#GASen Candidates Weigh In on Corporate Inversions

There’s a relatively new term that’s entered the political lexicon: Corporate Inversion. It occurs when a company located in the United States moves its headquarters overseas in order to reduce its U.S. tax burden. The Obama administration isn’t in favor of the practice, with Treasury Secretary Jack Lew calling for a new economic patriotism that would inspire corporations to remain headquartered in their mother country.

Rejecting Lew’s exhortations, businesses say they are acting in their own self interest. They point out that while they may have originally made most of their sales and profits in the United States, the 21st century global economy causes more of their sales to come from overseas. And because of U.S. tax law, they are forced to pay taxes on that income. If they purchase a foreign corporation and then declare it their corporate headquarters, they avoid the tax. It’s all perfectly legal, but some pundits on the left have called for companies to sign loyalty oaths, promising they won’t take their business out of the country.

Given all of that, it’s not surprising that Georgia’s U.S. Senate candidates disagree on what should be done about the problem. Walter Jones of the Morris News Service has the story:

When it comes to taxing profits U.S. corporations earn overseas, Michelle Nunn and David Perdue disagree.

Nunn, the Democratic Senate nominee, says profits earned abroad should be taxed and companies avoiding it are taking advantage of a loophole that needs to be closed.

Perdue, her Republican opponent, believes companies shouldn’t have to face a tax in the first place because no other country taxes overseas profits. He argues removing the tax would give those companies the incentive to use an estimated $2 trillion in ready cash sitting idle in foreign banks as a way to invest in American job creation.

While all three candidates in the race, including Libertarian Amanda Swafford, are calling for some sort of tax reform to solve the problem, the approach each would take would be different. Nunn appears to want to solve the problem by closing loopholes, implementing policies that would discourage relocating jobs and business overseas, and implementing revenue neutral tax reform. Perdue favors overall rate reductions, and along with Swafford considers the FairTax a possible solution to the problem.


  1. John Konop says:

    I would suggest a compromise between Perdue and Nunn proposals. Why not close the loopholes, but remove and or use a very low rate for dollars reinvested into the US economy. For instance we could have a 5% capital gain tax on all new investment dollars over the next 2 year held for more than 2 years before being sold. If we see this works extend it……This would drive investment into the US ie create jobs…….

  2. Bobloblaw says:

    There shoudnt be double taxation. If a US company pays taxes on the income they earn abroad, they should not pay again in the US.

  3. saltycracker says:

    So which approach will attract capital ?
    Does Nunn truly think that not allowing corporations to hold foreign earnings offshore won’t have slick accounting/tax law changes dramatically reduce those earnings, here or there ? We can’t even sort out the tax codes with domestic companies. She knows how to keep a non-profit from showing a profit and make a super highway out of the road to inversion.

    Fix the tax code – reducing the rate might raise revenue – it’s a pain to spend so much time and effort manipulating the system.

  4. George Chidi says:

    This is … EXCELLENT!

    We’re finally starting to have the substantive discussion about matters of national interest that we need. Remedies for corporate tax avoidance don’t cut cleanly along partisan lines. I can imagine a Democrat from Silicon Valley arguing that the U.S. system should align with international tax norms — that’s Perdue’s view. More than one Republican makes the economic populist argument that tax schemes like the “Double Irish” trick that reduces Google’s tax liability in the U.S. to near-zero should be prosecuted. Hell, that’s a Tea Party position.

    I was getting worried. Now I’m less so. Small business owners can accept operating disadvantages because of scale, or access to top-flight talent, or brand. But regulatory capture? They hate having to pay higher taxes on their profits for no better reason than they can’t blow a million on accountants and another million on lobbyists.

    Perdue has taken the position a management consultant would take … because the loopholes put money in the pockets of guys like him. His solution — if you want to call it that — wouldn’t cause some massive repatriation of wealth into the United States. It would create the incentive to have these corporations reconfigure their domestic profits to be taxed as foreign earnings, reducing their overall tax liability without additional job creation.

    We tried this approach before and it failed. A report from the Treasury Department called the 2004 tax break “a failed tax policy.”

    Instead of creating jobs and bringing more money into the U.S., we lost $3.3 billion in estimated revenues over 10 years, and led to U.S. companies directing more funds offshore. Meanwhile, the companies that benefited most from the tax break cut 20,000 domestic jobs between 2004 and 2007. Those were relatively good economic years for the U.S., as I recall.

    Except for the suckers who got fired.

    • Harry says:

      I don’t think you’ll see any Democrat from Silicon Valley arguing that the U.S. system should align with international tax norms . High-profit techs there are among those who benefit greatly from the corrupt and unjust US tax regime.

    • dsean says:

      That Report was from the Democratic Staff of the Senate Permanent Subcommittee on Investigations, not the Treasury Department. Shockingly, the Democratic staff (Carl Levin’s staff, actually) thought it was a “failed tax policy.” The Treasury Department would not characterize it that way. (Probably could not by statute, actually).

      The IRS estimated that the repatriation tax break brought back over $300bn out of foreign accounts into the US. The report does not assert a causal link between the repatriation tax break and either domestic job cuts or offshoring more profits. It just notes that some companies who benefited from the break also did those things.

      The question we ought to be asking is “what is the most efficient tax policy?” Not whether certain piecemeal breaks or rates benefit XYZ constituency. It’s generally considered to be a consumption tax with some mechanism to ameliorate the regressive effects (such as the FairTax, though other proposals exist). Unfortunately, those don’t offer enough opportunity for graft.

      • George Chidi says:

        It’s funny — in substance I agree with you about the consumption tax, although as a practical matter there’s almost no way to avoid massive economic dislocation by shifting to one.

        The FairTax is unworkable in practice since there’s no mechanism to deal with the double taxation on retirement earnings, nor effective measures for ensuring all transactions actually get taxed, never mind the effect on the real estate market or intellectual property. It also shifts additional taxes to the working middle class while reducing taxes on the wealthiest, which would exacerbate income and wealth disparities.

        The lack of a causal link to the job cuts in the study is fair to note. Stipulated.

        But there’s nothing at all to indicate the American Jobs Creation Act actually created any jobs, either. The Congressional Research Service — which is nonpartisan, last I checked — said the last foreign tax holiday could not be linked to job creation.

        “While empirical evidence is clear that this provision resulted in a significant increase in repatriated earnings, empirical evidence is unable to show a corresponding increase in domestic investment or employment by firms that utilized the repatriation provisions.”

        CRS believes another tax holiday will be used for corporate bonuses, paying down debt and shareholder dividends. Not job creation. (I suppose you can make a trickle-down argument here, but there’s no evidence that larger dividends creates jobs, either.)

        • dsean says:

          My larger point was that debating corporate repatriation rates (or even corporate income tax rates, generally) is really just nibbling at the edges. I doubt that that particular rate has much effect on anything, but tends to make for good talking points to attempt to motivate the base of each party (“Look at how unfair these evil corporations are” vs. “look at how stupid our tax system is – it’s keeping all this money overseas.”). Neither point is really right (or wrong), but both miss the real issue – our tax code creates a lot of perverse incentives that rational actors will exploit.

          As for the form of a consumption tax, I like the FairTax because it’s transparent and obvious as to what it’s doing. That’s generally my problem with a VAT system – it’s hidden at each step of the supply chain, so it’s more or less impossible to determine what tax rate you’re actually paying.

          A change away from income taxation is going to result in massive disruption. There’s no way around it. Some of the effects can probably be ameliorated with targeted policies. Others, like the potential for double taxation on savings, will just have to be accepted. It’s a cost-benefit analysis of which is better – our current taxation system which is horribly inefficient and corrupt, or the dislocations caused by changing to a more efficient and less corruptible system. I vote for changing the system.

  5. dsean says:

    What’s the “loophole” that Nunn says needs to be closed? If it’s increasing taxes on companies’ overseas profits, that just encourages more inversions and corporate spin-offs.

    If closing loopholes means applying a flat-rate based on a domestic GAAP gross profit statement (or something similar), then we might actually get some of the inefficiencies out of the tax code.

  6. saltycracker says:

    Allan Sloan wrote an excellent piece in the Aug 11 Fortune on inversions. Dont always agree with him but his points should be a part of discussions.

    With the usual case supports and sense of urgency he suggests a short term fix to stop inversions now and a long term fix. He believes it is an American problem and not a Demo/GOP one.

    Short: run with the democrat senator Levin bros. Proposal that the foreign firm owns at least 50% and the officers of the inverting firm step down. Tough love he thinks will end the coming high inversion rates.

    Long: run with a resurrected Ways and means plan by republican Camp to lower the Corp rate and eliminate loopholes.

    He also suggests Obama has thrown a wrench into getting anywhere. Instead of using his influence behind the scenes he/his admin publically invoked “economic patriotism” pressing congress to act…Sloan feels the letter was designed more to give Obama populist talking points than to influence congress to fix the problem.

  7. gcp says:

    “Loopholes” Is the EITC or the child tax credit a “loophole?” In short, every deduction, credit, exemption is a loophole. Dump them all and move to a consumption tax or combination flat tax and consumption tax.

  8. George Chidi says:

    Just to be clear, folks. The U.S. will never move to a consumption tax. It. Will. Not. Happen. Demanding one to the exclusion of all other remedies is an argument for the status quo of massive corporate loopholes.

    I am all for reducing the corporate income tax rate while closing corporate loopholes. Just close all of them, all at once. No exceptions. I’d give up solar subsidies and wind subsidies for an end to oil exploration subsidies and carried interest rules. Make banks mark their loans to market. Throw out farm subsidies. Corporate exemptions and subsidies cost the government more than our entire budget for food stamps.

    Some would rather argue, no, why bother, we should scrap the whole code because FAIRTAX!!1! Except that there will NEVER be a voting majority in either chamber willing to raise taxes on the middle class to enact it.

    • David C says:

      Here’s the thing. Adding loopholes is easy. Raising rates is hard. You do that kind of tax reform, with lower rates and “throwing out the loopholes,” then come back in 10 years, and you’ll have all the loopholes back, especially those where monied interests can hire lobbyists to put them back, but still have the lower rates, and therefore lower revenue. And you’ll lose the kind of credits that might provide broad public good but don’t have a wealthy industry behind them. Credits and breaks can provide market based solutions to the public good. This kind of zero-based approach to tax reform is counterproductive.

    • dsean says:

      The problem with this is defining “loophole.” One person’s loophole is another person’s standard depreciation schedule (see e.g. corporate jets). Same for taxation of foreign profits. There are some companies it may make sense to do so, others where it may not. Which is a loophole? It’s really easy to say that we should eliminate loopholes and subsidies and really difficult to define what loopholes and subsidies (indirect subsidies, anyway) actually are.

      FWIW, I totally agree that we should eliminate the subsidies you identify (to the extent that oil exploration is a subsidy – I think they’d otherwise be categorized as part of the COGS under GAAP if they weren’t specifically identified in the tax code).

      I also disagree that the US will never move to a consumption tax. Eventually, we’ll have to raise taxes on the middle class to stave off fiscal implosion and it’ll be the least-bad scenario. I wish I were more of an optimist on that, though.

      • Dave Bearse says:

        “Eventually, we’ll have to raise taxes on the middle class…”

        At the rate we’re going, there will hardly be a middle class in a few decades.

      • saltycracker says:

        Loopholes are reductions and the honeypot for lobbyists and Legislators.
        Set the tax level taking all things in consideration to promote a dynamic economy. No reductions, exceptions, exemptions, rebates, subsidies, exclusions, deductions or free days. Tax free classifications ok.
        Assess surcharges/tariffs/duties/fees on those things we wish to inhibit/restrict.

        • Dave Bearse says:

          I like that approach, though I’d allow a few straight-forward limited exemptions against income for income tax purposes, allow an exemption on first mortgage interest on one primary residence on up to say $100,000 of debt, and exempt up to the first $500 in interest and up to the first $500 in dividends, the purpose of relatively low interest and dividend thresholds being to eliminate many people from having to bother with reporting.

          Was the omission of tax credits purposeful, or an oversight?

          • saltycracker says:

            Realize were jut entertaining each other as politicians will never give up their honeypot.
            I’d imagine the first step to in the process would have to be term limits.

            No exemptions. Apply the tax against all income totaling $1,000 or more regardless of the source. Tax free securities/entities would not apply. I’d raise the age on full social security to 69 and on full fed retirement, including military to 62 and eliminate income tax on SS.

            debt deductions – heck no – the first to go should be any deductions for carrying debt.
            Tax credits and such, like energy, children, spousal, joint returns…no, no opening the door….and all returns individual. And on a one page form.

            Realize this assumes a Fed rate somewhere in the 10% range, maybe less….betcha it results in higher revenue.

            Safety net payouts might need to be higher and surcharges/tariffs/fees higher on those things we want to inhibit – imagine there is a lot of those……

            Most of society will feel they are pretty much in the same boat – assuming we do a much better job of admin the truly needy – and it makes for a better society.

            • saltycracker says:

              P.S. no deduction for charitable giving, medical costs, political donations…..either with the low overall rate…..

              Could get hairy sorting it out if we could run a lot of things through our business as a cost item to get to net earnings……but that’s the way much goes now….

              • Dave Bearse says:

                Those would be tough pills to swallow, e.g. I’d be inclined to changes instead of elimination, but would be supportive of eliminating those deductions if various trust schemes that eliminate exemption from estate taxes, were eliminated too (and reduced rates on dividends or interest in excess of exemption of nominal amounts).

            • Dave Bearse says:

              I don’t have firm feeling on term limits one way or the other—I take longevity into account in casting a ballot—it was part of the reason I voted for Perdue instead of Kingston. (What do you think about randomizing candidate order, and eliminating party affiliation and incumbency from non-primary ballots?)

              Change to elements of the progressivity of the tax code are inevitable in eliminating exemptions—there will be winners and losers, but virtually no personal exemption, and flat rate are for me an altogether different matter. Not that really substantive changes have much chance anyway, as you note, but including substantive reduction in progressivity transforms tax code changes to be as much about tax cuts for the rich as changes for efficiency, and makes the subject of major tax code change a non-starter for me. (I wouldn’t advocate the level of federal tax progressivity that I do if state and local taxation weren’t so flat.)

              I can’t go with exempting SS from income tax, nor raising full SS retirement age, either. SS solvency is a whole ‘nother matter, but keeping the discussion on taxation, SS income is income just the same as unemployment compensation, alimony, child support, dividends, interest, realized capital gains, other than nominal gifts, etc. Let a robust personal exemption and graduated rates shield most SS income from taxation.

              Too many people have developed too many ailments that hinder employment in their late 60’s. Increasing retirement age is an invitation to even more abuse of disability.

              People employed at desk jobs already have an SS advantage in both their ability to continue working and longevity, relative to mechanics/craft type employment. The SS changes you propose exacerbate the disparity.

              I’d considering eliminating corporate income taxes in their current form, substituting graduated rates on gross revenues, e.g. a sales tax, including sale of services, a huge difference from the Fair Tax being that personal income taxes don’t go away.

              Not that it would raise much revenue, but I’d subject some expenses for employees, and especially senior executives, to income tax. For example, a firm flies in its Board and lodges them for Board meetings—let the Board members pay those expenses out of pocket. The company can adjust its Board members compensation accordingly, grossing up to compensate for additional personal income taxes.

              • saltycracker says:

                I have no problem with the order or party but with the exclusionary processes including seniority, in getting known, vetted and on the ballot.

                The abuse of disability is not coming from folks in their ’60s. A skilled mechanic or a person with ailments has plenty of work options not involving physical stuff. Teaching at a vo – tech…..administration, sales…..Public retirement programs are out of control. This weekend chatted with a couple 51/52 both retiring from a six figure Fed job, full benefits and looking for another career opportunity, in public service. I’d encourage every young person to consider a Fed career as long as the financials are so screwed up in their favor.

                There are many options for fixing the tax code. The point is we must keep it simple for everyone and stop trying to single out some group or classification. Heck, look at the vitriol spewed and time wasted getting government to define marriage. Treat all as individuals in the tax code.

                I think the 10% will get more revenue out of the rich. Remember they have highly paid advice and complex strategies to keep their real rate low. If studies show that that’s way off we can slap a 5% surcharge on over $1 million. I’d apply that only to those that no philanthropic effort going on.

  9. Three Jack says:

    Finally a clear distinction on a fiscal issue can be drawn between senate candidates. Nunn basically goes for the standard dem talking point, ‘punish the evil, profit seeking corporations’. Perdue on the other hand correctly sees the problem with our tax code which drives companies offshore. Nunn wants to use the stick, Perdue the carrot. I’ll go with Perdue on this one.

Comments are closed.