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Posts Tagged ‘Tax Solutions’

In parts 1 and 2 of this series on how US corporations have succeeded in avoiding paying taxes, the focus has been on how corporations have avoided paying taxes at the US federal level and on their corporate income earned abroad. The US federal corporate tax has been in freefall for decades. Elsewhere globally, there has also been a ‘race to the bottom’ between countries to see who can cut corporate taxes the most and fastest. In addition to the US federal corporate tax freefall and the global corporate tax ‘race to the bottom’ between countries, there has been a freefall and ‘race to the bottom’ between the 50 states in the US as well that’s been going on for decades.

The following Part 3 therefore briefly examines this within the US corporate tax ‘race to the bottom’, as state legislatures have in recent decades between competing to offer more tax cuts to corporations (and even ‘reverse taxation’–i.e. direct subsidies, awards, and payments to corporations), in an increasing state level desperate effort to lure business headquarters from another state to their own. The outcome is that US Corporations now pay on average a mere 2% or so in effective taxes to the US states as a group.
This Part 3 concludes with a short list of priority proposals for reversing the ‘Great Corporate Tax Shift’, at the federal level in the US, between the US and other countries, and between the US states.

The State to State ‘Race to the Bottom’

Behind the decline in the corporate income tax as a share of total tax revenues lies the growing proliferation of corporate tax exemptions, credits, deferral of payments, and various other ‘loopholes’. This is the explanation of why the effective corporate tax rate has consistently declined while the official rate has not. This trend of declining effective rate is occurring at the state level as well as the US federal level.

While the official state corporate tax rates range from 5% to 10%, states in aggregate are averaging only about 2% effectively in corporate tax payments. States across the US have been in a ‘race to the bottom’ to grant more and more corporate tax loopholes and exceptions in order to lure corporations from other states to their state.

A recent New York Times survey showed that states are not only lowering their corporate tax rate to lure corporate headquarters and operations, but are granting corporations cash, free use of public buildings, exemption from property taxes, and diverse other ‘awards’ in a desperate attempt to bring jobs to their states from other states. The New York Times article estimated the cost in state corporate tax revenues at around $80 billion a year. In many cases the corporations take advantage of the ‘awards’ and then create few jobs or cease operations afterward anyways.

The $80 billion a year average since 2009 amounts to more than $300 billion in reduced state corporate tax revenues. That has occurred despite a cumulative budget deficit total among all 50 states of $581 billion during 2008-2012. In a sense then, more than half of the states’ budget deficits during the past four years may be attributable to corporate tax breaks, resulting in only 2% collected of the official 5%-10% state corporate tax. But instead of targeting a restoration of corporate taxation, most of the states have targeted reducing public workers’ pensions, benefits, and wages as the solution to their budget deficits.

Among the most egregious states lowering corporate tax revenues are Texas, which provides $18 billion a year in such concessions. Oklahoma and West Virginia have granted corporate tax concessions equivalent to one-third of their annual state budgets.

The industries and corporations that are the main beneficiaries of this ‘race to the bottom’ trend in state corporate taxation are oil & gas companies, film & entertainment, technology companies, and auto companies—the latter of which pioneered the trend back in the 1980s. Since 1985, auto companies have received $13.9 billion in state corporate income tax concessions. More than 267 auto plants have been shutdown in the US nonetheless.

The trend toward declining state income taxation continues to accelerate. A number of states have, and are proposing, to eliminate corporate income taxation altogether. Most recently, Louisiana, Kansas and Nebraska. The inter-state US corporate income tax ‘race to the bottom’ thus continues.

Solutions to the Corporate Tax ‘Race to the Bottom’

Solutions to the ‘Great Corporate Tax Shift’ are not economic rocket science. To address the ways in which US corporations today avoid paying taxes—state to state, country to country, and US federal—the following short list of measures should be legislated.

1. The State-to-State Corporate Tax ‘Race to the Bottom’

To avoid the state-state ‘race to the bottom’, an ‘Interstate Corporate Equalization Tax’ should be implemented. Corporations that move their (taxable) headquarters from one state to another should be required to pay the ‘losing’ state a fee equal to the difference in the two states’ corporate income tax for a period of three years into a special fund. Corporate subsidies and other ‘awards’ should be included in the fee calculation. The ‘gaining’ state should be required to deposit as well an equivalent amount of the corporate fee into the fund. All the funds from the corporate fee and state equivalent contribution should be deposited in a special worker benefits fund, administered by the losing state, to be used solely for supplemental unemployment, job training, and job relocation expenses for those workers who lost their employment when the corporation moved to the lower tax paying (‘gaining’) state.

2. The Country-to-Country Corporate Tax ‘Race to the Bottom’

To avoid the growing country-by-country corporate tax ‘race to the bottom’ that is occurring globally as well, measures are necessary to discourage US corporations’ avoidance of US taxes as result of shifting investment and jobs offshore. All current, numerous tax incentives that the US federal government grants corporations today to invest and shift jobs offshore should be immediately repealed. For example, US corporations should be eligible for the current investment tax credit only after the corporation has proven it has invested in the US. No US investment…no tax credit. Furthermore, the investment tax credit should be conditioned upon proving that 50% of the credit has been spent on accompanying US job creation associated with the investment. No US job creation…no tax credit.
Enforce the collection of foreign profits tax at a US effective corporate rate of 35%, not the current 2.2% rate. Companies that refuse to comply and continue to hoard their cash offshore in subsidiaries should be slapped with a rising progressive tariff on the goods they produce offshore and import back to the US until the foreign profits tax is fully collected. If they don’t pay your foreign taxes, then they can’t import back and sell your foreign made goods in the US.

Subsidiaries of foreign corporations operating in the US, with origins in those countries that engage in egregious corporate tax avoidance assistance—e.g. Ireland, Netherlands, Bermuda, and others—should be required to pay a supplemental corporate tax to the US federal government. Similarly, foreign corporations of those countries exporting their goods to the US should be required to pay an additional tariff on sales to the US.

US Multinational Corporations that practice ‘intra-company pricing’ designed to minimize their US based taxable profits, and to divert those taxable profits to offshore subsidiaries for the purpose of avoiding US taxes, should be considered as engaging in financial fraud, and thus subject to prosecution by the US Securities & Exchange Commission and other relevant regulatory bodies.

3. Select Measures Further Restoring US Federal Corporate Taxation

In addition to ending the corporate tax ‘race to the bottom’, both between US states and between countries, a priority short list of additional changes to federal US corporate taxation are also necessary. These include:

Make the ‘effective rate’ the nominal top rate for corporations. Corporations should pay an effective top corporate tax rate of 35%, not the actual 12% they do today. That means ending all corporate tax loopholes across the board except those that result in annually confirmed and proven US job creation.

All corporate depreciation allowances should be rolled back to definitions and standards in effect in 1980. All research & development corporate tax credits should be allowed only for R&D work shown actually conducted in the US, not by foreign US corporate subsidiaries.

Not least, for both US financial corporations and for ‘portfolio’ financial investments by US non-financial corporations, a financial transactions tax should be introduced that taxes stock and bond sales at 0.1% per value of the purchase for all stock purchases of 100 share or more; 0.5% for purchases of 1000 shares or more; and 1% for all shares of 10,000 or more. For bonds, a financial tax of $100 per each $10,000 value for Investment Grade corporate bond purchases, and $200 per each $10,000 for High Yield (Junk) Grade corporate bond purchases. A 1% tax on all foreign exchange trading by corporations. And a 1% tax on all third party derivative trading by corporations.

Collectively, these various measures would raise approximately $1 trillion a year, every year, eliminating all US federal deficits, as well as deficits for most US states. Their secondary effects would include re-directing the decades-long outflow of US corporate investment abroad and creating millions of jobs again in the US.

Jack Rasmus

Jack is the author of the 2012 book, ‘Obama’s Economy: Recovery for the Few’, published by Pluto Press and Palgrave. He hosts the weekly radio show, Alternative Visions, on the Progressive Radio Network. His website and blog are: http://www.kyklosproductions.com and jackrasmus.com, and his twitter handle, @drjackrasmus.

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In a contribution last week, it was shown how Corporate Taxes in America have been in decline now for more than three decades. Contrary to the drumbeat of corporate media throughout this year, and their false claims that US corporations are paying far more than their foreign capitalist cousins, US corporations pay an effective (i.e. actual) tax rate of only about 16-17%. That’s a combined US federal, foreign states, and US states ‘effective’ tax rate, only 2.2% of which represents the ‘effective rate’ paid on offshore earnings today.

The rising crescendo of demands for still more tax cuts for corporations by virtually all Republicans in Congress, and a good number of Democrats as well, is being whipped up in a joint effort to push through an overhaul of the US tax code. The timing is apropos. Midterm 2014 Congressional elections are approaching, and politicians once again begun to solicit campaign spending ‘indulgences’ (aka campaign spending contributions) from their corporate friends.

The tax code overhaul idea is also timely, this writer has previously argued, given the still unresolved budget-debt ceiling debates. Those debates were kicked down the road this past October 2013 and are due to come to a head January-February 2014 once again. Should the Republicans decide to agree to any of Obama’s current ‘smoke & mirror’ proposals to reduce some showcase corporate tax loopholes, that token reduction will almost certainly be accompanied by lowering the corporate tax rate in exchange. Obama has already proposed to do just that, reducing the top corporate tax rate from 35% to 28%. So the political stage is well set to ‘slip in’ the corporate tax and tax code overhaul discussions into the upcoming debates. The tax code overhaul discussions need not necessarily reflect the entire code. It could prove a ‘tax code light’, focusing primarily on the corporate income tax.

Senator Baucus’s $1.8 Trillion Multinational Corporate Gift

The ink was hardly dry on our last week’s contribution, ‘The Great Corporate Tax Shift, Part 1’, when Democrat Senator, Max Baucus, head of the Senate Finance Committee proposed last Tuesday, November 19, to “exempt much of the profits earned by American corporate subsidies in foreign countries”, according to a November 20, 2013 article in the New York Times.
Baucus’s proposal would in effect end all taxes on US Multinational Corporations earnings abroad, in exchange for what amounts to a $200 billion payment in back corporate taxes on those companies’ currently estimated more than $2 trillion offshore profits hoard. Baucus claims his proposal represents a 20% tax rate (compared to the current 35%). But $200 billion of $2 trillion looks more like a 10% tax rate to me.

The Baucus proposal, moreover, would mean the $200 billion is paid only slowly over the course of 8 years—thus leaving the companies to collect interest and reinvest the amount over the 8 year period to earn still more profits. And it’s likely that $200 billion would silently be dropped somewhere down the political road after 2016 when the public is not looking. However, what would remain permanent in the Baucus proposal is US multinationals wouldn’t have to pay a penny any longer on their earnings offshore that they kept there.

Amazingly, Baucus offered his proposal as a solution to discourage companies to divert their operations and jobs from the US to their offshore subsidiaries. But if they no longer have to pay taxes on offshore earnings, seems to me that’s a strong incentive to shift even more investment and jobs offshore, not less. Or, at minimum, to reinvest there the profits made there instead of repatriating the profits back to the US, pay the current US corporate tax rate of 35%, and invest the remainder in the US and jobs.

It’s not surprising that the response of the Business Roundtable, the premier big business lobbying arm, was warm to Baucus’s idea. It’s Vice-President, Matt Miller, noted “It’s good that they are continuing to have these discussions”, as quoted by the global business press source, The Financial Times. On the other hand, lobbying groups for the most egregious industries and corporations now hoarding the lion’s share of the $2 trillion offshore, want more.

In this following ‘Part 2’ contribution to the ‘Great Corporate Tax Shift’ theme, how multinational US corporations now get away with paying only 2.2% on their foreign earnings is explained. Keep in mind, the Baucus proposal would eliminate even that, replacing it with a one time $200 billion, paid over 8 years, in exchange for no more taxes on foreign earnings ever.

Gimme A ‘Dutch Sandwich’, with a ‘Double Irish’, & some Bermuda ‘On the Side’

Multinational Corporations have been engaging in a public relations full court press for the past two years, attempting to convince the public and politicians that the US corporate income tax is the highest in the world. They repeatedly point to lower official corporate tax rates throughout the advanced economies. It is true, most official corporate tax rates in Europe, Japan and elsewhere are lower than the US 35% official rate. But their corporate tax loopholes are nowhere near as generous as in the US. In addition, the ‘state’ or ‘provincial’ jurisdictions within many of these countries have higher official and effective corporate tax rates as well. Corporations pay more at the ‘state-province-district’ levels than the average effective rate of around 2% in the US.

The most telling rebuttal to US multinational corporate claims of US taxation at 35% as among the ‘highest in the world’ is that US corporations have been paying almost no tax on corporate profits earned offshore—while they have simultaneously been redirecting US earned corporate profits to their offshore subsidiaries to avoid paying US taxes as well. This game is made possible by ‘internal corporate pricing’ maneuvers. It works like this: charge the US operations high prices for goods made offshore and imported back to the US, so that there are little profits to book in the US. Then shuffle foreign made profits around to those countries with super-low tax rules and rates. Book the profits there and pay the lowest rates. Finally, refuse to pay the US foreign profits tax on even those reduced profits booked offshore.

The corporate pricing games that shift profits to offshore subsidiaries was made possible in large part by an IRS tax rule created early in the Clinton administration in 1995. This rule is referred to as the ‘Check the Box’ loophole. It enables multinational US companies to check a ‘box’ on its US tax forms that identifies a foreign subsidiary of the company as a ‘disregarded entity’ for purposes of paying taxes. The related ‘Look Through’ loophole, then allows the company to move profits between subsidiaries in its offshore operations.

Favorite places to shuffle foreign earned profits are Ireland, the Netherlands, and Bermuda. The Netherlands is preferred because it allows a company to avoid all withholding taxes. That’s called the ‘Dutch Sandwich’. Shuffle the profits there, and then on to Ireland with its 5-6% effective tax rate. Better yet, incorporate the company in Ireland in the first place and book all offshore profits there to begin with. Shuttle the profits through Ireland to Bermuda, where the effective rate is almost zero, and the combined loophole is called the ‘Double Irish’. Or how about a ‘Dutch Sandwich’ with a ‘Double Irish’?

It all sounds humorous but it isn’t. Apple Corporation last year avoided $9 billion in US taxes manipulating its profits in this manner. And remember, it’s not just actual profits earned offshore, but US de facto profits switched to offshore subsidiaries by means of ‘internal company pricing’, profits then shuffled around to low tax locations like Netherlands, Ireland, and Bermuda. Google Corp. is another clever manipulator of the arrangements, earning all its foreign income in Ireland, which its then routes through the Netherlands to avoid all withholding taxes. It thus employs a ‘Dutch Sandwich with a Double Irish’ to go.

This has all been going on since the Clinton years. The result by 2004 was the accumulation of more than $650 billion of U.S. multinational corporation profits in their offshore subsidiaries, retained there and not brought back to reinvest in the US or to pay corporate income taxes to the US government, as US politicians simply looked the other way and allowed it to continue.
During 2001-03 George W. Bush pushed a massive tax cut through Congress, involving tax cuts to personal incomes in general and in capital gains and dividend taxes for wealthy investors in particular. It has been estimated those tax cuts amounted to more than $3 trillion over the following decade, more than 80% of which went to the wealthiest US households. In 2002, Bush cut corporate taxes as well by hundreds of billions of dollars, in the form of new rules for accelerating corporate depreciation write offs. Depreciation write-offs on business equipment is another kind of corporate after tax profits that doesn’t show up in the latter totals. It is income that corporations ‘retain’, but must be used for subsequent re-investment in plant and equipment. But that reinvestment can occur offshore, not necessarily in the US. And so it has, as US corporations ‘foreign direct investment’ has surged since 2001, as investment in the US has stagnated.

The Bush administration then followed up its 2002 business tax cuts via depreciation acceleration, with another round of major corporate tax cuts in 2004. At the same time, in 2004, Bush declared a ‘tax holiday’ for multinational corporations on their foreign profits, now accumulated to more than $650 billion. The multinationals were then offered a sweet deal: repatriate some of the $650 billion back to the US and pay only a 5.25% official corporate tax rate instead of the official 35% rate. The precondition of the deal was that the repatriated funds had to be reinvested in the US to create jobs.

About $300 billion of the total was repatriated, but the effective rate paid was only 3.6%, not the even reduced 5.25%. And the money was not spent on investment and job creation in the US. Instead, it was used mostly to buyback stock and to finance mergers and acquisitions of competitors. This sweet deal set a precedent. Multinational corporations returned to the pricing practices loopholes noted above and continued to amass even greater profits. Today, the profits and cash hoarded offshore in non-taxable subsidiary ‘disregarded entities’ and shuffled around to Ireland and other places is no less than $2 trillion. The practices were allowed to continue under Obama in 2009 and again in 2012 with the latest ‘Fiscal Cliff’ tax deal of last January 2013. In 2012 alone, another $183 billion was added to the multinational corporate offshore cash pile.

For the past two years at least, multinational corporations have attempted to repeat the 2004 sweet deal they got from Bush. They got away with it before. Why not do it again? Instead of paying 2.2%, they want to pay nothing. This time on $2 trillion, instead of $700 billion. Baucus would have them pay 10% or $200 billion—though it’s unlikely anything near that would be collected over the 8 years they have to pay it. But even that is ‘too much’ to their liking. They want tax rules that in effect remove all taxes on US corporate income offshore income, by moving the US to what is called a ‘territorial’ tax system. That would result in an incentive to redirect even more US earned profits to offshore subsidiaries via ‘internal pricing games’. Today’s effective 12% US corporate tax rate would thus fall even further. That almost total elimination of the US Corporate Tax on offshore earnings would reduce US total federal tax revenues by $60 to $100 billion annually. Over 8 years, that amounts to more than $500 billion lost revenue—in exchange for ‘maybe’ $200 billion. A net loss of $300 billion, should the Baucus proposal be adopted. Equally important, it would introduce a major new and further incentive for Multinational Corporations to shift even more US jobs offshore.

Jack Rasmus
Jack is the author of the 2012 book, ‘Obama’s Economy: Recovery for the Few’, published by Pluto Press and Palgrave USA. He is host to the weekly radio show, ‘Alternative Visions’, on the Progressive Radio Network. His website is: http://www.kyklosproductions. He blogs at jackrasmus.com, and his twitter handle is @drjackrasmus.

Note: The full version of this article, ‘The Great Corporate Tax Shift’, complete with graphs and tables will appear in the December 2013 issue of ‘Z’ Magazine.

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Listen to my 11-06-13 Radio Show, ‘The Great Corporate Tax Shift’, on Alternative Visions at:

http://prn.fm/category/archives/alternative-visions/

or at:
alternativevisions.podbean.com

“Jack Rasmus discusses the ‘Great American Tax Shift’, shows how the Corporate Tax has been steadily declining for decades as a percent of federal revenues, percent of national income, and percent of corporate profits; why the Corporate Tax ‘effective rate’ is now 12%, not the official 35%; why corporations today pay state taxes of barely 2%, instead of official 5-10% rates, and only 2% on foreign earnings instead of 15-28%—for a total global real tax payment of 16%–not the 45%-50% corporate apologists claim. Jack explains how all this results in Corporate America now sitting on more than $10 trillion in cash and how that translates into income inequality trends and a global economy that is unable to fully recover from recession. Various myths about corporate taxes are also refuted (i.e. tax cuts create jobs, US corps have highest taxes in the world, corporations pay double taxes, etc.). And new corporate tax cut measures pending now in Congress in the Tax Code overhaul bill are explained.

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