The Cut Unjustified Tax Loopholes Act (called CUT by Levin) actually dates from the 112th Congress. The goal of the February 2012 version was to raise $155 billion over 10 years by making FATCA look more like the Stop Tax Haven Abuse Act and by cracking down on multinational efforts to shift profits abroad, while keeping deductions in the United States. It also would have changed the tax treatment of corporate stock options, curtailing deductions. It was introduced by Levin and former Sen. Kent Conrad of North Dakota. CUT went nowhere in the 112th Congress. Like most bills, it never even come close to being voted on.
The new version of CUT is very similar, but hasn’t become formal legislation. It is mostly in the form of a summary distributed to Levin’s Democratic colleagues. In the summary, Levin points out that corporate profits were at an all-time high of $1.75 trillion in the third quarter of 2011, while corporate tax revenues were at all-time low as a percentage of total taxes collected. He also says that while the nominal corporate tax rate is 35 percent, the effective tax rate is closer to 15 percent. One study found that 30 of the largest U.S. multinationals (with combined profits of $160 billion) paid no corporate tax at all from 2008 to 2010.
Levin would close what he calls offshore tax loopholes. These are mainly mechanisms for profit shifting. The senator calls out Apple, Google, and Microsoft in particular. Those three companies use intangibles to shift income out of the United States. There are myriad provisions in the draft that would affect those kinds of tax strategies, but they essentially amount to just forcing the IRS and Treasury to effectively administer transfer pricing rules. Other provisions in the CUT summary include the rules on options from the 2012 bill, a strengthening of FATCA, and, like House Ways and Means Chair Dave Camp’s discussion draft, the end of the so-called 60/40 rule for derivatives (forcing ordinary rates on 100 percent of the gains). Levin also would reform the tax treatment of carried interest by taxing it at ordinary rates.
It would be melodramatic to call Levin a tragic figure. But his interest in ending offshore tax abuse doesn’t really come from a position of strength. As chair of the Senate Homeland Security and Governmental Affairs Permanent Investigations Subcommittee, he has the ability to investigate and highlight abuses, but not really to push tax legislation. Neither the Stop Tax Haven Abuse Act nor CUT has ever had the backing of Senate Finance Committee Chair Max Baucus, who frequently has undercut Levin’s efforts to tighten the rules on international taxation. Other Democrats (and even the occasional Republican) will pay lip service to ending some of the transactions that Levin has railed against, but little has actually been accomplished, despite some explosive reports on tax havens, multinationals, and offshore banking. Some might say that FATCA owes its existence to Levin, and although that might be partly true, it is doubtful that the Michigan senator is very satisfied with either the original text of the bill (largely drafted by Baucus) or Treasury’s efforts to avoid enforcing it (exemplified mainly by the new intergovernmental agreement approach).
Illegal or not, U.S. multinationals abuse international tax rules and effectively misrepresent where income is earned for tax purposes. Levin is right to target them for additional revenues, especially if the alternative is higher taxes on middle-income taxpayers. Just don’t expect Baucus, other Democrats, and the rest of Congress to listen.