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Home | Politically Connected | National Politics | President

Obama vows to crack down on offshore tax shelters

He says it would raise $210 billion in the next decade, but critics say it would put U.S. firms at a disadvantage. Summary.

By JACKIE CALMES and EDMUND L. ANDREWS, New York Times

Last update: May 6, 2009 - 1:12 PM

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WASHINGTON - President Obama on Monday called for curbing offshore tax havens and corporate tax breaks to collect billions of dollars more from multinational companies and wealthy individuals, a move that appeals to growing populist anger among taxpayers but that is likely to open an epic battle with some major powers in American commerce.

With the proposals Obama outlined at the White House, the president sought to make good on his oft-repeated campaign promise to end tax breaks "for companies that ship jobs overseas." He estimated the changes would raise $210 billion over the next decade and help offset tax cuts for middle-income taxpayers as well as a permanent tax credit for companies' research and development costs.

The changes, if enacted, would not take effect until 2011, when administration officials presume the economy will have recovered from the recession. But business groups and some tax experts warned that the proposals could put U.S. corporations at a competitive disadvantage.

"This plan will reduce the ability of U.S. companies to compete in foreign markets, which will not only reduce jobs, but will also cripple economic growth here in the United States. It couldn't come at a worse time," said John Castellani, president of the Business Roundtable, a trade association of major businesses.

The proposals would especially hit pharmaceutical, technology, financial and consumer goods companies -- among them Goldman Sachs, Microsoft, Pfizer and Procter & Gamble -- that have major overseas operations or subsidiaries in such tax havens as the Cayman Islands.

At issue are tax laws that were intended to prevent multinational corporations from being double-taxed -- by the United States and by foreign countries -- by allowing companies to defer reporting their foreign income to the IRS and to get tax credits in the United States for foreign taxes paid. Obama's changes would address perceived abuses of those laws.

Economists are divided over whether higher taxes would give corporations incentives to move jobs overseas or impair economic growth at home. In the forthcoming debate, both Obama and the business lobby will claim that their way will save jobs. The top corporate tax rate is 35 percent, but the Treasury Department estimated that in 2004, the most recent year for which tax data is available, U.S. multinationals paid $16 billion in taxes on $700 billion in foreign income -- an effective rate of 2.3 percent on foreign profits.

Obama, in his remarks, reflected the public's restlessness in some of his most populist rhetoric to date. He said most Americans pay their taxes as "an obligation of citizenship," but some businesses and rich individuals were "shirking" their responsibilities, "aided and abetted by a broken tax system, written by well-connected lobbyists on behalf of well-heeled interests and individuals."

The Democratic chairmen of the House and Senate tax-writing committees, Rep. Charles Rangel of New York and Sen. Max Baucus of Montana, said some of the proposals reflect ideas from their panels. But Baucus said "further study" was needed. And Sen. Charles Grassley of Iowa, the senior Republican on the Senate Finance Committee, said if Obama is "using tax shelters as a stalking horse to raise taxes on corporations at the cost of U.S. jobs, he'll lose me."

Business groups had feared Obama would seek repeal of the tax-deferral law but he stopped short of that. Instead, one of his proposals would prohibit companies from taking U.S. deductions for expenses on overseas investments until they have paid domestic taxes on the profits from those investments. Treasury estimated this proposal alone would raise $60.1 billion from 2011 through 2019.

The administration would raise $86.5 billion by changing so-called "check the box" rules to end the practice in which some companies create foreign subsidiaries to shift income in ways that avoid taxes. Another proposal would close a loophole that allows companies to inflate the credits they claim for foreign taxes to the IRS, for an estimated $43 billion in new revenues. Separate steps to crack down on wealthy individuals with accounts abroad would raise nearly $9 billion.

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