I recently heard the CEO of a large, publicly held multinational company complain that high corporate taxes were a significant impediment to job creation. The U.S. imposes taxes of 35 percent on corporate income—even on cash that is earned in lower-tax countries. So, being economically rational creatures, corporate finance honchos are inclined to keep and invest that cash abroad—unless, of course, Washington were prepared to declare some sort of tax holiday.
In effect, large multinational corporations are holding money for ransom. Give us a big tax break, they say, or else hundreds of billions of dollars will never see their fellow Americans again. “Bringing the cash back to the U.S. has two advantages,” Keith Sherin, chief financial officer at General Electric, told the Financial Times recently while making the case for a tax holiday. “It would bring some additional revenues to the U.S. Treasury, because there would be some tax paid on it which is not being paid today. Companies then could decide what to do with that cash.”
This is all a little rich—and I’m not talking just about the executives. Yes, a temporary tax holiday might encourage companies to import dollars. After the 2004 Homeland Investment Act offered a special 5.25 percent rate for repatriated profits, 843 companies brought back $362 billion, according to the IRS. But it’s not clear whether the cash was used to hire workers and build plants—or to pay big salaries to top executives.
There are larger issues at stake, though. For starters, for most large companies the horrific 35 percent federal tax rate is as mythic as the Jabberwock. According to the World Bank’s scintillating Paying Taxes 2010 report, all U.S. corporate income taxes (federal and state) amounted to 27.9 percent of profits in 2009. The General Accounting Office estimated that in 2004 the “effective tax rate” on U.S.-earned income of big companies was 25.2 percent, and about one third of corporate taxpayers paid effective rates of less than 10 percent.
Why is the effective rate lower? Like individual taxpayers, companies minimize their tax payments by taking advantage of available deductions and credits. Unlike most individuals, companies also spend tons of cash lobbying for the enactment of tax loopholes and employing high-priced accountants skilled in the dark arts of tax minimalization.
Bloomberg’s Jesse Drucker reported in October that do-no-evil Google managed to pay taxes on overseas earnings at a measly 2.4 percent rate by employing strategies that sound like titles of movies you wouldn’t want to catch your teenage son watching: the “Double Irish” and the “Dutch Sandwich.”
Companies view taxes as either a form of punishment or a system to be gamed to the max. In reality, taxes are the price of citizenship. Large companies like Google are like members of a country club who are content to reap all the benefits of membership—government support for computer-science research, in Google’s case—but who go to great lengths to avoid kicking in for landscaping. Take General Electric, whose CFO has advocated for a tax holiday. GE gets huge benefits by virtue of its domicile in Fairfield, Conn. During the financial crisis, its GE Capital unit was a prodigious user of taxpayer-backed debt guarantees. GE’s infrastructure and energy units are major beneficiaries of stimulus funds and programs that assist the construction of alternative-energy facilities. And CEO Jeffrey Immelt will meet in India this month with President Obama, who will push his hosts to import more goods from companies like … GE.
You would think the company would go out of its way to make sure that the U.S. government has solid funding. You’d think wrong. As Chris Hellman wrote in Forbes earlier this year, “Last year the conglomerate generated $10.3 billion in pretax income, but ended up owing nothing to Uncle Sam.” In 2009 GE said its nonfinancial business would have owed taxes equal to about 26 percent of its pretax profits. But thanks to the (poor) performance of its financial-services units, GE was able to claim a net $1.09 billion tax benefit for the year.
In 1775 Samuel Johnson, complaining about the colonists who were rebelling over taxes, wondered: “How is it that we hear the loudest yelps for liberty among the drivers of Negroes?” How is it that the loudest yelps for corporate tax relief come from those who aren’t paying much in the first place?
Gross is economics editor at Yahoo Finance.