Missing voice on corporate tax reform: Corporations

By Steven Pearlstein
Thursday, October 28, 2010; 8:54 PM

The next time you hear some statesmen from the business community complaining that American companies can't compete internationally because of our highest-in-the-world 35 percent corporate tax rate, think of Google.

That's Google, the company that last year had revenue of $24 billion, on which it earned $8.4 billion in pre-tax profit and recorded a federal tax liability of $1.5 billion. That works out to an effective federal tax rate of 18 percent, well within the range of "globally competitive."

How does one explain the gap between the 35 percent statutory rate and the 18 percent effective rate? You might start by looking behind the numbers in Google's annual report, where you'll find that the company gets 53 percent of its revenue from outside the United States but records only 8 percent of its total tax liability to foreign countries. Dig a little deeper, and you'll discover that Google, the company that once promised to do no evil, turns out to be an ingenious tax dodger that has found a way to stash billions of dollars in profit in overseas tax havens.

Reporter Jesse Drucker of Bloomberg News lays out the details in a story that will appear in The Post's Business section this Sunday. Don't miss it. Drucker pieced together the details of the complex scheme after wading through regulatory filings in six countries. It begins with Google transferring the rights to some of its software and secret algorithms to a wholly owned Irish subsidiary, where it has 2,000 employees and books a good chunk of its foreign revenue. Before the end of the year, however, most of the profit from that business is routed through a Google-owned shell company in the Netherlands before ending up in another Google-owned shell company based in Bermuda, where conveniently there is no tax on corporate profits. As long as this well-traveled corporate income remains outside the United States, it is taxed at a rate of just over 2 percent.

It's all perfectly legal - in fact, the IRS reportedly signed off in advance on at least parts of it. And its's not that unusual: Apparently lots of other companies with valuable intellectual property are also in on the game. Drucker estimates that it saved Google $1 billion a year in U.S taxes between 2007 and 2009.

On CNN last week, Kathleen Parker asked Google's chief executive, Eric Schmidt, about his company's lack of fiscal patriotism. Schmidt resorted to the disingenuous parry favored by all corporate tax dodgers and cited his solemn, fiduciary duty to maximize returns to shareholders. He also mocked the idea that anyone would expect Google, or any other taxpayer, to volunteer to pay more than the tax laws require.

What was missing from Schmidt's response, however, was any acknowledgment of how unfair it must seem to other companies or individuals who don't have the tax lawyers or Washington lobbyists necessary to play such games. Nor was there any recognition that such games damage the U.S. economy by misallocating capital, distorting business decisions and reducing government revenue at a time of escalating deficits.

As it happens, just a few days before, during a televised town meeting hosted by CNBC, President Obama made an offer that no one in the business community seems to have picked up on. The "anti-business" president said he supported the idea of reducing the corporate tax rate to a more globally competitive level - 25 percent is the number frequently mentioned - but only as part of a package that tightened rules on inter-company transfers and eliminated enough corporate tax breaks so that there was no overall reduction in revenues or increase in the federal deficit.

Over the past year, a number of key lawmakers, Republicans as well as Democrats, have also have expressed interest in just such a reform effort. I'm told there's serious enthusiasm for it among members of the bipartisan commission set up by the White House to come up with a plan to rein in the federal deficit, which is set to make its report in December.

So far, however, there's been no response to the president's offer from the organized business community. A spokesman for the Business Roundtable endorsed the idea of a lower rate in the context of a "comprehensive look" at the corporate tax code but stopped way short of committing to the elimination of tax preferences. And the U.S. Chamber of Commerce was so busy trying to buy the election for the Republican Party that it had no response this week when I inquired.

This reluctance of major business organizations to step out front on tax reform no doubt stems from the fact that their membership is deeply divided on what reform should look like. Right now, it's big global companies like Google that have the most to lose if rules are tightened and tax breaks eliminated, while smaller domestic firms would gain most from a reduction in the rate. Similarly, companies in the insurance, pharmaceutical and energy sectors probably benefit disproportionately from existing tax breaks that do little for profitable companies in retail, distribution, manufacturing and business services. If history is any guide, the odds are that certain losers will out-shout and out-lobby the potential winners.

The conventional wisdom is that it will take presidential leadership to reform the tax code and balance the budget, but the reality is that it will require the support of the business community. Up to now, the refrain from the corporate sector has been almost exclusively, "What's good for business is good for America." Are there no leaders left in the boardroom who still believe it works the other way around?

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