Democratic presidential candidate Hillary Clinton unveiled a new proposal Wednesday to make it more difficult for multinational corporations to game the U.S. tax system.
Democrats have criticized companies for executing what is called an "inversion," in which an American company buys a foreign company and then transfers its main business operations abroad to avoid U.S. taxes, costing taxpayers billions of dollars.
"I am passionate about this because the maneuvers that powerful corporations are using to game the system and leave everybody else holding the bag are just offensive to me," Clinton said.
Last month, Clinton criticized the proposed $160 billion merger of Pfizer and the Dublin-based Allergan, which would allow Pfizer to take advantage of Ireland's lower corporate tax rate. She said the deal, which would be the largest tax inversion ever, was unfair for American taxpayers.
Clinton has since said she supports tightening rules for companies wanting to invert by requiring that they be at least 50 percent foreign-owned, going beyond the current 20 percent rule. A company looking to invert by merging with a foreign company would therefore have to merge with one that is the same size or bigger. She's also called for a new “exit tax” on companies entering into these deals.
On Wednesday, a Clinton aide told The Huffington Post that she would go further than these suggestions to target what is called "earnings stripping," which often accompanies a corporate inversion. When a U.S. company inverts, it will often load the U.S. subsidiary up with debt that is “owed” to the company's foreign headquarters. The company can then deduct interest payments on the debt from its taxable income, reducing its U.S. tax liability.
Clinton said at a town hall in Waterloo, Iowa, that if Congress does not act to end the practice of earnings stripping, the Treasury Department could use its legal authority to crack down on the tax loophole.
This action is something the Treasury Department has studied, though it did not announce any new policies to limit earnings stripping when it unveiled modest new measures to limit inversions in late November. (Treasury Secretary Jack Lew did say that the department wanted to take additional actions in coming months, including steps to limit earnings stripping.)
The department had solicited public comments on ways to "make inversions less economically appealing" in 2014. At the time, Reuters reported that "Congressional aides and lobbyists said the [Obama] administration was likely uncertain about its legal authority to tackle the practice and did not want to overreach." Clinton's Wednesday announcement indicates that she doesn't believe there would be a problem with taking executive action to end the practice.
Clinton pointed out that American companies like Pfizer have created new drugs with help from federally funded drug research and have counted on the Food and Drug Administration to approve their products.
"Fundamentally, this is not only about fairness, this is about patriotism," Clinton said. "If you became successful in America .... you have benefited from American tax dollars and flourished because of all the things that make America great, you should pay what you owe, just like everybody else."
Clinton's campaign said that the closure of the “earnings stripping” loophole would raise approximately $60 billion over 10 years, which could then fund initiatives to boost manufacturing, research and small businesses.
Sen. Chuck Schumer (D-N.Y.) introduced legislation targeting earnings stripping in 2014.
Of course, any attempt to crack down on inversions and earnings stripping would upset Wall Street banks, which have made approximately $1 billion in fees on inversion deals in the past three years. Clinton is neck and neck with Republican presidential candidate and former Florida Gov. Jeb Bush in the race for campaign donations from Wall Street employees and executives.
This story has been updated with comments from Clinton.
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