the US over ten years, and assumes an average pay of $43,000 a year over the decade, assuming further an average 20% personal income tax rate, the 2.9 job loss equates to an average annual loss in total income in the US Treasury of around $25 billion a year. That’s a total revenue loss of about $250 billion over the past decade alone. That total does not include the loss of additional state and local tax revenue, or the additional federal revenue sharing with the states that was required the past decade by the federal government to make up for the state-local tax revenue loss.

For the coming decade, 2010-2019, the lost tax revenue tab for the US Treasury would be significantly greater still, as even more jobs will likely be offshored and the average annual money income will be slightly higher than $43,000. The amount for the decade ahead would be easily in excess of $300 billion more.

But the total US tax revenue loss is even greater due to the direct loss of jobs from offshoring. The loss of tax revenue due to the loss of 2.9 million jobs (and an equal or greater number of lost jobs due to offshoring in the coming decade) is only part of the tax revenue loss picture attributable to U.S. multinational corporations.

For example, current federal tax laws actually give corporations tax breaks for moving jobs offshore. Shutting down facilities in the US in order to move offshore is considered an expense for the corporation in question, and it thus may deduct such expenses from its US tax liability on its operations that remain in the US. This means tens of billions more in lost tax revenue. Then theres the investment tax cuts given corporations that move offshore that partially pay for the cost of the capital equipment they purchase when they set up operations offshore. Both those items represent further tax revenue loss to the federal government.

These two loopholes, expensing and investment tax credit, used by companies that offshore jobs are difficult to estimate precisely, but together likely amount to at least another $150 billion dollars over the past decade, 2000-2009, and even more going forward for 2010-1019.

So we have $250 billion in lost jobs-based tax revenue for the past decade due to offshoring plus another $150 billion or so due to expensing and investment credit loopholes associated with the same offshoring and job loss. That’s a total of $400 billion.

But an even greater revenue loss is the result of these same multinational corporations refusing to pay their required foreign profits tax. By means of yet another loophole, with the exception of one year, 2005, for more than a decade now they have been defering paying taxes on foreign profits earned from their offshored operations. In fact, through various internal accounting devices they even redirect profits made in the US to their foreign subsidiaries, and thereby increase the amount that is deferred from paying taxes to the U.S. government.

It has been estimated by the global business periodical, The Financial Times, that as of mid-year 2010 non-financial US multinationals were sheltering $1 trillion in taxable revenue in their offshore foreign subsidiaries. They are holding the $1 trillion offshore, refusing to pay their share of taxes on it.

Back in 2004, the same multinational corporations played the same game’that is refused to repatriate taxes owed per the foreign profits tax. The total hoarded at the time was $700 billion. They complained then, as they do once again now, that their payment to Uncle Sam at the 35% corporate tax rate was higher than tax rates to foreign governments. In 2004, they were consequently able to get Congress to pass the Homeland Investment Act. That reduced their corporate tax rate on offshore earnings they chose to repatriate back to the U.S. to only 5.25% instead of the normal 35% corporate tax rate. Approximately $363 of the $700 billion was repatriated and taxed at the 5.25% rate. The reduced tax rate and repatriated $363 billion was taxed at the 5.25% rate in the understanding in the Homeland Investment Act that the funds would be used to create jobs. But the Act wasn’t implemented according to the letter of the law in 2005. Most of the $363 billion went to buy back company stock and to purchase other companies, which resulted in more job losses. The remaining $337 billion of the $700 billion never came back to the U.S.

The result of the nearly 30% lower rate (35% minus 5.25%) on the repatriated $363 billion was a loss of $108.6 billion to the US Treasury at that time. The other $337 billion was never taxed at all, which amounts to another $117.5 billion in lost tax revenue. The unpaid corporate taxes and revenue loss on the $700 billion at mid-decade, 2005, thus amounted to a total of $226.1 billion.

But even that’s not the entire amount of lost tax revenue. The $337 billion left offshore in 2005, and never repatriated at even the special one time 5.25% corporate tax rate in 2005, has since grown once again to $1 trillion by 2010, according to the Financial Times. At the 35% corporate tax rate that additional $663 billion (1 trillion minus $337 billion) amounts to still another $232 billion in lost taxes between 2005-2010.

And the $226 billion and $232 billion covers only US non-financial multinational corporations. It does not include offshore income hoarding and income diversion from the US to offshore by US multinational financial institutions. Conservatively, if banks and financial multinationals are added to the above figures, the grand total would be at least another $150 billion more.

Adding the preceding tax revenue losses due to multinationals offshoring of 2.9 million jobs, manipulation of loopholes, and both financial and non-financial multinational corporations refusal to pay taxes on foreign earnings according to US tax law the total revenue loss to the US government comes to more than 1 trillion.

Having gotten away with their offshore earnings tax reduction scam in 2004, multinational corporations are now once again playing the same lobbying game today in 2011. They are in the process of blackmailing Congress and the Obama administration to reduce the tax rate again on foreign earnings. Should they get their way once again in 2012, when Congress takes up the task of a major overhaul of the entire tax code, it will mean still hundreds of billions more beyond the $1 trillion in lost tax revenue every year for another decade to come.

Multinational corporations like General Electric and others argue the reduction in the offshore profits tax is necessary to create jobs while they simultaneously cut jobs by the millions and intend to continue to do so. They further argue that the US corporate tax rate is among the highest in the world. But the tax rate is only part of the picture. Actual revenues collected are a result of corporate tax loopholes, not just corporate tax rates. Together rates and loopholes add up to the actual tax take. The US has among the most tax loopholes of any developed economy in the world. As a result, corporate taxes in the US represent only 3.2% of GDP, one of the lowest tax takes in the industrial world.

Today the revenue and budget deficit stakes are even higher than they were during the past decade. All US corporations today, whether doing business offshore or in the U.S., want the corporate tax rate on operations in the US, as well as offshore, reduced to 25% from the current 35% rate. That proposal is already embedded in the current U.S. House Republican (Paul Ryan) budget. The 25% rate is also supported by the CEO of General Electric, Jeff Immelt, who heads up President Obama’s special trade council. And GE, it was recently reported, not only paid no corporate taxes in 2010 on its global income of $14.2 billion ($5.1 billion of that earned in the US), but actually got a check from the US Treasury for $3.2 billion in tax subsidy.

It appears President Obama has been steadily drifting in the same direction of the 25% corporate rate tax cut as well. After having run in 2008 on a platform that assured voters he would enforce the 35% on corporate offshore profits, and force multinationals to pay up on their offshore sheltering, in 2010 Obama abandoned the idea of enforcing the foreign profits tax altogether. It was shelved. Now he is moving in the opposite direction toward allowing even more corporate tax cuts.

This writers prediction is that in 2012 he will trade the corporate tax cut for a token increase in the personal tax rate on millionaires. The corporate tax cut will be justified as necessary to create jobs. The token increase in the top rate of the personal income tax will yield far less revenue than will be lost in cutting the corporate tax rate. But it will provide political cover. General Electric and other multinational CEOs will politely nod their heads and smile (and continue to collect their subsidy checks from the government). Net tax revenues will fall. The budget deficit will get worse. And GE and other heads of US multinationals will continue to offshore millions more US jobs in the years to come, thus providing even more evidence to the contrary of the myth that business tax cuts create jobs.

Jack Rasmus