Blog

It's Not Over Yet

By Jaimie Woo
Tax & Budget Associate

There are 12 days left before the 2014 election, and campaign efforts have hardly let up. Last-minute donations are flooding in, canvassers are knocking on doors, and organizations are registering young people to vote.

But after November 4, Congress will reconvene, and their work will be far from over.

Our representatives, whether they're re-elected or not, will return to Capitol Hill to deal with some important deadlines. They will need to pass a continuing resolution to ensure funding for the federal government, and they're also likely to renew a collection of 55 temporary tax breaks, known as "tax extenders," that are set to expire at the end of this year.

Extended for one or two years at a time, these tax breaks aim to stimulate our economy, encourage business investment, and provide research credits. However, due to a steady stream of corporate lobbying and campaign contributions, many tax extenders of questionable merit are passed without meaningful discussion or analysis of their success. Two tax extenders, in particular, incentivize companies to continue avoiding their taxes on U.S. profits by making it appear as if those profits are generated offshore. Adding insult to injury, this adds to the deficit -- costing the federal government $90 billion every year -- meaning their cost will be borne by taxpayers through future tax hikes or increased debt.

The Controlled Foreign Corporations (CFC) Look-Through Rule allows U.S. multinationals to create "stateless income" -- income that is treated, for tax purposes, as being earned in a low-tax (or no-tax) country. This could be in the Cayman Islands, where the company's operations may consist of only renting a mailbox, rather than in the countries where the employees and assets are actually located. It also makes it easier for companies to engage in "earnings stripping," another clever maneuver that permits them to book active income coming from high-tax countries into low-tax or no-tax countries without having to pay any U.S. taxes on U.S. profits.

A section of the tax code currently requires multinational corporations to treat passive income (such as interest, dividends, or royalties) as taxable income even if the income is not brought back to America. The Active Financing Exception is an exception to this general rule, created thanks to fierce corporate lobbying. Essentially, this rule allows multinational corporations to avoid tax on their worldwide income by making it look like their profit is generated in offshore subsidiaries, thereby manipulating their tax bill. It is a major reason why General Electric paid a federal effective tax rate of negative 11.1 percent between 2008 and 2012.

There is rising public outrage against big corporations' manipulation of these kinds of loopholes - for example, the outcry against inversions. Congress should take action to close loopholes and eliminate inversions, and let these two particularly egregious tax extenders expire immediately. When corporations like GE, Exxon, J.P. Morgan, and hundreds more use these methods to avoid their taxes, the public must pick up the tab in the form of higher taxes, more debt, or cuts to public programs. Meanwhile, small businesses that don't have offshore subsidiaries are categorically put at a competitive disadvantage.

Each individual Congressperson has a responsibility to act in the interest of the American people. In 12 days, they will have their opportunity. The CFC Look-Through Rule and the Active Financing Exception allow companies to thrive off of our American infrastructure, economy and education, and yet excuses them from paying their fair share in taxes. Wealthy corporations should not be able to cash out without chipping in, so let's not excuse them any longer.

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