The Wonk Room

Business Lobby Goes Into High Gear To Preserve Offshore Tax Deferral

Both CQ and National Journal have write-ups of the “tax battle” evidently looming between big business and the Obama administration, over the administration’s proposal to begin taxing the profits companies earn overseas. Of course, the business lobby is casting the proposal as a business-killing apocalypse:

“Just imagine a world 10 years from now where there are no U.S. multinationals because they’ve all been bought by foreign competitors,” says tax lobbyist Kenneth Kies. “This is bigger than ‘card check,’ bigger than cap-and-trade, and people don’t realize it.”

“Everything else pales in comparison,” says National Foreign Trade Council President William Reinsch, whose group is partnering with the Business Roundtable, the U.S. Chamber of Commerce, and the National Association of Manufacturers to preserve the deferral rule.

The business lobby’s rhetoric is similar to that used by Sen. Orrin Hatch (R-UT), who warned that “companies are going to leave” because of Obama’s “stupid, dumb-ass” tax proposals. But their scaremongering ignores the fact that U.S. corporate tax revenue as a share of the economy is below the Organization for Economic Cooperation and Development (OECD) average.

The U.S. raises less revenue from corporations than countries like the United Kingdom and Ireland, even with a technically higher rate. As we’ve noted before, loopholes and shelters contribute to a skewed idea of what the U.S. corporate tax system really looks like, but suffice to say, it’s not the crippling system that businesses make it out to be.

Plus, according to research by Dhammika Dharmapala at the Oxford University Centre for Business Taxation, allowing corporations to defer taxation on offshore profits means they will leave that money offshore regardless of their home nation’s tax rate:

Delaying repatriations in this way can confer a substantial deferral advantage on the [Multi National Corporations] by reducing the present value of its US tax liability. Moreover, this deferral advantage is magnified for tax haven affiliates (because the immediate source-based tax paid to the tax haven government is low or zero). Thus, MNCs have incentives to use tax havens to reduce or defer their tax liabilities, regardless of whether they happen to be based in countries with territorial or worldwide tax systems.

This deferral actually encourages corporations to invest overseas, costing America jobs and lost revenue. And in 2004, when the U.S. opened “a one-year window in which companies could bring their profits home at a 5.25 percent tax rate,” most of the money “was used to buy back stock from shareholders, not to invest in domestic operations.” Incidentally, for every $1 that corporations spent lobbying for that tax holiday, they saved $220 in taxes.