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In Depth October 14, 2009, 9:10PM EST

Inside the Business War Against Tax Reform

Lobbying by P&G, Schering-Plough, and others has stymied the proposed $210 billion in hikes. But their tactics raise troubling questions

By Nanette Byrnes, Robert Berner, Ben Elgin and Keith Epstein

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In the recession, jobs and global competitiveness are important to Senator Cantwell Alex Wong/Getty Images

Representative Driehaus of Ohio heard "a very persuasive argument" from P&G's Moeller Al Behrman/AP Photo

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Illustration by Matt Murphy

Industry appears to have won its fight to postpone President Barack Obama's corporate tax reform initiative by stressing two themes: that tightening tax rules would cost U.S. jobs and that it would hurt the nation's economic competitiveness. But those arguments can obscure the fact that some companies portraying themselves as defenders of the working person and the American economy are viewed by U.S. tax authorities as reluctant to fulfill their obligations under current law.

Companies such as Procter & Gamble (PG) and Schering-Plough (SGP) have deployed legions of lobbyists to argue that business is the potential victim in the tax debate. Corporations contend that the 10-year Obama plan to raise taxes by $210�billion, much of it on income generated overseas, will give foreign-based competitors a devastating advantage. These companies emphasize that they already face a 35% income tax rate, higher than that of most other countries.

The lobbying has helped persuade lawmakers of both parties to postpone significant action on taxes until next year or possibly 2011. "The country's economy is seeing signs of getting back on track, but in many regards it's still in turmoil," says Senator Maria Cantwell (D-Wash.), a member of the Senate Finance Committee. "When it comes to our nation's tax code, we not only have to rein in abuses to the system but also look at how to keep U.S. businesses successful in a global marketplace…and how we can facilitate job creation."

What They Really Pay

When evaluating industry's competitiveness and employment arguments, though, it's worth examining two other factors: the rates U.S. multinationals actually pay and the companies' behavior under existing tax laws. Few large corporations pay the official 35% tax rate. According to a study of IRS data by University of Virginia law professor George K. Yin, the average large company paid less than 27% in 2006, the most recent year for which data are available. General Electric (GE), whose executives have criticized the Obama tax plan, has lowered its effective tax rate from 31% in 1999 to just 5.5% last year. That added more than $18 billion to GE's profits over the nine-year period.

A GE spokeswoman says the company's 5.5% tax rate was especially low because of losses at its GE Capital unit. GE expects its rate to rise this year. The company's main concern, the spokeswoman adds, is that the "Obama tax proposals are out of line with the tax systems of virtually every other major industrialized country and consequently would put U.S. companies—GE included—at an even greater competitive disadvantage."

Some of the loudest protests against stiffer taxes come from companies accused of abusing existing law. As soon as then-candidate Obama began talking about closing tax loopholes last summer, Cincinnati consumer product titan P&G scrambled to forestall any legislation that would hurt its bottom line. The Obama plan, announced in May, would address foreign earned income on which companies don't pay U.S. taxes unless they bring the money home. The White House wants to capture some of the foregone revenue by changing certain international tax-credit and deduction rules. The plan would also make it more difficult to shield some overseas investment income from taxation.

P&G in-house lobbyist James McCarthy, a former IRS lawyer, has made nearly 50 visits to lawmakers or their staff, a company spokesman says. McCarthy has argued that the tax changes would put P&G at a disadvantage because its foreign rivals pay less in taxes in their home countries. The Administration proposal "will result in a loss of jobs for Americans and serious negative impacts on the U.S. economy," according to a Mar. 24 letter to lawmakers signed by P&G and 198 other companies and trade groups.

Lobbying Efforts

Like other major corporations, P&G focuses special attention on legislators from states where the company employs voters. Last spring, McCarthy met with staff in the office of Senator Olympia J. Snowe (R-Me.), a member of the Senate Finance Committee. He brought documents detailing the 512�jobs at P&G's Tampax plant in Auburn, Me. Higher taxes could put some or all of those people out of work, he contended. Snowe declined to comment on P&G's lobbying but said through a spokesman that she favors only those tax law changes that would not "put American employers at a severe competitive disadvantage."

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