President Obama’s plan to crack down on what he called abuse of overseas tax loopholes was met Monday with quick and unusually sharp opposition from big business, threatening to produce the administration’s first major confrontation with a broad segment of corporate America.
The fiercely negative reaction to the plan, much of which requires congressional approval, contrasted strongly with the business community’s muted criticism, at most, of the president’s sweeping government intervention in the banking and automobile industries.
The U.S. Chamber of Commerce said one of the proposed tax changes would hurt the U.S. economy by damaging the competitiveness of U.S.-based multinational companies.
“The U.S. multinationals employ millions of American workers,” said Martin Regalia, chief economist at the business lobbying group. “If you make the parent companies less profitable, you’re not going to create more jobs.”
Because the recession has made members of Congress sensitive about adding to anyone’s tax burden, Obama may have a tough time getting his plan through Congress.
“Both Republicans and Democrats in Congress will be listening to business very closely,” said Dean Zerbe, a former senior tax counsel for the Senate Finance Committee, which along with the House Ways and Means Committee deals with tax legislation. “The administration will really have to make a strong case why we’re taking steps like this.”
The proposed crackdown consists of two main proposals. The first targets wealthy people who use foreign tax havens such as the Cayman Islands to hide resources from the Internal Revenue Service.
The second proposal would change the way multinational corporations are able to deduct expenses incurred in foreign countries to reduce or avoid U.S. taxes -- a practice Obama said encourages the shifting of jobs overseas.
The president described the issue as one of simple fairness.
The goal, he said, is to end a “tax scam” by shutting down overseas tax havens that let U.S. multinational corporations and some individual taxpayers avoid paying U.S. taxes while ordinary Americans take up the slack.
“Nobody likes paying taxes, particularly in times of economic stress,” Obama said. “And yet, even as most American citizens and businesses meet these responsibilities, there are others who are shirking theirs.”
Business leaders responded furiously, saying the president mischaracterized current corporate tax law and unfairly tarred all corporations with the abuses of a few. Moreover, they said, Obama’s plan would unfairly penalize U.S. companies that are trying to compete in global markets.
Regalia of the U.S. Chamber said the ability of companies under current tax law to defer tax payments on overseas profits -- a provision Obama wants to undo -- was enacted intentionally so U.S. companies could avoid double taxation by the United States and the foreign countries in which they do business.
“The deferral was instituted as a way to address or remove some of the imbalances between the U.S. tax system and our foreign competitors’ territorial tax system,” Regalia said. “This was put in knowingly. It wasn’t sneaked in. It wasn’t a loophole. So if you take it away or reduce its value, you’re going to reinstitute the competitive imbalance between U.S. multinationals and their foreign competitors.”
The administration’s plan was unveiled just after Obama marked his first 100 days in office, a period in which he and the Federal Reserve embraced a series of massive bailouts for Wall Street and other corporate interests. Obama’s first major order of business, for example, was to push through a nearly $800-billion economic stimulus bill. It was followed by almost unprecedented government infusions of cash and credit to shore up major banks and stimulate lending.
Although business groups have supported much of Obama’s economic policy, including the stimulus bill, they have been bracing for him to make good on campaign promises that were less friendly to their interests -- pledges that resonated among blue-collar workers and labor leaders who supported his election. Those promises include scaling back tax breaks for U.S. companies that sent jobs overseas.
Under the part of Obama’s plan dealing with individuals with foreign income, overseas banks would be required to give the IRS as much information about their American customers as U.S. financial institutions do. If the overseas banks did not comply, the U.S. would assume they are facilitating tax evasion and impose penalties, administration officials said.
The president also proposes to change the law that lets U.S. businesses claim a credit against taxes they owe here for the foreign taxes they pay on profits earned overseas.
In place of a tax credit that lets companies defer U.S. taxes on profits earned overseas, the Treasury Department proposes permanent extension of a different credit providing incentives for businesses to create domestic jobs by investing in research and experimentation.
“We will stop letting American companies that create jobs overseas take deductions on their expenses when they do not pay any American taxes on their profits,” Obama said. “And we will use the savings to give tax cuts to companies that are investing in research and development here at home, so that we can jump-start job creation, foster innovation and enhance America’s competitiveness.”
Critics say Obama is blurring the line between tax evasion and the legitimate avoidance of tax under a policy that recognizes the realities of the global economy.
“It’s been almost a totem of the Democratic Party tax folks that there’s great cheating going on,” said Grant Aldonas, who served as undersecretary for international trade in the Commerce Department in the George W. Bush administration. “The problem is they’re living with a world economic framework that is 40 years out of date.”