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Corporate tax breaks in the mix
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12/19/12 03:00 PM ET
Tax hikes for millionaires and Social Security cuts for grannies. Those two divisive issues have dominated media coverage of the “fiscal cliff” debate. But now President Obama is hinting that corporate tax breaks might be in the mix.
Big players in the debate have been pushing for this all along. Take, for example, the “Fix the Debt” campaign, which has recruited more than 90 CEOs as spokespeople and plastered web sites, newspapers, and even a Washington subway station with their ads. The campaign has identified a shift to a “territorial tax system,” which would permanently exempt U.S. corporations’ foreign income from U.S. taxes, as a “basic budget need.” Fedex CEO Fred Smith is one of the biggest fans of this particular corporate tax break. He enjoyed face time with President Obama during one of the umpteen rounds of deficit deal dialogues the White House has held with business leaders. (Pity the few Fortune 500 CEOs who haven’t yet received an invitation.) Smith later explained his idea for a compromise: accept tax increases for the rich in exchange for an offer to “lower corporate tax rates to a territorial tax system.”
Why would a wealthy guy like Smith be willing to barter away his personal tax breaks for this corporate perk? His argument is a patriotic one – that this reform would encourage corporations to bring their money back to America to invest and create jobs.
The trouble is, similar tax breaks on overseas earnings haven’t led to job creation in the past. In the two years after a 2004 “tax holiday” that offered a temporary discounted tax rate of 5.25 percent on repatriated overseas earnings, the Congressional Research Service found that 12 of the top recipients laid off more than 67,000 American workers.
What is certain is that a shift to a territorial system would be a boost to the bottom line of global companies like Fedex. According to their annual report, the company has accumulated $1 billion in offshore earnings.
Under current rules, the statutory tax rate on those profits – if brought back to the United States – is 35 percent. Under a territorial system, Fedex could repatriate these earnings completely tax-free. That translates into an immediate potential tax break of as much as $350 million. This windfall, in turn, would likely boost executive bonuses and stock options – maybe even enough to offset any increases in their personal income tax rates.
An Institute for Policy Studies report I co-authored found that the 63 publicly held corporations leading the Fix the Debt campaign stand to gain as much as $134 billion in tax windfalls from a territorial system.
But will Obama go for it? Journalist Bob Woodward, of Watergate fame, reports in his latest book that Treasury Secretary Timothy Geithner is all for territorial taxation. During closed-door negotiations last year with House Speaker John Boehner, Geithner reportedly said “The goal is territorial,” while conceding that Republicans might have to settle for an exemption of only 95-96 percent rather than 100 percent. Boehner’s staff confirmed the accuracy of the quotes.
In public, the administration has not supported a territorial reform. But we saw two years ago how President Obama eventually backed down on his campaign commitment to repeal the Bush-era tax cuts for the wealthy.
If one of his chief negotiators favors a territorial tax system, it’s not hard to imagine that this dubious corporate tax break wind up on the table in the mad rush to reach a deal.
Anderson is Global Economy Project director of the Institute for Policy Studies.
Big players in the debate have been pushing for this all along. Take, for example, the “Fix the Debt” campaign, which has recruited more than 90 CEOs as spokespeople and plastered web sites, newspapers, and even a Washington subway station with their ads. The campaign has identified a shift to a “territorial tax system,” which would permanently exempt U.S. corporations’ foreign income from U.S. taxes, as a “basic budget need.” Fedex CEO Fred Smith is one of the biggest fans of this particular corporate tax break. He enjoyed face time with President Obama during one of the umpteen rounds of deficit deal dialogues the White House has held with business leaders. (Pity the few Fortune 500 CEOs who haven’t yet received an invitation.) Smith later explained his idea for a compromise: accept tax increases for the rich in exchange for an offer to “lower corporate tax rates to a territorial tax system.”
Why would a wealthy guy like Smith be willing to barter away his personal tax breaks for this corporate perk? His argument is a patriotic one – that this reform would encourage corporations to bring their money back to America to invest and create jobs.
The trouble is, similar tax breaks on overseas earnings haven’t led to job creation in the past. In the two years after a 2004 “tax holiday” that offered a temporary discounted tax rate of 5.25 percent on repatriated overseas earnings, the Congressional Research Service found that 12 of the top recipients laid off more than 67,000 American workers.
What is certain is that a shift to a territorial system would be a boost to the bottom line of global companies like Fedex. According to their annual report, the company has accumulated $1 billion in offshore earnings.
Under current rules, the statutory tax rate on those profits – if brought back to the United States – is 35 percent. Under a territorial system, Fedex could repatriate these earnings completely tax-free. That translates into an immediate potential tax break of as much as $350 million. This windfall, in turn, would likely boost executive bonuses and stock options – maybe even enough to offset any increases in their personal income tax rates.
An Institute for Policy Studies report I co-authored found that the 63 publicly held corporations leading the Fix the Debt campaign stand to gain as much as $134 billion in tax windfalls from a territorial system.
But will Obama go for it? Journalist Bob Woodward, of Watergate fame, reports in his latest book that Treasury Secretary Timothy Geithner is all for territorial taxation. During closed-door negotiations last year with House Speaker John Boehner, Geithner reportedly said “The goal is territorial,” while conceding that Republicans might have to settle for an exemption of only 95-96 percent rather than 100 percent. Boehner’s staff confirmed the accuracy of the quotes.
In public, the administration has not supported a territorial reform. But we saw two years ago how President Obama eventually backed down on his campaign commitment to repeal the Bush-era tax cuts for the wealthy.
If one of his chief negotiators favors a territorial tax system, it’s not hard to imagine that this dubious corporate tax break wind up on the table in the mad rush to reach a deal.
Anderson is Global Economy Project director of the Institute for Policy Studies.
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