Calvin Trillin, in an essay written for TIME, referred to the campaigning style of 1996 Republican presidential candidate Steve Forbes as "a great comedy-club impression of what would happen if some mad scientist decided to construct a dork robot." Still, Forbes won primaries in Delaware and Arizona and did well in several other primaries. Two words explain this success: flat tax. Forbes was essentially a one-issue candidate, but it was an issue that caught the fancy of voters.
Americans widely perceive a need to make the tax code less complicated, not just for individuals but also for corporations. If the U.S. brought its corporate tax rates more in line with the rates paid in other countries, perhaps companies like General Electric would be less inclined to employ a stable of gifted tax experts, led by a former Treasury official, who use a confusing series of tax shelters, subsidies and credits to ensure GE pays very little in taxes.
According to a scathing piece in The New York Times, GE paid no taxes last year in the U.S. and, in fact, earned a benefit of $3.2 billion. That's nothing new for GE. As Forbes reports, GE also paid no U.S. taxes in 2009 but earned a $1.1 billion benefit. Both the Times and Forbes explain how GE and other large multinational corporations get out of paying taxes. In GE's case, it greatly benefits from its GE Capital business and tax rules that let it defer taxes on profits earned overseas. From the Forbes article:
Over the last two years, GE Capital has displayed an uncanny ability to lose lots of money in the U.S. (posting a $6.5 billion loss in 2009), and make lots of money overseas (a $4.3 billion gain). Not only do the U.S. losses balance out the overseas gains, but GE can defer taxes on that overseas income indefinitely.
As The New York Times notes, corporate taxes now account for 6.6 percent of federal revenue, down from 30 percent in the mid-1950s. Not surprisingly, considering the federal government's need to cut the deficit, President Obama in 2009 proposed to eliminate several tax-avoidance methods widely used by multinationals like GE. Following strong pushback from the business community, the Obama administration later dropped the idea.
Now, however, lawmakers including prominent Republicans are considering a comprehensive reworking of the U.S. tax code. But some legislators are at loggerheads over whether to introduce a temporary tax break on repatriating profits held offshore before broader reform efforts begin.
As Bloomberg reports, opponents of repatriation include Rep. Dave Camp (R-Mich.), chairman of the House Ways and Means Committee; and Sen. Orrin Hatch (R-Utah), the top Republican on the Finance Committee. Its chief proponent is House Majority Leader Eric Cantor (R-Va.). Also backing the idea is WinAmerica, a coalition that counts lots of big companies among its supporters. Rep. Kevin Brady (R-Texas), a member of the Ways and Means Committee, plans to introduce a bipartisan bill for a repatriation holiday in the next few weeks, according to a spokeswoman.
The Treasury Department is against it. Michael Mundaca, assistant Treasury secretary for tax policy, wrote in a blog post that "letting our eye off the ball of comprehensive tax reform in favor of a temporary measure of this kind would be a mistake." There's also "no evidence" that a similar holiday in 2004 with a 5.25 percent rate on repatriated funds increased U.S. jobs or investment and "it cost taxpayers billions," said Mundaca in his post.
As James Pethokoukis writes for Reuters, Mundaca may have a point. A study by economists at the University of Connecticut and the National Bureau of Economic Research found that for every dollar returned by 843 companies in 2004, some 91 cents went toward share buybacks and another eight cents toward boosting dividends. However, says Pethokoukis, that's no reason to abandon the idea of repatriation. Even if most of the money returned to the U.S. goes to stockholders, the economy could get a boost with "knock-on" consumption, growth and jobs, he says.
Of course, as I wrote back in 2009, favorable tax structures are hardly the only reason companies expand their overseas operations. Getting into emerging markets with growth rates far higher than the U.S. is a factor, as is the ability to hire lower-cost workers. Still, the experiences of GE and other multinationals demonstrate the importance of taxes.