Why do corporations spend millions on lobbyists? Because it’s good business.
A University of Kansas study several years ago found that some U.S. multinational corporations reaped a 22,000 percent return on their lobbying costs when Congress voted to give them a “repatriation holiday,” letting them bring home their foreign earnings and, instead of paying the normal 35 percent corporate tax rate on those earnings, pay just 5.25 percent.
Nearly 850 firms took advantage of the holiday to repatriate more than $312 billion and pay the lower rate, costing the federal government billions of dollars in lost tax revenue. The repatriation holiday was supposed to pour corporate cash into the U.S. economy, creating investment and jobs, but there’s little evidence that it did so.
Multinational corporations are now enjoying a golden age of manipulation in which they can avoid paying as much corporate tax as they want and nobody goes to jail. That’s because it’s all legal.
In the ’90s, abusive tax shelters undercut the system. Today, abusive “transfer pricing” is the system. Brilliant tax professionals have lifted the practice to an art form, working with huge multinational conglomerates to manipulate intragroup pricing so they can shift taxable income to low-tax jurisdictions while shifting deductions to high-tax jurisdictions.
As Congress signals a desire to enact corporate tax reform, the lobbyists have begun to line up for more goodies. On their wish list: another repatriation holiday and a territorial tax system that would permanently reduce U.S. taxes on overseas profits.
But, sooner or later, this golden age of manipulation will crash. That it’s legal doesn’t make it right. The lobbyists gearing up to get even more favorable treatment may wind up with unfavorable attention instead.
Signs of a burgeoning backlash are mounting, in public opinion in the United States and around the world. Americans are less enthused about corporate tax breaks when corporate profits are on the rise but investment at home is not. In the United Kingdom, a recent ComRes survey found that almost half of Britons would boycott the products or services of a company that does not pay its fair share of tax (of course, “fair share” is about as vague a tax term as there is). Two out of three said tax avoidance is morally wrong.
That opinion seems to be spreading. A recent Organisation for Economic Co-operation and Development report on Base Erosion and Profit Shifting recognizes the efforts of multinational corporations to game the system, and it calls on nations to work together to address the issue in a comprehensive way. The report is astonishing when you consider that, for years, the OECD has been the referee — if not the industry enabler — of multinational corporate tax avoidance, including transfer pricing and other rules.
The OECD itself indicates that the BEPS report may be a game changer, saying, “What is at stake is the integrity of the corporate income tax.” Among other things, the report recognizes that something is broken in transfer pricing. That the OECD would say such a thing may be game-changing in and of itself.
Sen. Jeff Flake, R-Ariz., takes a selfie with his cut-out head during the Hoops for Youth 16th annual charity basketball game held at George Washington University's Smith Center, September 8, 2014. The members of Congress team beat the lobbyist team 46-40. Buy photo here.