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 OurFuture.org 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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