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This is a Christmas present for the tax lobby and Washington insiders, hardly a way to encourage investments with tax incentives, says James Henry, Senior Economist for the Tax Justice Network

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SHARMINI PERIES, EXEC. PRODUCER, TRNN: Welcome to The Real News Network. I’m Sharmini Peries, coming to you from Baltimore.

The tax break extensions approved by Congress this week would only apply to 2014 tax returns. Tax breaks for whom and why is the topic of our next discussion with James Henry.

James is joining us from Sag Harbor, New York. He’s a leading economist, attorney, and investigative journalist who is a senior economist at the Tax Justice Network.

Thank you for joining us, James.


PERIES: So, James–.

HENRY: Happy holidays.

PERIES: Thank you.

James, so these tax breaks were designed to assist whom? Let’s unpack some of this.

HENRY: Yeah. Well, this is an early Christmas present for the corporate tax lobby. GE has a tax department that has 1,000 people in it, and they’ve been busy. And so there’s $42 billion in this bill that was signed a couple of days ago or approved by the Senate, had been ratified by the House the previous week, and then the Senate has now adjourned.

So the bill contains about 55 different measures. A few of them are designed for regular folks, but the vast majority of them are really a benefit only to the world’s largest companies. They pertain to–first of all, one basic problem is that these are benefits that will be applied only to stuff that companies have already spent in 2014. All of these tax breaks expired at the end of 2013. And the Congress does this every year. They wait around till the last minute when kind of no one’s looking to pass this bill, this kind of a bill.

The total in the bill is about $41.6 billion. There’s three or four breaks that account for about half of that. For example, there is a $5.1 billion item for protecting companies that are transferring profits offshore and keeping them there tax-free. That’s not a worthy cause. That’s one reason why GE in particular has not paid any federal income taxes for five years. There is a $7 billion item for wind–sorry, a $7 million just for the R&D expenditures, $7.6 billion. And R&D in this bill is defined so loosely that it includes introducing new flavors of Pepsi or laborsaving equipment for firing people from low-wage restaurants. So it’s really–the research definition is so loose that a lot of stuff that’s not really basic research or even legitimate research is going to qualify here.

PERIES: Okay. And what does it mean that this only applies, actually, for two more weeks? It was just passed this week. What does that mean?

HENRY: It means that all of these tax benefits expired at the end of 2013. And this is just to extend them through the end of 2014. So if you’re going to–if you were going to do a wind farm, you would have already had to have done it, unless you do it in the last two weeks of the year, to qualify for the wind tax break here that I mentioned.

PERIES: So largely it benefits those who are planning to make–planning for this and was more or less sure. So you had to have had some inside information to really take advantage of it. But then again, this bill has been passed year after year, and these extensions have been going on since the Bush era.

HENRY: In any given year it sounds like $30 billion or $40 billion–not a lot of money. But if we do this every year, over ten years the CEO projects that it adds up to something like $700 billion of largely corporate tax breaks. And you’re quite right that the insiders knew, basically, that they were going to get these breaks at the end of the year, so they were doing their spending. It’s a heck of a way to run investment incentives. Let’s assume that we really wanted to have wind farms or–this bill contains incentives for NASCAR racetracks and for race horses.

Let’s put aside the question of whether those are investments that we want to subsidize with federal tax money. The way this is set up is just a crazy system. You need to have this kind of tax planning in place for several years at a time. You can’t just do this retrospectively at the end of the year. So this is really a travesty, and it’s fed by both parties participating in this hand-and-glove. And this is where they pay off their big donors.

PERIES: So, looking forward, James, what are the kinds of ways we could use tax incentives to benefit all of us, like for innovation and development and clean energy and that sort of thing?

HENRY: Well, there’s a category of investment that can’t rely on the first instance on the private sector to take the risks involved where there’s a longer-term need for government money involved. That’s always been the case in basic R&D and medical research. Some of the most important innovations in our economy have come from the federal government.

PERIES: So they have to be fairly specific and targeted in order for it to really benefit the public good.

HENRY: Well, it’s more a question of doing the kind of research that the private sector isn’t willing to do. The private sector horizons for investment tends to be well under ten years, and we’ve seen that in the pharmaceutical industry. They’re interested, private drug companies are interested in three-year products to get them to market. So you have to have organizations like NHS doing much more basic science.

And so I think the case for–the other case for investment incentives from the government is for some kinds of infrastructure which have a strategic importance and are not going to be supported by private spending, you know, the whole federal highway system. Or investments in education, I would argue, also deserve federal help.

But a lot of these giveaways aren’t in that category at all. They’re going to be for investments that have already been made. And this is just going to be falling to the bottom line or it’s going to be subsidizing profits that are being moved offshore by companies that have learned to game the tax system.

There’s very little evidence in terms of subsidies like depreciation that this actually increases investment on the margin. It basically is just a way of increasing profitability without having an impact on investment.

PERIES: Right. And, James, finally, what is being done about these kinds of tax breaks for the corporations? Is there a movement that is calling for–I know you’re a part of a tax justice organization. What are they calling for? And are they having any impact?

HENRY: Well, Tax Justice Network in particular has been lobbying for countries to stop competing against each other with respect to corporate taxation. We have what’s going on in the world, where it’s basically a race to the bottom with the United States and the U.K. and other major European countries cutting taxes, tax rates at a phenomenal level and providing lots of tax haven advantages, like we just saw in the Luxembourg scandal, where you had something like 350 companies parking subsidiaries there and avoiding corporate income taxes. That’s the kind of–one kind of thing that we need to clean up.

Unfortunately, the United States seems to be moving it just the opposite direction. We have–the new legislation that–probably going to be debated next year, calls for further reductions in the U.S. nominal and effective tax rates.

Most companies these days, most of the giants, are not paying anything like 35 percent. The right keeps saying that we have the highest corporate tax rate in the world after taking advantage of all these tax breaks and the capacity to move profits offshore and not pay taxes on it. U.S. major multinationals aren’t paying anything like that. I mean, Apple’s paying well under 5 percent worldwide, General Electric, as I mentioned, avoiding U.S. income tax entirely, and major companies like Google and Microsoft, Starbucks, playing the same game.

So we’ve been hoping for the OECD and the member countries like the United States to get behind tax reform that at least puts a floor under the effective tax rate that companies have to pay, ’cause it’s just not fair for the largest corporations on the planet, most profitable ones, to be avoiding corporate taxes entirely, and it has a terrible impact on developing companies, which rely very heavily on big multinationals to pay taxes locally.

So these are issues that, unfortunately, both political parties have an awful lot of donors from the corporate sector and many more lobbyists in Washington than the Tax Justice Network or Citizens for Tax Justice or any of the other NGOs that are working on these issues. But we have, I think–I’d like to say we have a lot of the facts on our side.

PERIES: Right. James, I thank you so much for joining us and elaborating on these issues. And we hope to maybe earlier in the year take this up again so we can try to get this issue addressed earlier.

HENRY: Well, it’s an issue that is not going to go away, and we’ve just seen the Pew study that showed that income inequality and wealth inequality in the United States are at all-time highs, and yet here we have the corporate lobby working overtime, on the edge of Christmas, to put more money in their own pockets, which is–since most companies or their shareholders are from the top income groups, this is not going to help with inequality. So this is a major priority for us, and it’s going to be an ongoing issue.

PERIES: And it’ll be a priority for us as well at The Real News Network.

Thank you so much for joining us, James.

HENRY: Thank you.

PERIES: And thank you for joining us on The Real News Network.


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James S. Henry is an investigative economist and lawyer, a Global Justice Fellow at Yale University, and a Senior Advisor at the Tax Justice Network. Previously, James served as Chief Economist at the international consultancy firm McKinsey & Co. As an investigative journalist his work has appeared in numerous publications like Forbes, The Nation and The New York Times.