By Nadia Prupis | Common Dreams
President Barack Obama on Monday announced a new proposal as part of his 2016 budget to tax the trillions in offshore profits made by U.S.-based multinational corporations, but critics say the plan leaves in place a system that “encourages companies to game the system to avoid U.S. taxes.”
The proposal would impose a 19 percent tax on the future overseas earnings of U.S.-based companies, as well as a one-time 14 percent tax on the trillions in offshore profits that those companies hold right now. The Obama administration said revenues from the one-time tax will go toward fixing the country’s crumbling infrastructure and filling in a projected gap in the Highway Trust Fund—which has suffered chronic shortfalls as revenues from fuel taxes remain unchanged since 1993 while construction costs continue to rise.
“President Barack Obama’s decision to challenge international tax avoidance is laudable, but his execution leaves a lot to be desired,” said Robert McIntyre, director of Citizens for Tax Justice. “If companies were required to pay the same tax rate on their foreign profits as their domestic income, then they should owe 35 percent on their accumulated foreign profits, rather than the 14 percent that President Obama is proposing under his new transition tax.”
“Such a low tax rate would disproportionately benefit the worst corporate tax dodgers and leave billions in tax revenue on the table that could be used to make critical public investments,” McIntyre said.
Currently, U.S. corporations only have to pay taxes on earnings when they bring the money back home, at which point they’re taxed at the full 35% corporate rate. That has led many corporations to stockpile cash overseas to avoid being taxed, sometimes delaying repatriation indefinitely.
Under Obama’s plan, future corporate earnings overseas would face a minimum tax of 19%, which corporations could then bring back to the U.S. without being taxed further.
In addition, the New York Times reports, “The president will reiterate his call for a business income tax overhaul that lowers the corporate tax rate from 35 percent to 28 percent, and 25 percent for manufacturers.”
James Henry, senior adviser with the Tax Justice Network, stated on Monday, “The proposal is not as bad as what Bush did in 2004,” referring to a previous tax repatriation holiday, “but if you keep doing this, you in effect repeal the corporate income tax.”
In 2004, a number of U.S.-based corporations repatriated their overseas profits under an amnesty provision of the American Jobs Creation Act. However, as Citizens for Tax Justice pointed out (pdf) in 2009, Congress “utterly failed” to ensure that those profits were actually used for job creation or any economic stimulus.
“A recent study found that there was no positive correlation between a company’s repatriated earnings and an increase in the permitted uses, but did find a positive correlation between the repatriation and increased repurchases of stock (effectively putting the money in the hands of the shareholders) which was NOT a permitted use under the bill,” CTJ found.
According to Robert Borosage, president of the Campaign for America’s Future, the 2016 plan will allow more of the same results.
“The last time [corporations] pulled this scam,” Borosage wrote on Monday, “they got a huge tax break and the money was largely used for mergers and stock buybacks, hiking the bonuses of the executive suite and doing virtually nothing for jobs. Worse, more corporations decided they could benefit from the scam, and started reporting more of their profits abroad. Only small business and patriotic corporations face the nominal corporate tax rate of 35 percent.”
The administration defends the one-time tax by saying it would avoid the complications of the repatriation tax. “Unlike a voluntary repatriation holiday, which the president opposes and which would lose revenue, the president’s proposed transition tax is a one-time, mandatory tax on previously untaxed foreign earnings, regardless of whether the earnings are repatriated,” a White House official said Monday.
While the president’s plan is preferable to existing tax loopholes, Borosage argues Obama is making the same political mistakes that punctuated budget negotiations with Republicans during his first term. “In rolling out his budget, the president said he learned that it was better to tell Americans what he thought should be done, than to compromise pre-emptively. So why not simply end deferral and tax multinational profits at the same rate as those of domestic businesses? Why give companies an incentive to move production or report profits abroad?”
Critics of the plan say large corporations, and their supporters in Congress, will be swift to take advantage of the White House position.
As Borosage notes, the proposal contained in Obama’s budget “is just the opening bid. Corporate lobbyists are salivating about the bidding war that is about to take place. The president has accepted the principle of a tax holiday to pay for badly needed infrastructure spending. Now the question is simply a matter of price.”
“In principle, President Obama’s international corporate minimum tax is a smart move because it would no longer allow corporations to defer paying U.S. taxes until they bring those foreign profits back to the United States,” said McIntyre. “In practice however, the proposed 19 percent rate is far too low and would leave in a place a system that favors international over domestic investment and encourages companies to game the system to avoid U.S. taxes.”
“Its unfortunate that President Obama continues to insist on revenue-neutral corporate tax reform overall, rather than using this opportunity to call for raising revenue over the long term,” McIntyre added.
Obama’s budget announcement follows a separate proposal released Friday by Sen. Barbara Boxer (D-California) and Sen. Rand Paul (R-Kentucky), which would tax corporations at 6.5 percent if they repatriated foreign profits within five years.
“This is how the rules get rigged,” Borosage says. “We desperately need to rebuild America. The anti-tax lobby stops sensible tax hikes. The corporate lobby grabs the opportunity… And we wonder how the 1 percent has managed to capture virtually all of the country’s income growth, while the middle class continues to sink.”
This article originally appeared on Common Dreams.