U.S. multinationals in Capital strike against taxes
Jan. 12, 2013
Global, nominally U.S. corporations have been on a tax strike since the last “repatriation holiday” in 2005. Corporations like Apple computer and General Electric are refusing to bring an estimated $1.7 trillion in “overseas earnings” back to the U.S. as long as the United States demands a 35% tax payment on those earnings. Apple, for example, has more than $12 Billion parked offshore. Google has $17 billion and Microsoft, $29 billion. “To the companies,” Washington Post reporters Jia Lynn Yang and Suzy Khimm note, “no other tax issue matters more.”
Faced with the same situation seven years ago, President George W. Bush let capitalist allies off with a five percent tax payment, and nearly $400 billion was eventually brought back to the U.S. But, while the tax holiday was “sold” to the public with the promise of job-creating domestic investment, ninety-two percent of that money was instead returned to shareholders in the form of dividends and stock buybacks.. Times reporter David Kocieniewski describes two differing versions of how one of the big winners, pharmaceutical giant Merck Corp., used the tax giveaway. According to:
“Merck spokesman, Steven Campanini…. the company used the [repatriated] money for “U.S.-based research and development spending, capital investments in U.S. plants, and salaries and wages for the U.S.”
According to regulatory filings, the company cut its work force and capital spending in this country in the three years that followed. …
Merck brought back $15.9 billion in October 2005. The next month, it unveiled a restructuring plan to cut 7,000 jobs. Over the next three years, about half those cuts were made in the United States, where the company’s employment fell to 28,800 jobs, from 31,500….
… Much the same happened elsewhere, according to a review of taxpayer data by the National Bureau of Economic Research. “For every dollar that was brought back, there were zero cents used for additional capital expenditures, research and development, or hiring and employees’ wages,” said Kristin J. Forbes, a professor of economics at the Massachusetts Institute of Technology’s Sloan School of Management. Forbes was a member of President Bush’s Council of Economic Advisers and led the study.
The pitch today is to eliminate U.S. taxes on foreign profits altogether, and switch to a “territorial system” – in which a company only pays taxes where it claims the money was made. But global companies have many ways of attributing earnings to tax havens like the Cayman Islands to avoid local taxation – or avoiding taxes altogether in “free trade zones” around the world. (U.S.-based Intel Corporation, for example, negotiated “foreign trade zone” status to avoid taxes in 2011 on its new facility in Chandler, Arizona.)
Unsurprisingly, wealthy global corporations find widespread political support for their strike, including from Co-Chairs Alan Simpson and Erskine Bowles of the National Commission on Fiscal Responsibility and Reform. “At least,” says Bowles in justifying the giveaway, “(the money) will be here and not circulating in other countries.” The territorial system of taxation was also endorsed by President Obama’s Jobs Council, headed by General Electric CEO Jeffrey Immelt. Thankfully, this Council has not met since early 2012. A call for this colossal break was also part of GOP Presidential nominee Mitt Romney’s economic platform, and House Republicans have passed a budget that includes a transition to a territorial tax system.
The effects of caving in to this “bring it home free” demand would include long-term damage to future U.S. budgets. “The territorial tax system they envision would gut the entire U.S. Corporate tax code,” according to Edward D. Kleinbard, a Professor of Tax Policy at the University of Southern California. Kimberly Clausing, an Economics professor at Reed College calculates that as many as 800,000 jobs could be added to low-tax countries instead of the United States.
Among factors making a complete Obama Administration cave-in on this demand unlikely is opposition from domestic firms, which already pay higher taxes than the country’s biggest multinationals. But some negotiated compromise seems likely, though not necessarily as part of “Fiscal Cliff” negotiations. A 20-25, percent taxation agreement, followed by significant financial repatriation, could be a significant Democrat victory, and a boost to the domestic economy.
Another arguably positive resolution might be following the Japanese example. Japan switched to a territorial system in 2009. But they also tax a company’s foreign income if taxes paid in another country are less than 20 percent. While 20 percent is still a low number, a global 20 percent standard would represent a remarkable move toward tax discipline in a global world.
It seems likely, however, that U.S. corporations would respond to this idea by continuing their strike.
Materials cited in this article:
“Companies Push for Tax Break on Foreign Cash,” David Kocieniewski, New York Times, June 20, 2011