Bush-era corporate tax breaks remain despite a continued slow economic recovery and account for more than $44 billion of lost revenue
JESSICA DESVARIEUX, TRNN PRODUCER: Last week, the House voted to extend special interest tax breaks, most of which expired at the end of last year. The 55 provisions included in this year’s package are the legacy of the Bush-era tax cuts that began in 2001. But 15 years later, these temporary tax break meant to stimulate a slowing economy have mutated into a slew of provisions that mostly help corporations avoid taxes. According to the bipartisan nonprofit Committee for a Responsible Federal Budget, these tax extenders have sapped the U.S. government of $44 billion in lost revenue over the past decade. And while some provisions do help individuals in the middle and lower classes, like tuition credits and deductions for teachers buying school supplies, three-quarters of that lost revenue has gone to big businesses.
JOSHUA SMITH, SENIOR POLICY ANALYST, ECONOMIC POLICY INSTITUTE: The two biggest provisions within the tax extenders legislation are the research and development credit and something called bonus depreciation, which allows big businesses to write off their capital investments faster than they would otherwise.
DESVARIEUX: Joshua Smith is a senior policy analyst at the Economic Policy Institute in Washington. He says that even beyond partisan politics, these tax extenders don’t make much sense for sound revenue policy.
SMITH: So all 55 of these provisions actually expired December 31, 2013. And this bill is going to make them retroactive just for the 2014 calendar year. Some they’re actually only good for two more weeks.
The idea of all of these is that they’re tax incentives, that they’re incentivizing certain behavior. For individuals, maybe it’s incentivizing going back to college or its incentivizing teachers to buy school supplies just because it’s a little bit cheaper with this deduction than without it. But for big businesses, things like research and development, they didn’t know they were going to get the credit when they made the decision to engage in research or development.
So at the end of the year, they’re just getting a windfall. They weren’t incentivized to do anything. They’re really just getting a gift right here at the end of the year. And it’s not going to help going forward either, because it’s going to expire again in three weeks.
So, really you wouldn’t find any economist on the left or the right that thinks that this is a good idea, a good way to do fiscal policy and tax policy.
DESVARIEUX: Part of the problem, Smith argues, is that Congress isn’t taking the time to review these measures and determine if they are actually stimulating the economy as intended.
SMITH: The things that are in this package that we like should be made permanent. And the ones that we don’t like–and for me that’s really most of them–should just go. The idea of doing this on a temporary basis is so that lawmakers can decide which ones work, which ones don’t, jettisons the one that don’t work, and keep the ones that do.
DESVARIEUX: But while these tax breaks might not make sense for American taxpayers, they do make sense for multinational corporations.
JAIMIE WOO, TAX AND BUDGET ASSOCIATE, U.S. PIRG: So there are two tax extenders in particular that we know are actually extremely ineffective and should be taken out. That’s the CFC look-through role and the controlled foreign corporations look-through role and the active [financing exception (?)]. These two extenders really just incentivize large, wealthy multinational corporations to continue avoiding their taxes by making it look like their profit is generated at an offshore tax haven or just offshore in a different country.
DESVARIEUX: Jaimie Woo is the U.S. tax and budget associate for the United States Public Interest Group. She says that many corporate provisions, including the CFC and active financing exception, do more than stifle the efficiency of the U.S. tax code.
WOO: Yeah. The CFC look-through role really incentivizes what’s called earnings stripping, as well as creates what’s called stateless income. So, for example, say an Irish subsidiary was paying royalties to a Bermuda subsidiary for kind of the ownership of a trademark–and this is all owned by an American Corporation. Right? So the Irish company pays it to the Bermuda company. And that profit is actually doesn’t have to be taxed at all in the U.S., because it’s considered active income from the Irish subsidiary. So, when the Irish subsidiary actually pays to the Bermudian subsidiary, that profit is deducted, their taxes are deducted from that profit, so they don’t have to pay taxes on it and–while, on the other side, Bermuda doesn’t have any taxes, so it’s a no-tax country. So, in a sense this income becomes untaxed anywhere and it becomes stateless income.
Right now, large corporations are able to defer their taxes on their U.S. profits when it’s in an offshore area. And the active financing exception basically says that financial institutions, like insurance companies and banks, can do the same thing. And that’s really problematic, because that profit is really highly mobile, highly fungible. And so it’s easily manipulated and it can be easily kind of warped into a way where that profit just doesn’t exist and you can not have to pay taxes on it.
DESVARIEUX: Smith adds that an important third provision is what’s known as bonus depreciation, which was in the Obama stimulus act of 2009.
SMITH: The idea was to try to encourage businesses to invest now rather than later. The whole idea, obviously: it would be cheaper to make some kind of capital investment today based on how it’s taxed rather than a year from now. That was the whole idea was to increase some kind of stimulus.
There have been government reports that show that it’s not very effective at creating that kind of stimulus. But it’s not effective at all–at all–if it’s made permanent, because the whole idea is to say that this is a temporary measure, you should invest now rather than later. If it’s made permanent again, it’s just a windfall for industry.
DESVARIEUX: But where Smith says lawmakers lack initiative to review these tax extenders, Woo says that their survival has more to do with special interests lobbying.
WOO: Corporations are able to send in their lobbyists. And, I mean, they have a lot of money to be able to do that. And then, like I said, they’re advocating for interests, like, for example, keeping the CFT look-through role and the active financing exception inside the package, claiming that they’re really good for the economy and they’re good for business activity and so forth, when in actuality we’ve seen that a large number of companies, actually, over 300 of the Fortune 500 companies are taking advantage of offshore tax havens and offshore loopholes to be able to avoid paying their taxes. And these are big names. Like, these are JPMorgan. This is Chase. This is GE.
DESVARIEUX: Woo says coupled with the government’s pro-austerity measures, these tax extenders begin to look contradictory to the credo of Republican and Democratic deficit hawks.
WOO: We believe that tax breaks deserve the same amount of scrutiny as do spending items. So when this package is being introduced, it’s going to add approximately $45 billion to the deficit. And when we see Congress saying, okay, we’re going to cut student loan programs or transportation benefits because we can’t afford them, that becomes a problem, because clearly we can afford to add $45 billion in tax breaks to the majority of which are large corporations.
DESVARIEUX: That view is consistent with public opinion. Exit polls from the midterm elections in November found that 80 percent of Americans think that politicians cater more to corporate interests than to the interests of average Americans.
WOO: People are overwhelmingly against corporate tax breaks and find that this is–it’s kind of an issue of unfairness. So these small business owners, they have to pay their corporate tax rate just the same. But corporations are able to pay 0-5 percent tax rate. And that just isn’t fair, because when that happens, average people have to pick up the tab for that.
DESVARIEUX: For The Real News Network, Jessica Desvarieux, Washington.
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