President Obama sent what the Christian Science Monitor called a shudder through corporate America with his announcement that he wants to move on a key campaign promise and close tax loopholes and scuttle foreign tax havens.
Here’s Obama’s announcement via an AP video that allows embedding posted on You Tube:
Here’s how progressive talker Ed Schultz frames it on his new MSNBC talk show, complete with an interview with a White House official who predicts a fight over the plan:
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The Monitor gives some background:
The move to target individual tax dodgers has significant international support. But the US is virtually alone among nations in taxing the overseas profits of its domestic corporations. Now, Obama would like to see that tax applied more strictly.
In 2004, the most recent year for which data are available, US multinational corporations paid about $16 billion of US tax on $700 billion of foreign active earnings, according to the White House. That is an effective US tax rate of about 2.3 percent.
Of the 100 largest US corporations, 83 have subsidiaries in nations judged by the US to be tax havens, according to a January 2009 Government Accountability Office report cited by Obama.
In the Cayman Islands, one mailing address alone houses 18,857 corporations.
“I’ve said before, either this is the largest building in the world or the largest tax scam in the world,” said Obama.
Under current law, US firms can take immediate deductions on their US tax returns for expenses used to generate profits overseas. But at the same time, they can defer paying US taxes on those foreign profits, until such time as they repatriate those profits to the American home office.
Obama’s proposal would bar firms from taking deductions for their expenses until they pay tax on the offshore profits. The change, which would take effect in 2011, would raise $60 billion in its first eight years, estimates the White House.
The administration also is proposing to make it more difficult for corporations to shift earnings from one foreign subsidiary to another. It is calling on Congress to pass a package of disclosure and enforcement changes intended to make it more difficult for wealthy individuals to hide their cash overseas.
And the administration’s new budget will contain funds to hire 800 new Internal Revenue Service employees dedicated to overseas tax enforcement, announced the president.
Business groups are not happy. The Wall Street Journal offers these details:
Business groups on Monday warned that Mr. Obama’s plan would eliminate American jobs, not add them. They said the current rules are aimed primarily at putting U.S. companies on an equal tax footing with international rivals, many of which benefit from more-favorable tax treatment by their home countries.
“The overseas operations of U.S. multinational companies support jobs and higher living standards here at home,” said John Castellani, president of the Business Roundtable, a trade association for multinationals.
Such an argument could appeal to lawmakers who will be weighing the Obama proposal — and who are concerned about employment rates in their home districts during the economic downturn.
A Treasury official said the administration’s plan also aims to right an imbalance created by U.S. tax policy between multinationals and the small businesses that generate the bulk of American jobs but generally don’t qualify for these tax breaks.
A coalition of business associations and corporations, known as PACE, or Promote America’s Competitive Edge, also criticized the Obama plan. It announced the establishment of a Web site, www.pace4jobs.org, as a source for information on corporate tax issues.
A piece in Forbes turns thumbs down on the idea:
The plan “represents a belief that there’s a substantial pot of easy money in the international tax rules. Frankly it’s a pretty old and tired idea,” says Clint Stretch, managing principal for tax policy at Deloitte Tax.
What the proposal really amounts to is higher taxes on big multinational companies, Stretch says, the equivalent of an 8% increase in corporate taxes.
President Barack Obama is proposing to go after that money in three main ways. First, the administration wants to eliminate rules that allow a company to take a tax deduction for its foreign operations but defer taxes on earnings until they are repatriated. This change would increase revenue by $60 billion over 10 years. Second, companies that pay foreign taxes are currently allowed to use them as a credit against their U.S. taxes. Altering these rules would raise $43 billion, the White House estimates. Finally, the administration would change a set of rules that govern how companies move income between foreign subsidiaries. Those changes would raise $87 billion.
Although the president framed the plan in populist terms, presenting it as cracking down on people who don’t pay their fair share, the proposal would raise only $8.7 billion of that $210 billion from eliminating actual tax evasion. (Tax experts agree that stopping the tax fraud is good policy; it’s just a small portion of the proposal.)
And what of companies that export jobs overseas to take advantage of low taxes? That message is muddled too, says Raymond Wiacek, the global tax practice leader at the law firm Jones Day.
Here’s an AP FQA on how foreign tax havens work…
Joe Gandelman is a former fulltime journalist who freelanced in India, Spain, Bangladesh and Cypress writing for publications such as the Christian Science Monitor and Newsweek. He also did radio reports from Madrid for NPR’s All Things Considered. He has worked on two U.S. newspapers and quit the news biz in 1990 to go into entertainment. He also has written for The Week and several online publications, did a column for Cagle Cartoons Syndicate and has appeared on CNN.