As the country begins to digest the revelations in the new offshore tax haven leak known as the "Paradise Papers," it’s important to not lose sight of the fact that the Congressional tax plan is out along with promises that it will end the gaming that has allowed multinational firms to shift trillions in profits offshore. Supposedly, the plan is to bring past profits and jobs back to the U.S. and prevent the offshoring in the future.
A closer look at the text of the bill suggests that the reality does not match the rhetoric.
Let’s start with the past profits. U.S. companies have approximately $2.6 trillion booked offshore on which they owe $752 billion in unpaid taxes. The House bill offers these companies a one-time deal to tax those profits at discounted rates of 12 percent for profits held in cash and 5 percent for other types of invested profits — that’s well below the current 35 percent rate, the rate in place at the time they earned the profits. In fact, that is a tax break of more than $500 billion on what they owe.
There is no economic case for discounted tax rates on profits already earned. In theory, lowering tax rates will incentivize future behavior. In this instance, the money is already earned. There is no loss of jobs or investment incentives by requiring companies to pay what they already owe before moving to a new system.
Drilling down further, findings from a 2011 U.S. Senate investigation indicate that there will be less benefit than advertised from the "return" of the profits to the U.S. The
Permanent Subcommittee on Investigations found that half the money booked offshore was simply routed through tax havens but reinvested in U.S. stocks, bonds, and real estate. We would be bringing much of the money "back" from Manhattan.
History also provides a caution about the benefits of repatriating these profits. The last time we gave companies a break on profits booked offshore was in 2004. The companies that took advantage of the break used the money for executive bonuses and dividends. They did not use the money for creating new jobs, raising workers’ wages, or investing in new factories or equipment. The top 15 companies to take advantage of the so-called ‘tax holiday,’ laid off 20,000 workers in the two years following the tax break. There is no reason to believe this time will be different.
The public benefit of a repatriation effort is derived from the revenue generated by the amounts companies pay toward what they owe in deferred taxes. That money could be used for rebuilding the nation’s infrastructure or meeting other public needs. A tax holiday that forgives hundreds of billions in corporate taxes, undermines the public benefit and rewards the companies that dodged taxes for all those prior years. Indeed, JPMorgan analysts are recently reported as saying that "we expect little economic effect from firms repatriating funds to the" U.S.
Going forward, gimmicks in the tax bill will give new incentives to move jobs offshore. One provision aimed at closing the offshore loopholes was recently gutted and other provisions leave several loopholes in place for favored special interests.
Currently, U.S. companies and individuals owe taxes on earnings wherever they are made – in Des Moines or Dublin. The new bill changes that longstanding parity so that companies will only owe taxes on profits they book in the U.S. or, in extraordinary circumstances, pay a lower tax on profits of offshore subsidiaries. It is safe to say that many offshore profits will go untaxed.
Under the original version of the bill, companies that moved some U.S. profits to offshore subsidiaries would have paid some taxes on those profits — that was good. But a recent amendment to the tax bill allows for deductions and other accounting games that nullify any benefit. After the amendment was adopted, the estimates on how much revenue would be raised dropped from $155 billion to $7 billion – this new loophole loses 95percent of the projected tax revenue of the original proposal.
Additionally, the bill exempts ordinary overseas profits from taxes. If the profit margins are extraordinary (there is a formula to determine this) the tax rate for those profits are half that for domestic companies. Multinationals will be incentivized not just to move profits on paper to tax havens but to move actual jobs and operations to lower tax countries like Ireland and Switzerland.
The bill sponsors say they are lowering the rate to reduce the exodus of jobs, but even the new rate of 20 percent for profits booked here is higher than the 0 percent rate for ordinary profits and the 10 percent rate for some extraordinary profits booked overseas.
This lower 10 percent tax rate only applies to overseas profits that are extraordinarily high. If companies move jobs overseas, then they can book those expenses overseas and keep the profit margins low to avoid even the 10 percent rate.
The bill sponsors say they are ridding the tax code of loopholes but, according to the text of the bill, oil, gas, and mining companies are exempt from even the 10 percent tax on extraordinary profits. They get a free pass. Banks and financial services are exempt as well. Apple, perhaps the most well-known and largest tax dodger, would get a free pass on its tax avoidance practices in Ireland and additionally be incentivized to move operations offshore.
In addition to complicating the tax code and incentivizing offshoring, the impact of these changes will further disadvantage small businesses and wholly domestic companies. Main street businesses do not — cannot — offshore their profits and play the games. Large businesses have built-in advantages such as bulk purchasing discounts and cheaper access to capital. They are inherent in a free market, and small business owners knew about those when they made the decision to open a business. But when government puts its thumb on the scale of big over small, that is an unfair advantage and one we should not accept.
All of this raises some basic questions: Why are we favoring foreign profits over domestic profits? And why are we incentivizing companies to move operations offshore?
The reality of the House tax bill does match the rhetoric used in selling it. We should reject this bill and work to close the offshore loopholes, stop the gaming, and ensure a fair and level playing field.