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Will Congress Be Duped Again On Offshore Taxes?

Like a savvy bargainer on a used-car lot, big multinational corporations have mastered the art of feigning indifference and walking away.

What they walk away with is their profits, stockpiling them abroad where they legally remain untaxed until returned to the United States. Then these corporations threaten to keep the cash offshore permanently unless Uncle Sam gives them a deep discount on their tax rates.

It’s a timeworn, but effective, trick. While the rest of us are stuck paying the sticker price, Congress is considering a special deluxe tax rate for these giant corporations.

Congress last fell for the old “walk away” in 2004. And the American people got burned.

That year, legislators gave 843 giant firms an 85 percent discount on offshore profits they “repatriated.” This reduced their long-term tax bills by about $100 billion.

Legislators opted for this one-off revenue bump in part because they believed, naively, that the companies would create U.S. jobs with the repatriated funds. They even called the tax break legislation the “American Job Creation Act.”

Like new owners of a bargain basement Beemer, though, the companies basically squealed their tires and sped away. Rather than hiring more workers, many simply used the money to boost shareholder dividends and executive pay.

Meanwhile, the profit-shifting revved up again, as firms maneuvered to create leverage for further discounts.

Big pharmaceutical companies, which are particularly good at tax-dodging tactics like registering their patents in tax haven countries, were some of the biggest abusers of the 2004 tax break.

Pfizer, for example, repatriated $40 billion to take advantage of the discount. Instead of boosting jobs, the drug company laid off more than 58,000 employees over the next six years.

Legislators appear to have learned little from the 2004 boondoggle. Pending bills in both the House and Senate would once again offer deeply discounted rates on repatriated profits.

President Barack Obama has a slightly stronger proposal: All overseas stockpilers would pay a mandatory 14 percent rate on offshore profits they currently hold, and then 19 percent thereafter. But that’s still a huge reduction over the ordinary 35 percent corporate tax rate, giving companies a powerful incentive to continue to shift profits overseas.

A handful of corporate giants stand to reap the vast majority of benefits from this trick.

According to a new report I co-authored for the Institute for Policy Studies and the Center for Effective Government, just 26 companies account for more than half of the $2.1 trillion in untaxed profits U.S. corporations currently hold offshore. Since 2004, these 26 firms’ overseas stashes have grown more than fivefold.

Lawmakers claim that short-term revenue from a discount tax on offshore profits is needed to pay for urgent investments in public infrastructure. But if we’re serious about fixing our crumbling bridges, roads, and dams, we should start by fixing our broken corporate tax system.

The taxes Pfizer and six other drug companies currently owe on their offshore profits, for example, would be enough to fix the 1 out of every 9 U.S. bridges in disrepair. We need to insist that all U.S. businesses pay their fair share of infrastructure and other public services.

Otherwise, we’ll just be taken for a ride.

OtherWords columnist Sarah Anderson directs the Global Economy Project at the Institute for Policy Studies and is a co-author of the report “Burning Our Bridges.”

Distributed by OtherWords.org.

Photo: 401(K)2013 via Flickr

The Student Debt Time Bomb

There’s a generational time bomb ticking — and the student debt crisis is the trip wire.

Adults under 35 disproportionately bear the brunt of escalating inequality.

America’s educated youth are graduating into an economy with stagnant wages and a torn safety net. Federal and state budget cuts, meanwhile, have spiked tuition costs and cut public services that aid young workers, such as transportation and affordable housing.

A rumble of legitimate discontent is mounting from the 40 million Americans saddled with student debt totaling $1.16 trillion — a number expected to increase to $2 trillion by 2022. College debt now touches 1 in 5 U.S. households and exceeds total credit card indebtedness.

The most frustrated students are blocking highways over tuition hikes. Others are launching “debt strikes” by refusing to pay the for-profit schools that bilked them.

Many more are defaulting after facing the stressful realization that they can’t find a job that pays enough to repay their debt. Over half of outstanding student loans are presently in deferral, delinquency, or default.

The student debt debacle has huge implications for the future. The average college graduate is now almost $30,000 underwater, with some on the hook for over $100,000.

This debt keeps young people from starting families, buying houses, and taking risks on new businesses. It also exacerbates the growing problem of wealth inequality and declining social mobility, since it gives debt-free graduates from wealthier families an enormous head start over their peers.

Many Baby Boomers without kids in college don’t fully appreciate how the economy is tilted against the rising generation — or how much higher-education financing has changed from previous generations.

Since the 1970s, tuition rates have risen over 1,000 percent, while state funding of universities has declined by 40 percent. And the proportion of young Americans with education debt more than quadrupled, from 5 percent to 22 percent.

The powerful student loan industry lobbied for — and got — draconian laws that penalize student debtors more than people holding mortgages, car loans, or credit cards. Servicers can garnish young graduates’ wages and disability payments to get their due.

And not even bankruptcy can cancel out these loans.

In some states, student debtors who fall into default can lose their professional certifications and even their driver’s licenses. Imagine borrowing money to get a nursing or cosmetology degree, falling behind in your payments, and having your source of livelihood revoked.

It doesn’t have to be this way. Other countries have offered free public higher education for decades.

In the 30 years after World War II, the government expanded access to debt-free college for millions of Americans. These included GI Bill recipients, but also millions of men and women without military service records who attended the great public universities of our land, paying a tuition bill they could afford with only a summer job.

Lawmakers should reverse the cycle of state budget cuts in higher education that shift tuition costs onto students and their cash-strapped families. Some states are considering creating “opportunity trust funds,” capitalized by state estate taxes on the richest 1 percent, to finance debt-free public education.

The national Strike Debt movement calls on Congress to spend an additional $15 billion a year to make public education free. They could accomplish this by cutting out for-profit colleges and the parasitic college loan industry, and by simplifying the existing labyrinth of education subsidies.

The vast majority of college debtors still suffer in isolation, viewing their struggle as a personal problem, not a societal issue. But this is about to change. When college debt borrowers wake up and flex their political muscles, they’ll be a force to be reckoned with.

Photo: thisisbossi via Flickr

Reclaiming Our State Budgets

I live in Chicago, a city of dramatic skylines and gleaming office towers for titans of business and finance. My state of Illinois is home to 17 billionaires, and our downstate farmers are the country’s second-largest corn and soybean producers.

And yet new Illinois governor Bruce Rauner says we’re so broke that we must slash $6 billion from our state budget this year — nearly all of it in programs for the poor and middle class. We’re so broke, he says, that there are no other options but to make deep cuts to basic services like mental health programs, drug treatment, and bus subsidies for the elderly.

He also wants to cut housing support programs for people who’ve experienced homelessness and eliminate dental and podiatry services for folks on Medicaid — all programs and services that have actually reduced the state’s overall costs.

Similar budget battles are happening in many states across the country.

Wisconsin governor Scott Walker, for example, aims to cut $300 million from public universities over the next two years. Kansas governor Sam Brownback wants to slash classroom funding by $127 million. And even in Maryland, the country’s third-richest state, Governor Larry Hogan has proposed cutting Medicaid and state employee salaries.

Despite the growing signs of a national economic recovery, these and many other state officials are whipping up budget hysteria and claiming that the only solution is to crack down on overspending.

I don’t see signs of overspending. When I look away from the skyline and the lakefront, I see young people with nothing to do after school. I see overfilled waiting lists for affordable housing. I see the rusty underbelly of our deteriorating elevated train tracks. I see social services agencies struggling to do more with less.

Draconian budget cuts on the backs of hardworking families and the most vulnerable aren’t the solution. We need more revenue from those most able to pay.

If you’ve ever walked along Chicago’s “Magnificent Mile” — an upscale stretch of skyscrapers and high-end shops along Michigan Avenue — you know we have no shortage of wealthy people.

What’s shocking is that the strip’s luxury store customers pay the same individual income tax rate as struggling working families. Illinois is one of eight states that apply such “flat taxes,” which favor the wealthy.

Many profitable corporations also get away without paying their fair share. In fact, two-thirds of corporations operating in Illinois pay no state corporate income taxes whatsoever.

A network of grassroots organizations called National People’s Action is connecting ordinary folks around the country who are fighting similarly senseless and painful budget cuts. In Illinois, I’ve joined up with ONE Northside and Fair Economy Illinois, two organizations that are bringing together social justice, labor, and faith-based groups to develop detailed proposals for an alternative approach to state budgeting.

The goal is to ensure that our thriving financial sector, our wealthiest residents, and our most profitable corporations pay their fair share of taxes so we can make the investments we need for a healthy economy — one that works for everyone.

Remember, we live in the richest country in the world. We’re not broke — we’re just keeping too much of our wealth in too few pockets.

Susan Gries is the Chief Financial Officer for a nonprofit provider of supportive housing and services in Chicago and co-chair of Fair Economy Illinois.

Cross-posted from Other Words

Photo of Governor Bruce Rauner: Metropolitan Planning Council via Flickr

A Tax Cut For Tax Cheats

If the most frequently dialed federal agency in America can’t even answer two-thirds of the millions of phone calls it gets, should the government cut its budget?

Congress thinks so. That agency is the Internal Revenue Service (IRS). And lawmakers have hacked at its budget yet again.

Worse still, those cuts will cost more money than they’ll save. They’re basically “a tax cut to tax cheats,” said IRS commissioner John Koskinen.

Regardless of your feelings about the IRS, Koskinen is right.

The government has slashed the enforcement portion of the IRS budget by nearly 20 percent over the last five years. That’s forcing the IRS to shrink the number of employees working on enforcement by 15 percent.

Talk about being penny wise and pound foolish. For every dollar the IRS spent in 2013, it collected $255, according to National Taxpayer Advocate Nina Olson.

Imagine that someone told a CEO that a given department was bringing in hundreds of dollars to his company for every dollar it spent. “It is difficult to see how the CEO would keep his job if he chose not to provide the department with the funding it needed,” Olson said.

Yet, she noted, “that is essentially what has been happening with respect to IRS funding.” Congress has slashed the IRS budget four times in five years. And those cuts are feeding the budget deficit that conservatives supposedly fret about.

It’s all about political expedience. Remember when the IRS faced accusations of singling out conservative nonprofits for tax scrutiny? Along with other experts, I predicted that it would spur further IRS budget cuts. Now Republican lawmakers are taking their revenge.

It’s a vicious cycle. Critics attack the IRS for making mistakes, darkening the public’s view of it. That gives political opportunists a chance to lobby successfully for cuts. A smaller budget virtually guarantees future mistakes by a cash-strapped agency.

Taxpayer services are underfunded too. The IRS now is unlikely to answer even half the phone calls it gets from taxpayers, Olson says. The average wait time is 30 minutes.

So another vicious cycle plays out as taxpayers who try to do the right thing get frustrated. Evasion rates rise. Pressure on the IRS enforcement team mounts.

On top of all that, taxpayers and collectors alike are coping with a tax code that’s more complex than ever. The IRS is responsible for implementing about 40 new provisions of the Affordable Care Act alone, for example.

And it could get more absurd.

The Republican Party is fundraising on the promise of abolishing the IRS altogether, as Citizens for Tax Justice reports. What happens when a country can’t collect taxes?

“Italy and Greece have been stuck in vicious cycles in which tax evasion runs rampant,”Washington Post columnist Catherine Rampell recently wrote. So politicians “raise tax rates to extract more money from the few law-abiding saps still out there, encouraging people to hide economic activity from even higher tax rates, and so on.”

That kind of dysfunction hurts honest taxpayers and bankrupts governments.

Let’s change course before it’s too late.

Bob Lord, a veteran tax lawyer, practices and blogs in Phoenix, Arizona. He is an Institute for Policy Studies associate fellow.

Cross-posted from Other Words

Photo: 401(K)2013 via Flickr