Rep. Delaney (MD-6) Promotes U.S. Tax Avoidance ONLY for Big Business
By Tanzi Strafford
On August 26, 2014, Burger King Worldwide announced that it is buying Tim Hortons, the Canadian coffee restaurant chain. As a result of this merger, the combined company will be the third largest fast-food restaurant company in the world with 18,000 restaurants in almost 100 counties and $23 billion dollars in combined sales. Not only is Burger King purchasing Tim Hortons that specializes in coffee and donuts (something like U.S. chain, Dunkin Donuts), but it is also moving its headquarters to Ontario, Canada.
By moving the headquarters to Ontario, Burger King Worldwide will lower its corporate tax rate from 35% U.S. to 26.5%, the Canadian corporate tax rate. The purchase price of Tim Hortons by Burger King was $12.5 billion dollars: 1) $9.5 billion JP Morgan and Wells Fargo in financing; and 2) $3 billion (25% of financing) by Warren Buffett, CEO of Berkshire Hathaway, in exchange for the shares of the combined company.
Since 2012, Warren Buffett and President Obama have also been the strongest advocates of the Buffett Rule for increased taxes, which the White House website explains in the following statement:
“No household making more than $1 million each year should pay a smaller share of their income in taxes than a middle class family pays. This is the Buffett Rule-a simple principle of tax fairness that asks everyone to pay their fair share.”
In answer to the question, “How would it make sure everyone pays their fair share,” the White House budget narrative states that “The Buffett Rule would limit the degree to which the best-off can take advantage of loopholes and tax rates that allow them to pay less of their income in taxes than middle-class families. …. And at a time when we need to pay down our deficit and invest in the things that help our economy grow and keep our country safe-education, research and technology, a strong military, Medicare and Social Security-giving tax breaks to millionaires simply doesn’t make sense.”
Unfortunately, Burger King and some other big U.S. corporations, including Buffett’s Berkshire Hathaway, don’t follow the “Buffett Rule.” U.S. corporations have a few methods to avoid or reduce the U.S. corporate tax, the top three of which are listed below:
First, some large corporations in the pharmaceutical, biotechnology and health industries actually do conduct research and development in the U.S. if government subsidies and tax breaks are available in counties with lower corporate tax rates.
Moreover, some states including Maryland, are also exempt from state business property taxes for pharmaceutical and biotechnology companies that manufacture and conduct research and development in Maryland. The form and information for business property tax exemption can be found at: http://www.dat.state.md.us/sdatweb/pp_rnd_3.PDF
The second method is a tax inversion where a U.S. corporation can acquire a company in a country with a lower corporate tax rate and relocate their parent company (headquarters) from the U.S. to that country. That is what Burger King is doing by acquiring Tim Hortons.
A third method used by some U.S. corporations to finance their operations here is by taking loans from their foreign subsidiary and using a U.S. tax credit on the interest they pay for the loan. There are many other methods that U.S. corporations use to avoid high corporate taxes. But most U.S. corporations keep their multi-billion dollar investments abroad, in the subsidiaries that they acquired, because if they were to bring these profits back to the U.S. they would be subject to the high corporate income tax.
To further help large corporations, Congressman John Delaney (D-MD), also a wealthy businessman who made his own fortune on two financial services companies, wants U.S. corporations NOT to pay corporate income taxes on the profits that they made abroad. To that end, in May of 2013, Rep. Delaney introduced the Partnership to Build America Act (H.R. 2084) that was introduced in the Senate in January, 2014. Under Delaney’s Act, an American Infrastructure Fund (AIF) would be created that would be “funded by the sale of $50 billion worth of Infrastructure Bonds which would have a 50 year term, pay a fixed interest rate of 1 percent, and would not be guaranteed by the U.S. government.”
After the Economic Policy and Institute (EPI) did a cost/benefit analysis of Delaney’s plan, it found that the drawbacks outweighed the benefits. The EPI states:
Given these estimates, we can calculate the cost to the federal government of financing the infrastructure bank in this manner. To sell $50 billion in AIBs requires a multiplier greater than four, which translates repatriations of at least $200 billion. The maximum amount of repatriations that would be allowed is $300 billion (when the multiplier is at the proposed legal maximum of six). The corporate income tax revenue lost from not taxing $200 billion of additional corporate foreign-sourced income is $70 billion (35 percent of the $200 billion), as it is likely that this $200 billion would eventually be repatriated and subject to the corporate tax in the absence of a one-time effective tax rate reduction.3 At the proposed maximum multiplier of six, the foregone tax revenue would be $105 billion (35 percent of $300 billion in repatriated foreign-sourced earnings . ……
In addition, this policy memo examines the funding mechanism of the infrastructure bank proposed in H.R. 2084 and S. 1957. The principal findings are:
•The bids by multinational corporations to participate in the funding mechanism would likely be much less aggressive than the bill sponsors anticipate.
•The initial funding from multinational corporations could be below the $50 billion goal set in the proposals.
•It would be much cheaper from a federal budgeting perspective to simply finance the bank’s start-up with a direct appropriation of funds. To meet the $50 billion funding goal through the bills’ proposed mechanism would require the federal government to grant about $70 billion to $100 billion in tax breaks to multinational corporations.
The detailed analysis can be found at http://www.epi.org/publication/how-not-to-fund-an-infrastructure-bank/
Since U.S. corporations have many ways to avoid high U.S. taxes, the tax burden falls squarely on small businesses. While President Obama and the Democrats use every opportunity to call for income equality, for example, this is one of many Obama’s speeches:
“So the basic bargain at the heart of our economy has frayed. In fact, this trend towards growing inequality is not unique to America’s market economy. Across the developed world, inequality has increased. Some of you may have seen just last week, the Pope himself spoke about this at eloquent length. ‘How can it be,’ he wrote, that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses two points?
“But this increasing inequality is most pronounced in our country, and it challenges the very essence of who we are as a people. Understand we’ve never begrudged success in America. We aspire to it. We admire folks who start new businesses, create jobs, and invent the products that enrich our lives. And we expect them to be rewarded handsomely for it. In fact, we’ve often accepted more income inequality than many other nations for one big reason — because we were convinced that America is a place where even if you’re born with nothing, with a little hard work you can improve your own situation over time and build something better to leave your kids……..
“For one thing, these trends are bad for our economy. One study finds that growth is more fragile and recessions are more frequent in countries with greater inequality. And that makes sense. When families have less to spend, that means businesses have fewer customers, and households rack up greater mortgage and credit card debt; meanwhile, concentrated wealth at the top is less likely to result in the kind of broadly based consumer spending that drives our economy, and together with lax regulation, may contribute to risky speculative bubbles.”
More on this speech can be found at http://www.whitehouse.gov/the-press-office/2013/12/04/remarks-president-economic-mobility along with the others.
As of January 2014, nearly half of American families are living from paycheck to paycheck, according to Time magazine. Currently, according to the Senate Budget Committee, one out of six American men between 25-54 years old are either unemployed or outside the workforce. Moreover, The Washington Post reports that in July, 2014 Maryland lost 9,000 jobs, making Maryland the 2nd largest in job loss nationwide during that month.
Rep. Delaney’s bill makes him one of the strongest advocates for the U.S. multinational corporations to avoid U.S. corporate taxes, despite all the studies that clearly state that if the U.S. government followed the prescriptions in Delaney’s Partnership to Build America Act (H.R.2084) that needs $50 billion funding, it would require the federal government to grant approximately $70 – $100 billion in tax breaks.
Instead of illuminating the loopholes and creating a reasonable U.S. corporate tax environment for all businesses so they can move back to the U.S. – leading to a stronger economy and a reduction in the income gap between the rich, middle class and poor, Democrat Congressman Delaney is engaged in dangerous policies that jeopardize even further the growth of the U.S. economy and jobs.