Republicans in the Senate have made it clear that they are not fans of President Obama’s proposals to close international tax “loopholes.” Specifically, Senate Minority Leader Mitch McConnell (R-KY) decried the proposal, claiming that, “Amount to a tax increase during a recession, which would likely drive jobs overseas.”
Of course, the Obama administration is painting the proposal in the exact opposite light. The administration claims that if the cost of doing business abroad was made tax neutral, more companies would do more of their business in the US. Obama says that the current structure “[i]s a loophole that lets subsidiaries of some of our largest companies tell the IRS that they´re paying taxes abroad, while telling foreign governments that they´re paying taxes elsewhere, and then they avoid paying taxes anywhere.”
And how much money are we talking about? In 2004, US multinational companies reportedly earned about $700 billion (with a b). They paid tax of $16 billion on those earnings. That works out to a 2.29% tax rate. Compare that to the lowest corporate tax rate of 15% for US companies earning income inside the company (and going up to 38%).
Interesting, no?
But, of course, these are multinational companies who are thriving and not relying on US taxpayers, right? Capitalism at work, right?
Nope. You know who is relying on those tax loopholes? The very companies that you and I are bailing out. Banks like Bank of America and Citicorp have each created more than 100 non-US tax-paying, off-shore subsidiaries (Citicorp has more than 400). That’s right. They’re using US tax dollars to pay bills when they’re maybe not even paying their fair share.
I say maybe because “fair” is what’s really at issue here. Is the plan fair? Tech companies say no – they’ve been some of the loudest critics of the plan. In fact, the Silicon Valley Leadership Group has gone on record as saying that its members found it “surprising to be construed in the same way as tax cheats.” These tech companies claim that these new regulations will force them to rethink the way that they do business – and no wonder. On a recent list of 50 companies who pay the least in US corporate taxes, tech companies like Apple and Yahoo constituted almost half – 22 – of the list. This, of course, makes sense, as it’s easy to move those businesses offshore.
Numbers aside, the Silicon Valley Leadership Group does have a point. Stashing billions of dollars offshore and not reporting it to the IRS is illegal. Using existing tax laws to your advantage is not. It’s very, very legal. It’s one of the things that we tax professionals do: advise how to use the law to your advantage.
So tossing multinational companies into the same pile as tax cheats isn’t fair. We might not like it. But it’s not fair.
On the other hand, perhaps paying 2% in earnings isn’t fair either.
Like Sen. McConnell, I have no real answers. I like the direction we’re moving, to try and level the playing field to bring US jobs back home. As someone who saw her dad’s job more or less be moved to Mexico (thanks, DuPont), I understand that we need to do something to keep US jobs in the US. I just don’t know that this is the way to do it. Your thoughts?
This legislation isn’t going to be a cure-all for anything — except to “catch” corporations that use existing tax laws to greatly reduce, or even eliminate, their US income tax obligations. By “leveling” a particular playing field, it will “repatriate” some tax revenues and may well lead to corporate rethinking about outsourcing jobs overseas.
Certainly it is annoying to discover that many of the firms that we’re “bailing out” are using these same laws to “evade” taxes. Perhaps one side benefit of all the TARP and other bailouts is that it focuses media attention on these companies and exposes to the general public some of their inner workings that heretofore nobody paid much attention to. Bonuses are another example. Maybe someone will note that many of these outfits still are paying dividends to their stockholders; I personally think that a condition of the bailout should have been to reduce dividende to a penny a year (there are technical reasons why it shouldn’t be zero). The stockholders’ money should be used to repair the business and not to drive it further in the hole.
To get back to the subject at hand, I approve of this legislation, although there should be something in there to protect those (if any) who have “legitimate” reasons to get the tax break. Don’t throw the baby (if there is one) out with the bathwater.
The number of subsidiaries doesn’t necessarily correlate with the amount of taxes avoided. I suspect that the smaller number of subsidiaries used by technology companies overseas lead to much higher earnings, and thus much larger amounts of taxes avoided.
But it still seems kind of odd that we would tax money earned abroad that’s mostly sent — and spent — in the US. If that money comes back to us as dividends, it’s going to be taxed at 15%. The US government is basically getting a 15% royalty on wealth produced outside the US, just because the wealth producers started here! Trying to collect even more seems greedy and counterproductive.
Solution? Drop the corporate tax rate even more. Corporations don’t pay taxes! The people that buy their products do! You want industry and jobs, cut corporate taxes, more hires, more people will start businesses and hire. And get rid of income taxes on individuals – it’s unconstitutional, our founders knew what income taxes did to societies, let’s give them a little credit. Facts are we would all be back to work and making more without it, and government could shrink enough and you and I wouldn’t notice a thing if the right areas were cut.
I doubt that 2% corporate tax has any credibility. That’s 2% US tax. Most other countries have their own taxes, especially if BoA is operating there.
Get ready for more job losses.
Quick note: while I agree that the 2% rate is somewhat skewed, most companies who put subs offshore do so in order to evade taxes. They choose low tax – or no tax – havens. I used to work for a trust company and have quite a bit of familiarity with offshore trusts and subs.
Solution – get rid of the US worldwide income tax net and move to a territorial system. US companies operating abroad would no longer be able to deduct foreign expenses against US source income. You also eliminate foreign tax credit arbitrage schemes through the blending of income earned in high and low tax jurisdiction. Seems to be compatible with the capital export neutrality standard.
Keeping it simple. Let’s see if I understand what the Democrats under Obama’s leadership are saying:
Coca Cola you do not pay enough income taxes. We are going to make you pay more. Coca Cola pays more in taxes, and what happens to the price of a Coke? Who was it, Mr Obama, you said wasn’t paying enough?
Keeping it simple. Let’s see if I understand…… Companies that are getting the bailout aren’t paying their fair share of taxes. Companies that are getting the bailout, aren’t making any money, that is why they need the bailout. So they need to get a larger bailout so they can pay more in taxes. They pay the US Government more in taxes so they can get more in a bailout?