“Chief Tax-Dodging Officers”: It’s Gotten Pretty Easy For Large Corporations To Avoid The Taxman
Republican and Democratic leaders don’t often see eye to eye on taxes.
But surprisingly, corporate tax reform looks like one area where there might actually be some potential for bipartisan action in Washington. This should be good news, since our corporate tax system is clearly hopelessly broken.
Here’s a stark indicator of just how broken: Last year, 29 of the 100 highest-paid CEOs made more in personal compensation than their companies paid in federal income taxes. That’s according to a new report by the Institute for Policy Studies and the Center for Effective Government.
Source: Fleecing Uncle Sam, an Institute for Policy Studies and Center for Effective Government report
Yes, it’s gotten that easy for large corporations to avoid the taxman.
This is true even for the country’s wealthiest companies. Citigroup, Halliburton, Boeing, Ford, Chesapeake Energy, Chevron, Verizon, and General Motors all made more than $1 billion in U.S. profits last year, but still paid their CEOs more than they paid Uncle Sam. In fact, most of them got massive tax refunds.
How is this possible?
While big businesses moan about the U.S. corporate tax rate of 35 percent, most of them pay nowhere near that. Between 2008 and 2012, the average large corporation paid an effective rate of less than 20 percent.
Hiding profits in tax havens is one of the most common ways large corporations avoid paying their fair share to the IRS. And indeed, the 31 firms who paid their CEOs more than Uncle Sam operate 237 subsidiaries in low- or no-tax zones like the Cayman Islands and Bermuda.
But that’s just one tax-dodging trick. Corporations have lobbied successfully for a plethora of other tax loopholes and subsidies.
Boeing, for example, has figured out how to double dip in the Treasury’s pool.
The aerospace giant hauled in more than $20 billion in federal contracts in 2013. According to Citizens for Tax Justice, taxpayers also picked up the tab for $300 million of Boeing’s research expenses last year through a tax break that Congress is now considering making permanent.
When tax time came, Boeing got $82 million back from the IRS, despite reporting nearly $6 billion in U.S. pre-tax profits. Meanwhile, Boeing chief executive Jim McNerney made $23.3 million.
Corporate tax dodging is bad for ordinary Americans — and our nation’s long-term economic health.
For example, if Boeing had paid the statutory corporate tax rate of 35 percent on its $6 billion in profits, it would’ve added an extra $2 billion to the funds available for public services. That sum would’ve covered the cost of hiring 2,775 teachers for a year.
Shirking taxes may boost the bottom line in the short term, but in the long run it erodes the economic infrastructure businesses need to be competitive.
Unfortunately, the current political rhetoric has little to do with cracking down on corporate tax avoidance.
Republicans are hooked on corporate tax giveaways. And President Barack Obama has suggested that he’s ready to reward corporations for stashing money overseas by giving them deeply discounted tax rates on their profits if they’ll just agree to bring them home.
Both of these positions are based on the unfounded claim that smaller corporate tax burdens translate into more good jobs.
In a Hart Research poll of voters on election night, only 22 percent favored taxing corporations less. In the same poll, less than 30 percent wanted Congress to make tax cuts a higher priority than investments in education, health care, and job creation.
The American people have their priorities straight. They deserve leaders who do too.
By: Sarah Anderson and Scott Klinger are the co-authors of “Fleecing Uncle Sam”; The National Memo, November 19, 2014
“The Speaker In Wonderland”: Boehner Sees Basic Current Events In The Reflection Of A Fun-House Mirror
The headline, at first blush, doesn’t seem amusing. House Speaker John Boehner’s (R-Ohio) latest op-ed – a 700-word piece for Politico – begins, “Do Your Job, Mr. President.”
It gets funnier, though, once the piece gets going. Boehner (or whoever writes these pieces for him) falsely claims, for example, to have “sent more than 40 jobs bills to the U.S. Senate.” He also claims the president “rewrote the law” by helping Dream Act kids, which isn’t at all what happened.
But the crux of the piece is about tax policy. “Our tax code, like our immigration system, is badly broken,” Boehner argues. “Because we have the highest corporate tax rate in the developed world, American companies have an incentive to relocate their headquarters overseas to lower their tax bill.”
That’s not quite right. We have a relatively high corporate tax rate, which corporations don’t actually pay thanks to holes in the tax code. President Obama has proposed cutting the rate while closing existing loopholes as part of a broader tax-reform package.
Republicans have refused, which made this part of Boehner’s op-ed plainly ridiculous, even for him.
…President Obama is hinting that he may act unilaterally in an attempt to supposedly reduce or prevent these so-called “tax inversions.” Such a move sounds politically appealing, but anything truly effective would exceed his executive authority. The president cannot simply re-write the tax code himself.
The right choice is harder. President Obama must get his allies on Capitol Hill to do their job. Senate Democrats, including Senate Majority Leader Harry Reid and Senate Finance Chairman Ron Wyden, pay lip service to tax reform, but they have utterly failed to act.
It sometimes seems as if Boehner lives in an entirely different reality – one in which the Speaker sees basic current events in the reflection of a fun-house mirror.
Let’s briefly review reality in the hopes of refreshing Boehner’s memory.
As we last discussed in February, House Republicans originally gave tax reform the special H.R. 1 designation – a symbolic bill number intended to convey its significance – with the intention of unveiling House Ways and Means Committee Chairman Dave Camp’s (R-Mich.) plan in the fall of 2013. Camp had spent three years of his life on a tax-reform overhaul, and House GOP leaders saw it as an important priority.
And then they changed their minds. In November 2013, Republicans no longer wanted to tackle the difficult task of overhauling the tax code, choosing instead to complain about “Obamacare” full-time. Shifting their attention to policy work, the party decided, would have been an unwelcome distraction.
By March 2014, House GOP leaders decided to give up on the idea altogether. Sure, GOP lawmakers could try to accomplish something on the issue, but the effort would almost certainly divide Republicans, and there was no guarantee they’d get a bill done, anyway. Worse, if they succeeded, it might offer an election-year win for President Obama, the very idea of which was a non-starter.
Asked in the spring about the substance of a tax-reform bill, Boehner said, quite literally, “Blah, blah, blah, blah.”
And now the House Speaker, who hasn’t even considered bringing the issue to the House floor, is whining in an op-ed that Democrats “pay lip service to tax reform, but they have utterly failed to act.”
This kind of chutzpah is kind of scary. Boehner seems to think we’re fools, unable to remember what he said and did just a few months ago, and unable to access Google long enough to check.
I can appreciate the Speaker’s frustration – he’s proven himself incapable of governing, and when he tries, his own members betray him – but that’s no excuse for shameless dishonesty.
“Do Your Job, Mr. President”? This from the Speaker who wants tax reform but won’t even try to pass it through his own Republican-led chamber? Which of these two leaders is failing to do his “job”?
By: Steve Benen, The Maddow Blog, August 11, 2014
“Corporate Artful Dodgers”: We’re Heading Toward A World In Which Only The Human People Pay Taxes
In recent decisions, the conservative majority on the Supreme Court has made clear its view that corporations are people, with all the attendant rights. They are entitled to free speech, which in their case means spending lots of money to bend the political process to their ends. They are entitled to religious beliefs, including those that mean denying benefits to their workers. Up next, the right to bear arms?
There is, however, one big difference between corporate persons and the likes of you and me: On current trends, we’re heading toward a world in which only the human people pay taxes.
We’re not quite there yet: The federal government still gets a tenth of its revenue from corporate profits taxation. But it used to get a lot more — a third of revenue came from profits taxes in the early 1950s, a quarter or more well into the 1960s. Part of the decline since then reflects a fall in the tax rate, but mainly it reflects ever-more-aggressive corporate tax avoidance — avoidance that politicians have done little to prevent.
Which brings us to the tax-avoidance strategy du jour: “inversion.” This refers to a legal maneuver in which a company declares that its U.S. operations are owned by its foreign subsidiary, not the other way around, and uses this role reversal to shift reported profits out of American jurisdiction to someplace with a lower tax rate.
The most important thing to understand about inversion is that it does not in any meaningful sense involve American business “moving overseas.” Consider the case of Walgreen, the giant drugstore chain that, according to multiple reports, is on the verge of making itself legally Swiss. If the plan goes through, nothing about the business will change; your local pharmacy won’t close and reopen in Zurich. It will be a purely paper transaction — but it will deprive the U.S. government of several billion dollars in revenue that you, the taxpayer, will have to make up one way or another.
Does this mean President Obama is wrong to describe companies engaging in inversion as “corporate deserters”? Not really — they’re shirking their civic duty, and it doesn’t matter whether they literally move abroad or not. But apologists for inversion, who tend to claim that high taxes are driving businesses out of America, are indeed talking nonsense. These businesses aren’t moving production or jobs overseas — and they’re still earning their profits right here in the U.S.A. All they’re doing is dodging taxes on those profits.
And Congress could crack down on this tax dodge — it’s already illegal for a company to claim that its legal domicile is someplace where it has little real business, and tightening the criteria for declaring a company non-American could block many of the inversions now taking place. So is there any reason not to stop this gratuitous loss of revenue? No.
Opponents of a crackdown on inversion typically argue that instead of closing loopholes we should reform the whole system by which we tax profits, and maybe stop taxing profits altogether. They also tend to argue that taxing corporate profits hurts investment and job creation. But these are very bad arguments against ending the practice of inversion.
First of all, there are some good reasons to tax profits. In general, U.S. taxes favor unearned income from capital over earned income from wages; the corporate tax helps redress this imbalance. We could, in principle, maintain taxes on unearned income if we offset cuts in corporate taxes with substantially higher tax rates on income from capital gains and dividends — but this would be an imperfect fix, and in any case, given the state of our politics, this just isn’t going to happen.
Furthermore, ending profits taxation would greatly increase the power of corporate executives. Is this really something we want to do?
As for reforming the system: Yes, that would be a good idea. But the case for eventual reform basically has nothing to do with the case for closing the inversion loophole right now. After all, there are big debates about the shape of reform, debates that would take years to resolve even if we didn’t have a Republican Party that reliably opposes anything the president proposes, even if it was something Republicans were for just a few years ago. Why let corporations avoid paying their fair share for years, while we wait for the logjam to break?
Finally, none of this has anything to do with investment and job creation. If and when Walgreen changes its “citizenship,” it will get to keep more of its profits — but it will have no incentive to invest those extra profits in its U.S. operations.
So this should be easy. By all means let’s have a debate about how and how much to tax profits. Meanwhile, however, let’s close this outrageous loophole.
By: Paul Krugman, Op-Ed Columnist, The New York Times, July 27, 2014
“Me, Pay Taxes?”: How Wall Street Avoids Paying Its Fair Share in Taxes
Like many Americans, you’ve probably just spent a good bit of time figuring out how much you owe in taxes. Most of us fill in the forms and follow the rules. But the rules are a lot more flexible for the largest U.S. corporations, and especially for the major Wall Street financial institutions and their top executives and owners. Banks and financial companies capture more than 30 percent of the nation’s corporate profits, but manage to pay only about 18 percent of corporate taxes while contributing less than 2 percent of total tax revenues, according to the Bureau of Economic Analysis and the International Monetary Fund.
What’s more, the owners and senior managers of our major financial institutions can exploit the loopholes in our individual income tax on a far greater scale than the rest of us. Below is a short guide to a few of the major ways that Wall Street avoids paying its fair share.
But I earned it in the Cayman Islands!: American corporations have developed a panoply of ways to route income through low-tax foreign subsidiaries. This practice goes well beyond the financial sector. Indeed, the latest publicized example involves a manufacturing firm, Caterpillar. Because of the inherently “placeless” nature of many financial transactions, however, financial institutions and their investors are among those in the best position to move income around in this fashion. The major Wall Street banks have thousands of subsidiaries in dozens of countries, all capable of engaging in transactions that enjoy the full guarantee of the U.S. parent company even as they take advantage of the tax or legal advantages of their foreign incorporation. Transactions in the multi-trillion dollar global derivatives market, for example, can pretty much be relocated anywhere in the world with the touch of a computer keyboard.
A way to crack down on the massive potential for tax avoidance this creates would be to simply rule that financial transactions backed up by a U.S. firm are in effect U.S. transactions and subject to U.S. tax law. Whatever international tax rules are designed to protect real manufacturing activity in other jurisdictions from inappropriate taxation should not apply to the passive income gained from financial activities that can easily be transacted from anywhere in the world. For some years U.S. tax law attempted to follow this principle, but starting in 1997 an “active financing” loophole made it much easier for multinationals to avoid taxation on financial transactions by moving profits to low-tax foreign subsidiaries. Combined with so-called “look through” provisions, these international tax loopholes mean that U.S. multinationals get to look around the world for the cheapest places to locate their earnings.
It’s not work, it’s investment!: The U.S. taxes capital gains on investments much more lightly than it taxes ordinary income. The details get complicated, but in general the profit on investments is only taxed at a maximum 15 to 20 percent rate, as opposed to a rate of almost 40 percent for high levels of ordinary income. Though its stated goal is to encourage investment and saving, a tax differential of this size can be seen as a subsidy to financial speculation, since it penalizes wage work compared to trading profits, and accrues to any investment held longer than a year, whether or not it can be shown to actually create jobs. In addition to the broad impact of the tax differential, the gap in rates creates a windfall for wealthy Wall Street executives in a position to maximize its benefits. Those who work for big hedge and private equity funds are in the very best position to do that, as they take much of their work income from the investment returns of the fund. Since they are legally permitted to classify this “carried interest” income as capital gains, they can cut their tax rates effectively in half – a windfall that costs the federal government billions of dollars a year, and means that some of the wealthiest individuals in America pay a lower tax rate on their earnings than an upper-middle-class family might.
Who, me, sales tax?: It’s easy to forget at this time of year when we’re all working on our income tax, but the sales tax is also one of the major taxes you pay each year. State and local governments take in more than $460 billion a year through sales taxes charged on everything from cars to candy bars. But Wall Street speculation isn’t charged a sales tax at all. Indeed, you’ll pay more sales tax for your next pack of gum than all the traders on Wall Street will pay for the billions of transactions they undertake every year. The non-partisan Joint Tax Committee of the U.S. Congress estimates that a Wall Street speculation tax of just three basis points – three pennies per $100 of financial instruments bought and sold in the financial markets – would raise almost $400 billion over the next decade. What’s more, such a fee would significantly discourage the kind of predatory trading strategies recently highlighted by author Michael Lewis, strategies that depend on trading thousands of times in a second in order to manipulate stock markets and extract tiny profits from each trade.
This only starts the list of ways Wall Street financial institutions and the people who run them manipulate the system and avoid paying their fair share; there are plenty more, including the use of complex financial derivatives to shelter individual income, the variety of techniques used by hedge and private equity fund partners to avoid effective IRS enforcement, and the continuing tax deductibility of corporate pay above $1 million, as long as it is sheltered under a so-called “performance incentive.” Tax time would be a good time for our elected representatives to get to work closing some of these gaps and loopholes, and leveling the playing field.
By: Marcus Stanley, Economic Intelligence, U. S.News and World Report, April 16, 2014
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