The Real Deficit Culprits: Offshoring and Corporate Tax Evasion

Jack Rasmus

What’s the con­nec­tion between the 25 mil­lion Amer­i­cans still job­less today, U.S. multi­na­tion­al cor­po­ra­tions and the esti­mat­ed $1.6 tril­lion 2012 bud­get deficit?

The deficit and bud­get cut­ting have been giv­en mas­sive amount of atten­tion in the press. At least a dozen dif­fer­ent pro­pos­als — from the Oba­ma admin­is­tra­tion, Repub­li­cans in the House, Democ­rats in the Sen­ate, deficit commissions,and oth­ers — are now debat­ed dai­ly. But as pro­pos­als and pro­grams for deficit cut­ting at the expense of social pro­grams pro­lif­er­ate, no one is dis­cussing how cre­at­ing jobs for the 25 mil­lion cur­rent­ly unem­ployed would essen­tial­ly resolve the bud­get deficit and elim­i­nate alto­geth­er the need to cut Social Secu­ri­ty, Medicare, Med­ic­aid, and oth­er pro­grams.

One of the major caus­es of cur­rent high, chron­ic lev­els of unem­ploy­ment in the Unit­ed States is off­shoring by U.S. cor­po­ra­tions. Less well known, how­ev­er, is that these same multi­na­tion­al cor­po­ra­tions are a sig­nif­i­cant cause of not only mil­lions of lost jobs, but of tril­lions of dol­lars of lost tax rev­enue as well — thus con­tribut­ing sig­nif­i­cant­ly to cur­rent and future bud­get deficits.

A recent report by the U.S. Com­merce Dept., a pro-busi­ness source, indi­cat­ed that big multi­na­tion­als like Gen­er­al Elec­tric, Cater­pil­lar, and big tech and drug com­pa­nies over the past decade reduced their Amer­i­can work forces by 2.9 mil­lion while increas­ing their jobs off­shore by 2.4 mil­lion. Apart from the harm inflict­ed on US work­ing fam­i­lies, this devel­op­ment has result­ed in the loss of huge amounts of tax rev­enue to the fed­er­al gov­ern­ment, con­tribut­ing in a major way to the country’s cur­rent bud­get deficit and ris­ing gov­ern­ment debt levels.

For exam­ple, if one aver­ages the total 2.9 mil­lion jobs lost in the U.S. over 10 years, and assumes an aver­age pay of $43,000 a year over the decade, assum­ing fur­ther an aver­age 20 per­cent per­son­al income tax rate, the 2.9 job loss equates to an aver­age annu­al loss in total income in the US Trea­sury of around $25 bil­lion a year. That’s a total rev­enue loss of about $250 bil­lion over the past decade alone. 

That total does not include the loss of addi­tion­al state and local tax rev­enue, or the addi­tion­al fed­er­al rev­enue shar­ing with the states that was required the past decade­by the fed­er­al gov­ern­ment to make up for the state-local tax rev­enue loss.

For the com­ing decade, 2010 – 2019, the lost tax rev­enue tab’ for the U.S. Trea­sury would be sig­nif­i­cant­ly greater still, as even more jobs will like­ly be off­shored and the aver­age annu­al mon­ey income will be slight­ly high­er than $43,000. The amount for the decade ahead would be eas­i­ly in excess of $300 bil­lion more.

But the total US tax rev­enue loss is even greater due to the direct loss of jobs from off­shoring. The loss of tax rev­enue due to the loss of 2.9 mil­lion jobs (and an equal or greater num­ber of lost jobs due to off­shoring in the com­ing decade) is only part of the tax rev­enue loss pic­ture attrib­ut­able to U.S. multi­na­tion­al cor­po­ra­tions.

For exam­ple, cur­rent fed­er­al tax laws actu­al­ly give cor­po­ra­tions’ tax breaks for mov­ing jobs off­shore. Then there’s the invest­ment tax cuts giv­en cor­po­ra­tions that move off­shore that par­tial­ly pay for the cost of the cap­i­tal equip­ment they pur­chase when they set up oper­a­tions off­shore. These two expens­ing’ and invest­ment tax cred­it’ loop­holes for com­pa­nies that off­shore’ jobs are dif­fi­cult to esti­mate pre­cise­ly, but togeth­er like­ly amount to at least anoth­er $150 bil­lion dol­lars over the past decade, 2000 – 2009, and even more going for­ward for 2010 – 1019.

So we have $250 bil­lion in lost jobs-based tax rev­enue for the past decade due to off­shoring plus anoth­er $150 bil­lion or so due to expens­ing and invest­ment cred­it loop­holes asso­ci­at­ed with the same off­shoring and job loss. That’s a total of $400 bil­lion.

But an even greater rev­enue loss is the result of these same multi­na­tion­al cor­po­ra­tions refus­ing to pay their required for­eign prof­its tax.’ It has been esti­mat­ed by the glob­al busi­ness peri­od­i­cal, The Finan­cial Times, that as of mid-year 2010 non-finan­cial US multi­na­tion­als were shel­ter­ing $1 tril­lion in tax­able rev­enue in their off­shore for­eign sub­sidiaries. They are hold­ing the $1 tril­lion off­shore, refus­ing to pay their share of tax­es on it.

Adding the pre­ced­ing tax rev­enue loss­es due to multi­na­tion­als’ off­shoring of 2.9 mil­lion jobs, manip­u­la­tion of loop­holes, and both finan­cial and non-finan­cial multi­na­tion­al cor­po­ra­tions’ refusal to pay tax­es on for­eign earn­ings accord­ing to US tax law — the total rev­enue loss to the US gov­ern­ment comes to more than $1 trillion.

Anoth­er cor­po­rate tax reduction?

Hav­ing got­ten away with an off­shore earn­ings tax reduc­tion scam in 2004, multi­na­tion­al cor­po­ra­tions are now once again play­ing the same lob­by­ing game today in 2011. They are in the process of black­mail­ing Con­gress and the Oba­ma admin­is­tra­tion to reduce the tax rate again on for­eign earn­ings. Should they get their way once again in 2012, when Con­gress takes up the task of a major over­haul of the entire tax code, it will mean hun­dreds of bil­lions more beyond the $1 tril­lion in lost tax rev­enue every year for anoth­er decade to come.

Multi­na­tion­al cor­po­ra­tions like Gen­er­al Elec­tric and oth­ers argue the reduc­tion in the off­shore prof­its tax is nec­es­sary to cre­ate jobs — while they simul­ta­ne­ous­ly cut jobs by the mil­lions and intend to con­tin­ue to do so. They fur­ther argue that the US cor­po­rate tax rate is among the high­est in the world. But the tax rate is only part of the pic­ture. Actu­al rev­enues col­lect­ed are a result of cor­po­rate tax loop­holes, not just cor­po­rate tax rates. The US has among the most tax loop­holes of any devel­oped econ­o­my in the world.

As a result, cor­po­rate tax­es in the U.S. rep­re­sent only 3.2 per­cent of GDP — one of the low­est tax takes’ in the indus­tri­al world.

Today the rev­enue and bud­get deficit stakes are even high­er than they were dur­ing the past decade. All US cor­po­ra­tions today, whether doing busi­ness off­shore or in the U.S., want the cor­po­rate tax rate on oper­a­tions in the US, as well as off­shore, reduced to 25% from ithe cur­rent 35% rate. That pro­pos­al is already embed­ded in the cur­rent U.S. House Repub­li­can (Paul Ryan) budget.

The 25 per­cent rate is also sup­port­ed by the CEO of Gen­er­al Elec­tric, Jeff Immelt, who heads up Pres­i­dent Obama’s spe­cial trade coun­cil. And GE, it was recent­ly report­ed, not only paid no cor­po­rate tax­es in 2010 on its glob­al income of $14.2 bil­lion ($5.1 bil­lion of that earned in the US), but actu­al­ly got a check from the US Trea­sury for $3.2 bil­lion in tax subsidy.

The approach­ing White House capitulation

It appears Pres­i­dent Oba­ma has been steadi­ly drift­ing in the same direc­tion of the 25 per­cent cor­po­rate rate tax cut as well. After hav­ing run in 2008 on a plat­form that assured vot­ers he would enforce the 35 per­cent on cor­po­rate off­shore prof­its, and force multi­na­tion­als to pay up on their off­shore shel­ter­ing, in 2010 Oba­ma aban­doned the idea of enforc­ing the for­eign prof­its tax alto­geth­er. Now he is mov­ing in the oppo­site direc­tion to allow even more cor­po­rate tax cuts.

In 2012, I believe he will trade the cor­po­rate tax cut for a token increase in the per­son­al tax rate on mil­lion­aires. The cor­po­rate tax cut will be jus­ti­fied’ as nec­es­sary to cre­ate jobs. Gen­er­al Elec­tric and oth­er multi­na­tion­al CEOs will polite­ly nod their heads and smile (and col­lect their sub­sidy checks from the government).

Rev­enues will fall. The bud­get deficit will get worse. And GE and oth­er heads of U.S. multi­na­tion­als will con­tin­ue to off­shore mil­lions more jobs in the years to come — thus pro­vid­ing even more evi­dence to con­tra­dict the myth that busi­ness tax cuts cre­ate jobs.

Jack Ras­mus is the author of Epic Reces­sion and the forth­com­ing Obama’s Econ­o­my: Recov­ery for the Few. His blog is jack​ras​mus​.com.

Jack Ras­mus, pro­fes­sor of eco­nom­ics and polit­i­cal econ­o­my at San­ta Clara Uni­ver­si­ty and St. Marys Col­lege, is author of Epic Reces­sion: Pre­lude to Glob­al Depres­sion, and The War at Home: The Cor­po­rate Offen­sive From Ronald Rea­gan to George W. Bush. His forth­com­ing book (2011) is Obama’s Econ­o­my: Why Recov­ery Failed. What’s Next? Ras­mus has pub­lished numer­ous arti­cles in Z mag­a­zine, Cri­tique, Amand­la, Against the Cur­rent, the Dis­patch­er and oth­er periodicals.
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