In his State of the Union address less than a month ago President Obama brought up a basic minimum corporate tax. He noted that “companies get tax breaks for moving jobs and profits overseas” and that American companies should not be allowed to use these mechanisms to avoid paying their fair share.
But in order to change this status quo, legislators need to close the loopholes that allow companies to drive down their effective tax rates far below the official rate. This needs to happen. There are far too many corporate tax loopholes—which are deductions, credits, and other tax expenditures that benefit certain activities—and they often result in very different marginal tax rates for different companies who conduct very similar business activities. It is these loopholes which allow corporations to pay an average rate of 12%, even though the statutory rate is 35%. It is these loopholes that allowed the 100 largest U.S. multinational corporations to pay about $16 billion of U.S. tax on approximately $700 billion of foreign active earnings in 2004 – an effective tax rate of about 2.3%.We must close these loopholes to align the effective corporate tax rate with the official rate.
And I am pleased to say that only a few short weeks after President Obama’s address, Senator Carl Levin and Senator Kent Conrad have introduced a bill, to accomplish just what the President said we should. The bill, called Cut Unjustified Tax Loopholes Act or CUT Loopholes, would slice these loopholes by:
[Preventing] companies run from the United States from claiming foreign status and dodging U.S. taxes on their foreign income (§103) by treating foreign corporations that are publicly traded or have gross assets of $50 million or more and whose management and control occur primarily in the United States as U.S. domestic corporations for income tax purposes.
[Requiring] annual country-by-country reporting (§111) by SEC-registered corporations on employees, sales, financing, tax obligations, and tax payments.
[Strengthening] John Doe summons (§115) by streamlining the process used by the IRS to issue summons to a class of persons, such as the clients of an offshore bank, accounting firm, or law firm, while strengthening court oversight.
[Strengthening] penalties (§§121-122) on tax shelter promoters and those who aid and abet tax evasion by increasing the maximum fine to 150% of any ill-gotten gains.
As Raymond Baker, Director of GFI, recently noted, the bill would eliminate “incentives to send money and jobs overseas; help level the playing field between small businesses and multinational corporations; increase information and transparency for corporate investors; and strengthen law enforcement and tax collection abilities.”
According to the Joint Committee on Taxation and the Office of Management and Budget, the CUT Loopholes Act would reduce the deficit by at least $155 billion over the next decade with $130 billion of that reduction being attributable to the bill’s offshore tax provisions.
The question of whether or not this important piece of legislation will pass does not come down to the will of Americans. Americans are already on board. According to the Des Moines Register’s Iowa Caucus Poll, 87% of individuals surveyed said corporate tax loopholes should be closed so that every U.S. business pays some taxes. Likewise, according to an independent poll 91% of small businesses agree that U.S. multinational corporations’ use of accounting loopholes to shift their U.S. profits to their offshore subsidiaries to avoid taxes is a problem.
As we know, Senator Carl Levin is no stranger to these issues. He has a long legislative history of promoting transparency and financial integrity. This bill adds yet another critical piece to his record. The President, likewise, has also supported similar legislation during his own career in the Senate. That, put together with his comments during the State of the Union, we can likely count on his support.
Since small businesses, average Americans, and the President of the United States are seem to be on board, the decision comes down to the remaining 98 members of the Senate, the 435 members of the House of Representatives and, of course, the multinational corporations, who—I’m willing to bet—all have a strong opinion. And I’m also willing to bet they’re going to work pretty hard to hold onto that loophole-ridden 2.3% effective rate. I say: let’s have that discussion. We’ve got a lot more going for us on this side.
Disclaimer: Unless specifically stated to be the views of the Financial Transparency Coalition, the opinions expressed on this blog are solely the opinions of the individual blogger and are not necessarily those of the Financial Transparency Coalition.