Revenue & Spending
Levin Bill Would Shutter Corporate Tax Loopholes
by Jessica Schieder, 9/24/2013
Last week, Sen. Carl Levin (D-MI) introduced the Stop Tax Haven Abuse Act, which would restrict the use of offshore tax havens by corporations. At a time when corporate profits are high by historic standards, the bill could raise money for vital government programs and reduce the deficit. The legislation is a slimmed down version of the Cut Unjustified Tax (CUT) Loopholes Act of 2013 (S. 268), introduced earlier this year.
The new bill would generate as much as $220 billion in revenue from the closure of tax loopholes and forecasted reductions in tax abuses over the next decade. A press release said the bill could "provide part of the foundation for a balanced deficit-reduction package to end sequestration."
The Stop Tax Haven Abuse Act requires increased transparency on the part of corporations in reporting profits and closes some of the legal loopholes they currently use to avoid paying taxes.
Currently, Sens. Mark Begich (D-AK) and Jeanne Shaheen (D-NH) are cosponsoring the bill along with Sen. Sheldon Whitehouse (D-RI).
The High Cost of Tax Avoidance
A combination of tax avoidance and evasion through the use of tax havens allows multinational corporations and wealthy individuals to avoid an estimated $100 billion in taxes each year, according to the Congressional Research Service (CRS). Some estimate the lost revenue could exceed $160 billion.
U.S. multinational corporations are estimated to collectively keep as much as $1.9 trillion offshore. Profits kept abroad are not taxable as long as they remain abroad indefinitely due to the current state of U.S. law. This exception to normal taxation is referred to as a "deferral." The deferral loophole is only one of many that allow corporations to pay far less than the top U.S. corporate tax rate of 35 percent. Some companies – like General Electric, Verizon Communications, and Boeing– paid a tax rate less than zero between 2008 and 2010.
(For corporations, as well as individuals, there is a tenuous line between legal tax avoidance and tax evasion. CRS states that the legality of some financial activities designed to minimize taxes paid is "not entirely clear.")
Forgone revenue means fewer dollars for infrastructure, education, scientific research, and health care.
If the $220 billion in estimated revenue over ten years was divided equally each year, it could ensure the federal Highway Trust Fund stays solvent, put the U.S. on track to repair the 11 percent of bridges that are structurally deficient by 2028, allow over 2.5 million young students to enroll in Head Start each year, or pay for 17 percent of the nation's worker health and safety research budget.
Increased tax revenues would ease some pressure on state budgets, as well. Preventing tax haven abuse by corporations and wealthy individuals would have generated around $26 billion in revenue for states in 2011. According to a U.S. Public Interest Research Group (US PIRG) report, this could have covered the education costs of more than 3.7 million children in K-12 grades in 2011.
Discouraging Tax Haven Abuse
The Stop Tax Haven Abuse Act requires more corporate transparency in reporting overseas profits, and it limits opportunities for individuals and corporations to strategically avoid U.S. taxes.
A major tax avoidance strategy this legislation attempts to restrict is the transfer of intellectual property to offshore subsidiaries. Companies make these transfers so they don't have to pay taxes on the profits they incur from owning copyrights and patents.
The bill also targets corporations that use subsidiaries in foreign countries as "shell corporations" where they park money to avoid taxation. The legislation requires corporations to disclose information about the beneficial ownership of their subsidiaries, including country-by-country employment, revenues, and tax payments, so tax officials can determine what role the subsidiaries actually play in the overall corporation.
A summary of the bill's main provisions posted on Levin's website asserts that it will:
- Crack down on the use of intellectual property transfers as tax-avoidance tools by taxing excess income earned from transferring intellectual property to offshore subsidiaries;
- Give the Treasury Department important new weapons to fight against foreign governments and financial institutions that aid tax avoidance, including the ability to prohibit U.S. banks from doing business with foreign banks in jurisdictions that impede U.S. tax enforcement;
- Require SEC-registered corporations to disclose employment, revenues, and tax payments on a country-by-country basis;
- Eliminate the tax incentive for companies to move jobs and operations offshore by limiting their ability to claim immediate tax deductions for expenses related to those offshore operations while deferring the U.S. tax on the income those operations generate;
- Repeal what are known as the "check-the-box" and "CFC look-through" rules, which allow multinationals to avoid U.S. taxes they would otherwise owe by making offshore subsidiaries disappear for tax purposes, turning taxable passive income into tax-deferred active income;
- Prevent multinationals from using short-term loans from their offshore subsidiaries to essentially repatriate income while avoiding taxes that should apply to repatriated money.
Small Businesses Support Closing Loopholes
The use of tax havens allows multinational corporations and wealthy individuals to keep income abroad, minimizing the federal and state taxes owed. Small and medium-sized businesses frequently do not have these options, however, which means that smaller firms are often paying higher taxes than the multinationals, creating an immensely unfair playing field. According to a report by US PIRG, the 100 largest publicly traded companies account for approximately $1.2 trillion in offshore profits, or more than 63 percent of all U.S. business profits held offshore.1 82 percent of the 100 largest publicly traded companies operate in tax havens or low-tax jurisdictions.
Since American small businesses often make their profits in the U.S., they support closing corporate loopholes that allow tax avoidance.
When polled, more than three-quarters of American small business owners support closing tax loopholes by requiring a more detailed profit-reporting system, according to a survey by the Main Street Alliance and the American Sustainable Business Council. About 64 percent of small business owners wanted to end deferral, the loophole that allows corporations to indefinitely avoid paying U.S. taxes by keeping profits abroad.
American small business owners think corporations should be required to pay their fair share of taxes before spending on education, infrastructure, or the military is reduced.
Whitehouse praised language in the Levin bill that eliminates unfair advantages in the tax code for multinational businesses, saying, "This bill would force corporations that are dodging their responsibilities to pay their fair share of taxes, and create an even playing field for American companies that already play by the rules."
The Public Wants Higher Corporate Taxes
Increasing tax revenue by reducing tax haven abuse has wide public support. Four out of five small employers support revenue-positive tax reform that closes tax loopholes that favor large corporations.
Closing corporate loopholes has historically enjoyed Republican, as well as Democratic, support. Sen. John McCain (R-AZ) joined Whitehouse and Levin earlier this year in introducing an amendment to the budget resolution in support of closing corporate loopholes. Other bills, including the Bipartisan Tax Fairness and Simplification Acts of 2010 and 2011, have enjoyed bipartisan support for the closure of tax loopholes and the elimination of tax breaks for special interests, as well.
The introduction of the Stop Tax Haven Abuse Act presents an opportunity for a bipartisan collaboration in raising revenue to pay for public investments the country needs.
1 63 percent represents the 100 largest publicly traded companies divided by the number 3,000, which represents the Russell 3000 companies, who collectively held $1.9 trillion offshore in May 2013.