Stopping tax avoidance without causing “flight”

June 26, 2013 — On May 21st, the U.S. Senate held a hearing designed to spotlight the practice of tax avoidance by multinational corporations. That practice has attracted international attention and anger for months, from protests and boycotts of Starbucks in the United Kingdom last December to a French claim against Amazon.com for 252 million euros ($334.5 million) in unpaid taxes. Citizens for Tax Justice, a non-profit tax-policy advocacy group based in Washington, D.C., estimated in a recent report that, if just 290 of the Fortune 500 companies that engaged in tax avoidance repatriated all their foreign profits from the most recent fiscal year, it “could result in almost $491 billion in added corporate tax revenue.”

“Unrepatriated earnings” are a function of the “deferral” provisions in current U.S. tax law that allow a multinational not to pay taxes on overseas profits unless and until such a company decides to bring those profits back to the U.S.

Some public policy advocates argue the U.S. should not be disturbed by the practice of deferral, but, instead, should adapt to the “reality” of an international tax system in which some territories, such as Ireland, Bermuda, and the Cayman Islands, maintain much lower corporate tax rates than the international norm. Such advocates tend to see current U.S. law as putting U.S. corporations at a competitive disadvantage, and support the adoption of a “territorial tax system” in which the U.S. would levy no taxes at all on foreign profits made by U.S.-based multinational corporations.

Other advocates, however, would replace deferral with a regime that taxed profits immediately, regardless of where they were earned, and argue that doing so would dramatically cut back on the incentive and ability for U.S. corporations to engage in international tax avoidance.

Would ending deferral have dangerous consequences, from making U.S. corporations uncompetitive with their overseas counterparts to driving those corporations to move their headquarters’ overseas? Remapping Debate’s inquiries have found that such concerns appear to be overstated, and that the U.S. — acting unilaterally or in concert with the international community — has a range of policy options that could mitigate or nullify those effects.

A broken system?

According to tax experts, the United States’ current international taxation policies both create strong incentives for international corporations to avoid paying U.S. taxes and provide the means for them to do so. Steve Wamhoff, the legislative director for Citizens for Tax Justice, told Remapping Debate, “Allowing corporations to defer the U.S. taxes on their offshore profits [is] of benefit to these corporations, because they can continue to hold these profits offshore — or claim that these profits are offshore — for years and years and years without having to pay any tax on them.”

Kyle Pomerleau, an economist at the Tax Foundation’s Center for Federal Tax Policy, said that given “the reality of the international economy,” corporations are acting entirely rationally by using loopholes and tax havens (though he preferred not to use that term) to reduce their tax rates. “You’d expect [it], just as an individual takes advantage of a child tax credit [and] education tax credits…You’re not blaming those individuals…They’re just trying to take advantage of the tax system as it was set up,” he said.

Remapping Debate asked Pomerleau if there wasn’t a role for the U.S. and other national governments, either acting alone or in concert, to influence or shape the worldwide economy in order to produce a more desirable result. Pomerleau rejected that idea: “The global economy must be taken as a given,” he wrote in an email.

Øygunn Sundsbø Brynildsen, a policy and advocacy officer at Eurodad, a network of non-governmental organizations from 19 European countries dedicated to researching issues of debt and development, disagrees. “I believe you can legislate the international system,” she said. “The U.S. is a global power…I think the U.S., by having strong rules, can sort of pave the way for a global system that will benefit everyone — everyone in terms of all countries.” Brynildsen said that if the U.S. or another “global power,” such as the European Union, were to take strong action against corporate tax avoidance, “Then it will be much easier for others to follow.” She believes the U.S. can “play a very important role in taking the first step,” and thereby help to level the international playing field.

Ending deferral

Some advocates for corporate tax reform believe it is possible to create an environment in which corporations would have fewer incentives and less opportunity to avoid paying U.S. taxes. With remarkable consistency, these advocates argued that the most important measure the U.S. could take would be ending its deferral policy. “The answer is to get rid of the rule that encouraged all the corporations to shift all their profits offshore in the first place, which is deferral. Until then, you’re going to still have a system where corporations have some sort of incentive to do that,” said Wamhoff.

Thomas L. Hungerford, a senior economist and the director of tax and budget policy at the Economic Policy Institute, a left-leaning think tank, agreed. When asked about what he believed would be the most effective measure the U.S. could take to combat tax avoidance, he replied, “The big thing would be just getting rid of deferral. It’s an incentive to basically shift as much profit overseas [as possible].”

And Nicole Tichon, the executive director of Tax Justice Network USA, the U.S. branch of an international coalition of tax researchers and activists based in the United Kingdom, added that deferral “incentivizes companies to not only defer their taxes, but to keep their operations offshore.”

A bill that would end deferral is currently on the floor of the U.S. House of Representatives. The Corporate Tax Fairness Act, developed by Senator Bernie Sanders (I-Vt.) in the Senate and Representative Janice Schakowsky (D-Ill.) in the House, was referred to the House Committee on Ways and Means in February, 2013, where it currently remains. The bill has only three co-sponsors: Representatives Keith Ellison (D-Minn.), Alan Grayson (D-Fla.), and Raul Grijalva (D-Ariz.).

Rep. Schakowsky asserted the importance of her bill in an interview with Remapping Debate. “Because of special rules for corporations and incentives we give them to set up foreign tax havens and engage in tax avoidance, [there is] about $590 billion over the next decade that could be in the U.S. Treasury.” Having that money, she said,  “would avoid having to do things like cut nutrition programs for poor people, which we’re doing right now.” Tax avoidance by multinational corporations, she said, “really burdens…the vast majority of Americans in this country, and we should end that.”