M.H. Wilkinson and Dan Smith: Stop rewarding corporate tax dodgers
If a kid steals a cookie, does it make sense to give him another and then hope that he won’t do it again? An army of corporate lobbyists is trying to convince Congress that after stashing nearly $1.4 trillion offshore to avoid paying the U.S. taxes they owe, they should get a massive tax discount for bringing the money back to America.
The last time Congress gave corporate America a “repatriation holiday” in 2004, despite promises of job creation, the firms that benefited most actually shed jobs, bought their own stock to boost the price, and increased executive pay. Eagerly anticipating the next holiday, they then shifted even more profits offshore. Small businesses and ordinary taxpayers who can’t afford high-priced attorneys or accountants were left to foot the bill.
Over 80 of America’s largest 100 publicly traded companies make use of tax havens, which all told cost American taxpayers $100 billion a year in lost revenue. Some of these offshore subsidiaries are nothing more than PO boxes. In fact, 18,857 “corporate headquarters” are registered at a single address in the Cayman Islands. With close to 1,000 lawyers and accountants in its tax department, General Electric managed to pay zero dollars in U.S. taxes on its American profits in 2010.
Here in Virginia, to make up for tax dodgers, the rest of the state’s individual tax filers had to pay over $2.4 billion in 2010, according to a U.S. Public Interest Research Group study. That breaks down to each taxpayer in the state paying, on average, an extra $411. If a corporation benefits from American education, infrastructure, and national security, it should pay the taxes it owes to America.
A tax holiday allowing corporations to pay just a 5 to 8 percent tax rate on profits they’ve kept offshore instead of the normal 35 percent would only reward companies that have shirked their tax responsibility. The vast majority of U.S. corporations — the small businesses that can’t hire aggressive tax attorneys — would not benefit at all. A study recently released by the Senate Permanent Subcommittee on Investigations found that just 0.015 percent of American corporations could take advantage of the tax holiday in 2004. Pharmaceutical and high tech giants accounted for nearly half of the returned funds.
While a tax holiday for tax dodgers is wrong on principle, research shows that it also doesn’t help the economy. The Senate study found that the 15 companies that brought back the most money in 2004 actually shed nearly 21,000 jobs. The companies didn’t use the extra cash to invest in research and development either. So where did the money go? According to the study, these same top firms markedly increased stock buy-backs and upped executive pay by nearly 60 percent in the two years following the tax holiday.
At the end of the day, the only clear effect the last tax holiday had on the economy was to encourage companies to shift even more of their profits offshore. According to a study by the Congressional Research service, the nonpartisan research arm of Congress, firms that took most advantage of the tax amnesty last time have increased the amount of cash stashed offshore by 81 percent. It’s clear what lesson they learned.
One of the strangest things about the renewed push for a tax amnesty is that the army of at least 160 corporate lobbyists fighting for it is pressuring the Super Committee, which is charged with cutting the deficit, to include it in its recommendations. They’re undeterred by the nonpartisan Joint Committee on Taxation’s finding that a corporate tax holiday will add at least $42 billion and as much as $78.7 billion (depending on the discounted tax rate) to the deficit over the next 10 years.
The facts speak for themselves. A corporate tax holiday is nothing more than a giant giveaway to the wealthiest American corporations that use offshore tax havens. It will encourage companies to engage in more of the same tax-dodging behavior and force small businesses and individual taxpayers to pick up the tab of the extra tax burden. Congress needs to keep the cookie jar closed, and not let the American taxpayer get fooled again.
M.H. Wilkinson is former executive director the Commission on Virginia’s State and Local Tax Structure for the 21st Century. Dan Smith is a tax and budget associate with the U.S. Public Interest Research Group.