How the Territorial Tax Cut Destroys Jobs

There is a little-discussed proposal that was introduced into the “fiscal cliff” discussions by the CEOs of the “Fix the Debt” campaign. This is for a “Territorial Tax System” idea that lets multinational companies off the hook for taxes on offshore profits. This plan is particularly dangerous to American wages and jobs — YOUR wages and job — as well as any American companies that don’t export their profit centers. This threat is not limited to the blue-collar jobs that have been disappearing, it also threatens the professionals, “knowledge workers,” designers, innovators and others who contribute to corporate profits here in the US.
The Territorial Tax proposal asks for no taxes on foreign profits of American corporations. This system would encourage and practically force companies to move profit generation (innovation, intellectual property, etc.) out of the US. This gives corporations an incentive to move everything that makes them money out of the country — every profit center, every job, every factory, every designer, inventor, etc.
This plan only benefits the giant multinational corporations — and helps them kill off even more American jobs and smaller businesses. And without those wages and taxes our infrastructure, schools, police and fire protections, and everything else here will decline even more.
If executives brought these American-company profits back to America now, disbursed it to shareholders or reinvested it in their companies — and paid the taxes due — this would be at least a $1.2 trillion boost to our economy. The taxes owed to We, the People wold help pay for our schools, etc., or help pay down our debt. But instead of just doing the right thing, this Territorial Tax Dodge System will add another layer of corporate game-playing, encouraging them to report even more of their profits as being made out of the US. It also lets the ones who have dodged taxes by holding cash offshore — and away from their own shareholders — get away with it. See this Citizens for Tax Justice report on companies that have been holding cash offshore — away from our ability to tax them as well as from their own shareholders, Which Fortune 500 Companies Are Sheltering Income in Overseas Tax Havens?

A new CTJ analysis of the financial reports of the Fortune 500 companies shows that 285 of these corporations had accumulated more than $1.5 trillion in overseas profits by the end of 2011, and there is evidence that a significant portion of these profits are located in tax havens.

In particular, our analysis shows that ten corporations, representing over a sixth of the $1.5 trillion in unrepatriated profits, reveal sufficient information to show that they have paid little or no tax on their offshore profit hoards to any government. That implies that these profits have been artificially shifted out of the United States and other countries where the companies actually do business, and into foreign tax havens.

A March Bloomberg report, Cash Hoard Grows by $187 Billion in Untaxed Overseas Profits also looked into specific companies that hide profits offshore (and away from shareholders) to avoid their corporate taxes.
The Institute for Policy Studies warns about the Territorial Tax in a report, The CEO Campaign to ‘Fix’ the Debt, A Trojan Horse for Massive Corporate Tax Breaks,

The 63 Fix the Debt companies that are publicly held stand to gain as much as $134 billion in windfalls if Congress approves one of their main proposals — a “territorial tax system.” Under this system, companies would not have to pay U.S. federal income taxes on foreign earnings when they bring the profits back to the United States.

The full report continues,

A territorial system would give companies additional incentives to disguise U.S. profits as income earned in tax havens in order to avoid paying U.S. income taxes.

[. . .] S&P 500 companies as a whole have nearly $1.5 trillion parked offshore, according to Citizens for Tax Justice. While some of these profits are offshore because a U.S. multinational corporation produced a product offshore and sold it to a foreign consumer, a significant share is there for the purpose of avoiding taxes.

Here’s how it works. The U.S. corporate tax code requires U.S.-headquartered corporations to pay a tax rate of 35 percent on their profits regardless of where in the world those profits are earned. But there are two important exceptions. First, U.S. corporations are granted credits for any taxes paid to foreign governments. Second, any profits deemed permanently reinvested offshore are exempted from U.S. taxes until and unless they are returned to the United States.

The report details ways that corporations shift profits out of the country.
David Cay Johnston talked about this idea on the Ed Show in May,

Well, what it would encourage companies to do is to take all their intellectual property that they haven`t moved and anything else they can out of country, so that they earn a dollar here in the U.S. and they show it to their shareholders, and then they may magically send it to the Cayman Islands and it disappears to the IRS.

So even if they are making things here in the U.S., they`ll be able to move profits out of the country by having their intellectual property out of the country. Secondly, if they find a place that has similar rules, then you move the jobs offshore and you can still earn tax free profits.

2004 – Been There, Done That, CUT Jobs

In 2004 corporate lobbyists got the American Jobs Creation Act passed, letting multinationals bring their foreign cash back at a special low rate. We allowed corporations to bring profits back to the U.S. at a tax rate of 5.25 percent, instead of the top corporate rate of 35 percent.
After bringing the profits back from the tax havens where they had been parked, the companies involved actually cut jobs. Alain Sherter, in Sure, a “Tax Holiday” on Overseas Profits Is a Great Idea — If You Hate America, looked into what happened and wrote,

The nonpartisan Congressional Research Service found that the companies that got the biggest tax breaks following the 2004 rate cut went on to eliminate jobs over the next two years. Instead of hiring, they mostly used the repatriated funds to repurchase stock or pay dividends — and to expand outside the U.S.
But it did provide a huge incentive to do even more offshoring of profits and jobs, because this scheme worked and the money came back in a tax holiday. So of course they are proposing to do it all over again.

Sherter points out this really does benefit a very few at the expense of the rest of us, including other companies,

Repatriation holidays also favor a handful of huge corporations at the expense of other companies, especially businesses without operations around the globe. In 2004, a total of five companies reaped more than one-quarter of the benefits from the tax holiday, while 15 firms got more than 50 percent. To pay for such a cut without raising the deficit, meanwhile, the U.S. would have to increase taxes on other U.S. businesses or make even deeper cuts in already tight federal spending.

Be aware of this Territorial Tax proposal. It is offered by the Fix the Debt CEOs, and it is entirely about reaping even more billions for the billionaires, at the expense of all of the rest of us and the country.

This post originally appeared at Campaign for America’s Future (CAF) at their Blog for OurFuture. I am a Fellow with CAF.
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