WASHINGTON -- As Congress grinds closer to shutting down the federal government and the White House floats proposals to cut social services for working families, big business is gearing up to try to win yet another budget battle: overhauling the corporate tax code. However the current budget tussling between President Obama and congressional Republicans ends, corporate titans and their lobbyists appear poised for a big victory at the expense of the American middle class.
President Obama said he hopes to eliminate many corporate tax loopholes during his State of the Union address, but he also pledged to cut the overall corporate tax rate -- a joint policy the White House has billed as "revenue neutral," meaning it will neither increase or decrease overall corporate tax receipts. The administration has not yet outlined which loopholes it wants to close or how far it wants to push down the tax rate.
Buoyed by the prospect of a business-friendly tax overhaul, however, the Business Roundtable and other high-powered corporate lobbyists are using tax reform negotiations to push for more offshore tax breaks and official federal forgiveness for tax avoidance schemes. They got a big boost on Tuesday when House Budget Committee Chairman Paul Ryan (R-Wis.) pledged to actively reduce corporate taxes in his fiscal 2012 budget proposal, which would also do away with or fundamentally change key social services, including Medicare.
Ryan's sweeping budget plan generated fierce opposition from congressional Democrats. But it may spark renewed enthusiasm for using the December released bipartisan deficit commission report as a starting point for long-term budget negotiations. The corporate tax reform proposed by the commission would permanently push popular offshore tax shelters beyond the reach of Uncle Sam -- very bad news for legislators, economists and average citizens hoping to see big companies play a bigger role in helping to narrow the budget gap. A bipartisan group of senators is already engaged in talks based off the report, and, in the wake of Ryan’s budget proposal, Third Way, a centrist Democratic think tank with close ties to Wall Street, is pressing lawmakers to hammer out a compromise largely based on the commission’s recommendations.
The push for lower corporate tax rates comes during a flush time for corporate America. Overall corporate taxes as a share of GDP are hovering around one percent, the lowest share of GDP since World War II.
"At a time when cuts to access to college, cuts to scientific research are on the table, it makes no sense to take corporate taxes off the table," said Chuck Marr, Director of Federal Tax Policy for the Center on Budget and Policy Priorities, a left-leaning think tank focused on economic issues. "The country is just starting this process of deficit reduction, and there are going to be some wrenching choices."
A senior Treasury official defended Obama's push for a revenue-neutral corporate tax overhaul in a recent meeting with reporters, contending that the main threat to today's economy isn't low corporate tax rates, but the possibility that higher tax rates will force companies to decamp abroad. The Treasury official requested anonymity in order to speak candidly about rationales for the department's economic policy proposals.
Both Obama and congressional Republicans have repeatedly emphasized that the official tax rate for big corporations of 35 percent is high relative to other nations, but the actual tax bills companies pay are much lower, thanks to the use of special exemptions, tax havens and other sweeteners sprinkled throughout the tax code.
According to a 2007 study by George W. Bush's Treasury Department, the average American company actually pays a tax rate of just 13.4 percent -- lower, for example, than France, Portugal, Spain, Japan, Canada, and Switzerland, and less than half the average rate paid in the United Kingdom and Australia. This, despite the fact that, according to the study, the U.S. had one of the highest official rates in the industrialized world.
Tax experts say that no meaningful corporate tax overhaul, revenue neutral or otherwise, can allow companies to continue stashing money in offshore tax havens-- a creative accounting tactic that allows big firms to avoid paying $50 billion in taxes every year, according to the U.S. Treasury. Gauging the specific amount of taxes lost to offshore accounts is difficult, however, and reform advocates say the number could be even bigger.
"Anybody who tells you that they do know is probably full of it," said Jack Blum, a Washington attorney who chairs Tax Justice USA, a tax code reform group. "The problem is that people don't report what they don't pay in tax, so it's very, very hard to tell how much money we're losing. For a long time administrations went out of their way to make certain that no data was collected."
For years, progressive lawmakers and tax policy advocates have targeted tax havens as hotbeds of federal budget abuse. Companies can register profitable enterprises at an address in the Cayman Islands-- even if it actually does business on Wall Street -- and voila: so long as companies leave their profits in the Caribbean, their taxes can be "deferred" indefinitely.
"It's the number one issue, more important than anything I can think of," said Bob McIntyre, a long-time tax reform advocate who works as Director of Citizens for Tax Justice, a non-partisan research organization dedicated to progressive taxation.
According to a 2008 report by the Government Accountability Office, 83 of the 100 largest U.S. companies operate subsidiaries in nations that the government watchdog considers tax havens. All types of firms indulge, from telecommunications giants to retailers to banks. Wall Street is particularly aggressive; at the time the GAO report was issued, just six American banks were operating more than 900 such sub-companies.
The few lawmakers with the audacity to propose a crackdown on offshore havens say that it would be politically impossible to secure without bestowing other tax benefits on companies.
Last year, Sen. Ron Wyden (D-Ore.) and then-Sen. Judd Gregg (R-N.H.) pushed legislation to overhaul the entire tax code for both individuals and corporations. The effort would have ended deferred tax shenanigans, but in order to bring any Republicans on board, the bill had to be revenue neutral, according to Jennifer Hoelzer, a Wyden aide closely involved with the talks.
"When you start talking about raising revenue, that just enters in more controversy than you need at the moment," she said.
Although the Wyden-Gregg legislation went nowhere last year, it included some provisions that could be used to build political support for another tax reform push. Under that plan, average voters would get a tax break, giving them a stake in a debate that is otherwise simply a battle between muscular corporations and other firms unable to more fully exploit tax perks.
"When we do something big like tax reform . . . people need something to show for it at the end of the debate," Hoelzer said. "For us, when we did both corporate and individual reform at the same time, the average tax filer gets a tax break at the end of it. You want to give people a reason to root for something."
A major concern for those hoping to require corporations to help narrow the deficit is a plan being floated by the Business Roundtable, a lobbying group representing CEOs of the largest American companies.
The Business Roundtable plan would make all international revenue from U.S. firms, including money stashed in Caribbean tax shelters, permanently nontaxable. The Business Roundtable declined to comment for this story, but its website claims that moving to a permanently untaxed foreign income system-- known as a "territorial" plan among tax experts -- is vital to making American business competitive with firms in other countries.
Many economists beg to differ.
"Those offshore affiliated corporations have no economic reality," said University of Texas Economist Calvin Johnson. "Cayman Islands is a suburb of Greenwich, Connecticut and ought to be treated that way. It has no independent life or meaning."
The Obama administration is already backpedaling in the face of this lobbying push. In a Tuesday hearing before a Senate subcommittee, Treasury Secretary Timothy Geithner said that the administration would consider granting a one-time tax holiday for corporations who stash money in tax havens, if it were part of a "comprehensive" tax reform project. Geithner did not specify what else should be included in such a comprehensive overhaul, but reiterated that the administration is committed to a "revenue-neutral" plan.
A bipartisan group of six senators is currently attempting to cut a deal on narrowing the deficit. The group includes Sens. Richard Durbin (D-Ill.), Kent Conrad (D-N.D.), Mark Warner (D-Va.), Tom Coburn (R-Okla.), Saxby Chambliss (R-Ga.) and Mike Crapo (R-Id.). A spokesperson for Chambliss said the group has no proposal yet and is still working out legislative language. None of the other senators would comment.
But a source close to the talks, who requested anonymity because negotiations are ongoing, said that corporate tax reforms would be based on recommendations from Obama's Fiscal Responsibility Commission. The Commission called for eliminating four categories of corporate tax breaks, while exempting offshore tax havens by adopting the "territorial" tax policy now being pushed by the Business Roundtable.