Head Smacker: Corporations Change Citizenship to Avoid Paying Their Fair Share


August 21, 2014

headsmacker_sqCorporate inversion has been all over the news lately. It’s the process by which American corporations renounce their U.S. “citizenship” and, often by buying a smaller company overseas, incorporate in a foreign country, without much change in its operations. This allows these companies to get all the benefits of being in the U.S. – our infrastructure, workers, research and development, patent and copyright protections, and others – all while still more vigorously dodging U.S. taxes. Walgreen’s was one of the biggest news grabbers lately, both when it was considering going through with an inversion and when, after public outcry and media and political pressure, it decided not to. Robert McIntyre, director of Citizens for Tax Justice, noted that “[Walgreen’s] initial plans to dodge U.S. taxes were merely a symptom of a larger problem. The loopholes in our tax code are so gaping that corporations can simply fill out some papers and declare themselves foreign companies that are mostly not subject to U.S. taxes.”walgreens corporate inversion
The main reason companies cite for an inversion is the 35 percent official corporate tax rate in the U.S. But in reality, most companies don’t pay anywhere near that 35 percent, after they take advantage of all the loopholes and breaks in the tax code.

A new paper by Edward Kleinbard, a professor at the University of Southern California and a former chief of staff to the Congressional Joint Committee on Taxation,  shows that, on average, companies paid only 12.6 percent in federal taxes in 2010 (the most recent data available). As reported in the New York Times, Kleinbard says that many smart U.S. multinational companies know how to game the system to the point where they already get a better tax rate than many foreign competitors, and that some companies don’t want to see the tax system changed even if it would lower the 35 percent statutory rate because it might also close many of the loopholes they are currently able to take advantage of.

An earlier report from Citizens for Tax Justice agrees. It shows that, not only are big companies paying nowhere near the 35 percent official tax rate, but far too many aren’t paying U.S. taxes at all. It also shows that most multinational companies are paying lower tax rates here in the United States than they pay on their foreign operations. And we not only let them get away with it, we continue to give them even more breaks. As we reported in a July edition of the Human Needs Report, the House passed a bill last month to make permanent the bonus depreciation tax break for businesses at a cost of $287 billion over 10 years. And an effort to limit that tax break and deny it to corporations that use the inversion scheme was defeated.

All of the recent media attention on inversions has many calling on Congress and the Obama Administration to act. The American Federation of State, County, and Municipal Employees (AFSCME) sent an action alert to supporters urging Congress to pass the Stop Corporate Inversions Act, legislation introduced in Congress in May. President Obama called companies that take advantage of inversions “corporate deserters,” and Treasury Secretary Jacob Lew has indicated that officials are looking into options the administration can take to end this practice. A new poll by Americans for Tax Fairness (ATF) found that over two-thirds of likely voters disapprove of corporate inversions, including 86 percent of Democrats, 80 percent of Independents and 69 percent of Republicans, and suggests that this could be a hot issue for the midterm elections.

If Walgreen’s had gone through with its inversion, it would have cost the U.S. $4 billion over five years in lost tax revenue. An infographic from ATF noted that this money could pay for 639,000 people covered under Medicaid or 3.5 million children covered by the Children’s Health Insurance Program for one year. Katrina vander Heuvel also noted that it could pay for six months of Head Start, providing a preschool education to nearly a million low-income children. While Walgreen’s didn’t go ahead with their inversion, estimates from the Joint Committee on Taxation suggest that, if current inversion trends continue, the U.S. could to lose nearly $20 billion in tax revenue over the next 10 years.

Something must be done to stop the tax evasion scheme known as corporate inversions. But with Congress still on vacation for another two weeks and only a limited number of days left in the legislative session this year, there’s still a good chance that nothing will actually happen. Even if a law is passed or executive action is taken to stop this practice, comprehensive corporate tax reform definitely won’t happen any time soon. Million and billion dollar companies will continue to use the multitude of other tax loopholes, breaks, and gimmicks to avoid paying their fair share. And the fact that they’re allowed to get away with it is a real head smacker.


[Photo: Mike Mozart via Flickr]

Head Smacker
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