Bills to Restrict Tax Competition Draw Ire

Published June 1, 2007

Two U.S. lawmakers have presented legislation attacking tax competition among nations, causing worry the legislation, if it becomes law, would damage the U.S. economy and hurt developing nations.

More than 40 representatives of leading tax and policy organizations have contacted U.S. Treasury Secretary Henry Paulson to warn of the harm they say would be caused by S. 396, proposed by Sen. Byron Dorgan (D) of North Dakota, and S. 681, proposed by Sen. Carl Levin (D) of Michigan.

S. 396 would penalize American companies operating in certain low-tax countries by subjecting them to a second layer of tax on their overseas income. S. 681 would impose numerous taxes, regulations, and penalties on Americans who earn income in selected low-tax jurisdictions.

Destroying Competition

“This is all about demagoguing against low-tax jurisdictions and the evil taxpayers in America who would have the gall to do business in these low-tax countries,” said Dan Mitchell, senior fellow at the Cato Institute. “Dorgan and Levin are total class-warfare Bolsheviks. They don’t understand or care that this is something that will cause U.S. companies to become less competitive.”

Mitchell said the bills would hurt growing economies in poor nations and pointed out relatively wealthy European countries with “tax haven” policies are not targeted in the legislation.

In introducing his bill to the Senate on January 25, Dorgan said every American “has a right to be angry when they hear repeated press accounts of corporate taxpayers that are shirking their tax obligations by actively shifting their profits to foreign tax havens or using other inappropriate tax avoidance techniques.”

Dorgan said his bill is virtually identical to one that was introduced in the previous, 109th Congress, except the current bill grants companies an extra year to comply with its provisions.

‘Using Offshore Havens’

“We have known for many years that some very profitable U.S. multinational businesses are using offshore tax havens to avoid paying their fair share of U.S. taxes,” Dorgan said in his Senate floor statement. “But in the face of these reports, the Congress and the administration have shown little interest in stopping this hemorrhaging of tax revenues.”

Andrew Quinlan, president of the Center for Freedom and Prosperity Foundation, said he and others worry the bills now have a better chance of passage because of the shift in power in Congress that occurred as a result of the November elections.

“I have heard from people all over the world who are worried about this,” Quinlan said. “When you start having blacklists of countries like this, and you penalize U.S. companies that operate in countries that have pro-growth policies, you make it more expensive for us to compete, and you hurt those countries.”

Steve Stanek ([email protected]) is managing editor of Budget & Tax News.