How to Repeal the Tax Loophole That Allows Companies to Hide Their Profits in Offshore Accounts

[RiverLover]

How to Repeal the Tax Loophole That Allows Companies to Hide Their Profits in Offshore Accounts
by David Cay Johnston
Yesterday 11:14 am
The Nation

If we want to address the inequality crisis, we must prevent corporations from sitting on hoards of untaxed cash.



....big Snip...

...The awful truth is that the great industrial engine that once created rising prosperity for the vast majority has been converted into a mining operation. Instead of creating new wealth by making ever more useful widgets and services ever more efficiently, today’s economic titans mine the pockets of the many. Public policy—laws passed by Congress, regulatory agency rules, and lax oversight of business—makes this mining economy possible.

We see this in the private-equity, high-speed trading, and hedge-fund operators who combine scads of borrowed money, favorable accounting rules, and offshore companies that block taxes to report huge profits. They rarely create new enterprises or improve existing ones. Instead they strip companies of their assets and froth the stock exchanges so they can collect profitable bubbles. The biggest multinational corporations don’t even pay corporate income taxes. Rather they profit off them, something I exposed 13 years ago and that a three-volume study by the Congressional Joint Committee on Taxation later confirmed.

What makes this possible are a few seemingly innocuous words slipped into the 1986 Tax Reform Act that hardly anyone noticed at the time. Those words allow multinational corporations to evade the caps on how much cash and near-cash domestic companies can hold by simply moving their profits offshore. Since 1909 Congress has limited cash hoarding because it damages the economy. Just as the economy would collapse if everyone cashed their paychecks and stuffed greenbacks in their mattresses, so too is economic growth damaged when corporations hoard cash instead of reinvesting.

But under the 1986 law American companies pay royalties, rents, and fees to their offshore subsidiaries, using accounting alchemy to convert profits into expenses. As long as those profits are held in so-called deferral accounts with an offshore mailing address, no taxes are due.

You would get the same deal if Congress let you take a deduction for every dollar in your right pocket that you moved to your left pocket and kept there.

The next part, though, is even more perverse: the multinationals buy the Treasury bonds that the federal government sells because it didn’t collect those corporate taxes right away. The government then pays these multinationals interest on their deferred taxes.

Do this for long enough and the magic of compound interest will result in more money than the value of the taxes owed, which are eroded by inflation. In effect Uncle Sam loans these companies their taxes at 0 percent interest and then pays them interest on the loan. If you could get a bank to do that for you when you buy a house, after three decades with no payments you would have enough money to pay the bank the deferred purchase price and enjoy three to four times the house’s price in cash....

Read the rest, and how to fix it, and how that will benefit us, here~
http://www.thenation.com/article/how-to-repeal-the-tax-loophole-that-allows-companies-to-hide-their-profits-in-offshore-accounts/

(David Cay Johnston, who won a Pulitzer Prize at The New York Times and now teaches at Syracuse University College of Law, is the editor of the anthology Divided: The Perils of Our Growing Inequality, now available in paperback.)

And FYI, our favorite "Democrat" has colluded with Rob Portman(R) to increase the fleecing of America by corporations...

56 Organizations Unite in Opposition to Schumer Corporate Tax Plan
http://www.nationofchange.org/2015/08/01/56-organizations-unite-in-opposition-to-schumer-corporate-tax-plan/

Here are the 56 Progressive Organizations fighting this (includes AFL-CIO, MoveOn, WFP, etc)~
http://www.americansfortaxfairness.org/files/ATF-letter-opposing-Schumer-Portman-proposal-56-signers-FINAL.pdf

[Betty Karlson]

1. Trickle upwards economics. n/t

[RiverLover]

3. Yep.

Its been a long time since Reagan started this, and no one in congress or the executive branch has done a thing to reverse it since.

[1StrongBlackMan]

2. Posted to for later. n/t

[raouldukelives]

4. K&R That has been the playbook since Reagan.

A young, fresh faced generation of coddled and privileged MBA's who always knew how special and unique they were. How successful and wealthy they would one day be. Many of them gleefully appointed to positions of authority by their friends and families who have themselves always been owed the world and all its wealth.

But the landscape was already littered with profitable companies, factories, hospitals and small banks that had already determined the best way to build a good company with a good name was to provide a good service. Which they did admirably over the decades to become what they were.

The only way to profit by working for these firms was by making a better product or by providing a better service. These things require intelligence, dedication and time. Something Gods special little angels had never learned about nor learned to respect.

They were due the world, wealth and all the time to enjoy it. The only way to accomplish this was by dismantling all the good works of their forefathers, by raiding the profitable companies, in many ways lynchpins of entire communities, and using deceit, dismantling and destruction to profit madly themselves in the short term while turning our country into a third world wasteland of low taxes on robber barons and harsh fines and prison sentences on our most vulnerable to continue funding more and more draconian municipalities.

There are those who find these people and changes disgusting and there are those who work for and emulate them.

It is only through the efforts and donations of so many shareholders that so much destruction has been wrought to so many in such a short time.

If it wasn't literally turning our world into hell. If it wasn't a spit in the face to everyone who ever fought and died for democracy. It'd almost be impressive.

[RiverLover]

5. But your post is very impressive, raouldukelives.

So well stated.

Sad tale of truth though.

[They_Live]

7. + 1000

K & R

[Enthusiast]

8. What a great post! I was a victim of this deceit, dismantling and destruction.

Twice!

That is why I hate it so much. This bullshit only benefits a relative handful. How anyone, in particular Democrats, could advocate this is beyond me.

[dreamnightwind]

10. +1

I am old enough to remember when this change started (or at least when I became aware of it) in the early 80's.

[JNelson6563]

6. K&R for exposure! This is so important!

[Enthusiast]

9. K&R! This post should have hundreds of recommendations!

[davidcay]

11. When will we see action not just griping?

In reading the comments above about the piece I wrote for The Nation I see lots of griping, but not a single word suggesting people are actually going to do something.

Posting comments did not end slavery, did not get us child labor laws, did not get us union organizing laws, did not give us environmental laws…

This piece was written to encourage people to read the anthology I edited, which just came out in paperback – DIVIDED: The Perils of Our Growing Inequality. Invite sized pieces it explains the many dimensions of inequality including environmental hazards, and education system tilted to the best of children, how are secure system chills 47 babies a day you would live have they been born in Sweden, and how pervasive wage theft has become.

I got 44 people to contribute to the book from Elizabeth Warren to Krugman to Stiglitz as well as other people who are not household names, but are highly regarded in their fields. Plato and Plutarch and Adam Smith and Studs Terkel are in there, too.

My hope was that people, once they understood the full dimensions of inequality, would organize and take action. But from comments posted at this website, and others, it seems the Internet has made it easier for people to gripe and not do anything actually useful to make our government be responsive.

David Cay Johnston
[e-mail]

[hill2016]

12. question about your article

What's this cash hoarding penalty law passed in 1909?

Your article has lots of holes in the argument though.

[Kensan]

13. Not sure if it's the same....

There has been an Accumulated Earnings Tax for decades on corporations that reserve earnings, and thereby prevent the second tier of taxation. This tax was part of the 1954 Code, and I believe was a refinement/continuation from the 1937 Code and possibly earlier.

Effectively, there's a formula that determines if corporations are accumulating too much earnings for their reasonable needs. The accumulation means the corporation is not paying dividends to shareholders (which would generally be taxable income to the recipients). So the IRS could determine that the accumulation is a tax avoidance strategy for the shareholders. A corporation can justify accumulations for a lot of reasons: working capital requirements, expansion, mergers, stock buybacks, etc. I haven't seen a corporation assessed this penalty tax since the early 1980's (and that was a result of a very spiteful IRS agent).

This penalty tax has always been unpopular because it was deemed as a penalty for being a successful business. It was put into the Code before multi-nationals ruled the landscape. Now, it's much easier for the big players to utilize Subpart F of the Code to set up "blocker" entities to stash cash offshore.

The smaller fish can utilize the IC-DISC provisions to defer taxation on their export sales (while playing rate arbitrage for paying a commission expense at their marginal rate versus recognizing dividend income later at the reduced capital gain rates). Not to mention, this is done while paying an absolute pittance of an interest charge on the deferral of taxes since the interest rates are ridiculously low.