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Obama's Tax Haven Reform Amounts to Chump Change

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.

K Street lobbyists haven’t squealed so loudly about proposed changes to the corporate tax code since they lost their three martini lunches. The uproar has drawn attention away from the fact that U.S. multinational corporations enjoy an effective tax rate of just 2.4 percent on billions of dollars in foreign active earnings.

In early May, the Obama administration announced plans to eliminate the advantages that multinational corporations have over domestic corporations when it comes to the tax treatment of reinvested profits. The reforms were part of a larger tax reform package that includes a pledge to step up the government’s enforcement efforts against wealthy individuals and corporations that stash their money in secret offshore tax haven accounts.

Candidate Barack Obama consistently promised to protect U.S. jobs by cracking down on corporate tax havens. At his May press conference he described the current system as “a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York.” 

The U.S. Treasury’s May 4 release details how it would “reform the [international corporate tax] deferral system,” a long-standing system of deductions and loopholes that allows U.S.-based multinationals to delay tax payments on overseas income until the earnings are repatriated.

Many corporate lobbyists expected Obama would repeal the entire deferral system altogether. That fear whipped up enough hysteria to motivate more than 200 large companies—including IBM, Coca-Cola, Caterpillar, Proctor & Gamble, Cisco, GE, DuPont and Eli Lilly—to send congressional leaders a letter objecting to Obama’s proposal weeks before it was even released. 

Rather than eliminate the deferral system, however, the administration presented an array of specific measures designed to address some of the more routine (and costly) ways that companies legally shift overseas income to avoid U.S. taxes. In addition, Obama added a proactive concession designed to neutralize his critics: A permanent extension of certain domestic research and development (R&D) tax credits that would facilitate tax planning and stimulate innovation (especially in green technologies), while creating more jobs at home. Overall, the deferral reforms are estimated to recover $210 billion in corporate income taxes, three times the amount needed to offset the R&D credit.

K Street Whining and Designing

Despite the fact that Obama’s plan emphasizes saving U.S.-based jobs, and appeals to populist anger at corporate tax dodgers, it didn’t get much bounce.

Some of the air was taken out by the efforts of former congressman and corporate lobbyist Dick Armey’s FreedomWorks to distract the media’s attention with its pseudo-populist “taxed enough already” (TEA) protests. Meanwhile, the corporate lobbyists’ preemptive objections tamped down support from tax policy leaders on the Hill, leaving the administration open to attack. 

Kenneth J. Kies, managing director of the Federal Policy Group, a lead corporate tax lobbying firm, promised that the fight over corporate tax policies would be the “largest fight the U.S. multinational community has this year and probably into the next. … This is bigger than card check [the bill that would make it easier for workers to organize unions]; this is bigger than cap-and-trade [i.e., global warming legislation] and people don’t realize it,” Kies warned. “Just imagine a world 10 years from now where there are no U.S. multinationals because they’ve all been bought by foreign competitors.”

Other corporate lobbyists and trade associations chimed in, including the ubiquitous U.S. Chamber of Commerce, the Business Roundtable, and the National Association of Manufacturers, whose whose president and CEO John Engler called the proposals “disastrous.”

Much is at stake for multinationals that use deferrals and other loopholes to significantly reduce their taxes. For example, the Wall Street Journal reported that 10 of the largest U.S. multinationals cut their taxes in 2008 by $20 billion by reinvesting $58 billion overseas. Specific companies that would be impacted by the change include:

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