Stop this egregious injustice: Why a bipartisan tax holiday is just another corporate handout

Corporations like Apple shouldn't get a sweetheart deal to "onshore" profits, tax expert Scott Klinger tells Salon

Published April 8, 2015 12:00PM (EDT)

  (AP/Paul Sakuma)
(AP/Paul Sakuma)

One of the more consequential paradoxes of American politics concerns the myth and the reality of bipartisan legislation. The myth is that American voters want it, and they want it bad. In fact, according to the more ridiculous iterations of the theory, Americans, more than anything else, just want to see Washington get things done — and get 'em done through compromise and bipartisanship. This is one of the reigning assumptions that help determine D.C.'s conventional wisdom.

The reality of bipartisanship, however, is quite different. Because despite all of the talk about compromise and reaching across the aisle, what Americans really want, by and large, is to see Washington make laws and policies that will address their biggest concerns — their paychecks, their healthcare, their personal safety and their children's education. But rather than see D.C.'s failure to assuage these concerns as a result of profound and sincere ideological differences, many Americans tend to think the culprit is an unwillingness to compromise (an impression reinforced by a mainstream media that, for various reasons, prefers to apportion the blame equally between the two parties).

When the reality and the myth are combined, the result is often something akin to the worst of both worlds, with the kind of legislation that can garner bipartisan support being tilted toward corporate interests and outside the realm of most regular Americans' concerns or understanding. That's why trade deals, for example, tend to be quite popular with both parties, even though most Americans are skeptical or outright opposed — assuming, of course, they're able and willing to pay the issue much attention. The same dynamic holds when it comes to ideas like corporate tax "holidays," which offer corporations lower tax rates so long as they agree to "onshore" their "offshore" profits.

No surprise, then, that a proposed tax holiday plan is slowly but surely making its way through Congress, blessed with — you guessed it — bipartisan support. But just because something unites senators or Congress members from each side of the aisle doesn't mean that it's a good deal for average Americans. And according to Scott Klinger, the director of spending and revenue policies at the Center for Effective Government and co-author of a new report on how corporate tax shenanigans hurt public investments, the tax holiday plan is a bad one, indeed. Recently, Salon spoke with Klinger over the phone about his report and the drawbacks of the tax holiday approach. Our conversation is below and has been edited for clarity and length.

In general terms, what's the proposal being talked about in D.C. right now? And what problem is it ostensibly trying to solve?

So the real problem is that we have a huge infrastructure deficit that we haven’t been attending to for many years. Many in Congress want to help pay for the infrastructure by bringing back some of the profits that companies have stashed offshore. So for instance, there’s more than $2 trillion dollars that’s offshore that no U.S. taxes have been paid on. Several members of congress think this is a pool of money that we should tax and then use that money for infrastructure. The problem with that is really a large pool of money, the companies that have the most offshore have been gaming the system and not paying their taxes, shifting their U.S. profits offshore so they don’t have to pay taxes. If we give a deep, deep discount on the taxes they owe, we’re burning our bridges to pay for not only the transportation infrastructure we need but also the money we need to repair our dams, our levees, our school buildings and our water systems.

Has this been tried before?

Yes, there was a big tax holiday in 2004. It was rather ironically called “The American Job Creation Act.” The idea was that companies had a lot of money, like half a trillion dollars offshore, and they were incentivized to bring that money back with a very low tax rate, 5.25 percent instead of 35 percent. The idea was that they would bring that money back and create jobs; hire, build factories, develop new products and create jobs. It totally backfired. Some of the biggest companies that brought back money actually laid off workers, 600,000 workers lost their job in the couple years after that tax holiday was passed. Companies saved taxes on more than $360 billion dollars, so the government lost a lot of tax revenue, and no jobs were created.

Basically, the companies used that money to buy back their stock to drive up the stock price. That’s important because CEOs and other executives receive a lot of their pay in stock, so the higher the stock price, the more pay they get. They also used it to pay dividends to shareholders. So average Americans and people who are looking for jobs or hoping to keep the job they had were big losers in that tax holiday. The judgement has been made pretty much across the board by everybody who studied that tax holiday that it was a failure.

Would there be a way to do something along the lines of what they’re proposing and address the failures of the last version? Or is the approach fundamentally flawed?

What members of Congress and the president should do first is close the barn door. Every year companies are shifting profits offshore, profits they make in this country, and they’re shifting them to places like the Cayman Islands or Ireland or Lichtenstein or Luxembourg that have very low tax rates, if they tax corporate profits at all. That game costs the U.S. Treasury $90 billion dollars a year. So we think the first order of business is to change the rules so that $90 billion dollars of tax revenue isn’t lost every year. If we invested that $90 billion dollars directly into infrastructure, over the next decade we’d have almost $1 trillion dollars in new infrastructure and we’d also have 1.8 million more jobs, because infrastructure spending creates a lot of jobs. So that’s the first thing we do.

Then you have to figure out what to do with the money that’s already offshore. We think the best solution is to change the laws to not allow companies to defer the taxes they owe on this money. Senator Sanders (I-VT) and Congresswoman Schakowsky (D-IL) from Illinois in the last Congress had a bill that would do just that. It would have raised an additional almost $600 billion dollars over the next decade, which we could have used also for infrastructure.

So there’s lots of things we can do. Congress needs to change the rules, Congress needs to ask big, multi-national businesses to pay their fair share. I would just add one more thing, that it’s really an equity issue. This April 15, every American family’s going to fill out their tax returns, pay their taxes, small business owners are going to pay their taxes, and because big businesses have these loopholes and have armies of accountants and lobbyists, many of them can get by paying very little taxes, if any at all.

Is there any way to spin this as something other than reaching for scraps from the table?

I think offering a big tax cut to companies that have been gaming the system is settling for crumbs, and that’s really the problem. This is money the companies owe, it’s not new taxes. It’s money they owe, they have a privilege to be able to put off paying those taxes until they technically bring that money back to the United States. Much of that money is already here in the United States; they deposit in foreign branches of Citigroup or Bank of America in the Cayman Islands or Ireland or some place else. The money is already available to them in the United States. For tax reasons, it’s still sitting legally in one of these offshore tax havens, but in terms of the company being able to use it, they can use it right now in most cases. The American citizens shouldn’t be settling for the crumbs. People should pay what they owe on their taxes, and that’s pretty much what we’re arguing. We don’t want to create a system that incentivizes the continuation of this trend.

In 2005 after the last tax holiday, there was about $500 billion dollars offshore. The companies knew another tax holiday was coming, so they started stoking even more away and over the last ten years that number has quadrupled. Now there’s $2.1 trillion dollars offshore. If we give another big tax holiday and companies get to bring back a bunch of money without paying very much taxes on it, then we’ll just see an acceleration of that and the pots will be refilling and another 10 years from now we’ll have many more trillion dollars that have escaped.

You mentioned before how much money there is "offshore." But how many companies' profits are we talking about here?

So there’s more than 5 million businesses in the United States that have employees, and there’s $2.1 trillion dollars that’s offshore right now. None of it’s been taxed. Just 26 companies have 60 percent of that money, $1.3 trillion dollars. So 26 companies would be getting this massive tax break. This isn’t a tax break for all businesses, this isn’t making all businesses more competitive and giving them a break on their taxes. This is giving an enormous tax break to 26 firms that have most successfully gamed the system and moved the profits they earned in the United States offshore. So that’s the real problem. The magnitude of it is that we have a $3.6 trillion dollar infrastructure deficit in this country right now. If we close these loopholes, we could raise over half a trillion dollars of money, $500 billion dollars of money for fixing our infrastructure, which would be a big down payment on this enormous gap that we have.

Let’s look just at the particular companies. Half the schools in this country were built to serve the baby boomers when they were starting out school 50 years ago and many of those are deficient and need to be replaced or substantially renovated. Apple owes enough money that the taxes that Apple owes are enough to cover 17 percent of the all of the cost of repairing America’s school buildings. GE owes enough on their $119 billion dollars that we could fix up all of the state, local, and national parks in this country. The national parks have a maintenance deficit of over $11 billion dollars and there’s some very serious problems going on there. One company, if they paid the taxes they owe on their offshore profits, could fix up all of that. These are the kinds of things we document in the report. Exxon and Chevron together, if they paid the taxes they owe on their offshore profits, could repair and replace nearly a quarter of the country’s levees that are in danger of failing. These protect lots of people’s property and people’s lives and are critical investments, particularly as we face more extreme weather and climate change-related issues.

Now, what about the argument that the White House has made with regard to the Trans-Pacific Partnership trade deal, which I imagine they'd make some version of here, too. Namely, the idea that this tax holiday is going to happen, one way or another, and taxpayers would be more likely to get a less-awful deal under President Obama than, say, a future President Bush?

In terms of someone else doing it better, the thing that’s most disturbing, sitting here in Washington, D.C., is people look at the $2 trillion dollars and they seriously say, “No one’s ever going to pay taxes on that, so we might as well get something for it.” I think that’s the divide between the White House and some of the members of Congress. Should we settle for 14 percent? Should we settle for 8.5 percent? What’s the right number? That’s where the debate is at. Our position is if we do that, we’re really letting go of our nest egg for making a lot of the repairs that we need to make to our infrastructure and other investments in this country. We think the public’s proper response to the current plans, both that of the president as well as the two congressional proposals, is it’s not enough. Companies should be paying a lot more. This is money that should have been taxed at 35 percent, not 14 percent, not 8.75 percent. If it happens again in the future president who’s of the other party, then I think people should rise up and say, again, it’s not enough.

I’ll leave you with one last thought. Inside Washington, that’s the ethic. Outside Washington, the notion that corporations aren’t paying their fair share is broadly held between Republicans and Democrats. It doesn’t matter where you are in the political spectrum, if you ask, the vast majority of people will say corporations aren’t paying their fair share. Some of the small business groups, some small business coalitions did a poll two years ago in 2013 and they asked small business owners in a poll that was two to one dominated by self-identified Republicans, are big corporations dodging their taxes through using these offshore loopholes a problem for your business? Ninety-one percent of them said it was. Overwhelmingly Republican poll, 91 percent said tax dodging was a problem for their small business. I think that’s the ethic that’s broadly shared in America, not let’s give corporations a big tax break who have gamed the system and then get a few small repairs made on our infrastructure.

By Elias Isquith

Elias Isquith is a former Salon staff writer.

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