Redefining Offshore Banking
During his campaign, Obama frequently stated his position that the tax code needs to be overhauled, and he pledged that he would level the playing field by "finally ending the tax breaks for corporations that ship our jobs overseas." However, the May 4th press conference announcing his plans to effectively end the use of offshore banking took an unexpectedly harsh tone compared to the inert campaign rhetoric he used to foreshadow his intentions.
President Obama spoke forcefully, saying, "And yet, even as most American citizens and businesses meet these responsibilities, there are others who are shirking theirs. And many are aided and abetted by a broken tax system, written by well-connected lobbyists on behalf of well-heeled interests and individuals. It's a tax code full of corporate loopholes that makes it perfectly legal for companies to avoid paying their fair share. It's a tax code that makes it all too easy for a number — a small number of individuals and companies to abuse overseas tax havens to avoid paying any taxes at all."
Large corporations that benefit from offshore banking were quick to respond to Obama's comments. As Bloomberg first reported, Carl Guardino, chief executive of the Silicon Valley Leadership Group, told U.S. Treasury officials that Obama's "word choices were a bit troubling."
Guardino went on to say that he and 52 other top executives of companies, including Hewlett-Packard Co., Intel Corp. and Oracle Corp., found it "surprising to be construed in the same way as tax cheats," since these are the same companies that have, in fact, complied with all existing tax laws and paid millions of dollars in taxes each year to the U.S. government already.
"If financial institutions won't cooperate with us, we will assume that they are sheltering money in tax havens, and act accordingly," Obama said. "And to ensure that the IRS has the tools it needs to enforce our laws, we're seeking to hire nearly 800 more IRS agents to detect and pursue American tax evaders abroad."
It is important to point out that there are no allegations of any illegal activity on the part of companies benefiting from these offshore banking loopholes under the current tax code. Although Obama's aggressive wording may be intended to capitalize on the growing dissatisfaction with corporate greed among American citizens – many of whom now find themselves muddling through extremely difficult economic times facing job losses at historic levels and a record number of home foreclosures – the President's use of inflammatory verbiage may also backfire by mobilizing strong opposition even within his own political party.
The day after Obama called for offshore banking reform at his press conference, Democratic members of Congress were already seeking to temper the hostile mood or find political cover. Senate Finance Committee Chairman Max Baucus, a Democrat from Montana, said in a statement that, "Further study is needed to assess the impact of this plan on U.S. businesses."
Joseph Crowley, a Democrat from New York who is also a member of the House Ways and Means Committee responsible for U.S. Tax Law changes, said he doesn't want any tax changes to "harm" Citigroup Inc. — which happens to be the largest private-sector employer of workers in his congressional district.
Many other members of Congress suggested a wait-and-see approach very different from the vigorous support needed to propel such a wide-sweeping reform through the bureaucratic process. Even though Obama knows the Democrats control both houses of Congress, pushing offshore-banking reform may prove to be a far more delicate task than some of his other initiatives.
Approximately 200 significant business interests, including Microsoft Corp., General Electric Co. and the U.S. Chamber of Commerce, signed a letter urging Congress not to enact new tax laws detrimental to offshore banking interests because they believe the changes would put them at a competitive disadvantage with rival companies operating overseas, since many of their competitors face far more favorable tax rates than what would be required by the United States if all revenue was brought back 'on shore' by upcoming legislation.
There is little doubt that creative accounting methods have enabled companies to utilize offshore banking in ways that greatly reduce their United States tax burden. The U.S. Treasury estimates that the changes in the tax code being proposed by President Obama would result in more than $210 billion of additional tax revenue collected during the next decade. According to the White House, in 2004 (the most recent year for which data is available), U.S. multinational companies claimed roughly $700 billion in overseas profits and paid an effective tax rate on that revenue of only 2.3 percent.
The Congressional Budget Office (CBO) published a preliminary analysis of the president's budget and an update of the CBO budget economic outlook. Their impartial analysis suggests that the country will face a $1.8 trillion deficit by the end of fiscal year 2009. As the collapse of key economic sectors, including banking and auto manufacturing, continue to weigh down any recovery efforts, theorists debate whether increasing tax revenue or enabling corporate interests to compete with a lower tax burden would be the more prudent course of action.
Information released by the U.S. Government Accountability Office (GAO), the non-partisan data analysis and investigative arm of Congress, showed that 83 of the largest 100 companies in the United States utilize some form of offshore banking, and that the largest beneficiaries of offshore banking include Citigroup, Bank Of America and JBM Chase with a combined balance sheet showing hundreds of billions of dollars in gross revenue and hundreds of legal subsidiaries in jurisdictions listed as tax havens. While the irony is that these are the same banks that have recently accepted billions of dollars in government bailout money should not elude anyone, it should also come as no surprise that opposition to these new offshore tax reforms will be particularly strong.
As a business owner, whether you favor offshore banking, utilize offshore banking, or find the existing offshore banking tax structure completely intolerable — now is the time to have your voice heard. Your representatives will be voting on legislation and amending it in numerous ways, but ultimately the final draft of any new offshore tax law rests in the hands of voters who mobilize to make their views known.
VoteSmart.org is an impartial website staffed by members of many political parties; its agenda is simply to empower voters in our democracy by providing them with the information needed to access the political process. The site allows you to find contact information for your own representatives in a matter of seconds. Phone calls, letters and emails directly impact the political process, and an intensely contested issue like offshore banking reform will most likely be decided by only a handful of votes one way or the other. Those who sit on the sidelines with their arms folded politically may find themselves floating way off shore as significant decisions about the future of the global financial landscape are being made by others who take the time to become more engaged in the political process governing all of us.