As Leona Helmsley's famously noted, "Only the little people pay taxes." That could easily apply to U.S. corporations today.
Large American companies have stockpiled $2.1 trillion in untaxed profits in offshore tax havens, with 26 corporations alone accounting for more than half of those profits, according to a new study from the Center for Effective Government and the left-leaning Institute for Policy Studies. In the last 10 years, those offshore profits have surged more than five-fold as corporations seek strategies to reduce their U.S. tax bill.
The massive money stash is causing debate among lawmakers about the best method for convincing those companies, like tech giant Apple (AAPL), to repatriate those profits. One bill from Senators Rand Paul, R-Kentucky, and Barbara Boxer, D-California, for instance, proposes providing a steep incentive: a tax rate for repatriated profits of only 6.5 percent, or far below the full 35 percent rate that would normally be levied. The Paul-Boxer proposal pledges to use the taxes to fund highway repairs.
But providing corporations with a tax holiday isn't the best strategy, especially given that it's failed to work in the past, Scott Klinger, director of revenue and spending policies at the Center for Effective Government, told CBS MoneyWatch.
"It's a just a big game, and a tax holiday incentivizes that game to continue," Klinger said. "We really need a clear signal from Congress and the president that enough is enough. Let's stop the practice first."
Two other proposals have been put forward, including one from President Obama, who recommends putting a 19 percent minimum tax on all offshore profits and a one-time 14 percent tax on the $2.1 trillion profit stash. Obama has also proposed using the proceeds to help fund infrastructure repairs.
While debate continues over the offshore profits, America's infrastructure is in dire need of investment. The country needs $3.6 trillion of investment in its roads, schools, public transit and other infrastructure by 2020, according to the American Society of Civil Engineers.
On Monday, the White House sent Congress a $478 million highway-funding plan. U.S. Transportation Secretary Anthony Foxx decries the backlog in much-needed projects that have been put off because of funding problems.
Providing a tax holiday on the $2.1 trillion in offshore profits may create a repeat of the 2004 American Job Creation Act, which provided U.S. businesses with a significant tax break on their offshore profits as a way to get them to reinvest in jobs. In one way, the tax holiday worked as 843 corporations brought back $312 billion in profits in exchange for a 5.25 percent tax rate.
But, Klinger noted, studies later found that businesses used the money to buy back shares and pay dividends, rather than to create new jobs. The provision failed to translate into higher domestic investment or employment, according to a 2011 study from the Congressional Research Service.
Instead of aiming for a short-term gain through a tax holiday, Klinger argued that lawmakers should instead focus on closing the loopholes that allow corporations to shift profits to overseas tax havens. One such proposal is the Stop Tax Haven Abuse Act, which would close some loopholes and raise $278 billion over 10 years, the study said, citing research from the Joint Committee on Taxation.
The U.S. business with the most money parked in offshore tax havens is Apple, which had $157.8 billion in unrepatriated offshore profits last year, according to the report. The study's authors estimate the taxes due on the offshore profits are $45 billion. In second place is General Electric (GE), which has $119 billion in offshore profits, for an estimated tax liability of $33.7 billion.
GE spokesman Seth Martin wrote in an email that the estimated tax liability "is not substantiated," and said the company reinvests its foreign earnings outside the U.S. because GE is in more than 175 countries.
"Also, under current U.S. law we would face higher taxes than most foreign competitors -- overseas at the point of sale and again in the U.S. -- essentially charging us more to invest at home than foreign competitors," he wrote.
But, he added, "We believe the tax code should be simpler and should reflect today's global economy, even if it means higher taxes for GE."
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