David Cay Johnston

By David Cay Johnston
The author is a Reuters columnist. The opinions expressed are his own.

The practice of favoring big corporations seems likely to take a costly leap forward soon, if Congress passes an $80 billion tax holiday for a handful of U.S. multinational corporations with untaxed profits overseas.

Sponsors of legislation to grant the holiday, which is gaining support in Congress, say it would encourage these companies to repatriate their profits, giving an infusion of cash to the sluggish U.S. economy that will create jobs.

But this ignores the negative impact on the losers: the other 99 percent of corporations who are not eligible for such a deal. Then there are the legions of workers likely to be pink-slipped, and taxpayers generally, who will have to make up the shortfall with more taxes and fewer services.

There are smarter ways to deal with the $1.4 trillion of U.S. profits sitting offshore and avoiding the U.S. corporate income tax. We’ll get to those solutions. But first, here are some facts on how the system works.

Companies license the rights to pharmaceuticals, software and other intellectual property to offshore subsidiaries, or they engage in cost-sharing arrangements with these offshore units.

The subsidiaries then charge the U.S. parent royalties and other fees, which the parent can count as tax-deductible expenses in the United States. And the subsidiaries take their profits in entities known as “tax nothings,” so-called because they are invisible to the U.S. Internal Revenue Service. So long as the profits are indefinitely reinvested offshore, no tax is due. The problem arises when the companies want to bring the profits back to the United States. That is where a tax holiday comes in.

PFIZER TOP OF LIST IN ’04

When Congress passed a similar tax holiday in 2004, the biggest beneficiary was drug manufacturing giant Pfizer Inc , according to a report to Congress by the IRS in June 2008. Pfizer brought back $37 billion and saved $11 billion in taxes.

Since then, the company has piled up another $42.5 billion in untaxed profits overseas, its disclosure statement at the end of last year showed.

Pfizer is among several companies lobbying Congress for another holiday for untaxed offshore profits. It and other firms want an 85 percent tax rate discount. Under the bill before Congress — offered by senators John McCain, a Republican, and Kay Hagan, a Democrat — the discount would be 75 percent.

Are our politicians unaware that the biggest businesses, and the wealthiest business owners, already bear lighter tax burdens than those who make less?

Business owners who make more than $5 million from all sources pay lower median and average tax rates than those who make as little as $350,000, a new study by the Congressional Research Service shows.

Congress listens most to those who lobby and make campaign donations, so the other 99 percent of corporations and business owners, like the 99 percent of taxpayers, tend to get the burden, not the benefit, of tax favors.

BRONZE PLATES

Nearly 2,500 years ago, the Romans stopped the rich and powerful from twisting the law for their own benefit by publishing the Twelve Tables, bronze plates that set forth a host of laws. It had taken the illiterate Roman plebeians, the ancient 99 percent, two centuries of demonstrations to get the laws in writing.

Today’s 99 percent can read, but tax law is so difficult to decipher that it may as well be written in Latin.

And, as the tax holiday bill shows, the ancient problem of the rich twisting the law for their own benefit endures.

I cannot fathom any legitimate reason to reward companies for using tax havens to delay the payment of taxes.

Doing so would be unfair to every purely domestic U.S. company, which cannot take advantage of this proposed act of favoritism, and to every individual taxpayer.

Then there’s the issue of jobs. In 2004, Congress gave 843 companies an 85 percent tax break on untaxed profits parked offshore. Republican Sen. John Ensign said that law, called the American Jobs Creation Act, would create 660,000 jobs.

Instead, many companies destroyed jobs. Pfizer shed 48,000 workers between the end of 2003 and the end of 2009, its annual reports show.

Asked to comment, Pfizer said it could not quantify the effect of the 2004 law, not least because of its acquisition of Pharmacia, the maker of arthritis drug Celebrex, the year before. “Given the number of significant events occurring during this period, including changes to the healthcare industry landscape, Pfizer’s acquisition of Pharmacia, and the economic downturn, it is not possible to say with any certainty the number of jobs created or lost,” Pfizer said in a statement.

Overall, the Institute for Policy Studies, a liberal think tank, estimated that 600,000 jobs were destroyed by the 2004 law. Other studies show more than 100,000 jobs lost.

Democratic Senator Carl Levin, who chairs the Senate Permanent Subcommittee on Investigations, released a report last week saying there is “no evidence that the previous repatriation tax giveaway put Americans to work, and substantial evidence that it instead grew executive paychecks, propped up stock prices, and drew more money and jobs offshore.”

OFFSHORE TAX PENALTY?

There is a smarter approach, one that would help with the United States‘ economic and fiscal woes:

Congress should impose a 50 percent tax on untaxed offshore profits earned in 2010 and earlier, unless they are repatriated by Dec. 31. Companies that repatriate would pay the standard 35 percent corporate income tax rate. If companies do nothing, which is unlikely, the measure would raise about $700 billion, slashing the deficit this fiscal year by 63 percent.

Second, Congress should require that, to escape the 50 percent tax, any repatriated profits be immediately paid out as dividends — on top of any existing dividends paid in 2011. Not all dividends would be taxed immediately, because many shares are held in pension funds and endowments. But the flow of cash would help the economy because, after all, the tax holiday sponsors say a flood of cash from overseas is just what the economy needs.