Evidence of excessive corporate tax avoidance keeps piling up. And so do Congress’ excuses, mainly from Republicans, for not doing anything to curb it.
The inaction has led the Obama Treasury Department to announce that it is weighing the use of its administrative powers under the tax code to stem the tax-avoidance tide. That is reasonable.
Corporate tax avoidance is excessive to the point of abuse. If lawmakers won’t stop it, the Treasury must use the legal tools at its disposal to do the job.
The immediate problem is inversions, whereby an American corporation acquires a foreign company to reincorporate abroad and cut its U.S. taxes — even as its headquarters, its officers, most of its shareholders, and much of its business remain in the United States. Inversions completed so far are expected to sap the Treasury of nearly $20 billion in taxes in the next decade.
That’s just the start. Of 22 inversions attempted since 2011, the largest have come this year. As many as 25 companies, egged on by big banks that earn big fees on the deals, are considering relocation abroad to cut their tax bills, according to Sen. Ron Wyden (D., Ore.), the chairman of the Senate Finance Committee. Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Citigroup have earned nearly $1 billion in the past three years by structuring inversions.
Congress went on vacation without voting on either of two Democratic bills to stop the tax flight. One would effectively end inversions by requiring American companies that move their tax addresses abroad to be at least 50 percent owned by foreign shareholders. The other bill would bar companies from receiving federal contracts if they reincorporate abroad to cut taxes.
Republicans have criticized inversions, but say the remedy is tax reform. That is a political dodge in support of a tax dodge. The Democratic legislation would be in effect for only two years, encouraging Congress to reform corporate taxes in the meantime.
The bills would do what Republicans say they want: Curtail inversions and foster tax reform. But what they really want is a big reduction in the corporate tax rate. To that end, they are pretending that inversions are unstoppable short of that.
Inversions are only one of many corporate tax schemes that need to be checked. The Senate Permanent Subcommittee on Investigations held hearings on “basket options,” financial products created by Deutsche Bank and Barclays and used by prominent hedge funds to dodge billions of dollars in taxes, the subcommittee says.
The inquiry follows subcommittee investigations of tax-avoidance tactics at Microsoft, Hewlett-Packard, Apple, and Caterpillar. All involve shifting profits abroad to avoid taxes in the United States; none has been curtailed or ended.
The cost to the Treasury is steep: According to a study cited last year by the subcommittee chairman, Sen. Carl Levin (D., Mich.), 30 of the largest American multinationals, with more than $160 billion in profits, “paid nothing in federal income taxes over a recent three-year period. Zero.”
Clearly, they want to keep it that way. With Congress immobilized, they are seizing their chance. If the White House is going to thwart them, it needs to act soon.
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