Spending Money to Make Money
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By Pedro Morillas
CALPIRG
With the second anniversary approaching of the Supreme Court’s decision in the Citizens United case – which opened the floodgates to corporate spending on elections – it’s worth a look at whether playing in politics actually pays off for corporate interests. As it so happens, it does.
Between 2008 and 2010 at least thirty US corporations spent more to lobby congress than they paid in federal taxes over the same time period. Clearly, when it comes to politics, corporations really do spend money to make money.
In addition to the “Dirty Thirty”, 280 consistently profitable Fortune 500 companies paid about half the statutory corporate tax rate while spending $2 billion to lobby Congress on tax policy and other issues. Twenty-nine of these corporations actually received a net tax rebate simply by exploiting special provisions and loopholes in the tax code.
All told, the “Dirty Thirty” companies made $163.7 billion in profits while paying zero dollars in federal income taxes and collecting a total of $10.6 billion in various tax rebates. Meanwhile, they collectively spent $475.7 million in lobbying expenses for the three year period. Mattel, a California based company, spent $800,000 on lobbyists and was rewarded with $366 million in subsidies.
One of the most egregious ways these corporations skirt their taxes is by shifting profits legitimately earned in America to offshore tax havens, where they are subject to little, if any taxes. At least 22 of the thirty companies studied had subsidiaries in tax haven countries. Wells Fargo, another California based company, has 58 tax haven subsidiaries.
The solution to closing offshore tax havens is simple. Congress should end the rule that allows U.S. corporations to “defer” U.S. taxes on their offshore profits. “Deferral” of U.S. taxes on these profits is often more like a blanket tax exemption for any U.S. profits that are dressed up as “foreign” profits using myriad accounting gimmicks. Failing that key reform, there are some other steps that Congress can take that will lessen, if not eliminate, the problems associated with corporations shifting their profits to offshore tax havens:
- Treating the profits of publicly traded “foreign” corporations that are managed and controlled in the U.S. as domestic corporations for income tax purposes.
- Requiring full and honest reporting by ending the ability of multi-national corporations to hide the identity of their owners and the origins of their profits behind layers of shell companies and requiring a full reporting of profits, country by country.
- Closing the loophole that allows foreign subsidiaries of U.S. companies to deposit profits in U.S. financial institutions, thereby benefiting from the stability of the dollar while skipping out on U.S. taxes.
The data show that corporate power and influence was already on full display when it comes to our tax code, which is riddled with special carve outs and loopholes won through decades of corporate lobbying. This is just one of a thousand reasons why, with one of the most expensive elections in history on the horizon, we need bold action from both the states and the federal government to end corporate influence in our elections.
The Supreme Court needs to reverse its decision to clarify that when our founding fathers wrote “of the people, by the people, and for the people” they did not mean “of the corporations, by the corporations, and for the corporations.”
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Pedro Morillas is the legislative director for the California Public Interest Research Group (CALPIRG). The report referenced in the article can be found here or at www.calpirg.org.
I agree with some of the concepts that you state. However, a few of your issues are a bit naive. Let us look at the three you advocated:
1. Treating the profits of publicly traded “foreign” corporations that are managed and controlled in the U.S. as domestic corporations for income tax purposes.
Companies invest overseas for many reasons. Most of these are not for avoiding taxes. For example, several years ago I led an overseas project to build a pharmaceutical plant in Indonesia as a subsidiary of an American drug company. This was done because Indonesia had laws that said that no "foreign" company could have access to their market unless they had a domestic manufacturing operation. Thus, to sell our products we had to have an Indonesian plant. Was this good for the American company? Absolutely, we sold precursors to the plant and we sold other finished products to Indonesia. But, this was not ideal for us. But, we had to do it because of Indonesian law. Of course, the cost of this plant was passed on to the Indonesian consumer. The plant paid significant taxes on the profits generated within Indonesia to the Indonesian government. If you make those plants pay a second, American tax than an overseas plant becomes impossible financially. In that case, our European competitors build plants and take over the Indonesian markets. The unintended consequence is that American companies loose ALL overseas business.
2. Requiring full and honest reporting by ending the ability of multi-national corporations to hide the identity of their owners and the origins of their profits behind layers of shell companies and requiring a full reporting of profits, country by country.
The identity of owners is very hard to hide, so I think there are enough legal tools to force this if you want. However, fair reporting of profits is easier said than done. How do you allocate corporate overhead and R&D costs to overseas operations? These are just table entry numbers. To the corporation whether these costs are charged to the mother company or to the subsidaries is completely arbitrary. However, they are real costs. Right now these costs are allocated in a manner to make profits appear in the country with the lowest tax rates. Do you want the US government to try to allocate these costs for every company in the US to determine where profits are reported? The layers of bueracracy would be formidable and the temptation for corruption would be irresitible.
I think the only realistic way to do this is to make US corporate tax rates the same as overseas countries so that their would be no incentive to manipulate profits. Thus, if you have a plant in France and corporate tax rate is 20% than for the reported profits from France the US coporate tax rate would be 20%.
3. Closing the loophole that allows foreign subsidiaries of U.S. companies to deposit profits in U.S. financial institutions, thereby benefiting from the stability of the dollar while skipping out on U.S. taxes.
All this would do is have foreign subsidiaries of U.S. companies to deposit money into non-U.S. financial institutions. German and Swiss Banks would love the business but how does this do the US any good?
Another effect of the great amounts of money thrown into campaigning is the effect on the news media.
The major news organizations stand to gain millions in payments for air time. In order to get the political organizations to book with them, they will bend over backward to treat their customers well.
That may very well include a tendency to shape the news and programming to support the very candidates they are soliciting for business.
It happened with tobacco companies, (60 minutes) and they have less power than some of the political constituencies.
When reporting the news, the media should be advising who's paying them, and how much, for advertising.