Tax Holiday Generates Holiday Gifts For Big Multinationals

Have you heard about the “tax holiday” idea? The idea is to let corporations bring overseas profits back to the United States at a very low tax rate. These overseas profits were made in various ways, including schemes to move factories and jobs out of the country in order to avoid paying taxes here. With a “tax holiday” they would … well … get to bring that money back and pay even less in taxes, rewarding them for the offshoring and tax dodging. We did this in 2004 and it cost the country a lot of jobs but made the rich even richer. So of course they want to do it again.
This is a test of our Congress. Will they continue to do the bidding of the top 1% and reward offshoring and tax dodging, even as more and more people are in the streets demanding they instead start doing the bidding of the 99%.
What Is A Tax Holiday?
Companies that report profits outside of the US don’t have to pay taxes on that money unless they bring it into the US. This encourages some companies to engage in various schemes that close factories and lay off workers here in order to report profits outside of the country. They use shell companies, foreign subsidiaries, post office boxes in tax havens as “headquarters,” etc. Other companies make a lot of money by making great stuff and selling it or providing great services. This money builds up and naturally owners want to bring it back here so they can live it up even more than they do. They could just bring it back and pay taxes (some do) but some are asking Congress to give them a “repatriation tax holiday,” letting them bring the money back (“repatriate” it) at a much, much lower tax rate than they would usually have to pay.
Of course, we are in a jobs emergency so they claim that giving even more money to those top 1% “job creators” is a good thing because it will “create jobs.” If we were in a green cheese emergency they, of course, would call them selves the “green cheese creators” and say that giving them this huge holiday gift would “create green cheese.”
They Tried It Before — FAIL
In 2004 Congress passed a tax holiday bill named the “American Job Creation Act of 2004.” The big multinationals promised that they wiould use the money to “create jobs.” (Have we heard that somewhere before?)
The Institute for Policy Studies looked at the results of the 2004 tax holiday and found that “their holiday didn’t just fail to create the promised jobs. Their holiday enriched corporations that actually destroyed jobs in the months right after they received their tax windfall.” IPS found that 58 multinationals who used the “American Job Creation Act of 2004” tax holiday not only immediately laid off tens of thousands, they continued laying off, and laid off close to 600,000 workers between 2004 and now. From the IPS summary of the study,

One government study looking at the first two years after the repatriation windfall found that 12 of the top recipients laid off more than 67,000 American workers. These firms collectively brought back home more than $100 billion …

The companies that gained the most from the tax holiday actually cut jobs, on top of that they used the tax gift money to buy back their own stock, increasing its value, and pay out dividends, both thereby enriching executives and shareholders.
Why Is This Even Being Discussed?
Why is such a bad idea even being discussed today, not to mention in a bill entertained by Congress? Well, why else? Nation of Change reprints iWatch’s definitive tax-holiday post by Aaron Mehta and John Aloysius Farrell, Wealthy Corporations With a Trillion Dollars Stashed Offshore Lobby For a ‘Holiday’ From U.S. Taxes, and in it we find the (usual) answer,

A number of trade groups and corporations that would benefit have joined in a coalition called WIN America . New lobbying disclosure reports show that the group and its member firms have spent millions of dollars, and employed dozens of lobbyists, to press for the tax break, according to an analysis.
[. . .] WIN spent the first 9 months of this year actively lobbying for a repatriation bill in Congress. It spent $380,000 to hire two firms (Cauthen Forbes & Williams and Capitol Counsel LLC) and target lawmakers with a total of eight lobbyists. Among the lobbyists hired directly by WIN are several people with strong ties to Congress:

  • Jim McCrery, a former Congressman who represented Louisiana’s 4 th district until 2009.
  • Drew Goesl, who served as chief of staff for Rep. Mike Ross and communications director for Sen. Blanche Lincoln; Ross is a co-sponsor of the House bill.
  • Tucker Shumack, a former legislative assistant for Sen. John Isakson, a co-sponsor of the Senate bill.
  • Dena Battle, a former legislative director for Rep. Dave Camp, who as head of the powerful Ways and Means Committee has sway over tax policy in the U.S.
  • Jeff Forbes, a former staff director on the Senate Finance Committee.
  • Libby Greer, a former chief of staff for former Rep. Allen Boyd.
  • Millions of dollars lobbying… says it all.
    Where Are We Now?
    There is plenty of opposition being voiced. A strong New York Times editorial, No Holiday, make the case against this holiday gift,

    Big business has clearly decided that the economic crisis is too important to waste. While Washington debates how to create jobs and cut the budget deficit, major corporations — read major campaign contributors — are pushing Congress for an enormous tax cut on corporate profits. Lawmakers seem all too eager to grant their wish.
    [. . .] These days, corporations are flush with $2 trillion in cash that is not being used for hiring. As long as the economy is weak and consumers aren’t spending, tax cuts will add to the cash pile, not create jobs. A tax holiday also would add to the deficit, in part because companies rush to bring money home, rather than repatriating the earnings over time at the usual rate.

    At the Center on Budget and Policy Priorities blog, Chuck Marr writes in, Corporate Tax Holiday Would Be a Costly Mistake,

    A well-funded corporate lobbying campaign is pushing Congress to allow multinational corporations to bring profits held overseas back to the United States at a temporary, bargain-basement tax rate.
    …Congress tried this in 2004 and it proved an embarrassing failure. Firms not only failed to use the “repatriated” funds to boost their U.S. investment and hiring, many of them actually laid off thousands of U.S. workers.

    Marr also writes that this tax holiday, following the 2004 holiday, would make tax holidays an expectation, and that,

    … large revenue losses in later years would more than wipe out those gains as corporations shift more investments, profits, and jobs overseas in anticipation of yet another temporary holiday.

    Yes, anticipation of the next tax holiday. And the one after that.
    Even .. Heritage???
    In a shocker of shockers, Heritage Foundation agrees. (The check from the multinationals mush have gotten lost in the mail!) WSJ: Heritage: Repatriation Tax Holiday Wouldn’t Create Jobs,

    Giving U.S. companies a tax break for bringing home profits held overseas likely won’t create more jobs or spur domestic investment, an influential conservative think tank will argue in a report to be released Tuesday.
    In a break from many Republican lawmakers and a host of major U.S. companies including Google Inc., Apple Inc., Pfizer Inc. and Microsoft Corp., the Heritage Foundation said in a new study that a repatriation tax holiday would not motivate companies to hire new workers.

    Here are Jared Bernstein and Chuck Marr discussing whether Congress should give this holiday gift to the top 1% and their giant multinationals:

    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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    Lobbyists Admit Corporate Tax “Holiday” Didn’t Work, But Demand It Again

    This post originally appeared at Campaign for America’s Future (CAF) at their Blog for OurFuture. I am a Fellow with CAF.
    The usual suspects are trying to sell us on yet another scheme to keep from paying their taxes. This one is called a repatriation tax holiday—a huge cut in the tax rate on money companies are holding outside of the country. We did this before and it didn’t work out so well for us, so of course they want to do it again.
    Multinational corporations hide profits in offshore shell companies to avoid taxes. Here is how the scheme works:
    One shell company manufactures in China or another low-cost country, sells the products to a shell company “based” in a tax-haven like the Cayman Islands at a low price so the manufacturer doesn’t show much profit. The tax-haven company immediately sells it to their U.S. company at a very high price, so the tax-haven shell company gets most of the profits.
    Then the products are sold here for not much above what was paid, so very little profit is made by the U.S. company. The tax-haven shell company reports all the profits as a result of selling TO but not IN the United States. Low profits here equals low taxes here.
    As long as the actual money isn’t brought into the U.S., they don’t pay U.S. taxes on it. So after years of this scheme a ton of cash is sitting in these tax-haven countries, and the wealthy few want to be able to use it to buy even more jets, houses, Maybachs, etc. And, of course, they don’t want to pay their taxes.
    So of course, the inevitable “business groups” are trying to get Congress to pass a “repatriation tax holiday” on the profits they are holding outside of the country.
    From The Hill, Business groups press Treasury to shift on corporate tax holiday:

    The U.S. Chamber of Commerce and the WIN America Campaign, the business coalition … flatly state that U.S. multinationals have little incentive now to bring what they say is roughly $1 trillion in revenues back home and that allowing them to do so at a reduced rate would help stimulate the American economy.

    They Always Say It Creates Jobs
    The “business groups” argue that bringing the money back would “stimulate the economy” and create jobs. They say everything that helps the rich get richer creates jobs. But then it doesn’t create jobs. Then they say the next thing will create jobs so we go fo it, and then that doesn’t either. Meanwhile they get richer and richer, and we get poorer and poorer and need even more jobs.
    Been There, Done That
    Here’s the thing, we tried this in 2004. “Business groups” argued that bringing the money back would cause them to invest in the United States—and they got what they wanted. 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.
    How did that work out for the economy and jobs? Not so well. Alain Sherter, in Sure, a “Tax Holiday” on Overseas Profits Is a Great Idea — If You Hate America, looked into this and writes,

    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. Bring the profits back untaxed, and then start the cycle 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.

    Tom Sullivan posted his own review of repatriation on in 2009:

    Washington Post business columnist Allan Sloan reacted to the [American Jobs Creation Act] in 2006, saying, “Companies don’t add jobs based on one-time chances to repatriate money from overseas.”
    And they didn’t, according to Finance Committee Chairman, Sen. Max Baucus (D-MT), who argued against renewing the tax holiday. “The data shows that the last time we enacted something like this there were virtually no new jobs created in the United States. None.” Baucus continued, “Companies used this money for other purposes.”
    North Dakota Democrat, Sen. Byron Dorgan rebranded the proposal: “There’s another phrase for repatriation; it’s called rewarding the outsourcing of jobs.”

    The Cost
    U.S. PIRG, in Tax Shell Game: The Taxpayer Cost of Offshore Corporate Havens says,

    Key Findings
    • The cost to taxpayers due to the use of offshore tax havens is as high as $100 billion per year – $1 trillion over 10 years. U.S.-based individuals and corporations who pay taxes on their revenues must shoulder this burden for those who do not.
    • Taxpayers must shoulder the burden – U.S. PIRG Education Fund calculated each state’s taxpayer contribution proportional to their yearly federal contribution to make up for the $100 billion lost. [For California taxpayers, that figure was $11,679,735,788; for Texas, $8,653,820,2590; for New York, $8,432,456,612; for Florida, $4,932,770,661.]
    • Our allies in other nations are also calling for decisive action to reign in these abusive tax havens. The Group of 20 (G-20), which provides a forum for world financial leaders to promote global economic stability, recently issued a communique providing for sanctions against tax haven countries.

    Business Groups – Or People?
    Corporate wealth is really just personal wealth, held at arms length from the person to mask what is going on. The wealthiest 1% own 50.9% of all stocks, bonds, and mutual fund assets. The wealthiest 10 percent own more than 90 percent. The bulk of us own less than 1 percent. When you hear about “corporate” holdings, think about this chart from the Working Group on Extreme Inequality:
    So with this tax holiday proposal we’re once again talking about benefits that go to the top few percent, at the expense of the rest of us. At the expense of schools, roads, police, firefighters, nurses, roads, rail, health care and all the things We, the People try to do for each other.
    These days we seem to always be talking about benefit to the top few percent, at the expense of the rest of us. Funny how that works.
    • Cut back on the things We, the People (government) do for each other, so the top few can have even more.
    • Cut Social Security — the money employees have set aside all their lives — to preserve the tax cuts that went to the top few.
    • Get rid of the retirement plans of state government employees so the top few don’t have to pay state taxes.
    • Get rid of unions so the top few don’t have to pay good salaries or provide benefits.
    • Cut back on etc. so the top few get more …
    • Cut back on etc. so the top few get more …
    • Cut back on etc. so the top few get more …
    • Cut back on etc. so the top few get more …
    Citizens For Tax Justice has a report on this problem, Congress Should End “Deferral” Rather than Adopt a “Territorial” Tax System, and they offer a simple solution: tax it.

    Some corporate leaders are pushing Congress to adopt a “territorial” tax system, which would exempt the offshore profits of U.S. corporations. Congress should move in the opposite direction and adopt a “pure worldwide” tax system, which taxes all profits of U.S. corporations the same while providing a credit to avoid double-taxation.

    Believe Them
    The other day I had a conversation with Bill Parks, who has written here about The Buffett Balanced-Trade Idea. He offered a practical modification of this idea. He proposed that we should just believe companies when they file their accounting reports that list where the sales are, then taxing the percentage of their profits according to that ratio of percentage of sales.
    Here is how that would work in the tax -avoidance scheme described above. Remember, they are reporting that the tax-haven country pays a low price and the U.S. pays a high price. The result is high profit sales TO the U.S. but not IN the U.S. So fine, sales to the tax-haven country is a low-percentage of their profits, to the US a high percentage so the US then collects the same dollar ratio of taxes.
    Tax-avoidance case: 90% of profits are reported to be made by selling from Cayman Islands shell company TO the U.S.
    Tax-collection result: Therefore 90% of taxes on profits have to be paid to the U.S.
    Putting American companies to work for us is a better solution than giving them a holiday.
    Other resources:
    Bloomberg: Tax Holiday for $1 Trillion May Lure Back Profits Without Growth
    Center for American Progress: Tax Expenditure of the Week: Offshore Tax Deferral
    Chuck Collins, Senior scholar, Institute for Policy Studies, Pay Up, Corporate Tax Dodgers
    Phineas Baxandall and Nicole Tichon, PIRG & Tax Justice Network USA, In The Public Interest: A (Non)Taxing Issue
    Nicholas Shaxson: Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens
    US PIRG: Who Slows the Pace of Tax Reforms?
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