We need a tax system that will encourage business creation, growth and global expansion while providing for appropriate U.S. tax revenues and investment in America and its work force.
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This strategy and maneuver (known as tax “inversion”), has been around for decades as U.S. firms expanded overseas and other countries adopted lower corporate tax rates than the U.S top rate of 35% (statutory rate can go to 39% on paper). In reality, since 1987, the taxable income rate has fallen to 68% from 95% and many corporations are very adapt at manipulating and using the convoluted and complex tax code to avoid paying taxes all together. But one example is General Electric, which in 2010 reported worldwide profits of $14.2 billion, claimed $5.1 billion of total came from the United States and not only did not pay any American taxes but claimed a tax benefit of 4.1 billion.
GE built a top notch giant tax department, led by former Treasury official John Samuels, and with an aggressive strategy that mixes fierce lobbying for tax breaks and innovative accounting, manages to concentrate its profits offshore and mostly avoid U.S. taxes. In a regulatory filing, G.E reported that its tax burden on American profits was 7.4% only, and even that is overstated since it includes taxes that will be paid if overseas profits are brought back, and since they are overseas, G.E. is effectively getting money back.
Why then are there such substantial efforts to cut corporate tax rates? Obviously a simplified tax code with lower tax rates might minimize, if not eliminate, the need for costly armies of accountants, lawyers and lobbyists to get around or reduce tax requirements.
Important to note that under U.S. tax law, multinational corporations based in the U.S. are not taxed on overseas profits until those profits are repatriated to the United States. It is estimated that upward of $2 trillion in profits are sitting abroad unavailable to both shareholders as dividends or to be taxed by the treasury. This money is also not coming back as investment in American and its labor force.
There are several ideas floating to resolve this issue. The obvious and corporate popular one is to simplify the tax code and reduce corporate tax rate to the around 20%. This might work for the country’s tax revenues as well as for the corporation if the code was simplified and deductions were eliminated, which in essence is the Senate Finance committee, headed by Senator Max Baucus, initial proposal which will also end tax deferrals to repatriate overseas profits.
In Oliver Stone’s 1987 movie wall street, Gordon Gekko (played to chilling, self absorbed Oscar winning perfection by Michael Douglas), famously says in shareholder meeting of a company he is about to acquire as well as liberate its assets for the benefit of its shareholders “I am not a destroyer of companies. I am a liberator of them! The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA. Thank you very much.”
In a “slightly” different and more socially responsible point of view, Senator Elizabeth Warren made the case that corporate and business success is a team effort, which includes all taxpayers and country institutions on all levels, local, state and federal. She went on to say that “There is nobody in this country who got rich on his own.
“I hear all this, you know, ‘Well, this is class warfare, this is whatever.’–NO!
Nobody.You built a factory out there—good for you! But I want to be clear.
You moved your goods to market on the roads the rest of us paid for.You hired workers the rest of us paid to educate.
You were safe in your factory because of police forces and fire forces that the rest of us paid for.
You didn’t have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did.
Now look, you built a factory and it turned into something terrific, or a great idea—God bless. Keep a big hunk of it.
But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.”Crooksandliars.com
Burger King now proposes a $11.4 billion deal to buy Canadian doughnut chain Tim Horton. In a conference call with analysts and investor, Burger King Executive Chairman Alex Behring stressed that what drives this deal is “international growth possibilities and not tax rates.” (The Chronicle-Telegram).
In response, Senator Sherrod Brown said, at the 20th annual Lorain County Organized Labor Day Family Celebration, that Burger king benefited from food inspections, police protection and roads paid for by U.S. taxpayers, but won’t be paying its fair share of taxes due to inversion. He urged the crowed to patronize locally owned restaurants instead of Burger King. He went on to say “They decided to renounce their American citizenship…so why help them?”
What is clear is that the world is getting smaller all the time and U.S. firms (and firms in all countries) are seeking foreign markets, economies of scale and global growth. Each country has a vested interest in keeping its fair share of revenues from taxing businesses that it helped succeed via investments in physical infrastructure, virtual infrastructure, labor force, education and specialized training, R&D incentives, small business support, tax breaks, police, fire, export support and other state and fed services. Reform of the tax code is a step in the right direction, however, national pride, patriotism, belief in American and its talent and spirit also must play a role. Profits and fortunes have been made in this country while keeping the business American and benefiting from all this country has to offer, including its freedoms and consumer base without resorting to complex and expensive manipulations of the system to avoid taxes.
What is needed now it leadership and political and business will to restructure the tax system, provide for incentives and fertile ground for business to compete and succeed on a global basis while making sure American and multi-national corporations invest in America and its labor force and taxpayers get the return they paid for as well as the services, opportunities, infrastructure and standard of living they deserve.
Photo: citizens4taxjustice /Flicker Photo2: chescrowel /Flicker Video: honestgrifter.com /YouTube