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.
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More About Chye-Ching Huang

Chye-Ching Huang

Chye-Ching Huang is a tax policy analyst with the Center’s Federal Fiscal Policy Team, where she focuses on the fiscal and economic effects of federal tax policy. You can follow her on Twitter @dashching.

Full bio | Blog Archive | Research archive at CBPP.org

3 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. George Buzzetti #
    1

    You should be on TV and more broadly published. You explained that in 3 minutes or 1 page double spaced, an executive summary that even an elementary student would understand. When you can do that you have it down. Thanks.

  2. Kimberly Monaco Munday #
    2

    I appreciate your website and your work.

    In the way of comment re: this story…here goes: I do not know if you are old enough to remember this, however…there was a fairly publicized case in the SF Bay Area. It was about a pre-teen getting caught cheating on exams. If my memory serves, the exams were to help this young person achieve entrance into a prestigious, private high school…although I could be wrong about the motive.

    The crux of this story was this…the student was caught cheating. His very wealthy dad went to court to argue that “Since cheating is an intrinsic part of doing business in the USA, restricting his right to cheat would hinder him in the future…when trying to get ahead in business.”

    I wish I had made this up…more importantly I wish I had source material to attribute, this is based on my memory from over 20 years ago

    Remembering this instance ticks me off now, just as much if not more, than it did those 20+ years ago, when I read it. I am a mom of twin daughters. I spent quite a lot of time explaining to them how this “notion” was wrong headed. It seems I was one of few.

    I wish I knew how to research stories, to expose those whom I know to be “in it for themselves”. Alas, I do not…which is why I send this note to you.

    I hope you continue to excel in your profession. Thanks for doing it,
    kimberly
    One last comment. Why didn’t those subjected to Congressional investigation over the economy tanking in 2008, what “fiduciary” means?

    • Syntara Sarych #
      3

      I was working on an undergrad degree with a business major in the early ’80′s. I recall that one of the final upper-level business courses I had to take involved the professor telling us students that the only way we could pass this course was by cheating and stealing the work of the other students in the class. Yes indeed, she was telling us how to “operate” in the business world we were endeavoring to earn the rights to enter. One caveat to cheating and stealing to pass the course, we had to be able to get away with it.

      I forget the details of that particular course, but it did involve a lot of out of class time effort…I believe the professor told us we would need to spend about 40 hours a week on “homework” for that class. Of course part of that time had to be spent tailing our classmates and trying to get access to the work they were doing so that we could do the very same work, in a slightly different way, and then call it our own, and that would “prove” to the instructor that we did indeed get our work from the efforts of others in the class.

      How slimy is that? Welcome to the new beginnings of the Reagan Era!!!



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