Corporations: Yes, We're Moving Abroad to Get Lower Tax Rates

Wednesday, August 29, 2012 by Common Dreams

U.S. corporations are continuing tax dodging practices to boost their profits by the millions by reincorporating abroad, an article The Wall Street Journal on Wednesday shows.

John D. McKinnon and Scott Thurm describe how 10 companies have moved or have announced plans to move their incorporation address oversees since 2009 in an effort to lower their effective tax rate.

Alexander Cutler, chief executive of Eaton, a Cleveland-based company that has reincorporated in Ireland, said, "We have too high a domestic rate and we have a thoroughly uncompetitive international tax regime." The move is saving the company $160 million a year.

Another company that moved is Ensco, now saving more than $100 million a year in tax dodging.

Yet while companies complain of a burdensome corporate tax rate of 35% and say that was a motivating factor behind their reincorporation oversees, very few companies actually pay that rate.

A Reuters report from May describing the Eaton reincorporation lays this out as well:

The top U.S. corporate tax rate is 35 percent, the highest in the world, though few companies actually pay that much due to abundant loopholes that lower their effective rates.

The Eaton-Cooper deal comes as the U.S. Congress inches toward a broad corporate tax code overhaul. The deal could add momentum to that effort, with Republicans arguing that high U.S. tax rates can drive companies to drastic measures.

In what could be a painful drain on the Treasury over time, at least seven U.S. companies in recent months have chosen through acquisition or merger to renounce their U.S. corporate citizenship by relocating to Ireland, the Netherlands, Switzerland or other lower-tax countries.

"There have been more of these in the last two months than in the five years before," said Bob Willens, an independent tax analyst and publisher of The Willens Report.
The Eaton-Cooper deal will lead to $160 million in annual tax savings for the combined company, even though Eaton in practice already pays far less than 35 percent. That is thanks to its foreign subsidiaries, many of which are already in low-tax countries such as Luxembourg and the Cayman Islands.

In fact, many companies are paying a negative tax rate, as data from Citizens for Tax Justice show.

While there has been talk of the deficit at the Republican National Convention going on now in Tampa, there has been no talk of the impact closing corporate tax loopholes would have on the deficit.

“These big, profitable corporations are continuing to shift their tax burden onto average Americans,” said Citizens for Tax Justice director Bob McIntyre. “This isn’t fair to the rest of us, it makes no economic sense, and it’s part of the reason our government is running huge budget deficits.”

“Getting rid of corporate tax subsidies that cause such widespread tax avoidance ought to be a key part of any deficit-reduction program,” said McIntyre. “As a bonus, revenue-raising corporate tax reform would make it much easier to fund the investments we need to improve education and repair our crumbling roads and bridges — things that would actually help businesses and our economy grow.” 

Obama Plans Corporate Tax Cut In Year Of Record Profits

Thursday, May 5, 2011 by The Nation

by Allison Kilkenny

 

As nationwide budget protests continue this week, Treasury Secretary Timothy Geithner is prepared to unveil the Obama administration’s plan to lower the top corporate tax rate from the current 35 percent to less than 30 percent, and as low as 26 percent.

In order to pay for the cuts, the proposal calls for closing loopholes and slashing exemptions. Politico reports that Geithner has already begun meeting privately with CEOs, academics, labor unions, and liberal and conservative think tanks, and his aides say he is “encouraged by the response.”

Part of that optimism stems from the fact that Democrats and Republicans are both allies of the business world.

One top business lobbyist, speaking on condition of anonymity, said corporate tax reform should be “the easiest piece” of a complex fiscal bargain “because you have people in both parties in the business community.”

Meanwhile, the number of people who filed new applications for jobless benefits leaped 43,000 last week to 474,000, the highest level in almost nine months.

The surge in unemployment comes at a time when U.S. corporations are more profitable than ever. The end of 2010 saw some of the biggest gains in the business world, according to data from the federal Bureau of Economic Analysis. Corporations reported an annualized profit of $1.68 trillion in the fourth quarter, up from the previous record of $1.65 trillion in the third quarter of 2006.

In the first quarter of 2011, Exxon-Mobil, the world’s biggest and most profitable corporation, raked in $10.7 billion. That’s a 69 percent increase over the same quarter last year, and the highest quarterly profit since 2008. This is happening during a time when citizens are searching underneath the couch cushions to scrape together enough change in order to fill their gas tanks so they can go file for unemployment benefits.

Exxon also happens to be one of US Uncut’s top targets. The oil giant uses offshore subsidiaries in the Caribbean to avoid paying taxes in the United States. The company paid zero U.S. income tax in 2009, while enjoying billions in taxpayer-funded subsidies and its CEO’s total compensation reached over $29 million.

Now, in addition to raking in record profits by sheltering revenue in foreign tax havens, Exxon and its Fortune 500 comrades, rest on the brink of enjoying more sweeteners in the form of tax breaks.
Of course, tax havens are only one part of a rigged system that allows corporations to make bank during economic recession. There are also the practices of government subsidies, (read: taxpayer subsidies) outsourcing jobs, and buying off politicians that allow top corporations and their CEOs to flourish while one in four American children survives on food stamps.

While I was watching CNN this morning, a talking head made the comment that the corporations were forced to “go lean” during the recession, but now that the economy is recovering, they refuse to hire simply because they like being lean! Why wouldn’t they? Corporate America is enjoying record profits, so there are no incentives to hire an expensive American worker (with their pesky unions’ minimum wage demands, rational work schedule, and health benefits) when they can outsource the same job for cheap labor overseas.

Another alternative is to just bust unions and treat workers like they’re employed in the third world, a path chosen by Wal-mart, which secured a spot at the top of the Fortune 500 list released today.
Then there’s the problem of corporate lobbying and bribery. Corporate America dominated Washington’s lobbying spending in the first quarter of 2011, according to a report from the Center for Responsive Politics. The US Chamber of Commerce spent just over $17 million in the three-month period. Next was General Electric (the “King of Tax Dodgers”) with just over $9 million, and AT&T with spending just over $6.8 million.

Corporations learn to grease the wheels early, which is why their financial support of political candidates is so bipartisan. Before the presidential election, John McCain received three times more money from the oil industry than President Obama. However, Obama received more in campaign cash than McCain from the employees of some of the biggest oil companies: Exxon, Chevron, and BP, three companies that routinely grace the top echelons of the Fortune 500 list.
It’s no wonder that the big companies with the most money buy the most access and win the most favorable pieces of legislation.

The Obama administration is considering these corporate tax cuts during a time when almost every state is experiencing some kind of budget cut protest. Teachers, police, fire-fighters, unions, students, and their supporters have occupied state Capitols and campuses to demand a one-tier America where everyone (citizens and corporations, alike) sacrifice during times of fiscal crisis.

New White House Battle: Corporate Taxes

(More evidence that Obama's administration is cozily in the pockets of corporate special interests. Between legislating for the people or the corporations, he will side with corporations every time. We've seen that lowering taxes in no way persuades corporations to hire more employees. It's just more profit straight into their pockets. Especially if they approve the corporate tax holiday.--jef)

Wednesday, May 4, 2011 by Politico.com
by Mike Allen

The Obama administration is quietly gearing up for a high-profile launch in May or June on what may turn out to be the most heavily lobbied issue of the year: corporate tax reform.

“This will be a feast for K Street,” said one top aide.

At a time when the two parties can find little common ground legislatively, strategists on both sides tell POLITICO they hope to advance their jobs agenda by finding a way to lower corporate tax rates.

“This would send a reassuring signal to the economy, and is something both parties should support in theory,” a senior administration official said, predicting “a numbers game” in which companies and industries ferociously litigate the fine points.

Treasury Secretary Timothy Geithner plans to ignite the debate by unveiling a white paper that advocates lowering the top corporate tax rate from the current 35 percent to less than 30 percent and as low as 26 percent, according to aides. The proposal is likely to fall between 26 percent and 28 percent.

To pay for that, the proposal will call for closing loopholes and slicing exemptions. The two main ones are a tax deduction for domestic manufacturing and accelerated depreciation for capital equipment.

Aides say Geithner will personally dive into the negotiations. House Speaker John Boehner also sees this as a ripe area for bipartisan cooperation. And House Budget Committee Chairman Paul Ryan included corporate tax reform in his budget, which has been adopted as the GOP’s fiscal blueprint.

Aides predict that corporate tax reform is unlikely to pass as a stand-alone bill but could serve as a sweetener as part of a deal on a 2012 budget or a longer-term plan for reducing the deficit. There is unlikely to be enough time to include it in haggling over an increase in the debt ceiling, which will be needed this summer.

Agreeing on how to rework corporate taxes will be tough, and many aides remain privately pessimistic. But the two sides’ willingness to try to find common ground is a notable departure from their stances on most other contentious issues on the Capitol Hill docket.

Geithner has already begun his campaign with a series of closed-door meetings with CEOs, academics, labor unions and liberal and conservative think tanks. Aides say he was encouraged by the response. At the White House, Jason Furman, principal deputy director of the National Economic Council, is working the issue.

“This won’t be like health care, where you put out specific ideas people have to take or leave,” an administration official said. “We’ll be more than willing to make trade-offs — to look at alternatives that lower the rates and broaden the base,” a euphemism for cutting back on loopholes.

One top business lobbyist, speaking on condition of anonymity, said corporate tax reform should be “the easiest piece” of a complex fiscal bargain “because you have people in both parties in the business community.”

“There’s definitely demand,” the lobbyist said. “Politically, this can get done in a time of economic stress because it is clearly in the frame of helping American businesses compete and innovate and adjust.”

Aides in both parties warned, though, that they see notable hurdles. Some House Republicans are pushing for individual tax reform at the same time, with one top aide contending the administration “is leaving the American family out of the picture.”

“Their interest seems to be big business and whether they can win some corporate friends” ahead of the 2012 reelection campaign, the Republican said.

Opposition is likely to break down regionally and by industries, rather than by party or ideology. Small- and medium-sized businesses without sophisticated tax planning are likely to benefit, while highly international conglomerates might wind up paying higher rates under reform.

Mining does well under the current system. So opposition may crop up in the politically sensitive states of coal country. Technology and pharmaceutical companies see reform as a vehicle for a temporary tax break on overseas profits they bring back to the U.S., known as a repatriation tax holiday. So many big California companies may be for it.

One possibility for the administration white paper is a move toward a more territorial system that is consistent with taxation schemes in the rest of the developed world, focused on taxing profits earned in the U.S. Such a provision would probably include a transitional measure that allowed companies to move profits earned abroad back to the U.S. at a lower tax rate — say, 10 percent.

A Senate Democratic aide said the administration’s plan for a corporate tax overhaul is “definitely viable, but only as some type of grand bargain that includes the rest of the tax code and potentially entitlement reform and spending cuts.”

“There is bipartisan support for corporate tax reform, but it’s the low-hanging fruit,” the Democrat said. “They’re going to want to use it as a lure or incentive to tackle the harder problems. It’s the bunny that runs out in front and gets all the dogs racing.”

Corporate Tax Loopholes

Start With the Drug Companies
By DEAN BAKER

The marginal tax rate for corporations is 35 percent. This is one of the highest tax rates among wealthy countries, which makes it a great talking point for anti-tax conservatives. However, corporations typically pay less than a quarter of their profits in taxes, making the U.S. a relatively low tax country.

Having a high tax rate and then filling the code with loopholes is a way to support the loophole industry, it is not good economic policy. It makes much more sense to lower the rate and eliminate the loopholes, so that the marginal tax rate is also the rate that businesses actually pay. Ideally this should be done in a way that raises some additional revenue, since we will need more money once the economy recovers.

There is a long list of ill-conceived tax breaks that have been put into the tax code over the years, but the best place to start is with the drug industry's credit for research. As a result of this and other tax breaks the pharmaceutical industry pays just 5.6 percent of its profits in taxes. This puts it just above the biotech industry, which pays 4.5 percent of its profits in taxes.

It is bad enough that the drug industry manages to earns its tens of billions in annual profits largely tax free. However, much of this research spending does little to advance public health. Much of this money goes to develop me-too drugs of little medical value. Some of the research is effectively marketing, as the drug companies try to promote the use of their drugs under the auspices of doing post-approval trials.

The result of this system is that we often end up paying hundreds or even thousands of dollars per prescription for drugs that would sell for just a few dollars in a competitive market without patent protection. The government already spends more than $30 billion a year on bio-medical research through the National Institutes of Health. It would make much more sense to directly finance the research by the industry, eliminate the tax breaks and let all drugs be sold as generics at Wal-Mart for $4 per prescription.

Obama Likely to Pursue Corporate-Tax Cut

by David Wessel
Wednesday, December 29, 2010 by The Wall Street Journal

All signs point to President Barack Obama pursuing far-reaching changes to the corporate income tax, seeking to lower one of the highest statutory corporate-tax rates in the world by eliminating deductions, credits and loopholes.

If he proceeds, the administration will insist that any changes raise as much revenue as the existing, 35% corporate tax. That's to constrain those who want to lighten the business-tax burden and those who want to get more money from business. But the constraint means that for every company that saves a dollar, another will pay a dollar more.

The White House says no decisions have been made and that the president has yet to have a session with his economic team devoted to corporate taxes. But Treasury tax technicians are sifting through options, CEOs are buzzing and the president has voiced his druthers: "We would be very interested," he said in October, "in finding ways to lower the corporate-tax rate so that companies that are operating overseas can so do effectively and aren't put at a competitive disadvantage." In a recent NPR interview, Mr. Obama talked about "a conversation over the next year" aimed at "simplifying the system, hopefully lowering rates, broadening the base."

Any Obama pitch, perhaps in the State of the Union, will be that corporate-tax reform will make America "more competitive," induce more companies to invest here, reduce costly complexity and improve long-term growth prospects. Truth be told, this won't do a whole lot to boost growth, but this is one of the options that is free and doesn't widen the budget deficit. Congressional Republicans say they're at least interested in talking.

Unlike income and payroll taxes, the corporate tax has been shrinking. From 3.8% of gross domestic product, the value of goods and services produced in a year, in the 1960s, it was down to 2% of GDP before the recent recession. "The corporate tax is a shadow of its former self," Congressional Research Service economist Jane Gravelle has said. It's largely a big-company tax: Half of all business profits go to entities organized to be taxed as individuals, a way to pay less in taxes; 85% of corporate income taxes are paid by 0.5% of companies, fewer than 10,000 in all.

In the past 25 years, the corporate tax has grown barnacles, some crafted to encourage investment, others narrow provisions with little economic merit. With the capitulation of Japan and the U.K., the U.S. is the only major economy that tries to tax multinationals on world-wide income instead of profits made at home, an unsustainable perch. Although various deductions mean most companies pay far less than the 35% statutory rate, most estimates suggest that the actual U.S. federal-state corporate-tax rate in ordinary times (when the government isn't offering the temporary investment tax breaks it is now) is higher than in many, not all, other big countries. Several others, most recently Japan and Canada, are moving to cut corporate rates, which could put the U.S. at a disadvantage at a time when capital moves across borders with increasing ease.

Before the financial crisis, the Bush Treasury was eyeing the corporate tax, arguing that it distorted decisions, fostered inefficiency and cost business $40 billion a year in compliance. Mr. Obama's Presidential Economic Recovery Advisory Board (Perab) picked up the baton, saying in August that the current corporate tax has "deleterious economic consequences," encourages borrowing and induces investment "for tax reasons rather than for reasons of economic efficiency."

In short, the corporate income tax has few defenders. But changing it without losing revenue is challenging. Each percentage-point cut in the existing corporate tax reduces revenues by about $120 billion over 10 years. Closing a few loopholes won't do enough to reduce the rate significantly: Taxing credit unions as corporations yields $19 billion over 10 years, for instance; taxing Blue Cross/Blue Shield yields $8 billion.

To make this worth doing, the rate probably needs to fall toward 25%. That means big changes. Take the 2004 tax break for "domestic production," described as a way to boost manufacturing but so broadly defined that it covers hamburger making. If it were eliminated, the corporate tax rate for all companies-from Wall Street to the Rust Belt-could be reduced by 1.4 percentage points. But to the one third of companies that get the tax break, it shaves the rate by 3.5 percentage points. So their taxes would go up unless some other popular deductions are eliminated, such as accelerated depreciation (which allows companies to write off investments for tax purposes more quickly than for accounting purposes).

Basically, there's a trade-off: Fewer tax breaks for companies to do what Congress has been convinced (either by economists or lobbyists) they should do, versus a lower tax rate. Deeper rate cuts may mean bigger changes, perhaps limits on the interest on debt that companies can deduct or forcing big businesses now outside the corporate tax to pay it.

Deficit hawks will say any savings should reduce debt, not tax rates. Some executives will say just cut the rate, forget the base-broadening. Some liberals will object to shielding business from paying more. And every loser will lobby hard. Ultimately, Mr. Obama likely will try to make this a problem for big business: You want lower rates, he'll say, find us a way to pay for it.

Who Ultimately Pays the Corporate Income Tax?

By UWE E. REINHARDT | JULY 23, 2010

I ended last week’s post by asking whether anyone knows which human beings ultimately pay the corporate income tax.

An intuitively appealing answer is that the tax is levied on profits, which are a return on capital invested in a corporation. Therefore, those who made that investment — the shareholders — absorb the tax fully in the form of a lower after-tax return on their investments.

That impression would be reinforced by the short-run, partial-equilibrium model of the individual company that we sometimes trot out in freshman economics courses.

In the partial-equilibrium model, the company’s capital stock is assumed to be fixed in the short run. Imposing or raising a tax on the profits will not change the company’s decisions on prices and production, because to maximize after-tax profits the company would take the same steps as to maximize pretax profits.

But economics professors quickly add that all bets are off in the longer run, when the company’s capital stock relative to the input of labor can change and when the owners of investable funds can decide whether to invest their money at home or abroad or in enterprises not subject to corporate taxation.

General-equilibrium models accommodating this wider view of the economy and the longer run go much beyond the compass of a freshman course and show that who actually pays the corporate income tax — the owners of capital or labor — is driven by a number of factors in complicated ways that elude simple intuition.

A fine review of these extended models can be found in Jennifer Gravelle’s recent paper, “Corporate Tax Incidence: Review of General Equilibrium Estimates and Analysis.” A broader review of the economic literature on all facets of the corporate income tax, not just its incidence, can be found in a paper by Jane G. Gravelle and Thomas L. Hungerford, “Corporate Tax Reform: Issues for Congress.” Be warned: while both papers avoid formal mathematical modeling, they might be a tough slog for anyone who did not major in economics in college.

The models in question typically divide a country’s economy into a corporate sector (the “taxed sector”) in which businesses are treated and taxed as if they were individuals, a concept known as legal persons, and another “non-taxed sector” in which business entities are not taxed as legal persons. Furthermore, the models can be for either a “closed economy” that does not trade goods or services and investable funds with the rest of the world or an “open economy” that engages in trade and financial capital flows with other countries.

Looking at the open-economy model, exactly how corporations shift the corporate tax either to labor or to the investors in the company, or to both in some proportion, depends upon the interplay of a number of factors, the most important of which are:

1. the relative ease with which investable funds can be shifted to other countries and how responsive such capital flows are to changes in the after-tax rate of return to capital in the taxing country;

2. how easy it is in the taxing country to substitute imported goods and services for all domestically produced goods and services;

3. how easy it is in the taxing country’s taxed and untaxed sectors to substitute labor for capital, and vice versa, in the domestic production of goods and services;

4. the relative capital intensity of production in the taxed and untaxed sectors of the taxing economy;

5. the size of that economy relative to the rest of the world’s economy. It matters, for example, whether the country is small, like Ireland, or large, like the United States.

The earliest formal general equilibrium model, published in 1962 by a University of Chicago economist, Arnold C. Harberger, in the Journal of Political Economy, assumed a closed economy. In that model, the burden of the corporate income tax ultimately fell entirely on the owners of capital.

When the model was modified as an open economy in which capital in the taxed country can escape by flowing abroad to untaxed or lower-taxed countries, some or all of the burden of the corporate income tax shifted to labor. Under the assumption of perfect international capital mobility and perfect substitutability of imported goods and services for all domestically produced goods and services, labor would then bear the entire corporate income tax, because labor is the only immobile factor than cannot escape the tax.

Other modeling efforts since that time, or econometric estimates inspired by these models, have ranged between these extreme incidence models.

Economists are divided on the issue. Some (including Gregory Mankiw) are persuaded that the corporate income tax ultimately falls mainly on labor, rather than on the presumably wealthier owners of capital. One can actually make a case for cutting the tax in the name of a more progressive income-tax structure, which should appeal to voters and politicians left of center.

Other economists, including the authors of the surveys cited above (Jane Gravelle, Jennifer Gravelle and Thomas Hungerford), are persuaded by the available empirical evidence on the five factors I note that the burden of the corporate tax ultimately rests mainly on the owners of capital. That also appears to be the operative assumption of the Congressional Budget Office, the Treasury and other agencies when they analyzethe distributional impact of various forms of taxation.

So, given that even economists cannot agree on who actually bears the burden of the corporate income tax, why not abolish the tax altogether and instead tax human beings directly? The arguments against such a move are twofold.

First, even bringing in only 12 percent or so of total federal taxes, the corporate income tax represents the third-largest source of federal revenue and could not easily be replaced with an alternative source, especially in these times of fiscal pressures.

Second, if the profits of corporations were not taxed, the corporate form of enterprise would become one more major tax shelter through which wealthy people could shield their income from taxation. That probably is the main reason why abolishing the corporate tax has never had any political traction, in the United States or abroad.