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Wednesday, April 24, 2013

What Does It Mean To Be An “American” Corporation?

The Campaign for America’s Future is a strategy center for the progressive movement.

What Does It Mean To Be An “American” Corporation?

What does it mean to be an American? What does it mean to be an American corporation? An article in the Wall Street Journal the other day should trigger questions like these.

WSJ: Domestic-Based Multinationals Hiring Overseas,
Multinational companies based in the U.S. boosted their global work forces in 2011 almost entirely by hiring workers overseas, underscoring the slow growth in the U.S. job market.

… The paltry hiring at home reflects where multinational companies are focusing their attention. Stronger economic growth in overseas markets in Asia and Latin America is driving their expansion, reinforcing their shift toward cheaper labor or closer access to customers.

The U.S. parents of multinational firms account for about one-fifth of total private U.S. employment. Since 1999, employment by U.S. multinationals is down by 1.1 million inside the U.S., while it is up by 3.8 million overseas.
The hiring by American companies is not happening in the U.S. At the same time these companies are holding $1.7 trillion of profits outside of the country, away from their own shareholders and our economy to avoid their taxes, while pushing to dramatically lower the taxes they pay us – and even to get out of paying any taxes at all on money they make outside of the country!

Why Do We Have Corporations?

Why do We the People even have laws that allow corporations and give them special benefits? The answer obviously is for our common benefit — why else would we do it? The corporate form of a business enables the company to easily obtain capital from investors, in order to accomplish large-scale projects that benefit us. To encourage this we give these entities special privileges. For example, we limit liability which means the investors are not held liable for the actions of the company – they won’t lose more than their investment if the company gets sued for some reason. We provide a system that helps them obtain financing, insurance, market liquidity and all kinds of things to help those investors get a good return on their money.

Benefit: We the People want railroads, but it takes a lot of money to build and operate a railroad. And our system wants private companies to do the work of building and operating railroads instead us just doing it ourselves. So we set up a way for a private company to gather investment from lots of people.

Why Do We Want “American” Corporations?

Why don’t we just contract with any old corporation that comes along to get things done for us? Who cares what country these entities are from? Why should we as a country want to encourage and support our American corporations? Because American corporations make money for us. That is the whole point.

Other countries see themselves as countries, and compete with us as a country, for their benefit and the benefit of their people. As much as some of us might want a world in which we all cooperate and share and have “free trade” and other ideals and dreams, the fact is that other countries understand themselves as countries. Companies and industries located in other countries are operated to benefit their people. Their governments give them special benefits to help them compete with our companies. And then they are taxed so their country can have good schools and infrastructure and all the rest of the benefits of the modern world, for them.

And if we do not respond in kind, then their people end up better off at the expense of our people.
As long as other countries operate for the benefit of their people, it is our job to keep up our end of the bargain as it exists and operate as a country for the benefit of our people. This means that we support our companies, and expect them to bring the money they make back here, and share the returns with us.

We The People Used To Understand Who Is The Boss

We the People (used to) understand that these companies exist for our common benefit and (used to) expect certain things back from these corporations. We (used to) expect them to provide high-quality products and services and not engage in fraud and trickery. We (used to) expect them to provide a safe and fair work environment with good wages and benefits. We (used to) expect them to be good citizens that benefit the communities where they operate. And our laws and enforcement (used to) make sure they operated that way – for our common benefit.

These understandings and expectations have disappeared. An Apple executive articulated the new corporate understanding to The New York Times. He said giant multinationals like Apple “don’t have an obligation to solve America’s problems.” And to prove it, American corporations are holding $1.7 trillion in profits outside the country – just sitting there – rather than bringing that money home, paying the taxes due and then paying it out to shareholders or using it to “create jobs” with new factories, research facilities and equipment.

We The People Have Forgotten

Citizens, elected officials and corporate management have forgotten why we have corporations and who they are supposed to serve. We have instead developed a system in which corporations exist for their own sake, doing anything they want to do, and doing these things only to enrich the few who own and manage them.

There is no longer an understanding and expectation that these entities – creations entirely of We, the People — are supposed to exist for the common good of We, the People. They no longer try to provide high-quality goods and services. They no longer feel they must avoid fraud and trickery – and without enforcement of rules are able to gain advantage over others that do not operate this way. They no longer provide a safe and fair work environment with good wages and benefits. They are not good citizens that benefit the communities and country where they operate.

They are no longer under the control of We the People.

Are American Multinationals Really American?

For all intents and purposes giant “American” multinational corporations have transformed into entities with completely different interests from their American workers, customers, communities, citizens and government. These corporations are no longer operating in the interest of America or any country, while claiming the benefits of being American corporations (when it suits them.)
For example, the giant American multinational corporations are now set up and structured to avoid paying taxes here, or to any country. They set countries against each other in their hunt for low-wage labor, subsidies and advantages in markets.

Some companies are even “American” when it suits them, and not “American” when it does not. The post, Unraveling The Romney/Bain Tax Story drew on a New York Times report, Offshore Tactics Helped Increase Romneys’ Wealth. From the post:
Why is part of the same company set up based in Delaware, and part in the Cayman Islands or Luxemburg or Bermuda? Because the functions of the American-based company are those functions that avoid taxes on foreign entities, and the functions of the Caymans-based part are the functions that would have to pay US taxes if it was in the US. But in reality it is the same company — except for tax purposes! Here is the explanation of the foreign-based parts, from the Times article:

Had those funds been set up in the United States, the Romneys and other American investors would probably have been subject to certain federal taxes for their ownership of “controlled foreign corporations.” Setting up the funds in the Caymans allowed them to avoid those taxes.
Here is an explanation of the American-based parts,

Another appeal of offshore funds is that they help private equity attract investment from deep-pocketed big institutions like pension funds and university endowments. While these are generally tax-exempt, they are liable for taxes on “unrelated business taxable income” if they put money in funds that use debt financing to make investments.
So why aren’t they all just foreign-based? Why do they need to have an American-based part? One reason is that making the loans that run up the debt that enables these companies to get the interest deductions (more tax avoidance) would incur income taxes if the loans came from a foreign entity,

Beyond their tax advantages, however, offshore funds controlled by American money managers can also create new tax problems. Those funds are limited in their ability to make loans without triggering corporate income taxes — an issue for Sankaty funds. Therefore, they usually have a parallel domestic fund that makes the loans, holds them for a period before selling a portion to the offshore fund, a practice known as “season and sell.”
And, of course, the American-based entities enable the low “carried interest” tax rate that hedge fund managers enjoy. The company paying Romney can’t be foreign-based,

So-called carried interest, the cut of a fund’s investment gains earned by its managers, enjoys a favorable tax treatment. But under I.R.S. rules, carried interest cannot be derived from a corporation, like the offshore blockers used by Sankaty.
The American-based entities can buy American companies without incurring “foreign-based” obligations. Then the foreign-based entities can avoid the taxes that the American-based buyers of companies would have to pay. And the foreign-based investors can be in the foreign-based parts of the company, avoiding US tax obligations. Also American entities like pension funds can avoid US taxes they would otherwise have to pay.

To put it another way, the same company can pretend it is US-based when that is what it needs to be, and foreign-based when that is what it needs to be.
What Can We Do?
First of all, we want and need corporations, for the reasons outlines above. For our common benefit, to accomplish large-scale projects, and as a result to bring shared prosperity to our citizens.

But we have to be the boss of them. We have to understand again that We the People set up this system of corporations for our common benefit. (Why else would we set up these things?) And we have to again call ourselves a country.
Can we align the interests of these giant corporations with our national, American interest? If we cannot, they should be stripped of their American corporate privileges and be required to do the same things as other entities that are not wedded to the national interest. And then We the People can build and support American companies that are.


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Thursday, April 11, 2013

5 Juicy Tax Breaks That Corporations Enjoy That the Public Can't Touch



Do you get a tax break for breaking the law?


US companies are keeping more of their profits offshore, choosing overseas tax havens amid talk in Washington about closing corporate tax loopholes, The Wall Street Journal reported Monday


Corporations are quick to claim “corporate personhood” and their First Amendment rights when it comes to their ability to donate to political candidates, influence elections, and lobby or when it comes to advertising their products, especially those deemed dangerous or socially destructive. But on tax day, corporations are quite content with a tax code full of perks and privileges for corporations that are not available to living, breathing human beings.
  1. When corporations break the law, they get a tax break
If you forget to feed the meter, or go a little too fast and get a speed camera traffic ticket in the mail, or God forbid fail to pick up after your dog in a public park, when it comes to tax time, forget it – none of these fines for bad behavior are tax deductible.

But that’s not the case for corporate bad actors.  Take, for example, BP’s toxic mess in the Gulf of Mexico or Wells Fargo’s abusive lending practices that cost tens of thousands American families their homes. BP’s clean-up costs and Wells Fargo’s settlement fees were likely fully deductible, leaving the rest of us to pick up a significant piece of the tab for their destructive behavior. Senators Sherrod Brown (D-OH) and Charles Grassley (R-IA) have issued a bi-partisan call to end the tax deduction for Wall Street banks settling charges of lending abuse that lead to the Great Recession.
  1. When corporations fall on hard times, the tax code helps makes them whole
When corporations fall on hard times and lose money in a given year, those losses cannot only be used to fully offset any taxes they owe that year, but they are allowed to carry those losses into the future for up to seven years, reducing their taxes when good times return.

Families face a different set of rules on tax day. Imagine the family that has experienced long-term unemployment or costs of an uninsured major illness during the year. They might have to deplete their savings or retirement accounts to stay afloat. Like the corporation, they are able to deduct the cost of their losses in the year they occur, but unlike corporations they cannot generally carry the deductions they cannot use into future years.

Corporations can use future tax savings to recoup their losses and replenish the savings drained during the bad year. Human families get no such benefit.
  1. Many corporations get to choose where in the world to report their income, allowing them to choose a nation with low or no taxes
For American workers, there is little doubt where their income is earned and thus where the taxes are owed. If you are a doctor with an office in Omaha, you can’t pack up your diploma and ship it to a bank vault in the Cayman Islands and tell your patients to mail their payment check to a post office box in the Caribbean nation, explaining that they need to pay for the intellectual property represented by that diploma.

But if you are a corporation, that’s exactly what you can do. U.S corporations have $1.7 trillion of their profits stashed offshore, much of it in places like the Cayman Islands, even though most have no employees or offices in tax haven nations. They do so because they register their patents in a tax haven nation, like the Cayman Islands, that imposes no taxes on corporate income. They argue that the shift in profits from the U.S. to the tax haven is to pay the cost of the intellectual property represented by the patent. This sort of profit shifting and tax haven abuse by corporations costs the U.S Treasury $90 billion a year in lost tax revenue.
  1. Superstorm Sandy devastated millions of American families, but corporations got to deduct the full value of their losses from their taxes
Millions of American families suffered damage to their homes and property last year, from Superstorm Sandy, western fires and other natural disasters. The federal tax code expects human property owners to pick up the full cost of damage for an amount equal to ten percent of the taxpayer’s annual reported income. Beyond the ten percent threshold, any additional losses may be taken as a tax deduction.

In contrast, corporations face no such income threshold. Corporate shareholders are not asked to absorb damages equal to ten percent of the corporation’s taxable income as individual families are. Corporations can –and do – deduct every dollar of losses they incur. Many firms, including Verizon and other utilities serving the New York and New Jersey areas saved millions of dollars on their 2012 taxes by deducting the full costs of Sandy damage on their taxes.
  1. If you are an American citizen working abroad you pay American taxes on your foreign earnings; if you are an American corporation you can indefinitely delay paying U.S. taxes on income you earn abroad.
About five million American citizens live or work abroad. Come April 15th, each of them is expected to file a tax return and pay U.S. taxes on all their income. The amount they owe is reduced by an amount equal to any taxes they paid to foreign governments on that income.

But U.S. corporations get a different deal, called deferral. They get to indefinitely put off paying U.S. taxes of their foreign until and unless they bring those funds back to America. This loophole costs the U.S. Treasury almost $60 billion a year. Senator Bernie Sanders (I-VT) recently introduced the Corporate Tax Dodging Prevention Act, which would close this loophole, putting corporations and real humans on the same footing come tax time.

As many people work hard to make corporations less human on election day, perhaps it is time to make them more human on tax day.

Scott Klinger is an Associate Fellow at the Institute for Policy Studies.