In Tax Battles, “Competitiveness” Means Coercion

Dave Johnson

Watch out for this one. With fast track trade authority done, the big corporations are now pushing for massive tax giveaways. This is another exercise of raw corporate power by the few to take what they want from the many. The corporations use complexity to get people to tune out, and their schemes are masked by smooth words like “reform” and “competitiveness,” but it is all just another grab for (even more) money and power.

There are two areas where the corporations are coming at us. The first is a blatant grab to keep somewhere up to $700 billion in tax money they already owe on “offshore” profits. The second is a push to permanently cut corporate tax rates – even more.

Taxes Owed On Offshore Profits

Multinational corporations avoid paying U.S. taxes using a “deferral” loophole. This loophole lets them dodge taxes on profits made outside of the country until they bring the profits back into the country (called “repatriation”).

Thanks to this loophole, multinational corporations have been engaging in all kinds of schemes to make it appear as if profits were made outside the country. And then they keep the profits out of the country and away from the taxes they owe. This has been going on for a while, the amounts have been building up, and now we’re talking about more than $2 trillion in profits, which means somewhere up to $700 billion in taxes owed. (A hundred billion here, a hundred billion there, after a while it starts to add up to real money.)

One way multinational corporations make it look as if these profits were made outside of the U.S. is by using complexity. They set up corporations that appear to be based in tax-haven countries but are really subsidiaries of the U.S.-based parent corporation. So in effect, it is really the same corporation moving money around to different branches, masked by the complexity of subsidiary corporations and borders.

Example: A corporation reports that it pays a fee to a “foreign company” to “license” intellectual property, such as patents, copyrights and designs. The foreign company is really just a subsidiary corporation set up in a tax-haven country – often consisting of little more than a mailbox – and the ownership of the intellectual property is transferred from the parent to this “non-U.S. company.” This mailbox“foreign company” charges the parent for use of the IP, and the parent reports that the profits are made by the “foreign company.” Electronics, software, pharmaceuticals … even shoes might be sold in the U.S. but using these schemes the profits appear to go to the licensor (mailbox) in the tax-haven country. Even worse, another common scheme involves moving actual manufacturing or other production (and the jobs) to a subsidiary corporation outside of the U.S. and selling the goods back to the U.S. parent for a high price, so much or all of the profit is made there, not here.

The “foreign” subsidiary corporation has the profits, and the parent corporation is considered profitable because it owns the mailboxessubsidiaries. But the corporation doesn’t have to actually pay the taxes on those profits until it transfers the cash back the U.S. parent. Which they do not do.

Because of complex schemes like these that trigger the “deferral” loophole multinational corporations now have over $2 trillion in profits, they are keeping out of the country, away from taxes, shareholders and our economy. This represents somewhere up to $700 billion in taxes already owed to the U.S. government – meaning owed to We the People for our infrastructure and schools and the rest.

These giant corporations are now “lobbying” for giveaways that let them just keep that money (surprise), and too many of our elected officials are cooperating.

For example, we need money to maintain our infrastructure. (We need the money because these corporations are dodging their taxes.) Some of our elected officials, in their great (corporate-bought) wisdom, are suggesting that we give these companies “incentives” to “bring back” the profits with a “tax holiday” – meaning let them pay a much lower (or no) rate. An article in The Hill, Looming highway funding debate stirs tax fight in Senate, explains one proposal:

“Senate Democratic leaders are pushing the six-year transportation plan included in President Obama’s budget, which calls for $317 billion in spending on roads and $143 billion on federal transit projects.

They want to pay for it by requiring U.S. corporations to repatriate overseas profits at a 14 percent tax rate, which would raise $238 billion in revenue, and tax future foreign earnings at 19 percent.”

See what they did there? They are not really proposing “requiring” the companies to pay a 14 percent rate, they are proposing letting them pay 14 percent instead of the 35 percent they owe. And to top it off they want future “offshore” profits to be taxed at only 19 percent instead of 35 percent – a sure-fire way to get every company not already doing it to start inventing schemes to make it look like their profits are all made “outside of the country.”

If they do this, the best business to be in will be the business of selling mailboxes in tax-haven countries. Because every company will be getting one and there won’t be a penny of profit made in the U.S. ever again.

Keep an eye out for this one. Do not let Congress do anything that lets these companies pay less than the 35 percent they already owe on “offshore profits.” And any future tax rate on offshore profits that is lower than the rate on U.S. profits will guarantee that every remaining factory, penny of profit, etc. leaves the country for a mailbox in the Cayman Islands.

Corporate Tax Rates

The other money grab going on is an effort to lower corporate tax rates here. This one is called “corporate tax reform.” “Reform,” as in “huge cut in their taxes.”

Corporations used to pay a top tax rate of over 50 percent (after costs, salaries, expenses and various tax breaks are deducted). The corporations complained that this was “too high.” They convinced our Congress that this tax rate was not “competitive,” so the rate was lowered and then lowered again. Now it is only 35 percent. (This was a decrease of more than 30 percent in their taxes.)

When they said the rates were not “competitive,” it meant “we will leave your country and go to a country that offers us lower tax rates.”

Because of the resulting cuts, the share of federal revenue (the “tax burden”) that comes from corporate taxes has fallen from around 32 percent in 1952 to around 8.9 percent now. As a share of gross domestic product (GDP) it has fallen from about 6 percent of GDP then to less than 2 percent now.

See if you can guess what happened to everyone else’s share of the tax burden when the corporate share dropped? Bonus points if you can guess what will happen after the corporate share drops again.

“Competitiveness” = Extortion And Coercion

After we lowered corporate tax rates to 35 percent the corporations went from country to country saying their tax rates were not “competitive” with ours, and country after country gave in and lowered their tax rates, too.

Now they’re back, saying that our corporate tax rates are not “competitive” with those lowered rates in other countries.

The threat is very clearly made: lower our taxes or we’ll move, and you will lose jobs and any tax revenue you do get. The corporations use smooth words to mask the extortion. They say the corporate tax system needs “reform” because our tax rates are not “competitive.” But extortion is extortion: “give us what we want or we will pack up and take the jobs, profits, etc. somewhere else.”

Corporations do this cross-border extortion inside the U.S. as well, going from state to state, threatening to move to a lower-tax state, extorting concessions, breaks, even direct subsidies.

When corporate taxes are cut two things happen. First, the relative power of government is weakened relative to the big corporations. The government, with less revenue, has to cut back on inspections and enforcement of regulations; efforts to protect the rights, health and safety of citizens; and efforts to protect citizens from being hurt by the power of the big corporations.

Second, the lost revenue has to be made up for somehow. We have suffered cut after cut in the things government does to make our lives better – like maintaining our infrastructure, funding education, funding basic scientific research, and other services. Meanwhile, the few who own and control the big corporations have more and more – inequality. The public loses its faith in government … which in itself gives more power to government’s alternative – the corporations.

Get updates in your inbox