I was asked:
The U.S.. in effect, subsidizes companies that offshore. They didn't believe me. Can you help me explain it?
My response: I'm sure I don't know the full extent of it, but below are only a few of the ways.
- 3/19/11. Added links at the end on plans by right-wing Treasury Secretary Geithner and Republicans for another "tax holiday" for multinational corporations as Republicans did in 2004. They let corporations return profits squirreled away in foreign countries to the U.S. They're taxed, not at the much-complained-about 35% tax rate that the multinationals never pay, but at a much lower rate; in 2004 that "holiday" had a 5.25% rate! Such blatant thievery.
While many characterize the changes that would stop the subsidies as protectionism, it's actually about ending "reverse protectionism." Considering the growing U.S. trade deficit, it's clear that the U.S. does not have a problem with "protectionism" and that, to the contrary, "reverse protectionism" is winning. Ending "reverse protectionism" is not protectionist.
What's somewhat amazing is that these subsidies are so entrenched that they're not even recognized as warping the playing field. The field is so uneven that it has led to an exponentially-increasing trade deficit that will destroy our economy. If foreign countries want access to our markets, they can help pay for the systems that support that access.
- Companies can defer paying taxes on income from foreign subsidiaries ... indefinitely.
- Tax loopholes, such as moving headquarters to a tax haven.
- Allowing R&D and other investment tax credits for companies that move manufacturing off shore ... the U.S. doesn't fully benefit.
- Corporations engage in flawed transfer pricing schemes to avoid U.S. taxes, e.g., they sell components to foreign subsidiary with very low profit markup, and buy back product after manufacture with a very high foreign profit markup.
- Not including labor & environmental standards in trade pacts is a subsidy. The costs of environmental degradation and injuries to workers are externalized onto the public at large. Without standards, democracy is undermined: individuals don't value and "purchase" clean environment & workplace safety, governments do; if a government isn't a democracy, it doesn't represent the interests of its citizens.
- Corporations are allowed to write-off the cost of shutting down a factory in the U.S. when it transfers the work to a factory in a foreign country.
- Corporations are allowed to write-off the cost of bringing new foreign employees to the U.S. and requiring its U.S. employees, as their last duties before being fired, to train the foreign employees to do their jobs.
- Excessively high real interest rates set by the Federal Reserve Board in the 1980s encouraged manufacturing to go offshore, because investing in real assets has yielded lower returns than investing in financial assets. This led to the leveraged buyouts of the 80s and the weakening of the manufacturing sector.
Businesses avoid taxes whenever they can and they influence legislation to avoid taxes whenever they can. They leave it to the public at large (especially to those who work for a wage, rather than those who reap dividends and capital gains) to pay for the systems and services that allow businesses to make their returns.
And also we compete with other countries, like those in Europe, that provide universal government health insurance which means companies in those countries do not bear that major cost.
For much more detail, see below and in A Systems Thinking Perspective on Manufacturing & Trade Policy:
The ones Kerry notes are (from http://www.johnkerry.com/pdf/tax_reform.pdf):
1. Current tax laws allow corporations to defer paying U.S. taxes on income earned by their foreign subsidiaries, providing a substantial tax break for companies that move investment and jobs overseas. Today, under U.S. tax law, a company that is trying to decide between locating production or services in the United States or in a foreign lowtax haven is actually given a substantial tax incentive not only to move jobs overseas, but to reinvest profits permanently, as opposed to bring them back and re-invest in the United States.
2. Current international tax loopholes allow American companies to escape taxes by taking advantage of complicated international tax rules. These abuses include "corporate inversion" where an American company moves its headquarters to a tax haven like Bermuda to avoid taxes, certain types of cross-crediting that encourage companies to shift income and jobs to low-tax havens, restricting tax avoidance through hybrid structures, and other abuses.
These are real, but they are only two of the particularly egregious subsidies. Here are others I note in A Systems Thinking Perspective on Manufacturing & Trade Policy:
3. The U.S. allows R&D investment tax credits to companies that do not retain their complementary assets (e.g., manufacturing) in the U.S. This is a problem because, when a nation that subsidizes an innovation does not retain the manufacturing, it does not fully profit from the innovation.
4. Corporations engage in flawed transfer pricing schemes to avoid U.S. taxes. This distorts accounting of profits and losses.
- The nation does not fully profit because it cedes a large portion of the profits to the nations that do the manufacturing. Continuing such subsidies is a form of "reverse protectionism." The dynamic is explained in detail in the section of a Systems Thinking Perspective on Manufacturing Base Restoration on "Why innovation alone isn't enough: Profiting from Technological Innovation").
- Here is a summary of Teece's rationale:
- The more easily innovations can be imitated, the more an innovating firm risks ceding a significant share of the returns from innovation to customers, imitators and owners of complementary assets (e.g., manufacturing). To prevent this, the innovating firm itself must focus on protectable innovations, focus on products /services for which the necessary complementary assets are already under its control, or establish appropriate plans for contracting/leasing or integrating the necessary complementary assets. Managers must become adept in understanding their organizations and markets as dynamic systems.
- For the same reasons that control of complementary assets, such as manufacturing, are important to companies, they also matter to innovating nations. In regions of weak appropriability, innovating firms without the requisite manufacturing and other specialized capabilities may fail and, similarly, innovating nations may allow competing nations to capture the lion's share of the profits from the innovation.
Transfer pricing is when the U.S. corporation sells, say components to be assembled, to its foreign subsidiary with a very small markup for profit. Then the foreign subsidiary does further assembly and manufacture and sells the product back to its U.S. corporate parent with a very large markup for profit. The U.S. company sells the product in the U.S. at a price that yields only a small profit due the high cost to it from its foreign subsidiary. This allows the foreign subsidiary to retain the profits and pay low taxes in the foreign country compared to taxes that would be paid in the U.S.
The U.S. could require accounting standards that disallow obviously fraudulent transfer pricing schemes whereby corporations move profits to foreign subsidiaries to take advantage of the lower taxes in foreign countries (resulting from tax wars). Allowing such transfer pricing schemes is a form of "reverse protectionism."
5. Corporations are allowed to write-off (deduct the expense) the cost of shutting down a factory in the U.S. when it transfers the work to a factory in a foreign country.
6. Corporations are allowed to write-off (deduct the expense) the cost of bringing new foreign employees to the U.S. and requiring its U.S. employees, as their last duties before being fired, to train the foreign employees to do their jobs.
7. Not including labor and environmental standards in trade pacts is a form of subsidy. This is "reverse protectionism" and a subsidy because the costs of environmental degradation and injuries to workers are externalized onto the public at large.
8. Excessively high real interest rates set by the Federal Reserve Board is a policy that has encouraged the loss of manufacturing.
- Just as intellectual property protections protect private capital, labor and environmental standards protect social capital, or quality of life, built up over centuries. They protect our ability to further increase social capital. With inadequate trade protections for labor and environmental standards, which must be strictly monitored and enforced, our (labor and environmental) social capital is now being undermined and will continue to seriously erode. Note that "free trade" proponents don't have a problem working toward enforcing intellectual protection restrictions because they protect private capital, rather than social capital.
- In countries without constitutional democracies (especially in dictatorships) and without the technical competence and financial means to perform sound science, citizens cannot properly value their environment; the market doesn't set prices for the environment, governments do.
- The lack of democracy and effective political institutions affects the ability of nations to make sound economic decisions. (Thompson and Strohm, 1996):
- However, if one does include the environment in the theory of comparative advantage, an important caveat is in order. This caveat is, of course, that the market does not set prices for the environment and that is, therefore, a task for government. It is quite possible that the government will price the environment incorrectly (by which we mean that it fails to require the full internalization of the costs of environmentally harmful practices). If that should happen, then it is still true that countries will tend to export the goods that use intensively factors of production that are relatively cheaper. But it is no longer true that trade patterns reflect relative scarcity, nor that trade is unambiguously welfare increasing.
- Also, developing countries lacking the capability to perform sound science cannot properly evaluate impacts on health and the environment (Yoshino, et al., 2002):
The Federal Reserve Board setting excessively high real interest rates (in the past) has encouraged manufacturing to go offshore. Why invest in real assets for returns when one can invest in financial assets? This led to the leveraged buyouts of the 80s and the weakening of the manufacturing sector. (See the section on "The Economic Environment and National Economic Policy" in Systems Thinking Perspective on Manufacturing Base Restoration).
But some complain about "excessive corporate taxation"
When it's proposed that these policies should be reversed, many talk about "excessive corporate taxation." But they only get away with that complaint because so many don't realize the extent to which corporations escape taxes altogether (see the article below). They get the benefits and pass the costs on to others.
The U.S. allows "tax competition" between the states that have produced large and growing infrastructure backlogs ($1.6 trillion nationally). The tax breaks awarded to corporations are subsidies, the costs of which are passed on to the public at large.
Cutting taxes, that is, engaging in tax competition with other countries and among regions in the U.S., to attract companies is the standard recommendation of those who wish to promote economic growth. Indeed, tax competition is lauded by the CATO Institute (Edwards and de Rugy, 2002), which sees this as a desirable way to limit government.
- Tax competition does attract companies and it does limit government, but the consequences are serious. The result is taxes that are insufficient to cover the long-term costs of roads and schools. This leads to infrastructure backlogs and calls for even more growth "to increase the tax base" and pay for infrastructure. Unfortunately, while there is a short-term tax benefit from growth, taxes remain insufficient to cover the long-term costs of growth; and the cycle continues.
Corporations don't pay the moaned-about 35% rate. Many don't pay any U.S. taxes at all!
60% of U.S. firms escaped taxes during boom By John D. Mckinnon, WALL STREET JOURNAL, 4/7/04
WASHINGTON - More than 60 percent of U.S. corporations didn't pay any federal taxes for 1996 through 2000, years when the economy boomed and corporate profits soared, the investigative arm of Congress reported.
The disclosures from the General Accounting Office are certain to fuel the debate over corporate tax payments in the presidential campaign. Corporate tax receipts have shrunk markedly as a share of overall federal revenue in recent years, and were particularly depressed when the economy soured. By 2003, they had fallen to just 7.4 percent of overall federal receipts, the lowest rate since 1983, and the second-lowest rate since 1934, federal budget officials say.
The GAO analysis of Internal Revenue Service data comes as tax avoidance by both U.S. and foreign companies also is drawing increased scrutiny from the IRS and Congress. But more so than similar previous reports, the analysis suggests that dodging taxes, both legally and otherwise, has become deeply rooted in U.S. corporate culture. The analysis found that even more foreign-owned companies doing business in the United States -- about 70 percent of them -- reported that they didn't owe any U.S. federal taxes during the late 1990s.
"Too many corporations are finagling ways to dodge paying Uncle Sam, despite the benefits they receive from this country," said Sen. Carl Levin, D., Mich., who requested the study along with Sen. Byron Dorgan, D., N.D. "Thwarting corporate tax dodgers will take tax reform and stronger enforcement." A 1999 GAO study on corporate tax payments reached similar results.
The latest report has given new ammunition to the campaign of Democratic presidential challenger Sen. John Kerry, who has criticized President Bush for failing to crack down on corporate tax dodgers. Kerry wants to end corporations' ability to park their overseas earnings in tax havens, in order to discourage outsourcing; in return, he is proposing a lower U.S. corporate tax rate.
To be sure, Kerry has supported some of the most recent big corporate breaks, such as those contained in a 2002 economic stimulus bill. And the latest GAO report focused on tax avoidance that took place entirely during the Clinton years.
A spokesman for the Bush campaign said Kerry's own campaign has acknowledged its plan wouldn't stop outsourcing. "Sen. Kerry has a habit of putting forth political statements that wouldn't achieve the policy goals that he says they would," Bush spokesman Scott Stanzel said.
An IRS spokesman noted that the agency recently has stepped up enforcement activity for business taxpayers. The Bush administration's 2005 budget request includes a 10 percent increase for IRS enforcement, mostly to go after more corporations.
The GAO report also may further fuel a drive in Congress to crack down on a variety of corporate tax-dodging strategies, such as a recently discovered leasing maneuver that allows companies to buy up depreciation rights to public transit lines, highways and water systems. Senate tax-committee leaders have released a list of companies involved that includes a number of well-known financial firms, such as First Union Commercial Corp., a unit of Wachovia Corp. Wachovia has defended its involvement, saying the transactions are legal.
The new report also could spur further IRS action against tax-shelter peddlers and their customers. The IRS is closely examining tax-shelter deals sold by accounting firms such as KPMG LLP, for example. That firm recently experienced a management shake-up in response to the inquiry.
Conservatives depicted the GAO report as an argument for tax-code overhaul for both corporations and individuals. Dan Mitchell, a fellow at the Heritage Foundation, a conservative think tank, also noted in corporations' defense that they have an obligation to shareholders to pay as little tax as they legally can.
The basic federal corporate-tax rate for big corporations is 35 percent. But the federal tax code also offers many credits and loopholes that allow many companies to pay far less than that.
How to they manage to pay far less? Here's one way to make it 5.25%!
Does tax code send U.S. jobs offshore? 3/21/2008
At issue is the U.S. tax code's treatment of profits earned by foreign subsidiaries of American corporations. Profits earned in the United States are subject to the 35% corporate tax. But multinational corporations can defer paying U.S. taxes on their overseas profits until they return them to the USA — transfers that often don't happen for years. ...
Today's U.S. tax system encourages corporations to structure their operations to shift profits to low-tax foreign locales such as Ireland, Bermuda or the Netherlands. That's especially true for companies that benefit from so-called intangible assets that are difficult to value. By assigning patents or other licenses to foreign affiliates, corporations can legally book profits in low-tax venues rather than the USA, economists say.
Evidence of legal tax-shifting can be seen in government statistics. In 2005, U.S. multinationals' units in Ireland, which levies a corporate tax of just 12.5%, reported profits that were twice as large as the profits of all U.S. affiliates in Germany, France and Italy combined. ...
Regarding "transfers" returning profits to the USA: They'll keep profits there until they get a "tax holiday" that lets them bring back profits at an extremely low tax rate ... 5.25%!!!
Trillion-dollar Tax Holiday Sought by Multinationals by Bob Adelmann, 3/18/11.
Claiming that granting a "tax holiday" for her company (and other large multinationals) would be beneficial to the United States, Oracle President Safra Catz said that such a holiday would allow earnings sitting in idle accounts abroad to be “repatriated” and freed up for better use here in the United States. “It’s an absolute no-brainer,” she said. If the money flows back to the United States, "it will create jobs." If it stays where it is, it will wind up "funding everybody else’s economies and banks." ...
In 2004, a multinational “tax holiday” was enacted, and 843 corporations repatriated some $362 billion in profits from their foreign operations, generating nearly $20 billion in revenues for the Treasury. The opportunity was especially attractive because the tax rate was reduced from the usual 35 percent rate to just 5.25 percent if the companies acted within a year of passage of the act.
Sure, it's a no-brainer for multinationals like Oracle. They complain about a nominal 35% rate that they never pay thanks to write-offs and keeping profits offshore. And Republicans are gearing up to promote the thievery:
Congress Considers “Tax Holiday” for Corporations 2/13/11
... This week, Treasury Secretary Timother Geithner addressed an issue that’s been making the rounds which would give multinational companies a tax break. In the midst of all of the clamoring about lowering the corporate tax rates in the US (since we’re second only to Japan in terms of the highest tax rates), US lawmakers are considering throwing corporations yet another bone: a tax holiday.
Here’s the deal. Under existing law, US companies can more or less stash cash in offshore companies for eons and not have to pay tax on it until they repatriate it. This is, of course, not at all the case for individuals, as you are no doubt aware due to the current witch hunt stepped up efforts by the IRS to find unreported individual offshore accounts. But companies have a different set of rules.
By most estimates, US companies have stockpiled earnings of more $1 trillion – roughly the size of the current federal deficit. That’s a lot of cash that we’d like to see here, no?
So GOP leaders have come up with an idea to get those companies to bring back the cash: lower the tax rate. Rep. Eric Cantor (R-VA) and Sen. Orrin Hatch (R-UT) are said to be proposing a “tax holiday” which would temporarily drop the corporate tax rate for the purposes of expatriation.
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