Charlie Cray is the director of the Center for Corporate Policy and a collaborator on Halliburton Watch. He is also the co-author of, The People’s Business: Controlling Corporations and Restoring Democracy (Berrett-Koehler).
Last week, the Democrats lost an opportunity to take the moral and political high road, letting tax-dodging corporations score another victory. Given the chance to stand with American taxpayers, 28 House Democrats last week chose instead to block a proposal that would blacklist U.S. businesses that move offshore to avoid paying taxes—depriving them of lucrative government contracts.
During House negotiations over a 2006 appropriations bill, Rep. Rosa L. DeLauro, D-Conn., offered an amendment to ban all Transportation and Treasury departments and agencies from contracting with corporations that have reincorporated offshore to avoid paying their fair share of taxes. DeLauro called on her colleagues to “tell these companies that if they are going to not pay taxes in this country, then, they will no longer reap the benefit of government contracts in this country, either.” A similar restriction already applies to Homeland Security contracts.
Unfortunately, 28 Democrats joined with 203 Republicans to block the proposal, including Rep. Rahm Emanuel, D-Il. Just two years ago, Emanuel castigated President Bush for “block[ing] Democratic efforts to stop American companies from incorporating through a postal drop in island tax havens” in an op-ed for the Wall Street Journal.
Not only was the vote a lost opportunity for the Democrats, but it represents a huge victory for the “Benedict Arnold” club of lobbyists who have worked the Hill for Accenture, Tyco, Ingersoll-Rand, Foster Wheeler, Nabors and other corporations that have moved their headquarters offshore in recent years. One of the leading lights in this crowd—Jack Abramoff—has already been dimmed by the Indian gambling scandal. Yet, there are plenty of others to pick up the slack. Among those who have pushed against bills to curb tax dodging in recent years are ex-Congressmen Bill Archer, Bob Dole, Tom Foley, Slade Gorton, Robert Livingston, Toby Moffett and Steve Symms.
The offshore corporate tax dodge has propelled public outrage ever since 2001, when Connecticut-based Stanley Works announced it would set up a brass plate headquarters in Bermuda. Hammered by employees, investors and state and federal officials, the company eventually backed down, but the issue has been a no-brainer for politicians interested in pushing for corporate accountability ever since. Nevertheless, pressure from corporate lobbyists and consultants—who, for instance, advised the Kerry campaign to back off the issue after he visited Tyco’s former New Hampshire headquarters during last year’s primary—have doused many a Democrat’s populist instinct to pick up on this issue.
Last week was not the first time the public interest lost out to the corporate lobbyists. By our count, at least 44 attempts were made to close the offshore tax loophole and bar corporate expatriates from federal contracts between 2001 and 2004. Every one of those attempts failed until last year’s JOBS Act, the big tax law that President Bush signed into law, which includes a provision that closed the reincorporation loophole. (Unfortunately, the law exempts dozens of companies that have already moved offshore.)
Meanwhile, the provision to bar corporate expatriates from federal contracts was first passed as part of last year’s Department of Homeland Security appropriation. Although it exempts a $10 billion border-control contract already given to Bermuda-based Accenture, it should serve as the basis for a government-wide policy. Last week’s vote in the House may have slowed the momentum toward that goal, but the 190 votes in favor of the resolution—including 20 Republicans—suggests we haven’t seen the end yet.
Bans on offshore tax havens are just one of the many steps Congress must take to address the dramatic drop in federal corporate taxes in recent years. The treasury department reports the federal government collected $184 billion in corporate income taxes in 2004 (up from $ 132 billion in 2003)—or just 9.6 percent of total taxes collected. That’s just barely half the 17 percent of the pie corporations paid in 1970. Measured another way—by Congressional Budget Office figures—corporate income taxes declined from 4.2 percent of the GDP in 1967 to 1.2 percent in 2003, rising only slightly to 1.6 percent in 2004.
Offshore tax haven abuses have a lot to do with long-term declines in corporate taxes. Tax Notes, the nation’s preeminent tax policy journal, estimates that between $10 and $20 billion was lost in 2003 alone due to even more complicated offshore schemes that corporations used to shift at least $75 billion of taxable profits offshore. As Tax Notes Editor Martin Sullivan has suggested, “Indeed, the figures provide just one more indication that the U.S. system of taxing international income is nearing a breakdown.”
Savvy corporations use a variety of multinational tax and shelter schemes—like transfer pricing (faulty billing), “income stripping,” the parking of intellectual property (“intangibles”) offshore—to avoid paying what they would otherwise owe. The IRS cannot keep up with these and other sophisticated tax avoidance schemes, which are more often than not invented by corporate lawyers, bankers and accountants in search of lucrative tax consulting fees. (Tax consulting was for the most part exempted from the list of activities that Sarbanes-Oxley restricted auditors from providing to their clients.)
How can Congress put the brakes on corporations’ creative accounting? In addition to barring corporate tax dodgers from all government contracts and giving the IRS the tools its needs to go after corporate tax fugitives, there are many other measures Congress can pursue. For one, Congress should direct the IRS to stop treating offshore shell corporations as legitimate companies. A genuine economic purpose standard should apply so that offshore subsidiaries are not used for complicated tax avoidance schemes.
With at least 100 high-powered corporate lobbyists continuously poking obscure loopholes in the law and fighting to block even the most obvious reforms, relatively simple reforms like the one introduced last week will not be easy. That’s why taxpayers concerned about growing deficits should demand that Congress also rope in the tax traitor lobby and make corporations pay their fair share.
