A U.S. Senate investigations subcommittee grilled executives from Caterpillar Inc. today about the company's tax strategy. Senators were not suggesting the manufacturing giant of anything illegal; they simply were inquiring how Caterpillar was able to avoid paying $2.4 billion in U.S. taxes since 2000.
Members of Congress already should be fully aware of how this happens. They approve the onerous tax code corporations must adhere to -- and pay small fortunes to ensure they're maximizing allowable profits.
On that front, Caterpillar is not unique.
Pepco Holdings, a utility company on the East Coast, had a cumulative effective tax rate of -33 percent from 2008 to 2012. Twenty-six of America's largest corporations paid zero federal income tax in that same five-year period, including Boeing, General Electric and Verizon. In 2011, U.S. companies received $181 billion in income tax breaks, which equaled the total amount of taxes they paid.
Allowing corporations to defer U.S. taxes on profits earned overseas is one of the biggest revenue streams lost to the federal government. The other is accelerated depreciation for capital investments.
And every dollar the government allows in a tax break is a dollar that can't be spent elsewhere. In fiscal year 2013 alone, tax breaks authorized by elected leaders and signed into law cost the federal government an estimated $1.13 trillion. That's almost as much as the $1.18 trillion Congress authorized in discretionary spending for the year.
So Sen. Carl Levin, D-Mich. and chairman of the Senate subcommittee, intends to use Caterpillar as an example of why Congress needs to revisit the tax code. In particular, the company's lucrative international parts distribution business. Caterpillar has 4,900 U.S. employees in that division, and 65 in Switzerland. Yet 85 percent of the division's profits are moved to the Swiss office, where Caterpillar pays the host country 4 percent to 6 percent in taxes. And, of course, avoids paying the U.S. government anything on those dollars. That's how Caterpillar has avoided billions in the past 15 years.
It's all legal -- but precisely what Congress needs to address.
Unfortunately, there are too many in the House of Representatives -- and Senate, for that matter -- who are focused on the federal statutory corporate tax rate of 35 percent. That represents one of the highest effective tax rates amongst industrialized nations.
But so few pay it, the rate is meaningless. Tax breaks, loopholes and accounting schemes make it a laughable figure.
There is social utility in many of the tax breaks granted. Policy objectives can be achieved if targeted correctly. But with so much of the trillion-dollar-plus tax breaks given annually ending up in the hands of large corporations and wealthy individuals, the carve-outs need to be examined closely -- and regularly.
Editorial by Patrick Lowry