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Why Obama is Taking on Corporate Tax Havens
Why, one may ask, is Obama taking on yet another huge fight by taking aim at foreign tax havens? Yes, it's unfair that multinationals pay an average tax rate of only 2 percent on their foreign revenues, and it's unfair that some wealthy Americans are avoiding taxes altogether by parking their fortunes abroad. But, hey, these have been true for decades. So why take them on now, when the President is also taking on universal health insurance and global warming, and trying to get the economy going again?
The White House says that some jobs go abroad because American companies are lured there by tax loopholes which, if closed, would bring the jobs home. True. But a crackdown on tax havens might also cost American jobs if companies decided that a higher tax burden here required them to cut payrolls in order to stay competitive or to simply leave the United States altogether.
Another possible explanation is that it was a campaign promise. Obama frequently criticized the tax code for allowing American companies with overseas operations to defer paying taxes on corporate profits if they placed the money back into their foreign subsidiaries. But this can't be it, either. He criticized several other things as well -- such as the North American Free Trade Agreement -- which he now seems comfortable with.
So again: why this, and why now?
Two reasons, both strategic. The President needs the cooperation of many big corporations if he's going to get universal health insurance enacted this year. Many of these companies would benefit from lower health costs but they're reluctant to take on Big Pharma, big health insurance companies, and major health providers, all of whom are dead set against a provision in the emerging health insurance proposal that would allow the public to opt for a government health plan. How does it help for him to take on corporate tax havens? Because the President needs as many bargaining chips with the rest of corporate America as possible. The proposed crackdown on foreign tax avoidance is one such chip. He might be willing to take it off the table if big corporations lend him active support on health insurance.
The second reason has to do with revenues. Originally the White House had planned to pay for universal health insurance by limiting tax deductions for wealthier Americans. But the Democratic leadership nixed that source. The rich Americans who take the deductions, and the groups benefiting from the wealthy's tax-deductible expenditures on them, had enough political leverage to make it a non-starter. That means the White House has to find other sources of money.
By some measures, $700 billion or more in U.S. corporate earnings is now sitting in overseas accounts. A portion of that might be made available to help pay for universal health insurance. The Administration figures it could raise over $100 billion over ten years by preventing companies from taking immediate deductions for overseas expenses while deferring tax payments on profits there, and claiming inflated credit against American taxes for foreign taxes paid. It could raise another $95 billion by making it harder for individuals to hide their income in offshore accounts, and harder for companies to shift income from one foreign subsidiary to another in search of the lowest-tax jurisdiction.
The White House is preparing to release a more detailed budget blueprint later this week. That blueprint has to contain some credible ways to pay for universal health insurance. Otherwise the measure could become vulnerable to deficit hawks who, like vultures over road kill, continue to circle ominously.
The White House says that some jobs go abroad because American companies are lured there by tax loopholes which, if closed, would bring the jobs home. True. But a crackdown on tax havens might also cost American jobs if companies decided that a higher tax burden here required them to cut payrolls in order to stay competitive or to simply leave the United States altogether.
Another possible explanation is that it was a campaign promise. Obama frequently criticized the tax code for allowing American companies with overseas operations to defer paying taxes on corporate profits if they placed the money back into their foreign subsidiaries. But this can't be it, either. He criticized several other things as well -- such as the North American Free Trade Agreement -- which he now seems comfortable with.
So again: why this, and why now?
Two reasons, both strategic. The President needs the cooperation of many big corporations if he's going to get universal health insurance enacted this year. Many of these companies would benefit from lower health costs but they're reluctant to take on Big Pharma, big health insurance companies, and major health providers, all of whom are dead set against a provision in the emerging health insurance proposal that would allow the public to opt for a government health plan. How does it help for him to take on corporate tax havens? Because the President needs as many bargaining chips with the rest of corporate America as possible. The proposed crackdown on foreign tax avoidance is one such chip. He might be willing to take it off the table if big corporations lend him active support on health insurance.
The second reason has to do with revenues. Originally the White House had planned to pay for universal health insurance by limiting tax deductions for wealthier Americans. But the Democratic leadership nixed that source. The rich Americans who take the deductions, and the groups benefiting from the wealthy's tax-deductible expenditures on them, had enough political leverage to make it a non-starter. That means the White House has to find other sources of money.
By some measures, $700 billion or more in U.S. corporate earnings is now sitting in overseas accounts. A portion of that might be made available to help pay for universal health insurance. The Administration figures it could raise over $100 billion over ten years by preventing companies from taking immediate deductions for overseas expenses while deferring tax payments on profits there, and claiming inflated credit against American taxes for foreign taxes paid. It could raise another $95 billion by making it harder for individuals to hide their income in offshore accounts, and harder for companies to shift income from one foreign subsidiary to another in search of the lowest-tax jurisdiction.
The White House is preparing to release a more detailed budget blueprint later this week. That blueprint has to contain some credible ways to pay for universal health insurance. Otherwise the measure could become vulnerable to deficit hawks who, like vultures over road kill, continue to circle ominously.
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Could it be to PAY for universal health care, global warming research and development, and to help the economy by reducing the deficit?
What a concept! Making absurdly wealthy people pay their way. The GOP will consider this positively Un-American. Why are you complaining about it?
May 4, 2009 4:44 PM | Reply | Permalink
Who's complaining? Seems to me he's just trying to explain what might appear to be a strategically dubious proposition. Frankly, it does seem a little odd, coming right on the heels of the defeat of the cramdown bill — we just now saw how the ultra-rich still own the Senate, and now he wants to go after their precious off-shore tax havens?! But if he's doing it to stake out a stronger negotiating position so that he can compromise and still get something meaningful, it makes much more sense.
May 4, 2009 6:36 PM | Reply | Permalink
Maybe it also happens to be the right thing to do. Stranger things have happened.
May 4, 2009 5:09 PM | Reply | Permalink
There's also an important fairness issue here, which I know you recognize. If most business people, who run small businesses that don't make use of off-shore tax shelters and the like, would really look at this issue honestly they'd have to wonder why they pay their taxes in full while their bigger competitors don't.
May 4, 2009 5:14 PM | Reply | Permalink
Yes, destor23, so reasonable, so logical, so very un-republican. Do you think the middle class will ever catch on to the fact they, along with the lower class, are getting it up the wazoo by the very wealthy? Or will they continue to think that pain in their ass is the government?
May 4, 2009 9:42 PM | Reply | Permalink
Sorry, but I have to ask: Can Reich back any of this up? It seems a lot of conjecture pulled from who knows where.
Some of Reich's statements are just sloppy, such as asserting Obama is "OK" with NAFTA becasue he hasn't taken it on already after 100 days, when he certainly has enough to do and has made clear he doesn't want anything too disruptive while repairing the economy.
Sloppy writing about Bush was always annoying because there were enough things to dislike about Bush without red herrings to confuse or distract people. It's exponentially more annoying to see Obama getting the same treatment.
I'd also point out Obama is focusing on foundational issues such as finance, energy, and healthcare. Issues at the root of our economy and society. Those are major structural changes to lay a different foundation for future growth and prosperity. While NAFTA is a serious issue, it's secondary to the issues Obama is presently focused on.
May 4, 2009 5:39 PM | Reply | Permalink
btw, as others have pointed out in this thread, I'd also agree that closing tax loopholes and tax havens are foundational issue of fairness and generating revenue.
A huge point Reich seems to be missing: closing tax havens and loopholes is a preliminary step towards fair trade policies.
How can one regulate trade on a multinational corporation incorporated in a tax haven, who is still generating jobs in your community, but not paying any taxes, and receiving all the privileges of your government services and infrastructure? The most common argument against any sort of regulation or fair practices is that they'll just go somewhere else to pay less taxes. That's not a sustainable model, it's a rush to the bottom with communities and entire nations getting shorted.
The tax havens must be closed and companies need to reintegrate into the many nations in which they operate.
By closing tax havens, and by forcing companies to reintegrate and start paying for the services (infrastructure, security, labor, etc) they receive in developed countries, the Obama administration will also have the leverage and framework to negotiate better trade deals, rewarding and punishing companies based on their merits to the US economy and people.
As Obama has said many times and is just common sense, we should incentivize companies willing to create jobs in the US and fully participate in wealth creation in the US.
May 4, 2009 5:57 PM | Reply | Permalink
Exactly - these corporations have the protection of US laws and 'citizenship' without paying their share of the costs. Small businesses and individuals who cannot (or would not for reasons of morality and patriotism) play financial games should not be forced to subsidize the greedy.
May 4, 2009 6:25 PM | Reply | Permalink
Nice assertions.
As someone who owns and operates both US and Foreign companies.... your hope that suddenly we'll have leverage to equalize trade is both unsupported and horse puckey. Where I operate (Latin America) labor laws are more stringent than the US so the US worker even has an edge. But still they are a more competitive option.
I'll just pay taxes on the income, and continue to hire cheaper, more capable, and more diversified labor pools in foreign markets.
Seems like 'fair trade' is often lost on the most aggressive proponents. How can you believe that if the US competed fairly with foreign markets, US workers will be the beneficiaries.
Nice pipe dream, but alas, on a level playing field foreign workers will win. Although I'm sure Lou Dobbs likes a good spitter when getting his shine.
May 5, 2009 1:41 AM | Reply | Permalink
ummmm yeah. You know who he is, right? I think he's generally qualified to assert that Obama isn't taking on Nafta on a campaign pledge because BO needs political capital. Once you have run a university and the labor department, willing to cut you the same slack.
May 4, 2009 6:07 PM | Reply | Permalink
No, he's not qualified to just assert that. Nobody is. And Reich has been wrong before. He doesn't have a crystal ball. Though if he did he'd probably foresee you spit shining it.
May 4, 2009 11:34 PM | Reply | Permalink
I find it very comforting to always be reminded how this government needs bargaining chips to actually fight the corruption to get something done for the people.
i hope i never forget that.
it will make me so sad.
May 4, 2009 5:49 PM | Reply | Permalink
I'd say there's a lot more than $95 billion to be had by making it harder for individuals to hide their income in offshore accounts. I think there's hundreds of billions hidden in tax havens. it's time for all governments, not just the USA's to rein in the wealthy and make them pay their fair share.
May 4, 2009 5:52 PM | Reply | Permalink
I don't understadn all this talk about having to come up with money to pay for universal health insurance. We already pay much more than any other nation. Why isn't it enough to simply redirect the billions already going for the rotten health insurance system we have now?
May 4, 2009 6:37 PM | Reply | Permalink
Good point. I never envisioned a program that was cost-free to most consumers; just for those who CAN'T pay as we already have. The whole system would be less expensive per person because the risk would be shared throughout.
May 5, 2009 7:28 AM | Reply | Permalink
Can we please stop pretending universal health insurance with a "public plan" is anything but a Band-Aid on a gangrenous limb?
May 4, 2009 6:43 PM | Reply | Permalink
I'm too tired to go into depth, but competition from a public plan derived from Medicare in conjunction with better regulation to stop cherry picking and increase medical efficacy and efficiency, in sum, totally changes the incentive structure towards better health care and cost efficiency. It'll make a huge difference.
May 4, 2009 11:38 PM | Reply | Permalink
You're right.
If our alleged elected representatives started representing our interests we would simply go straight to single payer and let the paraisitic insurers who have bled this country white twist slowly in the wind as they so richly deserve to do.
May 5, 2009 10:08 AM | Reply | Permalink
i hope he's doing it because its the right thing to do. however, it may also be useful for raising revenue and showing that his administration is not captive to the moneyed interests and corporatocracy.
there is a lot of deserved, populist outrage at the shenanigans of our moneyed class and this sends a strong message that the rules of the game are changing... even if geithner and summers continue to flush our money down the toilet propping up the greed class on Wall Street.
it's good policy.
it's fair.
it provides bargaining leverage.
it's good politics.
and it's about time someone took these robber barons down a peg.
May 4, 2009 7:02 PM | Reply | Permalink
Hmm, why do I think this is just more Obama theater and he'll ultimately do nothing to close the tax havens? Wall Street will need them to store the latest $1,000,000,000,000 in taxpayers' money the Administration is about to send their way.
May 4, 2009 7:26 PM | Reply | Permalink
One reason is that as Senator he was sponsoring the Stop Tax Haven Abuse Act. It appears he really believes in this stuff.
Another reason is that the rest of the OECD, except maybe Luxembourg and Switzerland, has been patiently waiting for 8 years to get moving again on tax havens. Our fellow OECD members are concerned about all the tax revenue they are losing, too.
May 5, 2009 1:25 AM | Reply | Permalink
I imagine there's little political cost to sponsoring an act to raise corporate taxes. The corporations know it's all for show, so they don't feel threatened. Did Obama ever get it made into law? Did he have any intention of ever getting it made into law? Under Reich's best case scenario the government could collect $195B from corporations and individuals over 10 years. Unfortunately, Bush/Obama/Geithner have given AIG alone more than that in the last 8 months. And Geithner/Obama's about to give Wall Street another $1 trillion. They'll have to close a hell of a lot of tax havens to make that money back. Let's face it: Obama is a post-modern slave of Wall Street and the corporations. 4 to 8 years of doing their bidding and he and Michelle will reap incredible rewards and his 2 girls will attend whatever schools they desire and will have any job they want in the world. (See Clinton, Chelsea, career of.) There is no working class hero.
May 5, 2009 9:20 PM | Reply | Permalink
How 'bout Obama's just trying to regain a little lefty cred after losing most of what he had bailing out the Wall Street banks and throwing in the towel on mortgage cramdown?
May 4, 2009 8:17 PM | Reply | Permalink
I'm glad you're finally admitting your rt wing tendencies. It must have been hard faking it though the Dem Primary.
May 4, 2009 11:41 PM | Reply | Permalink
Run, Ralph, Run!
Nader, that is.
May 5, 2009 7:51 AM | Reply | Permalink
A lot of folks criticize Obama for trying to do too much; however, the alternative is to serve one ball at a time over the net so the Republican spin and mud crew can slam it back. It's important to have a lot of stuff coming over the net all the time. Don't let the Republicans take over the story. (And it seems to me that they have started to sound panicky and hysterical.) Besides, how can the Republicans counter this without seeming to side with clearly greedy and arguably unpatriotic actions. The Republicans since Nixon have been able to convince their blue-collar constituents that their well-being coincides with that of the Corporate wealthy. It does not. This is the type of policy that should help drive that point home to those who matter. The policy Obama is recommending is, on its face, right.
Many of Obama's policy initiatives may not pass this or even the next Congress; but it's important to get them on the menu so they are there for future campaigns and Congresses.
May 4, 2009 8:38 PM | Reply | Permalink
I'd agree, however, the obstacles increasingly look like they will come from the Blue Dogs, such as Ben Nelson and Evan Bayh.
May 4, 2009 11:40 PM | Reply | Permalink
This is only now (maybe) possible because of the state of the economy. That's one reason.
Another reason is that this is part of a larger struggle between the charters of nation-states and the charters of corporations. The underlying historical context has been a fight to control how wealth and power are controlled through regulation and lack of regulation.
The details are what we all concern ourselves with, day in and day out. That is why we deal with such absurd fictions as the ideas that the act of spending money is speech, or that business entities enjoy the rights of citizens. It's why jingoism about free markets and deregulation and world trade get so much press. It's why lobbyists and the fairness act are issues at all. But all of these are symptoms that need to be fixed.
And he's acting before the window of opportunity closes.
May 4, 2009 11:56 PM | Reply | Permalink
Hey, cute rat pic!
May 5, 2009 7:58 AM | Reply | Permalink
Joe Conason, over at Salon, wrote a fascinating article back in March on this topic.
http://www.salon.com/opinion/conason/2009/03/23/big_clawback/index.html
Take a good look at the number of tax shelters employed by multinationals. And where. There is obviously no other reason for having so many "subsidiaries" in places like the Cayman Islands than to avoid paying taxes.
An excerpt:
It's time to stop this nonsense. Our tax dollars are going out to tax cheats. Corporate welfare on steroids.
May 5, 2009 12:10 AM | Reply | Permalink
Rachel Maddow did a good job on this subject tonight. Interviewed Austin Goolsbee as well.
http://www.msnbc.msn.com/id/26315908/#30568765
May 5, 2009 12:20 AM | Reply | Permalink
Obama or no, Ghana, in conjunction with Britain's Barclays Bank, is going to start a new tax haven in Western Africa.
Western Africa has become of interest as a transit hub to both Latin American and European organized crime seeking to exploit Europe's burgeoning cocaine market.
Tax havens are often associated with money laundering.
May 5, 2009 9:34 AM | Reply | Permalink
Small businesses and the self-employed might support this Obama proposal--if it were made revenue-neutral. That is, if the extra revenue coming in from closing tax loopholes on multinational corporations were rebated back to American companies with American workers in the form of tax cuts.
But that's not what Obama has proposed. Indeed, *all* businesses are going to see their operating costs rise through cap-and-trade and other policies which will raise energy costs. And the self-employed are going to see their taxes rise when the Bush tax cuts expire.
Under Obama, frankly, I don't see the business climate in America improving for any businesses after the recession ends. The only businesses who will do well are those who get Government contracts. And as we all know, Government contracts are political.
May 5, 2009 12:03 PM | Reply | Permalink
America remains the sole industrialized power that taxes its citizens, and corporations, outside of its national borders. How this assault on our international competitiveness can be considered “fair” is quite a stretch.
Even if the $700 bn figure is correct, and the 2.3% tax paid on it, the issues are the same.
1) Companies do not move overseas to avoid taxes. They do so for access to markets, primarily, and lower operating costs (regulatory compliance, wages and, yes, taxes) secondarily.
2) Companies operating overseas pay taxes in the jurisdiction in which they operate, just like everyone else. If US companies also have to pay US taxes, they are less competitive.
3) If US companies operating overseas and paying an average 2.3% extra tax to the US government had to pay significantly more tax to the US government, they would not close their foreign operations and open up shop in America. There is no possible way that a tax threat such as this can possibly create one net new job in American.
4) The vast majority of US companies abroad do not, Powkat, have “the protection of US laws and ‘citizenship.’ Rather, they have to overcome the obstacles US law places in their ability to do business outside the US legal jurisdiction.
5) US citizens living overseas (of which I am one) pay taxes in the jurisdiction in which they operate, just like everyone else. If US citizens also have to pay US taxes, they are less competitive.
Of all the comments here, Syncrofly is the only one who seems to actually understand what it means to do business, or to do business abroad..
May 5, 2009 10:29 PM | Reply | Permalink