The Center's work on 'Businesses' Issues


Debating Corporate “Inversions”

September 19, 2014 at 3:32 pm

At a Heritage Foundation panel discussion this week, CBPP Senior Tax Policy Analyst Chye-Ching Huang debunked myths surrounding the recent wave of corporate “inversions,” in which U.S.-based firms move their headquarters overseas for tax purposes, and explained why policymakers should take strong action against them, explaining:

People think that there is a simple story that is driving inversions . . . that there are companies that are changing their tax headquarters to escape the highest statutory rate in the OECD [Organisation for Economic Co-operation and Development].  But that simple story is not what is happening. . . . The problem is really about U.S. multinationals and other multinationals gaming the tax system in the U.S. and all throughout the OECD so that they can claim that all of their profits are in tax havens.

Other panelists included CNBC Senior Economics Contributor Larry Kudlow, Heritage Chief Economist Stephen Moore, and Walter J. Gavin, Retired Vice Chairman of Emerson Electric.

As we’ve explained (see here and here for examples), the effective tax rate that U.S. multinationals face on their worldwide income is well below the 35 percent top U.S. statutory rate.  A big reason why is that multinationals report vast amounts of their income as coming from tax havens where they pay little or no tax.  Adopting a foreign headquarters could make it easier for multinationals to claim that their profits are made offshore and to use tax havens to avoid taxes anywhere.

House Republicans’ Wrong-Headed Approach to Tax Extenders

September 17, 2014 at 1:00 pm

House Republicans are putting before the House this week a campaign-oriented bill of wide-ranging measures that have previously passed the House, including repealing portions of the Affordable Care Act and scaling back Dodd-Frank regulations.  The bill, which won’t advance beyond the House due to obvious Senate and White House opposition, also includes business tax provisions that lawmakers will likely consider again during Congress’ post-election lame duck session this fall.  For that reason alone, the legislation warrants some attention.

The House bill would make permanent certain “tax extenders” — so named because Congress routinely extends them for a year or two at a time — as well as bonus depreciation, which lets businesses take larger upfront tax deductions for certain purchases, such as machinery and equipment, and that historically has been a temporary measure to help revive a weak economy.  Congress should reject the House approach to these provisions because it is not fiscally responsible, is poorly designed from an economic standpoint, and is antithetical to tax reform.  Moreover, it reflects seriously misplaced priorities, putting the permanent extension of these business provisions ahead of more pressing provisions for hard-working families.

  • Its $500 billion price tag is fiscally irresponsible.  Policymakers have enacted significant deficit-reduction measures since 2010, with the vast majority coming from spending cuts.  The one revenue contribution stems from the 2012 “fiscal cliff” bill — i.e., the American Taxpayer Relief Act — that raised $770 billion in revenue from high-income taxpayers (from 2015 to 2024).  The tax extenders and bonus depreciation provisions in the House bill would reduce revenue by $500 billion over the decade, effectively giving back two-thirds of the revenue contribution to deficit reduction (see chart).  (The total cost of the House bill is about $575 billion, because of other revenue-losing provisions.)

  • It’s poorly designed from an economic standpoint because it makes bonus depreciation permanent.  Making bonus depreciation permanent accounts for more than half of the $500 billion cost of the business tax provisions.  But bonus depreciation was specifically designed not to be permanent because its temporary nature is what drives its (albeit limited) effectiveness during recessions.  Its modest economic boost comes entirely from inducing firms to accelerate some of their purchases into the period when the tax break is in effect and the economy is weak.  Making it permanent would negate this modest incentive effect.  That’s why the Bush Administration and Congress allowed it to expire after the 2001 recession ended and why this Congress should let it expire now.
  • It moves away from tax reform.  The fundamental nature of tax reform is to “broaden the base” by scaling back tax subsidies and to use the freed-up funds to lower tax rates, reduce budget deficits, or both.  For example, House Ways and Means Chairman Dave Camp (R-MI) earlier this year advanced a comprehensive plan that eliminated tax subsidies for certain business investments, including the repeal of bonus depreciation.  These changes were central to his base-broadening provisions.  But the package that House Republicans are now bringing before the House goes in the opposite direction.  Its provision to make bonus depreciation permanent narrows the tax base and, thereby, moves away from tax reform.

If, during the lame duck session, policymakers consider making any tax extenders permanent, they should focus first on making permanent important provisions of the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) that are due to expire at the end of 2017.  Failure to make the EITC and CTC provisions permanent would have a significant impact on low- and moderate-income families, pushing 17 million people (including 8 million children) into — or deeper into — poverty.

Kleinbard: “Competitiveness” Argument for Moving Firms’ Headquarters Overseas Is a Canard

August 12, 2014 at 10:10 am

The claim that many U.S. companies are moving their headquarters overseas because U.S. corporate tax rates make them uncompetitive is “largely fact-free,” USC law professor and former Joint Tax Committee staff director Edward Kleinbard concludes in a new paper.

While many firms and their lobbyists highlight the 35 percent top U.S. corporate rate, that’s not what companies actually pay, Kleinbard explains.  The effective tax rate that U.S. multinationals face on their worldwide income — that is, the share of this income that they pay in taxes — is well below this statutory rate.  A big reason is that multinationals report vast amounts of their income as coming from tax havens where they pay little or no tax, even if they have few staff and do little business there.

Kleinbard also explains that the 2004 repatriation tax holiday, which allowed multinationals to bring profits held overseas back to the United States at a temporary, vastly reduced tax rate, gave them a big incentive to stockpile billions more in tax havens and await another tax holiday.  These large stashes of profits in tax havens are an important reason — Kleinbard thinks the key reason — why many companies are considering moving their headquarters overseas.  By “inverting,” these companies can basically declare their own, permanent tax holiday and avoid ever paying U.S. taxes on foreign-held profits.  And once inverted, they can use legal avoidance schemes to effectively get those profits to their U.S. shareholders.

In other words, multinationals are already using tax havens to achieve zero or extremely low tax rates.  Firms considering inversions are searching not for a “competitive” tax rate but a zero tax rate by ensuring that those profits remain “stateless” — that is, taxed nowhere at all. (Echoing a famous line from Mae West, Kleinbard’s paper is titled “‘Competitiveness’ Has Nothing to Do With It.”)

Kleinbard’s solution has three parts:

  1. Make it harder for a U.S. multinational to invert.
  2. Prevent companies that do invert from effectively distributing their “foreign profits” to U.S. shareholders without paying U.S. tax.
  3. Make it harder for all U.S. multinationals to claim that U.S.-earned profits were actually earned in tax havens and low-tax countries.

Plug the Inversion Loophole Now

July 22, 2014 at 2:53 pm

The New York Times’ latest “Room for Debate” feature asks how the United States can stop corporations from moving their headquarters overseas — known as corporate “inversions” — to avoid taxes.  In my contribution, I explain that inversions are a high-profile part of the problem that multinationals’ profits aren’t taxed anywhere, because tax rules let companies claim they earned the profits in in zero- or low-tax havens.

I point out that Pfizer — whose inversion plans made recent headlines — could keep billions in profits permanently untaxed by inverting.  Ed Kleinbard, USC law professor and former staff director for Congress’ Joint Committee on Taxation, explains in detail in a new Wall Street Journal piece how companies can lower their tax bills through an inversion.

In the Times, I recommend swift, targeted anti-inversion legislation:

Slashing U.S. corporate taxes won’t solve an inversions problem created by profits that already aren’t taxed. Instead, U.S. policymakers should first swiftly enact targeted anti-inversion legislation to protect the U.S. tax base.

That’s why Senate Finance Committee Chair Ron Wyden should be applauded for his pledge today (during a Senate Finance Committee hearing on inversions and international tax reform) to immediately try to stop U.S. firms from incorporating overseas for tax purposes.  “Let’s work together to immediately cool down the inversion fever … The inversion loophole needs to be plugged now,” Wyden said.

Then, any eventual corporate tax reform could raise revenue by eliminating inefficient business tax breaks for both domestic and foreign profits and reducing opportunities and incentives for corporations to engage in international tax avoidance, and level the playing field between domestic and multinational companies, as we’ve previously explained.

Click here to read the full “Room for Debate” piece.

Finally, Signs of Momentum on Corporate Inversions

July 17, 2014 at 4:26 pm

First it was Pfizer.  Now it’s Walgreens.  These and a growing list of companies have made headlines as they consider shifting their headquarters overseas — so-called corporate “inversions” — so they can avoid paying taxes on past and future profits.  In reality, these companies are not going anywhere.  They will still rely on U.S. infrastructure and scientific research and our educated workforce.  They just don’t want to help pay for it.

These headlines beg for a swift policy response.  Reps. Sander Levin (D-MI), the top Democrat on the House Ways and Means Committee, and Chris Van Hollen (D-MD), the top Democrat on the House Budget Committee, have advanced a House proposal that would make it harder for U.S. companies to expatriate to avoid U.S tax and, consequently, save $19.5 billion over ten years.

There are now fresh signs of momentum as key players hint that they want to try to act quickly.  Specifically, Treasury Secretary Jacob Lew, in a letter to Senate Finance Committee Chairman Ron Wyden (D-OR), called for a “new sense of economic patriotism” and said “we should not be providing support for corporations that seek to shift their profits overseas to avoid paying their fair share of taxes.”  He called on Chairman Wyden to pursue anti-inversion legislation.  Chairman Wyden quickly signaled support for near-term action, as did Senate Majority Leader Harry Reid (D-NV).

Secretary Lew’s call for a new patriotism isn’t new.  In 2004, Congress took swift bipartisan action in response to a spate of corporate inversions. Then-Finance Committee Chairman Chuck Grassley (R-IA) and his committee issued a press release describing Congress’ legislative action:

‘This will hit the unpatriotic companies that dash and stash their cash,’ Grassley said. . . .

‘I still remember my disgust when I watched a video of an accounting firm partner hawking corporate expatriation as a ‘mega trend hot topic’ because of depressed stock prices [after the events of September 11, 2001],’ Grassley said. 

As the current uptick in inversions shows, corporate tax lawyers have found ways around the 2004 anti-inversion provisions.  Policymakers should approve legislation that strengthens the bipartisan response from a decade ago — and soon.  Waiting for corporate or international tax reform will only invite more tax avoidance-driven corporate exits.