Are American Corporations Really Less Competitive Because Of Taxes?

Corporate tax rates used to top out at 52.8 percent. Later rates were lowered to 48 percent and then 46 percent. Then in 1986 corporations complained that this (lowered) rate made them "uncompetitive" and demanded "corporate tax reform." Because job creators. So the rate was lowered to 35 percent.

Now in 2014 corporations are complaining that this (lowered) rate makes them "uncompetitive" and are demanding "corporate tax reform." Because job creators – or something. This time they threaten to – or do – renounce their U.S. citizenship, saying it is because of too-high tax rates.

So, here we are again. They want rates lowered even more. But are corporate tax rates really "uncompetitive?" And what does that even mean?

Tax Rates Are Plenty Competitive

At the New York Times' Dealbook Andrew Ross Sorkin looks at this issue in "Tax Burden in U.S. Not as Heavy as It Looks, Report Says." Sorkin looks at a paper, "'Competitiveness' Has Nothing To Do With it," by Edward D. Kleinbard. Kleinbard is a professor at the University of Southern California and used to be chief of staff to the Congressional Joint Committee on Taxation. Sorkin quotes Kleinbard:

“Despite the claims of corporate apologists, international business ‘competitiveness’ has nothing to do with the reasons for these deals,” he [Kleinbard] writes. “Whether one measures effective marginal or overall tax rates, sophisticated U.S. multinational firms are burdened by tax rates that are the envy of their international peers.”

Our tax rates are "the envy of their international peers?" Sorkin explains:

Professor Kleinbard contends that most United States multinational companies don’t pay anywhere near 35 percent. Companies paid, on average, 12.6 percent, according to the Government Accountability Office, which last measured it in 2010, by deliberately stashing piles of cash abroad.

"Stashing piles of cash abroad" ...

What Is The Real Reason Corporations Are Renouncing U.S. "Citizenship?"

So why are corporations really renouncing their "citizenship?" Simple answer, according to Kleinbard, is they are doing this so they can pocket hoards of "deferred" offshore profits without ever paying the taxes they owe on these profits.

A (different) tax loophole called "deferral" allows companies to avoid being taxed on their non-U.S. profits until they "bring the money home." Because of this loophole, corporations have been taking steps to make it look as if their profits are made outside of the U.S., and have piled up about $2 trillion in cash that they are keeping out of the country.

Here is why this is such a big deal: Corporations have "stashed" up to $2 trillion, maybe more, of profits made outside of the country. This represents up to $700 billion of taxes they owe – and the U.S. badly needs. This huge amount of money creates a huge amount of incentive to engage in all kinds of scams, diversions, obfuscations, extortions and demands as well as outright paying for certain members of Congress to obstruct efforts to do something about this. (P.S.: Paying to block Congress from obtaining up to $700 billion of tax revenue We the People are owed is not "ideology"; it is corruption.)

What Is This "Deferral" Of Which You Speak?

Here is how the deferral scam works. An American company sets up a non-U.S. "subsidiary" in a tax haven. That non-U.S. company gets or produces goods, services, patents, whatever, at a low price. (This often involves shifting paper (and copyrights, patents) around to make it look like profits are not made in the U.S., but in too many cases this means the U.S. company actually moves U.S. jobs, factories, production, call centers and other assets out of the country.) The subsidiary sells to the U.S. company at a high price. Most or all of the profit is therefore made by the non-U.S. subsidiary, so the profits are considered to be non-U.S. and taxes on those profits are "deferred." This still counts as profits for the U.S. owner of that subsidiary, but the U.S. company does not have to pay taxes (they are "deferred") until they "bring the profit home."

Corporations tried to get a "tax holiday" so they could just bring the cash back without paying the full amount of taxes owed. Enough people sounded the alarm on this scam, and it appears that it isn't going to happen. Even worse, people have been sounding the alarm about the "deferral" loophole, so corporations are afraid that one day Congress might close it and make them pay the taxes they owe on their non-U.S. profits.

These corporations see that if they renounce their citizenship before the U.S. fixes this loophole, they can just keep the money. Kleinbard makes the case that this is the reason many companies are looking at "inversions" – not because U.S. tax rates are "uncompetitive," but as a way to get out of paying taxes on their huge hoard of non-U.S. profits.

Trapped?

The U.S. companies that have set up foreign subsidiaries complain that these non-U.S. profits are "trapped" outside the country. They say they can't bring the money home because they would have to pay taxes on it. So is this money really "trapped" and unable to be used by the U.S. parent company? Of course not.

Welcome to the next phase of corporate tax scamming. There is a simple way that the U.S. parent company can access that hoard of cash they are "keeping outside of the country" to avoid paying the taxes they owe. The non-U.S. subsidiary company "loans" money to the U.S. parent. So all of the non-U.S. cash actually is available to the U.S. parent. But wait, there's more. The U.S. parent pays interest to the subsidiary, which is deducted from taxes and reduces the U.S. tax bill even more.

Solutions

There are different proposals out there to solve these problems. First, there are proposals to stop these companies from renouncing their U.S. citizenship using inversions.

The issues of how corporate "inversions" work – companies renouncing their U.S. citizenship – is analyzed in Tuesday's post, "Polling Shows Democrats Should Campaign On Corporate Patriotism." The solutions to that problem included proposals by President Obama to use executive action to stop "income stripping" and to keep "inverted" companies from getting government contracts; the Stop Corporate Inversions Act of 2014 in the Congress, which will be obstructed by Republicans; and a proposal to tax companies based on their percentage of sales that occur in the U.S., as described in the post "A Simplified Way To Tax Multinational Corporations."

There is also a simple way to fight abuse of the "deferral" loophole. The reason this is in the tax code at all is so U.S. companies can use "offshore" profits to invest in growth. This is a win-win because we want U.S. companies to do well, and because the U.S. is supposed to benefit when to profits are brought home and taxes are paid. A very simple way to fight abuse of deferral is to charge a fee of, say, 5 percent a year on deferred profits. The full amount of taxes will still be paid when profits are finally brought home, but we collect an additional 5 percent a year until they are. This removes the incentive to just keep the money out of the country.