Global Policy Forum

Tax Havens and the Business Lobby


By Faiz Shakir, Amanda Terkel, Satyam Khanna, Matt Corley, Benjamin Armbruster, Ali Frick, Ryan Powers, and Pat Garofalo

May 21, 2009


This week, President Obama announced "a major offensive against businesses and wealthy individuals who avoid U.S. taxes by parking cash overseas." The administration plans to prevent corporations from claiming tax deductions on overseas investments until they pay U.S. taxes on their profits. It also aims to reverse a Clinton-era rule known as "check the box," which allows companies to easily shift income into tax havens. "Even as most American citizens and businesses meet [their tax] responsibilities, there are others who are shirking theirs," Obama said. "And many are aided and abetted by a broken tax system, written by well-connected lobbyists on behalf of well-heeled interests and individuals." Indeed, the business lobby immediately cried foul over the proposed changes, claiming that they will harm corporations' competitiveness and "eliminate American jobs." "It is the wrong idea, at the wrong time for the wrong reasons," said John Castellani, the Business Roundtable president. "This is going to be the largest fight that the U.S. multinational community has this year and probably into next," added Kenneth Kies, a tax lobbyist who represents firms like Caterpillar, General Electric, and Microsoft.

THE NEED FOR TAX REFORM: America's current tax system is clearly in need of reform. The corporate taxes collected by the U.S., as a percentage of GDP, falls well below the Organization for Economic Cooperation and Development (OECD) average -- despite the fact that the U.S. has a higher statutory tax rate than most countries. Due to the myriad loopholes, shelters, and deductions that are available for corporations to take advantage of, one explanation of this is the corporate practice of deferring tax payment by stowing profits in low-tax countries like the Cayman Islands. By keeping this money offshore, corporations are able to significantly lower their effective tax rate -- in some cases by more than 20 points. General Electric, for instance, paid just 5.5 percent in taxes in 2008. In 2004, "U.S. multinationals paid an effective U.S. tax rate of just 2.3 percent on $700 billion in foreign profits." And according to U.S. PIRG, a $100 billion annual tax burden is shifted onto U.S.-based companies and taxpayers due to tax avoidance. Obama's proposed changes are reasonable measures that will bring the tax code closer to responsibly and fairly calculating income to be taxed.

THE BUSINESS LOBBY GEARS UP: Even before Obama formally announced his plan to reform the tax code, the business lobby was gearing up to fight the proposals. "This is bigger than 'card check,' bigger than cap-and-trade, and people don't realize it," said Kies. Groups including the Business Roundtable, the U.S. Chamber of Commerce, the National Association of Manufacturers, and the National Foreign Trade Council, "helped form a lobbying coalition called Protect America's Competitive Edge that is devoted specifically" to defeating the President's tax proposals, and their major claim is that businesses will move jobs overseas if the changes are enacted. Catherine Schultz, senior vice president for tax policy at the National Foreign Trade Council, said that she "has spoken with companies that are already weighing major changes in their business structures that could take operations abroad." However, the premise of Obama's plan is to encourage investments in the United States, instead of keeping it more cost-effective for companies to use tax havens. As Barrett Sheridan at Wealth of Nations wrote, "of the $103.1 billion raised by cutting down on tax arbitrage, $74.5 billion will go to making a permanent tax credit for companies that invest in R&D in the U.S. That hardly sounds like a plan that will damage U.S. growth prospects."

THE CRAM-DOWN EXAMPLE: Last week, business lobbyists and special interests showcased their influence by scuttling an important housing bill. Support for a cram-down provision -- which would have allowed bankruptcy judges to readjust mortgage payments for troubled homeowners -- evaporated in the face of furious lobbying by the banking and mortgage industries. The cram-down measure failed to pass the Senate by a vote of 45-51, even though it could have "prevented 20% of foreclosures at no cost to the taxpayers." Various banks and credit unions were involved in negotiations for weeks prior to the bill coming to a vote, yet different parties felt pressure to walk away from the table at one point or another. One business lobbyist bragged about the mess, saying that "chaos is good." As FireDogLake's Jane Hamsher found, "finance, insurance and real estate (FIRE) interests paid over $42 million to lobbyists who worked to defeat mortgage write-down in bankruptcy (cramdown) in the first quarter of 2009, as well as other anti-consumer legislation such as capping credit card interest rates." The campaign to defeat cram-down led Sen. Dick Durbin (D-IL) to say that "the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place."


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