Saturday, December 5, 2015

The Congressional Love Affair with Corporate Tax Avoiders

"I learned two startling things. First, Bermuda must be part of the U.S. tax base. Secondly, if Google is expected to pay taxes in the UK, it will take all those 53,600 jobs — which are mainly in California — and move them to Bermuda." — EconoSpeak, December 2, 2015

Senator Bernie Sanders: “Each and every year, we lose $100 billion in revenue because large corporations and the wealthy are stashing their profits in the Cayman Islands, Bermuda and other offshore tax havens. That has got to stop." (Sanders lists the top 10 corporate tax avoiders.)

"In 1952, the corporate income tax accounted for 33 percent of all federal tax revenue. Today, despite record-breaking profits, corporate taxes bring in less than 9 percent." — Bernie Sanders, ranking member Senate Budget Committee on Wednesday, August 27th, 2014 — Politifact: Mostly true.

Via EconoSpeak (December 2, 2015) Congressional Aid to Multinationals Avoiding Taxes

The OECD’s Base Erosion and Profit Shifting (BEPS) initiative is an effort by the G20 to curb the abuse of transfer pricing by multinationals. Senate Finance Committee Chairman Orrin Hatch (R-Utah) is not a fan:

Throughout this process we have heard concerns from large sectors of the business community that the BEPS project could be used to further undermine our nation’s competitiveness and to unfairly subject U.S. companies to greater tax liabilities abroad. Companies have also been concerned about various reporting requirements that could impose significant compliance costs on American businesses and force them to share highly sensitive proprietary information with foreign governments. I expect that we’ll hear about these concerns from the business community and others during today’s hearing.

Indeed we heard from some lawyer representing The Software Coalition who was there to man-splain to us how BEPS is evil. I learned two startling things. First – Bermuda must be part of the US tax base. Secondly, if Google is expected to pay taxes in the UK, it will take all those 53,600 jobs which are mainly in California and move them to Bermuda: particular how the changes to the international tax rules as developed under BEPS will significantly reduce the U.S. tax base and create disincentives for U.S. multinational corporations (MNCs) to create R&D jobs in the United States

Yes – I find his testimony absurd at so many levels. Let’s take Google as an example. When they say foreign subsidiaries – think Bermuda. Over the past three year, Google’s income has average $15.876 billion per year but its income taxes have only average $2.933 billion for an effective tax rate of only 18.5%. How did that happen? Well – 55% of its income is sourced to these foreign subsidiaries and the average tax rate on this income is only 6.5%. Nice deal! Google’s tax model is not only easy to explain but is also a very common one for those in the Software Coalition. While all of the R&D is done in the U.S. and 45% of its sales are in the U.S. – U.S. source income is only 45% of worldwide income. Very little of the foreign sourced income ends up in places like the UK even 11% of Google’s sales are to UK customers. Only problem is that income ends up on Ireland’s books with the UK getting a very modest amount of the profits. Now you might be wondering how Google got to the foreign taxes to be only 6.5% of foreign sourced income since Ireland’s tax rate is 12.5%. But think Double Irish Dutch Sandwich and you’ll get how the profits ended up in Bermuda as well as perhaps a good lunch! But what about that repatriation tax you ask. Google’s most recent 10-K proudly notes:

“We have not provided U.S. income taxes and foreign withholding taxes on the undistributed earnings of foreign subsidiaries”.

In other words, they are not paying that repatriation tax. Besides the Republicans want to eliminate. Let’s be honest – Congress has hamstringed the IRS efforts to enforce transfer pricing. The BEPS initiative arose out of this failure. And now the Republicans in Congress are objecting to even these efforts. And if Europe has the temerity of expecting its fair share of taxes, U.S. multinationals will leave California and relocate in Bermuda? Who is this lawyer kidding?

Senator Bernie Sanders (the ranking member of the Senate Budget Committee) is proposing a $1 trillion infrastructure plan over five years. His presidential campaign cited a Joint Committee on Taxation estimate for Sanders’s Corporate Tax Dodging Prevention Act, which would raise more than $113 billion over the next decade, as well as an $900 billion estimate in the tax lawyer’s letter for the cost of the “tax expenditure” that allows U.S. corporations to defer paying U.S. tax on their foreign earnings until that income is repatriated. Bernie's plan will create as many as 13 million jobs. This number is derived from a White House Council of Economic Advisers estimate that every $1 billion in federal highway and transit investment would support 13,000 jobs for one year. The Washington Post reluctantly agrees:

"Bernie Sanders can make a credible case that he can fund his $1 trillion infrastructure program over a 10 year period by taxing the profits of U.S. corporations now held in low-tax tax havens — and that such a spending plan could result in 13 million jobs."

The European Commission is poised to launch a formal probe against McDonald's over the company's use of tax shelters in Luxembourg, a major victory for a union-backed effort to shine a light on McDonald's tax practices. According to the Fiscal Times, McDonald's came to the attention of the commission in February during the Luxleaks scandal, which revealed that hundreds of companies had agreed to secret deals in Luxembourg saving them billions of dollars in taxes.

The charity War on Want and three unions, which trawled through the leaked revelations, accused the company of avoiding billions in tax payments across Europe. The report by War on Want and the unions focused on tax payments between 2009 and 2013, when McDonald's relocated its European headquarters from London to Switzerland and set up a holding company for intellectual property in Luxembourg.

SEIU, one of the labor groups that released the report, has long been pressuring McDonald's over its international business practices, including in Europe and Brazil. This inquiry could draw serious blood from McDonald's, which is alleged to have dodged $1.7 billion in U.S. taxes using the Luxembourg entity. (The company, like all companies, denies any misconduct. If that's true, then it means the laws must be changed.)

Corporate Tax Extenders Costs Workers Billions

CBS News (Dec. 4, 2015) A battle over billions in business tax incentives:

Deep in the $1.1 trillion dollar spending bill that Congress has to pass by Dec. 11 to avoid a government shutdown are 50 annual "tax extenders" that would provide tens of billions of dollars in tax relief for the private sector. Advocates say these measures, which have been around for years, are essential for U.S. businesses to compete globally. Critics claims that they're nothing more than a form of corporate welfare paid for with deficit spending. Perhaps the most controversial of all the business tax extenders are the "active financing exception" and the "controlled foreign corporations look-through rule." U.S. multinationals rely on these provisions to reduce their tax liability through various ways of shifting income to offshore subsidiaries. Corporate giants such as Apple , General Electric and Google were investigated by the Senate's Permanent Subcommittee of Investigations for using these provisions. Senators Carl Levin, D-Michigan, and John McCain, R-Arizona, who chaired the panel, blasted the practices as tax avoidance, saying they cost the government billions of dollars in lost revenue. A 2014 report by the Citizens for Tax Justice, a nonprofit advocacy group, explored this offshoring strategy and found that 288 of the Fortune 500 companies that were profitable between 2008 and 2012 paid an average effective tax rate of just 19.4 percent over that five-year period, while 26 companies paid no federal taxes at all. McIntyre of Citizens for Tax Justice told CBS MoneyWatch: "Since the 1950s the share of federal income tax revenue paid by corporations has dropped from 40 percent down to around 19 percent these days." [Bernie Sanders said it went from 33 percent in 1952 to less than 9 percent today. Either or, it's still a huge drop in the tax they pay.]

A 2013 report from Americans for Tax Fairness and Public Campaign found that 373 businesses and trade groups hired nearly 1,400 lobbyists to push for tax extenders over a three-year period. The tax extender bill would extend most of the traditional 50-odd tax breaks for a year, but it would also make six corporate tax breaks permanent, costing a whopping $667 billion.

Two other measures, the Active Financing Exception (AFE) and the “look-through” rule, let corporations benefit from foreign tax havens. AFE (costing $78 billion over 10 years) enables financial institutions to defer taxes on income they claim to have earned outside the United States; all sorts of accounting tricks can make it appear like dividends, interest and other income were generated offshore.

The Look-through Act (costing $22 billion over 10 years) allows multinational corporations to move profits to tax-haven shell companies without having to pay U.S. taxes, while reducing their tax rate on real earnings.

Other proposed permanent corporate tax breaks have bipartisan support, like the research and development tax credit ($182 billion). But just giving a bunch of corporations free money won’t lead to the broad bipartisan vote necessary to force President Obama’s signature. So other perks have been added to the tax extenders bill.

The bill might also delay a tax on medical devices for two years ($5 billion), an Obamacare funding source that Democrats in states with lots of medical device companies — even stalwart liberals like Elizabeth Warren and Al Franken — oppose. Mother Jones reports that members of Congress have personal investments of $68 million in this industry. (So much for the STOCK Act)

The bulk of the $889 billion price tag for the "tax extenders" (for now) directly supports corporations, with scraps going to workers, students and the sick. While some fiscal conservative groups have grumbled about the cost, Republicans in Congress are proving they believe in the famous dictum uttered by Dick Cheney: “Reagan proved that deficits don’t matter.”

Related Headlines

  • The Washington Post: Corporate taxes have become a hot item since Pfizer’s announcement last week that it has made a $160 billion deal to become the biggest tax deserter in U.S. history.
  • The Guardian: Report says increasing inability to tax corporate profits means governments are forcing workers and consumers to plug the revenue gap.
  • PFI: Corporate tax revenues have been falling across OECD countries and individuals are being left to foot the bill, the economic think-tank has found.
  • Wall Street Journal: EU Corporate Tax Crackdown Expands
  • The Monitor: Congress needs to support families, not corporate tax giveaways

As president, Senator Sanders says he will stop corporations from shifting their profits and jobs overseas to avoid paying U.S. income taxes. But the Republicans in Congress won't agree — and for some reason, the voters keep putting Republicans and "moderate" Democrats in Congress (Elizabeth Warren isn't on the list, so we're still waiting on her.)

Mark Zuckerberg, Facebook CEO

Mark Zuckerberg faces criticism over his $45 billion pledge (December 2015 by Brian Mastroianni at CBS News)

Zuckerberg is not "giving away" 99% of his FB wealth. He's "donating" his FB shares to an LLC [limited liability corporation] that he controls for minimizing taxes. Like other U.S. multinationals, Facebook has used a range of accounting techniques to minimize its taxes. Those include funneling profits to tax havens overseas, a practice critics say deprives the U.S. government of revenue.

Mark Zuckerberg’s $45 billion loophole (December 2015 by James Kwak at Baseline Scenario)

Much of the internet is giddy over Mark Zuckerberg and Priscilla Chan’s "pledge" to give "99%" of their Facebook stock to "charity". Other super-rich people will feel no pressure to sign onto the Giving Pledge or donate their money to the traditional charity system. Instead, they will create their own LLCs to maintain complete control over their money, and spend it on their own pet projects and political issues. That’s not a good thing. [Like the Clinton Foundation?]

Mark Zuckerberg is giving away his money, but with a twist (December 2015 by Mathew Ingram at Fortune)

The widow of Apple's co-founder Steve Jobs and Bill Gates also have a LLC foundation, and the "flexibility" of that structure was apparently one of the things that makes it so appealing. LLC corporations can make for-profit investments and political donations — but unlike charitable trusts, they don’t have to report their political donations. [See reader comments at Mark Thoma's blog.]

Flashback to 2012: Eduardo Saverin, one of the founders of Facebook, officially de-friended the United States by giving up his American citizenship for the more tax-friendly residency status of Singapore. After Saverin departed for Singapore, Democratic Senators Chuck Schumer and Bob Casey introduced a bill to double the exit tax to 30% for anyone leaving the U.S. for tax reasons. More and more American expatriates are renouncing their citizenship as a result of the crackdown in foreign tax regulations, which was initiated after the Swiss bank UBS was accused of helping US citizens to hide money abroad. UBS paid $780 million in settlement fees to the US and disclosed information on over 4,000 American tax dodgers — and Mitt Romney could have been one.


Corporate crime reporter Russell Mokhiber writes that large corporations are now being hit with penalties of more than a billion dollars for environment, health and safety violations — but yet, violations and evasion of regulators continue — as do lack of criminal prosecutions. Similarly, big banks are facing high fines, but this has not changed their behavior.

Andrew Gavin Marshall calls them the ‘Global Mafiocracy” and says:

“In other words, the big banks – along with large insurance companies and asset management firms – do not simply act as a cartel in terms of engaging in criminal activities, but they form a functionally interdependent network of global financial and corporate control. Further, the banks work together in various industry associations and lobbying groups where they officially represent their collective interests.”

This is a driving force behind the extreme wealth inequality that we are experiencing. Billionaire Bonanza (a report from the Institute for Policy Studies) documents that the twenty richest people in the US have more wealth than the bottom 152 million people.

As if that isn’t enough, the three international trade treaties being negotiated [the Trans-Pacific Partnership (TPP), the Trans-Atlantic Trade and Investment Partnership (TTIP) and the Trade-in-Services Agreement (TiSA)] overreachs far more than any past agreements — all to hand more power to transnational corporations — and all thanks to Republican LITEs such as Obama and Hillary, and other "moderate" Democrats and Republicans in Congress.


  1. Lawmakers Near Deal on Billions in Tax Cuts. Republican and Democratic negotiators closed in Friday on a major package of tax cuts for businesses and individuals that could exceed $700 billion in forgone revenues over a decade. The package would extend or make permanent around 50 temporary tax breaks that have expired or will soon lapse. By combining business breaks that are priorities of Republicans with tax credits for lower-income workers and families that are critical to Democrats.

    Score one for the Republican establishment. After being on the defensive for months over the renewal of the Export-Import Bank, Washington’s big business interests won a decisive victory on Thursday when Congress voted overwhelmingly to reopen the agency through Sept. 30, 2019, as part of a popular highway bill. The bank, which provides loan guarantees and other benefits to spur United States exports, had been under sharp attack for months from conservative lawmakers and activists with ties to the Koch brothers’ political network, which assailed it as a form of corporate welfare and crony capitalism.

  2. Why do pro athletes and Hollywood stars sign deals with corporations (i.g. Nike) that offshore everybody else's jobs — or with banks (i.e. Capital One)? Many times these celebrities are already fabulously rich, so it's not like they need the money. These people must think: "Screw all of you! I got mine! Now I'm going to get me some more!" But yet, their fans continue to support and adore them.

  3. These are the GOP's proposals for taxes (not including capital gains, where the very rich generate most of their income)...

    John Kasich and Jeb Bush each call for reducing the number of tax brackets from seven to three and setting the top marginal income tax rate at 28 percent. The top rate now is 39.6 percent (on incomes over $413,200 for individuals — those in the top 1 income bracket).

    Marco Rubio, working with Sen. Mike Lee (R-Utah), proposed three rates on individuals: 35 percent, 25 percent and 15 percent.

    Chris Christie also advocates going to three rates, with his top rate at 28 percent.

    Donald Trump backed three rates: 10 percent, 20 percent and 25 percent — with a 15 percent corporate tax rate (currently it is 35%, but the "effective" rate that they actually pay is usually much less — sometimes ZERO.)

    Ted Cruz calls for starting over with an across the board flat tax rate of 10 percent. Flat taxes are regressive, because across-the-board cuts benefit the rich more than the poor.

    Rand Paul backs a flat rate of 14.5 percent on individuals (which raises it for lower income earners making less than $9,225 a year, and lowers it for everybody else.)

    Both the Cruz and Paul propose business taxes that have been compared to the value-added tax used in Europe.

    Rick Santorum endorses a 20 percent flat tax on businesses, with special breaks for manufacturers (who offshore jobs).

    Ben Carson wants a tax model based on the tithing called for in the Bible, but he has not laid out specifics in a way that can be scored by economists.

    Also, Jeb thinks an internet sales tax is necessary for fairness, while Rubio promises to veto it. (for billionaire Jeff Bezos of Amazon, as one example).

    Billionaire Steve Forbes makes an exhaustive case for a 17 percent flat tax for individuals and corporations.

    Overhauling the code is the new Speaker’s (Paul Ryan) pet issue, and he made that clear when he agreed to give up his chairmanship of the tax-writing Ways and Means Committee that he was not going to let go.

    Grover Norquist (who wants to shrink government down to the size where we can drown it in the bathtub) is happy with most of the GOP's proposals.


    Republicans and Democrats have gone back and forth over the tax package and a 1 trillion dollar omnibus spending bill. The spending bill needs to reach the president’s desk by the middle of next week to avoid a government shutdown…Negotiations surrounding the two pieces of legislation have become intertwined, and Republicans leaders have indicated that the omnibus and tax extenders bills will come to the floor together in one large vehicle. That won't fly with Pelosi, who fiercely opposes the tax package in its current state...Making the Earned Income Tax Credit and Child Tax Credit permanent has been a priority for Democrats in negotiations. While the Child Tax Credit is in the extenders package, Pelosi wants it to be indexed, meaning its benefits will rise with inflation -- something Republicans haven’t been responsive on. Another sticking point is the sheer size of the tax extenders package, which could cost upwards of $700 billion over the next decade. Republicans are also pushing hard to include a measure that would lift a 40-year-old ban on crude oil exports to the tax deal.

  5. New York Times: As congressional leaders were hastily braiding together a tax and spending bill of more than 2,000 pages, lobbyists swooped in to add 54 words that temporarily preserved a loophole sought by the hotel, restaurant and gambling industries, along with billionaire Wall Street investors, that allowed them to put real estate in trusts and avoid taxes. They won support from the top Senate Democrat, Harry Reid of Nevada, who responded to appeals from executives of casino companies, politically powerful players and huge employers in his state. And the lobbyists even helped draft the crucial language. The small changes, and the enormous windfall they generated, show the power of connected corporate lobbyists to alter a huge bill that is being put together with little time for lawmakers to consider. Throughout the legislation, there were thousands of other add-ons and hard to decipher tax changes.

  6. The new spending bill includes permanent tax breaks — with the support on both sides of the aisle:

    One which allows companies to deduct R&D costs.
    One allowing businesses to write off up to $500,000 for the purchase of heavy machinery or office equipment.
    One that expands the category of foreign income that is not taxed.
    One allowing businesses to write off investment costs up front.

    And the bill also delays taxes on medical devices — and delays the “Cadillac tax” (a tax on employer-provided health plans.)

    With interest, this bill will cost taxpayers $830 billion over the next 10 years. With no new revenue sources (taxes), the expense will just be tacked onto to the huge deficit. Either that or, there will be cuts in other government spending (other than defense).