Home Again, Home Again
by David Atkins (“thereisnospoon”)
While Harry Reid and John Boehner posture over just whose nearly identical version of austerity will reach the President’s desk, another side drama has been playing out over the possible inclusion of a tax holiday for corporations performing accounting gimmicks by shifting profits through global tax havens. For instance, Microsoft only paid a 7% tax rate on last year’s profits:
If you want to know why tax from surging corporate profits isn’t making much of a dent in the United States’ crippling budget deficit, a glance at Microsoft Corp’s recent results provides some clues.
Things were rosy in the giant software company’s just-ended fiscal fourth quarter, which produced record sales of nearly $17.4 billion, a 30 percent increase in after-tax profit, and a 35 percent gain in earnings per share…
Partly it was because the company had a one-time refund of $461 million from the IRS for previous overpayments and because of its over-estimation of tax rates in previous quarters. There may be increased sales of products to consumers overseas, though it is not clear from company disclosures how much of a factor this might be.
But Microsoft is straightforward about the core reason for its lower tax bill: It is increasingly channeling earnings from sales to customers throughout the world through the low-tax havens of Ireland, Puerto Rico and Singapore.
This sort of thing is, of course, happening all over the corporate sector. It leads not only to a loss of jobs in the United States, but also to a gaping budget hole requiring austerity measures, politically difficult revenue increases or both. Conservatives like to complain that this is due to America’s high corporate tax rate of around 35%. They claim that companies like Microsoft have no choice but to shift profits overseas. But while it’s true that that nominal corporate rate is the 2nd-highest in the world, the effective corporate is far, far lower due to all the tax loopholes. But conservatives do have something of a point here, in that it’s a lot easier for a corporation just to take those profits overseas than to pay all those accountants to find and exploit all those loopholes.
That’s why when revenue increases on the corporate sector are considered, smart politicians don’t talk so much about raising taxes on corporations (which would actually be counterproductive in some ways given our already high nominal rate), than about eliminating the loopholes they’re allowed to exploit, which would result in far more revenue generation than would raising the nominal rate, while also leveling the playing field for smaller companies that don’t have the resources to try to exploit them.
But there’s also the issue of what to do about companies that have already taken their profits offshore. Enter the odious “corporate tax holiday.” The tax holiday would allow corporations to repatriate their funds, but at much lower level than the nominal rate. Matt Taibbi has more:
The madness that is the proposed tax repatriation holiday is continuing and gathering steam. More and more members of congress are coming out of the woodwork, scratching their chins in contemplative consideration as it were, pretending that they’ve just realized what a great day a corporate tax holiday would be – not that they’ve taken gazillions of dollars from the firms lobbying for it or anything…
One thing that people must understand about this tax repatriation business is that it’s a wholly bipartisan affair. It’s not solely the work of evil Republicans. This is a scheme that requires heavies in both parties to help ram the knotty, hard-to-sell legislation through. On the Democratic side, unsurprisingly, the main actor is going to be Chuck Schumer. John Kerry is also involved with this nastiness. Barbara Boxer led the 2004 effort and the failed 2009 campaign to get a holiday, and is rumored to be lurking somewhere in this business.
As Taibbi correctly points out, we’ve done this before, and rather than creating jobs, it simply created a stock repurchasing bonanza for the corporations themselves. And yet there seems to be a very bipartisan push to do it again, meaning that there will be no incentive at all for large corporations to continue to take profits in this country as they know that they’ll get one of these sweet deals at regular intervals. More Taibbi:
I’m still shocked at the lack of press coverage of this. In all this scratching and clawing over dimes here and there, and clamoring for trillions in cuts, we’re seriously considering what amounts to a gigantic new systematic loophole for corporate taxes?
Again, if they pass this thing one more time, the fiction of the “one-time holiday” disappears forever, and the next decade will see an explosion of exported profits, “transfer pricing,” and cunning use of correspondent banks to stealth-repatriate offshored funds. Everyone will know that the effective corporate tax rate has been dropped from 35 percent to 5 percent – all companies need to do is hide profits overseas and bring them back about once every presidential term or two.
There’s a “good government” argument for doing this, of course: the potential alternative that the U.S. will never see even a dime of that revenue otherwise. That’s why everyone from SEIU figures to the awful Third Way people to the cigar-chompers at Duke Energy are all supporting the holiday:
At a Third Way think-tank conference in Washington last week, Andrew Stern, former president of the Services Workers International Union, presented the case in favor of a new tax break at a panel discussion on the issue.
“So we have an American problem. We have very few solutions, given the nature of politics here,” he said.
“And I think when Democrats realize that this is stimulus and probably the only stimulus that has a chance of passing, and Republicans realize this is a corporate tax break, you know we have a perfect situation for a solution,” Stern said.
The main argument in favor of the corporate tax holiday is that money spent abroad is money that is not being spent here in the United States.
“I cannot believe under any circumstances that having a trillion dollars overseas is an advantage over having a trillion dollars at home,” said Stern.
Jim Rogers, president and CEO of Duke Energy, participated in the Third Way event also, and addressed one question being put forward, i.e. “Would it be better to have another stimulus for a trillion dollars or to bring this money back?”
“And the answer is, hands down, bring this money back. Our country cannot afford another stimulus, particularly the way the money is deployed. We can’t afford it, and the reality is, we need to face up to that and move on to something that we can afford and will actually help generate jobs in this country,” he said.
But, of course, that’s not actually true. First of all, the tax holiday doesn’t help create jobs: it helps inflate corporate stock prices and corporate bottom lines, with a minimal boost to the national treasury. And as we all know, jobs and rising stock prices stopped going hand in hand long ago.
There are multiple other solutions to the problem, including levying hefty fines and other punitive measures on corporations that take this step. How long would Microsoft last if it had to pay a 20% premium for selling its products to U.S. customers while offshoring profits, and try to pass those along to the American consumer? Not long.
What we have is a political problem. On both sides of the aisle, that sort of anti-flat-world policy would be considered “protectionism.” And that’s a dirty word among the Grand Poobahs and Mandarins in both parties.
Which means that once Boehner, Reid and Obama are all done posturing for one another and we get a final austerity package, watch for this corporate giveaway to be included in the final bill, courtesy of that wonderful “bipartisan consensus” so many voters seem to cherish.