American Corporations Too Busy Cheating Taxpayers to Actually Produce Good Products
By David Dayen
Treasury Secretary Jack Lew’s announcement of a series of new rules to reduce the financial incentives behind corporate inversions tells you a lot about where our economy sits right now. Productivity and growth scarcely matter as much as what I would call the “gimmick economy.” Companies now spend an inordinate amount of time figuring out not how to beat their competition, but how to prosper from tricks and loopholes their accountants find buried in the law. Every corporation has become, at the root, a financial company, adept at moving money around on paper and little else. And the government has to scramble in a never-ending race to keep up with the innovations.
To start with, understand what a corporate inversion is: an on-paper transaction involving a merger between a larger U.S. company and a smaller counterpart abroad. No worker moves overseas as a result of the merger. No production facilities or corporate offices transfer. Instead, the address on the corporate masthead changes from America to the low-tax alternative where the overseas company is headquartered. It’s a completely fictitious pretension, no different than if I used a handicapped placard to park in good spots everywhere I went, and then limped around after getting out of the car.
CEOs claim that America’s burdensome 35 percent corporate tax rate forces them to be creative, and in absence of fundamental tax reform, they must reluctantly renounce their corporate citizenship to stay competitive with their overseas counterparts. First of all, in actuality, corporate taxes are not much of a burden; thanks to all the loopholes and credits, corporations pay on average a 12.6 percent tax rate , according to a 2013 Government Accountability Office paper. Second, by that logic, if I think a bank vault unfairly denies me access to lots of money, I should be allowed to use creative strategies to bust it open.
In reality, corporations’ reasons to invert have nothing to do with staying competitive, as USC law professor Ed Kleinbard explained in a recent paper. It’s merely about preventing the unintended consequences of one gimmick, by loading up on another gimmick.
You see, multinational corporations have more than $2 trillion parked offshore, money that was either earned through foreign subsidiaries, or from a series of tax-sheltering strategies. That money, in theory, cannot be transferred to their American operations – in particular, to reward executives and shareholders – without paying a tax. Corporations therefore defer repatriating these profits, and the money remains “trapped” overseas, although the bulk of it is actually invested in things like Treasury bonds, earning modest interest amid the tax avoidance.
Corporations first tried to deal with this through public whining, claiming that they could not reinvest in America without bringing this money home tax-free. In 2004, Congress approved a tax amnesty on offshore cash, but the $300 billion repatriated did not go to investment or growth, but mostly to stock buybacks and dividends to goose share prices.
The 2004 amnesty led corporations to assume that they could simply stockpile money out of the U.S., and beg Congress for another reprieve. But Congress, incredibly, learned a lesson, and never allowed repatriation again.
So inversions became a second option for trying to unlock overseas cash. Once corporations establish a headquarters offshore, they can basically funnel money into it to avoid taxes, in a number of ways. They can make loans from the offshore cash into their new foreign parent company, “hopscotching” the U.S. tax system. They can strip earning from their domestic operations and, through accounting tricks, pretend they were earned overseas, again passing them along to the foreign parent. They can spin out their assets to a shell company built in a tax haven (known as a “spinversion”) to facilitate the earnings stripping and hopscotch loans.
In all cases, the goal is to get as much money into the lowest tax treatment as possible. And it won’t surprise you to know that Wall Street, which facilitates all these mergers, makes a tidy profit in the exchange, nearly a billion dollars in the past three years.
With the new regulations announced Monday, the Treasury Department will attempt to stop some of these transactions, though not all of them. The rules attack hopscotch loans by making the inverted company liable for taxes when they try to take deferred profits from a subsidiary. They prevent pass-throughs of stock or property into foreign parent companies to avoid taxation. And they try to prevent spinversions into a third-party shell corporation. But Treasury did not try to reduce incentives for earnings stripping, the ways in which inverted companies shift money into the foreign parent and lower the tax bill on their U.S. earnings.
Victor Fleischer, a tax law professor at the University of San Diego, told Salon, “It should shut down a few deals but not all. It’s not as aggressive as the Treasury could have been, but far better than doing nothing.” You’ll be shocked to learn that the Obama administration found a middle path on a policy.
You can read tons of articles debating the administration’s anti-inversion strategy. But let’s look at the big picture of what these inversions signify. Corporations, at great effort and expense, have figured out how to pretend to be domiciled overseas to save money. The government, through similar effort and expense, cuts off some of the benefits. Presumably what happens next is that corporations engage in another round of scouring the tax code for some other way to profit. And government has to chase that. And so on.
Tax dodges are as old as the republic. But I seem to remember a time when selling a half-decent product was the pathway to corporate riches. Since the 1980s, however, large corporations, from Google to GE, have fundamentally become financial firms, using sophisticated techniques to manage their cash. Sometimes that involves parking money offshore; sometimes it involves interest-rate swaps or other derivatives; sometimes it involves using debt to finance operations because it offers better tax advantages than equity; sometimes it involves using stock buybacks or real estate sales to simulate better corporate performance.
So many resources go to financial engineering that research and development or capital investment, things that circulate money through an economy, ends up withering. The gimmick economy values tax arbitrage or pretend growth to actually out-achieving business competitors. The stock price, and how to game it, becomes an end goal for executives who are typically paid based on how well the stock performs. CEOs with backgrounds in investment banking become more valuable than those with experience in the corporation’s actual industry.
This myopic preference of the short-term over the long-term goes a long way to explaining why we have a Main Street economy with stagnant wages, weak job security and an inability to get ahead. All the money gets tied up in financial game-playing to goose short-term values. And the powerful actors who created this system don’t want it to change.
Congress can end this gimmick on inversions by deciding that, if a company is managed in the United States, it’s American, regardless of the address on the letterhead. Hilariously, they may get it done by threatening a bunch of other corporate gimmicks. Corporations want Congress to retroactively extend a bunch of tax breaks that expired at the end of 2013 in the lame-duck session. Democrats may link those tax extenders to anti-inversion legislation, forcing corporations to choose between which set of tax breaks they want to keep.
But the larger point holds. Until we end this over-financialization that has crept into every aspect of our economy, corporations will simply move from one gimmick to the next.
America is not in debt because of peak oil
by Ralph Nader
The all-consuming Washington, D.C. wrangling over debts and deficits, spending and taxing is excluding a large reality of how these financial problems can sensibly and fairly be addressed. These blinders in Congress and the White House come from fact-starved ideologies — mostly from the Republicans — and fear-fed meekness — mostly from the Democrats. Both are furiously dialing for commercial campaign cash.
Take the gigantic world of corporate tax avoidance. Ronald Reagan signed the Tax Reform Act of 1986 that was designed to increase corporate tax revenues by over 30 percent. Today, President Obama wants to diminish or delete some tax loopholes (technically called tax expenditures) for large corporations, but let most of the revenues be cancelled out by lowering the corporate tax rates. How the world changes.
Obama’s mild approach is unacceptable to the big business lobbies and their Republican mascots in Congress. They want more tax breaks so they can keep trillions of more dollars over the next decade.
Exxon, Wells Fargo, Yahoo! — $0 in tax
Lost in this whirl of vast greed and political calculation are options, which if pursued with a sense of fairness for the people of the country, would go a long way in providing revenues for public works jobs — repairing America — which in turn would generate more consumer demand by these workers.
The ultra-accurate Citizens for Tax Justice (CTJ) publishes precise reports on the effective taxes paid by corporations that make an utter mockery of the 35 percent statutory tax rate for corporations.
On June 1, 2011, CTJ released a preview of its forthcoming study of Fortune 500 companies and “the taxes they paid — or failed to pay — over the 2008-2010 period.” Judging by the preview, this report should silence those who say that the U.S. taxes corporations more than other industrialized nations.
What do you think the following profitable corporations paid in actual total federal income taxes in that period: American Electric Power, Boeing, Dupont, ExxonMobil, FedEx, General Electric, Honeywell International, IBM, United Technologies, Verizon Communications, Wells Fargo, and Yahoo? Nothing!
CTJ reports that “from 2008 through 2010, these 12 companies reported $171 billion in pretax U.S. profits. But as a group, their federal income taxes were negative: $2.5 billion.”
CTJ documents that “not a single one of the companies paid anything close to the 35 percent statutory tax rate. In fact, the ‘highest tax’ company on our list, ExxonMobil, paid an effective three-year tax rate of only 14.2 percent…and over the past two years, ExxonMobil’s net tax on its $9.9 billion in U.S. pretax profits was a minuscule $39 million, an effective tax rate of 0.4 percent.”
Next time you hear Republicans like Eric Cantor, John Boehner and Mitch McConnell repeat their statement that corporations are overtaxed and need a break, you can tell them that “had these 12 companies paid the full 35 percent corporate tax, their federal income taxes over the three years would have totaled $59.9 billion.” CTJ director, Bob McIntyre noted that these 12 companies are “just the tip of an iceberg of widespread corporate tax avoidance.”
The public is not hoodwinked
Of course, most Americans suspect as much, even if they don’t have the exact figures. A recent Gallup poll asked the public’s opinion on where they stand on the tax cuts for the rich and the tax breaks for the corporations. By a 45% margin, they opposed tax cuts for the rich and by a 55% margin, they opposed tax cuts for corporations.
So what are Barack Obama and the Democrats waiting for? They have the undeniable facts and overwhelming public sentiment behind them. Why do they let Cantor, Boehner and McConnell continue to mouth falsehoods without rebuttals of the truth?
It’s obvious. The Democrats want big time money from the executives and political action committees of the Fortune 500. The Democrats are willing to let the Republicans fuzz the debate and dare to try and make Medicare and social security benefits absorb the sacrifices. Indeed last week, the Washington Post headlined Obama signaling to the Republicans that social security “is on the table.” [Editor's note: President Obama has subsequently announced his willingness to make further cuts to social security. Express your disapproval to his campaign by clicking here.]
Even the meek reporters should no longer fail to challenge the Republicans’ daily mantras.
Should you have any doubts that the corporate state is in firm control of your government, try this test: If you paid a single dollar in federal income tax in any of the years 2008, 2009 and 2010, you paid more than the giant General Electric (GE) company. In that period GE made $7.722 billion in U.S. profit, paid no taxes and received $4.737 billion from the IRS. As the New York Times reported on March 24, teams of GE tax lawyers and accountants are making sure they avoid taxes altogether, shifting the burden to you.
These big companies are laughing at us all the way to the taxpayer-bailed-out banks. They’re even laughing at their own shareholder-owners. The non-financial companies are sitting on about $2 trillion. Inert dollars, producing nothing and earning minuscule interest are better deployed by enlarging the dividend payments to their shareholders. A mere 10% of that sum as dividend payments this year would pump $200 billion into an economy needing more consumer demand.
Reporters and columnists need to start addressing these topics at news conferences with members of Congress and White House staffers. The Washington press corps shouldn’t behave like sheep!
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