Weekend Economists: See the Kittehs! May24-27, 2013

[Demeter]

101. ‘A’ Is for Avoidance

http://www.nytimes.com/2013/05/26/opinion/sunday/a-is-for-avoidance.html?_r=0

Even before last week’s Senate hearing on Apple, it was clear that the aggressive use of tax havens and other tax avoidance tactics had become standard operating procedure for global American companies.

Microsoft and Hewlett-Packard were the focus of a similar Senate hearing last September, while Google, Amazon and Starbucks have drawn recent scrutiny in Europe. And, of course, there is General Electric, which achieved a perfect zero on its United States tax bill in 2010. In fact, G.E. was reputed to have the world’s best tax avoidance department until Apple came along with tactics to stash some $100 billion in Ireland without paying taxes on much of it anywhere in the world and, apparently, without breaking any law. And that is the problem. Rampant corporate tax avoidance may not be illegal, but that doesn’t make it right or fair. As corporate tax revenue has withered as a share of the economy and as a share of total revenue, Washington has leaned more heavily on individuals to pay for government. In 2012, personal income taxes and payroll taxes raised $1.9 trillion, compared with $242 billion raised from corporate taxes, a disparity that contributes to widening inequality and, in turn, to a slow economy and less social mobility. Congress’s Joint Committee on Taxation estimates that fully taxing the profits sheltered abroad by American corporations would raise an additional $42 billion in revenue this year, enough to end more than half the spending cuts in the sequester.

Yet it is not clear that lawmakers are committed to stopping widespread tax avoidance. Instead, they may further entrench the system, or even make it worse. The most immediate issue involves a tax repatriation holiday. Under the law, American corporations can defer paying tax on their profits as long as the money is held abroad. Apple is one of nearly two dozen major corporations pushing for a tax holiday, which would permit corporations to bring their foreign-held profits to the United States over the course of a year at a discounted tax rate. A tax holiday in 2005 dropped the rate from 35 percent to 5.25 percent, enticing corporations to repatriate some $300 billion. It was billed as a way to create jobs and boost investment, but it was a total policy failure. The repatriated money was mostly used for dividend payments, share buybacks (which tend to raise executive pay) and severance pay for employees laid off in corporate restructuring. The holiday rewarded aggressive tax avoidance, with 77 percent of the repatriated profits coming from tax haven countries, according to the Government Accountability Office. Worse, that tax holiday encouraged American companies to come up with even more ways to shift profits abroad in anticipation of a second tax holiday. Since the last holiday ended, profits held in foreign countries have skyrocketed, according to expert testimony at the tax avoidance hearings in the Senate last year. American corporations now have an estimated $2 trillion stashed abroad.

Some American corporations are also lobbying for a new “territorial” tax system, which would, in effect, be a permanent holiday: profits made or shifted abroad would be forever untaxed in America, even if the country where the profits were held was a haven with no or low taxes. That would further encourage the shift of jobs, investment and profit abroad — exactly the wrong policy direction. Equally pernicious is the notion, shared by members of both political parties, that corporate tax reform should be “revenue neutral” — meaning that it should simplify the code but not raise any taxes. That is absurd. It would leave the nation chronically short of revenue and increasingly reliant on working people to shoulder the tax burden.

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