Follow the Money
Prof. Kim Clausing reveals how U.S. corporations exploit tax loopholes worth billions of dollars.
When news broke last summer that fast-food behemoth Burger King was taking over the Canadian coffee-and-doughnuts chain Tim Hortons, it made headlines around the globe. For starters, there was the sheer size of the deal. A hefty $11.5 billion. Just as significant, however, were the tax implications. The merger would allow Burger King to register itself as a Canadian company, thereby avoiding millions of dollars in U.S. taxes.
To understand the story, reporters from the Wall Street Journal to Time turned to ÌÇÐÄvlogÊÓƵ professor Kim Clausing, a leading expert on how multinational corporations pay—or don’t pay—their taxes.
Prof. Clausing is “one of the world’s experts in international public finance,” says Leonard Burman, director of the Tax Policy Center, a D.C.-based nonpartisan think tank that is a joint venture of the Brookings Institution and the Urban Institute.
She has been twice named a Fulbright research scholar, doing research in Belgium and Cyprus, won grants from the National Science Foundation, the Smith Richardson Foundation, and others, and has published more than two dozen articles. She is also a renowned figure on campus—students rave about her uncanny ability to bring clarity to complexity, as well as her supportive mentoring.
“She’s so accomplished, but at the same time she’s very humble,” says Brian Moore ’13, whom Clausing converted from a philosophy to an economics major, and who currently works as a research assistant for the White House Council of Economic Advisers, as she once did. “Kim is such a clear, precise thinker, and she makes sure to give you just as much complexity as you need to understand a concept . . . I learned the bread and butter of economic analysis from Kim, and that’s something that is relevant in my job every day.”
“What’s remarkable about Kim is that she’s an excellent teacher who is also able to thrive in her research,” says Prof. Jeff Parker [1988–], the senior member of the economics department at ÌÇÐÄvlogÊÓƵ. “Whatever she does, it is always of the highest quality.”
Clausing’s recent work examines how U.S. multinationals merge with overseas companies, enabling them to define themselves as foreign corporations under U.S .tax code and thus avoid paying U.S. taxes. Known as corporate inversions, these deals can save companies millions and sometimes billions of dollars in income taxes in the U.S., where the 35% corporate tax rate is among the steepest in the world.
In the past year, major corporations ranging from Chiquita (bananas) to Medtronic (medical devices) announced inversion-related moves overseas. Fearing a consumer backlash, Walgreens (drug stores) recently dropped plans to move its headquarters to Switzerland.
President Obama recently denounced tax inversions as “unpatriotic.” The White House wants to find ways to limit inversions, such as raising the percentage of foreign ownership required in companies that move abroad from the current 20% to 50%. Others, including Senator Orrin Hatch (R-Utah), the top Republican on the finance committee, instead propose cutting corporate tax rates so that multinationals have less incentive to park their profits overseas.
Any way you slice it, inversion—and the wider issue of corporate taxation—has become a hot-button political issue, and Clausing’s research puts her smack in the middle of the debate.
Senator Ron Wyden (D-Oregon), the powerful chairman of the Senate finance committee, recently knocked the federal tax code as a “dysfunctional, rotting mess of a carcass.” He rings Clausing up on occasion to get her thoughts (she is not a paid consultant). “Tax policy can be pretty dense and usually has the same excitement as a root canal, but Professor Clausing always makes it interesting, relevant, and understandable,” says Senator Wyden, who has championed tax reform over his 33 years representing Oregon in Congress. “We have minisummits on the subject at neighborhood coffee shops, where I know she will always provide good sense and a smart, fact-driven analysis about policy.”
Clausing is careful to avoid partisan rhetoric when she talks about taxes. “I see the issue a bit more analytically,” she says. “I have a hard time seeing what these companies are doing (with tax inversions) in strict moral terms, as being patriotic or unpatriotic. If I were the tax director of a major multinational firm, and I saw these games you can play, I’d be tempted to play them, too, since tax directors have a primary responsibility to the shareholders. What we really have is an unpatriotic tax code, because it encourages companies to do these shenanigans.”
That said, fixing the tax code is not a simple matter. Clausing estimates that the U.S. government loses 60 to 90 billion dollars each year due to the tax avoidance of multinational firms. Reform options range from simple steps that would shut particular loopholes all the way to comprehensive measures that would change the entire system of multinational corporate taxation as we know it today.
In terms of first steps, Clausing supports simple measures, like better data collection, that can shed more light on the scale of the problem. She has contributed her thoughts to an ongoing process by the Organization of Economic Cooperation and Development (OECD) that seeks to stem corporate base erosion and profit shifting, in part by developing better data sources and research methods.
Other modest reforms could tighten loopholes and help protect the U.S. tax base, and Clausing notes that there is a surprising degree of consensus around the broad idea of coupling a lower corporate tax rate with a broader corporate tax base and the closing of loopholes. But, as with many policy issues, the devil is in the details.
In terms of more systemic reform, Clausing favors an idea known as “formulary apportionment.” In this system, multinational firms would be taxed based on their worldwide income, and some share of that income would be assigned to the U.S. tax base, depending on how much of their economic activity occurred in the United States. This would insulate the U.S. tax base from the sorts of accounting shenanigans that have led to large revenue losses in the past.
Clausing grew up in Champaign, Illinois. Her father was an engineering professor at the University of Illinois who wanted his two daughters to follow in his footsteps. She remembers that for her 12th birthday, he got her a reverse Polish notation scientific calculator. Her sister studied engineering and now works for Ford. With the encouragement of her mother, who had earned degrees in music and literature, Clausing went to Carleton College in Minnesota.
Economics appealed to her early on because she saw it as a practical approach to solving society’s problems. “Economics is about taking your common sense further,” she says. “You can sit there and have a conversation with someone about climate change or the minimum wage and come up with many sorts of ideas. But if you have an economics background, you can stretch your common sense further in a more rigorous and systematic way and ultimately, I think, come up with more sensible solutions to your problems.”
After majoring in economics at Carleton, Clausing went to Harvard, earning a PhD in 1996 in international economics, which she notes tended to be a male-dominated field of study. “I wanted to prove something to myself,” she says.
Clausing focused her studies on a niche that has defined her career: the intersection of government tax policy and international trade. “There aren’t a lot of people who work in both areas, so there are a lot of interesting questions to ask,” she says.
What she finds most interesting, she says, is the role of government in what is an increasingly international economy. “You wind up with questions that economics should be good at solving, like, ‘How do you tax a company that doesn’t belong anywhere?”
Clausing spent a year as a staff economist for the White House Council of Economic Advisers before coming to ÌÇÐÄvlogÊÓƵ in 1996. She chose ÌÇÐÄvlogÊÓƵ because she wanted both to teach and do research—plus, ÌÇÐÄvlogÊÓƵ reminded her of Carleton. (In the middle of the interview for this article she sprang up from her chair, went to one of her shelves, and plucked out the original copy of Job Openings for Economists containing the want ad for the job at ÌÇÐÄvlogÊÓƵ starred.)
Prof. Carl Stevens ’46 [economics 1954–90] took her under his wing at ÌÇÐÄvlogÊÓƵ. Though he had recently retired, Stevens was a sterling example of an academic who cared about making a difference in the real world. “Carl was very wise because he realized what we did here was important, but it wasn’t everything,” she says. “He was an inspiration because he never got caught up in campus minutiae. He was always thinking about the bigger issues and what he could to make the world a better place.”
Years later, one of her thesis advisees, Dawn Teele ’06, married Stevens’ grandson Josh Simon ’05. Clausing played matchmaker, and eventually, ordained through the mail-order Universal Life Church, presided over the couple’s wedding vows.
Teele, who went on to earn a doctorate in political science at Yale and is now a postdoc at the London School of Economics, describes Clausing as a “very frank, very funny” professor who always made economic concepts relevant to students. She was a caring, involved mentor, Teele says, who once gave her a valuable piece of advice before a job interview. “She told me to always take a two-second pause before answering any question. I still think about that whenever I have an interview. I say to myself, ‘Be like Kim.’”
A recent session of Econ 201, Clausing’s introductory Principles of Economics class, demonstrated her skill as a teacher. (It also took place on a day when she was quoted in the New York Times.) Leading the class through a discussion of supply and demand, she sketched graphs on the blackboard to illustrate important concepts, pausing frequently to pose or answer questions from the 20 students, most of them freshmen and sophomores. Dressed in a classic, understated style— black pencil skirt and blue blouse—she explored concepts such as elasticity and equilibrium by returning again and again to concrete examples such as paying rent and filling up the gas tank.
“To teach well, you have to imagine what it’s like not to understand what you’re teaching,” she explains. “I love the intro class the most because of that, actually. Before students take the class, there are so many mysteries in the world they don’t understand. Like, ‘Why is the unemployment rate what it is?’ Or, ‘Why is China’s economic growth faster than Bangladesh’s?’ To be able to take them in one semester from a state of ignorance to having some framework for thinking more deeply about those questions is rewarding.”
Accomplishing so much as an educator and as a scholar while being the divorced single mother of two school-age children, however, doesn’t leave much free time. She can’t help staying busy, given her Midwestern work ethic. She strikes a work/life balance—and maintains her seemingly preternatural equanimity—thanks to a passion for organization. “To a fault actually,” she admits with a sigh of resignation, adding, half in jest, that she puts together “a spreadsheet for everything.”
After all, she’s got numbers to crunch, papers and policy briefs to write (more than a half-dozen published the past few years), and students to teach and advise.
Asked to sum up what it is that drives her to work so hard, Clausing offers up a pithy quotation from one of her intellectual heroes, Nobel Prize–winning economist Paul Krugman:
But the honest truth is that what drives me as an economist is that economics is fun . . . There is hardly anything I know that is as exciting as finding that the great events that move history, the forces that determine the destiny of empires and the fate of kings, can sometimes be explained, predicted, or even controlled by a few symbols on the printed page. We all want power, we all want success, but the ultimate reward is the simple joy of understanding.
Romel Hernandez is a freelance writer based in Portland.
Tags: Professors, $_EscapeTool.xml($tag.getChild('title').text), Research, Editor's Picks