In response to public outrage, congressional Democrats are clamoring for a crackdown on offshore tax dodges. They've focused particularly on the notorious Bermuda loophole, whereby unpatriotic companies such as Tyco, Stanley Works, Accenture (formerly Andersen Consulting) and PricewaterhouseCoopers Consulting have or plan to set up mail drops in Bermuda to avoid taxes on their U.S. profits.
Sensing the public mood, Bill Thomas, the California Republican who chairs the Committee to Bankrupt America (formerly the House Ways and Means Committee), says Republicans also want to address the problem. But while the gop bill offers lip service to halting multinational tax abuses, it consists mainly of measures that go in exactly the opposite direction.
A little background: Over the past several years, the World Trade Organization has repeatedly ruled that a foolish $5 billion per year U.S. tax subsidy for Boeing, General Electric, Caterpillar and a handful of other big exporters violates our international trade agreements. Various attempts to rewrite the tax break to make it legal have failed to impress the wto, and U.S. companies now face significant trade sanctions unless the subsidy is repealed. Even most backers of the tax break have finally conceded that it has to go.
That should be good news, because not spending the $51 billion the subsidy would cost over the next decade would make at least a modest dent in the huge Bush budget deficits. But that's not how the Committee to Bankrupt America thinks. Under the rubric of "competitiveness," it's insisted that every penny gained from ending the export subsidy must be funneled back into other costly multinational tax loopholes.
Politics forced Republicans to pretend to attack the Bermuda loophole, but their bill does as little as possible. For starters, they significantly watered down a Democratic proposal to disallow sham Bermuda reincorporations -- and then provided that even that limited reform will expire after three years! Although the change may at least temporarily stop Stanley's Bermuda plans, it explicitly grandfathers companies such as Tyco that set up their mail drops early.
Another of the GOP's Bermuda-related measures would limit schemes to shift profits offshore through interest write-offs, but would not curb similar deductions for the use of patents, trade names and so forth. That seems to have been carefully designed to protect the Bermuda tax-sheltering activities of Accenture and PWCC --who remonikered themselves ("Monday" for PWCC) to get around a law forbidding expatriate companies from charging their American operations hefty deductible fees for the use of pre-existing trade names.
In total, these and a few other reforms in the bill are estimated to curb tax-shelter abuses by about $15 billion over the next decade. Meanwhile, Republicans want to spend $83 billion on what they outlandishly calls "simplification" measures. As Wayne State law professor and leading international tax expert Michael J. McIntyre notes in a written analysis of the gop bill, these 18 new loophole provisions "would reduce the fairness and efficiency of the tax system and reduce the competitiveness of the U.S. economy...Their unifying aspect is that they have been on various goody lists prepared by the big accounting firms over the past several years." For example, while the Bermuda-related reform curbing improper interest write-offs would raise $5.5 billion over 10 years, another provision in the bill would increase unjustified interest deductions for multinationals, at a cost of $23.4 billion. Another $37.4 billion measure would make it easier for companies to artificially shift profits into tax havens through intracompany "transfer pricing."
Most Americans probably believe that multinational corporations, whether U.S. or foreign owned, ought to pay taxes on their American profits, just like purely domestic companies. Unfortunately, we learn more every day about how severely that goal has been undermined by aggressive tax sheltering on the part of unscrupulous corporate bosses and their accountants. Perhaps less well known is how enthusiastically the current management in the House of Representatives -- and the White House -- supports these abuses.
In fact, as things now stand, the only plausible reason to think Thomas' outrageous bill could fail in committee is that a few Republican members, notably Washington state Rep. (and anti-estate-tax zealot) Jennifer Dunn (R-Boeing), think the measure's corporate giveaways are insufficient.
If you're wondering why our tax laws are so messed up, the pending multinational tax deform bill ought to be Exhibit A against the perpetrators.
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