Business Roundtable Fiscal Cliff Proposal Bargains For Concessions On Corporate Rates

FILE - In this May 7, 2009 file photograph, Honeywell Chairman and Chief Executive Officer Dave Cote speaks after inauguratin
FILE - In this May 7, 2009 file photograph, Honeywell Chairman and Chief Executive Officer Dave Cote speaks after inaugurating the company's new facility in Bangalore, India. Cote is one of the top 10 highest paid CEOs at publicly held companies in America last year, according to calculations by Equilar, an executive compensation data firm, and The Associated Press. The Associated Press formula calculates an executive's total compensation during the last fiscal year by adding salary, bonuses, perks, above-market interest the company pays on deferred compensation and the estimated value of stock and stock options awarded during the year. (AP Photo/Aijaz Rahi, file)

After spending months opposing tax increases for the wealthiest Americans, the Business Roundtable, an influential corporate lobbying group, this week relented, accepting higher rates for the affluent in the name of averting the fiscal cliff.

"We’re advocating for everybody to give a little," said Jim McNerney, who chairs both Boeing and the Roundtable, which represents 160 major companies, during a Wednesday conference call. “This is the voice of pragmatism. That’s what we do for a living. We’re pragmatic people every day."

But that pragmatism appears to come with a healthy dollop of self-interest. Business chieftains have accepted higher rates on income taxes for the wealthy in exchange for something they have long sought -- a break on corporate income taxes. President Barack Obama has signalled that he is open to so-called corporate tax reform as part of the fiscal cliff negotiations, according to The Wall Street Journal -- a position he apparently adopted at the same time the business lobby changed its position on raising taxes on wealthy individuals.

The precise shape of that tax reform is far from certain, and will be hashed out in negotiations well into 2013. But for the Roundtable companies, reform is a euphemism for the preservation of favored perks for major American businesses, according to finance experts.

"This is not something that is going to make the tax code more fair," said Eileen Applebaum, an economist at the progressive Center for Economic and Policy Research think tank, of the approach advocated by the corporations.

For some companies, the appeal of corporate tax reform is obvious. The clothing retailer Gap, for example, paid 34.9 percent of its income in federal taxes from 2008 to 2010. A lowering of the federal rate from 35 percent to 28 percent, as the president proposed in February, would save the company millions of dollars.

Other companies, especially in the oil and gas industry, the financial services sector and the defense industry, appear to be doing quite well already. Over that same period, 2008 to 2010, the aeronautics company Honeywell International, for example, paid an effective federal tax rate of -0.7 percent, according to a report by Citizens for Tax Justice and the Institute on Taxation and Economic Policy. In other words, a company that is hugely reliant on the federal government for contracts was able to claim enough tax credits and route earnings through enough loopholes to avoid paying the government any taxes for three years.

So why would Honeywell, which is also part of the "Fix the Debt" committee that has lobbied for a fair solution to the debt crisis, not stick with the status quo?

Honeywell did not respond directly to this question, but in an email a spokeswoman said the company "adheres to the tax laws of all jurisdictions in which it operates and is subject to ongoing review by tax authorities and is compliant in all respects.”

Tax experts suggested several possible motivations.

The first, and the most obvious, is that these companies want the U.S. to adopt a new system for assessing taxes on income earned in foreign countries. As The Huffington Post reported on Wednesday, that system -- known as the territorial system -- would allow U.S.-based companies to bring home income earned overseas without paying any additional taxes (or very low taxes).

One study, by the left-leaning Institute for Policy Studies, found that 63 companies advocating for a debt deal would stand to save $134 billion in tax payments if Congress approves a switch to the new system.

Current tax policy requires companies to pay the 35 percent U.S. rate, minus whatever tax payments were made overseas. That's not something multinational companies much want to do, so they've used an exemption to the tax code passed by Congress every year since the 1980s to "defer" paying those taxes indefinitely. (Many of the Fix the Debt companies have lobbied to support a permanent extension of this rule, as well).

Honeywell has $8 billion in earnings socked away overseas, and could see potential savings of $2.8 billion if brought back tax-free, according to the report.

Another possible reason why multinational companies are pushing for corporate tax reform: they hope that tax rates will come down enough to trigger a ripple effect that spurs other countries to also lower their rates.

Thirty years ago, the average corporate rate in Western countries was 50 percent. When the U.S. lowered its rate to 35 percent, the other developed countries followed suit. In subsequent years, most other countries lowered the rate again and again -- each time the argument was that doing so would make their country more attractive for multinational investment.

In the United Kingdom, for example, the rate is set to drop to 21 percent in 2014.

For companies like Honeywell, that foreign rate is very important. In 2011, Honeywell reported that its effective foreign rate was 28.7 percent. An arms race of ever-lower rates around the globe would benefit the company enormously.

How low does Honeywell think the rates will go? In a CNBC interview earlier this year, Honeywell chief executive Dave Cote told Andrew Ross Sorkin he believes the U.S. corporate rate should be zero. He then acknowledged that from a "fairness perspective," such a low rate wouldn't work.



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