The Center's work on 'Businesses' Issues

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.

Don’t Believe the Hype: Permanent “Bonus Depreciation” Not a Positive Step Toward Tax Reform

July 15, 2014 at 9:23 am

The House has voted to convert “bonus depreciation” — a large, temporary tax break that policymakers adopted during the recession that lets businesses take bigger upfront tax deductions for certain purchases such as machinery and equipment — into a permanent feature of the tax code at very substantial cost.  The Senate should not go along for two fundamental reasons.

First, as we have explained in a previous paper, permanent bonus depreciation is fiscally irresponsible — costing $276 billion over ten years, according to the Joint Tax Committee — and delivers relatively little economic benefit, even as a temporary measure.

Second, and our focus here: despite what some conservative champions suggest, permanent bonus depreciation would not represent a positive step toward tax reform.

Several conservative groups — including Americans for Prosperity and Americans for Tax Reform — claimed in a letter to lawmakers that “making bonus depreciation permanent would be a massive victory in the cause of tax reform.”  That’s because, they wrote, “[f]ull expensing, a dream of tax reformers going back to the original supply siders, would be within reach.”  Full expensing would enable businesses to deduct the full cost of these purchases in the year of purchase.

Supply-side dreaming should indeed be a wake-up call to Congress, for it suggests that bonus depreciation — or, full expensing — would come wrapped in a package with a host of other questionable items.

Americans for Prosperity, for instance, outlined a tax reform plan that not only embraced full expensing but also included:

  • Cutting the tax rate on corporations’ foreign profits essentially to zero; 
  • Repealing the estate tax; 
  • Eliminating all limits on contributions to retirement accounts, which would primarily benefit very affluent individuals; and 
  • Slashing the top income tax rate.  (Americans for Prosperity cited House Budget Committee Chairman Paul Ryan’s proposal to cut the top rate from 39.6 percent to 25 percent and Senator Rand Paul’s proposal to replace all tax brackets with a flat 17 percent rate.) 

These priorities have two common elements:  a very large drain on federal revenues and a very large tilt toward the nation’s wealthiest individuals.  This tax reform dream would be injurious to working and middle-class Americans, who would have to pay higher taxes to help make up for the massive revenue losses, face deep cuts in key programs — likely including programs such as Medicare — to accommodate the large revenue losses, or both.

Congress should make sure this doesn’t become a reality.  The Senate can start by declining to go along with the House’s irresponsible action on bonus depreciation.

House Shouldn’t Reinstate Bonus Depreciation

July 8, 2014 at 5:34 pm

The House is expected to vote this week on a Ways and Means Committee bill that reinstates and makes permanent a tax provision known as “bonus depreciation,” which lets businesses take bigger upfront tax deductions for certain new purchases such as machinery and equipment.  The Ways and Means Committee bill is economically unjustified and fiscally irresponsible.  The Joint Tax Committee estimates the measure would cost the Treasury $276 billion in forgone revenues over ten years, adding to deficits and debt.

In April, the Ways and Means Committee began to consider a series of mostly business “tax extenders” — so named because Congress routinely extends them for a year or two at a time.  The cost of all the business tax cuts that Ways and Means has adopted, including bonus depreciation, now totals $581 billion, and includes not only extensions of tax provisions that have been routinely extended, but also generous expansions of some of those provisions.  That’s enough to wipe out three-quarters of the $770 billion in revenue raised by the high-income provisions of the 2012 “fiscal cliff” legislation.

The full House has already passed a number of these Ways and Means bills.  Members shouldn’t add the bonus depreciation bill to that list.  In addition to the bill’s cost, there are other compelling reasons why policymakers should not reinstate bonus depreciation and make the policy permanent:

  • It increases already generous tax treatment.  Under current law, companies already receive generous tax treatment when they invest in equipment and buildings, particularly if they borrow the funds to finance this investment.  In those cases, instead of a company investing in equipment, making a profit, and sending a percentage of those profits to the government in taxes, the government in effect adds to the pre-tax profit of the company by providing a subsidy through the tax code.  Adding bonus depreciation would greatly expand this generous tax subsidy, as the chart below shows.

  • It was meant to be temporary.  Congress enacted bonus depreciation solely to bolster the economy during the recession, and not with the intent of making it a permanent feature of the tax code (or extending it year after year like a tax extender).  In the previous economic downturn, Congress enacted bonus depreciation in 2002 — and then a Republican President, House, and Senate let it expire after 2004, when the economy was stronger.  Moreover, studies have shown that bonus depreciation “is largely ineffective as a policy tool for economic stimulus,” according to the Congressional Research Service.