Obama's Tax Haven Reform Amounts to Chump Change

By Charlie Cray, CorpWatch. Posted June 17, 2009.

•    General Electric, which reportedly lowered its 2008 U.S. tax rate by 27 percent through deferrals and favorable treatment of exports;

•    Pfizer, which cut its 2008 effective tax rate by 20.2 percent through offshore deferrals;

•    Merck & Co., which cut its effective rate by 11.7 percent; and

•    Johnson & Johnson’s, which lowered its effective tax rate by 12.4 percent via reinvesting $4 billion overseas.

“We know we’re going to take on some tough interests,” Obama’s press secretary Robert Gibbs said, “but the president believes this is a fight we should have, and one that we can win.” After all, he continued, “fairness is not something that will put them at a competitive disadvantage.”

Congressional Dickering

The grousing by corporate lobbyists may have been over the top, but it was not unexpected. Yet the weak support the administration received from many of its most important allies on the Hill pointed to its own failure to anticipate the furor.

Senator Max Baucus (D-MT), the powerful head of the Senate Finance Committee (which sets tax policy for the Senate), suggested that “further study is needed to assess the impact of this plan on U.S. businesses,” while Iowa Senator Chuck Grassley, the committee’s ranking Republican, pledged to support any effort to crack down on tax abuses. “But if [Obama is] using tax shelters as a stalking horse to raise taxes on corporations at the cost of U.S. jobs, he’ll lose me.”

Although Representative Charles Rangel (D-NY), chair of the House Ways and Means Committee (responsible for shaping House tax legislation), welcomed Obama’s plan—not surprising since many of the plan’s provisions were modeled after Rangel’s 2007 tax reform bill—he also suggested a possible compromise: In exchange for closing various loopholes, the Democrats might agree to lower overall corporate tax rates. Even Representative Richard Neal (D-MA), a well known progressive member of Ways and Means, gave the administration’s proposal a cool reception:  “We have to keep American companies competitive, and ‘deferral’ is not [tax] avoidance.” 

If groups across the ideological spectrum agree on one thing, it is that the Obama plan omitted a key reform: simplified tax codes. Although his press strategy was designed to appeal to popular outrage over corporate irresponsibility and offshore tax haven abuses, the public is unlikely to rally round a list of fairly arcane and technical reforms. By failing to stoke popular support with a clear plan, Obama has for now effectively left Congress little choice but to dicker over the details.

Obama has “bought into the Washington idea of mucking up the tax code with gimmicks” designed to satisfy one or another constituency wrote ace tax reporter David Cay Johnston in Tax Notes.

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Charlie Cray is director of the Center for Corporate Policy in Washington, DC.

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