Expert Debunks Claim U.S. Corporate Taxes Are Too High

Posted: September 7, 2015 in Big Pharma Tax Fraud
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Kleinbard’s work was highlighted by the New York Times’ Andrew Ross Sorkin in a column Monday, triggering a flood of social media buzz. 

Corporate taxation has become a hot-button issue as more U.S. companies have acquired foreign firms and then moved their headquarters overseas as a way to reduce their tax burden.

According to data from the General Accountability Office cited by Kleinbard, corporations on average paid 12.6 percent as of 2010.

Other tax experts have made the same point as Kleinbard. 

A report by the advocacy group Citizens for Tax Justice noted that 111 of the 288 companies it examined paid zero or less in federal taxes in at least one year from 2008 and 2012.

“It is true of course that the federal corporate tax rate — nominally, 35 percent — is too high relative to world norms, and that the ersatz territorial system requires firms to waste money in tax planning and structuring, but effective marginal tax rates and overall effective tax rates reach the level of the U.S. headline rate only when firms studiously ignore the feast of tax planning opportunities laid out before them on the groaning board of corporate tax expenditures,” he wrote in the 32-page paper.

Critics of the U.S. tax code — and there are many — aren’t convinced. 

American Tax Foundation Chief Economist Will McBride, argued that the GAO data that Kleinbard cites underestimates the taxes that corporations pay by 100 percent because it relies on data from a year where companies carried a high number of losses forward because business was hurt by the Great Recession.

Even when that unusual event is factored in, U.S. companies still pay too much in taxes with rates above 20 percent. 

Like many tax experts, McBride agrees there are too many loopholes in the codes though he doesn’t fault the efforts of companies who lawfully try to minimize their tax burdens.

“You have to ask why there is so much of it going on,” McBride says. 

“The big one is the manufacturing deduction that knocks off 3 points for manufacturers.  

Then there are all of the green energy credits which are completely over the top and do not belong in the tax code.”

Unlike most countries in the world, the U.S. has adopted a territorial taxation system whereby companies have to pay U.S. taxes on their profits earned overseas. 

The paper takes aim at the idea that U.S. companies are placed at a competitive disadvantage because of the tax code and that high rates are to blame for the recent spate of inversions. 

These deals occur when U.S. companies acquire firms in lower tax countries and relocate their headquarters there to take advantage of lower rates.

President Obama has taken aim at inversions, denouncing the companies that use the strategy as unpatriotic. 

He supports efforts to lower the corporate tax rate and close loopholes, but figuring out which ones to close gets bogged down in political partisanship.

In his column, Sorkin urges readers to read the professor’s “provocative paper” even if they disagree with him because it will “explain why corporate tax change will be so difficult to accomplish even with the backing of both Democrats and Republicans, who have routinely provided lip service to the idea of lowering rates, but taken no action.”

Are These Companies Unpatriotic?

CBS/ISTOCKPHOTO

For most people, trying to pare their tax bill is simply common sense. But the recent surge in so-called inversion deals is raising the ire of everyone from activists to the Obama administration.

To be sure, the strategy isn’t new as a way for multinational corporations to reduce their tax burden. 

But a recent pickup in the number of businesses using the method is raising red flags, with several large companies recently having bought or merged with foreign firms in order to reincorporate in tax havens overseas.

Like many hot-button topics on Wall Street and Capitol Hill, tax inversions involve money — lots of it. 

By moving their headquarters outside the U.S., companies that use the technique will avoid paying almost $20 billion in taxes over the next decade, according to a study from the Joint Committee on Taxation.

Since 1983, 76 U.S. corporations have moved their tax domiciles out of the country, with the pace picking up in recent years, the Congressional Research Service said this month.

In one such transaction, for instance, Walgreen (WAG) is considering moving its base to Switzerland as part of a $16 billion deal to buy the 55 percent of U.K. drugstore chain Alliance Boots it doesn’t already own. 

That would cost taxpayers$4 billion in lost revenue, advocacy group Americans for Tax Fairness said last month.

The statutory corporate tax rate in the U.S. is 35 percent, and while many companies use techniques to reduce their tax bills, inversions are increasingly attractive

Ireland, for instance, has a corporate tax rate of just 12.5 percent.

This week, Treasury Secretary Jacob Lew wrote to members of the House Ways and Means Committee and the Senate Finance Committee, urging lawmakers to take action.

“What we need as a nation is a new sense of economic patriotism, where we all rise or fall together,” Lew wrote in the letter. 

“We should not be providing support for corporations that seek to shift their profits overseas to avoid paying their fair share of taxes.”

But it’s unlikely that anything will change anytime soon, despite “domestic political noise” about the practice, political risk consultancy Eurasia Group wrote in a report Friday. 

That’s because the Obama administration can’t affect change on its own, while Congress is unlikely to tackle tax reform ahead of the November midterm elections.

Inversions have been concentrated in the pharmaceutical industry, which is seeking savings as insurers pressure the companies on drug prices, as well as in the retail, manufacturing and consumer industries. 

Since 2009, seven corporate tax inversions have taken place, while there are currently 11 pending or under consideration, according to the Ways and Means Committee Democrats.

Below are five of the biggest tax inversions that have been announced this year alone.

AbbVie/Shire: $55 billion

Photo, file: REUTERS/Brendan McDermid

North Chicago, Illinois-based AbbVie (ABBV) is the biggest U.S. company to move to a foreign address for tax purposes. In its proposed $55 billion deal to buy U.K.’s Shire, AbbVie would legally become British, lowering its tax rate from 22 percent to 13 percent, according to Bloomberg News.

AbbVie, which makes the rheumatoid arthritis medicine Humira, said the deal isn’t solely for tax purposes. 

“This is a transaction that we believe has excellent strategic fit, well beyond the tax impact,” AbbVie CEO Richard Gonzalez said in a recent conference call to discuss the merger.

Valeant/Allergan: $53.3 billion

Photo, file: Don Murray/Getty Images
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