Wednesday, December 12, 2012

Offshore Tax Havens - Dodging That Tax Bullet

A report by U.S. PIRG examines the use of offshore tax havens by American corporations and wealthy individuals and shows us how much these "people" (remembering that "corporations are people too") are avoiding in U.S. taxes.  U.S. PIRG estimates that these "tax dodges" cost Washington an estimated $150 billion in lost tax revenue annually.

Of the top 100 publicly traded American corporations, at least 83 use tax havens according to the GAO; these companies keep more than 70 percent of their cash in off-shore subsidiaries to protect profits from the American tax system.  This includes such name-brand companies as Wal-Mart, Coca Cola and Pfizer.  Further, 30 of America's largest corporations actually made money off the current tax system by receiving tax rebates, ending up with an overall negative tax rate.  In recent days, Google has come under the microscope of the mainstream media around the world when it was reported that the company avoided $2 billion in world-wide income taxes by shifting $9.8 billion in revenue to Bermuda, a nation that has no corporate income tax.  This "shifting" has allowed Google to cut its overall tax rate in half.  Remember, "Don't Be Evil"!

Just in case you were wondering how profitable America's corporate world is, here is a graph from FRED showing that after-tax corporate profits reached a new record in 2012 despite the significant drop during the Great Recession and the problems in the Eurozone economy:

For the first two months of fiscal 2013, Washington collected $4 billion in corporate taxes, down 4.6 percent from 2012.  This compares to individual income taxes of $178 billion which were up 12.9 percent from 2012.  Looking at fiscal 2012 in its entirety, Washington collected $242 billion in corporate taxes compared to $1132 billion in individual income taxes; in 2012, corporate taxes made up 9.9 percent of total revenue compared to 46.2 percent that was gleaned from individual income taxes.

Let's go back to the $150 billion in annual lost tax revenue.  U.S. PIRG looks at how this additional tax revenue could be spent in light of the looming fiscal cliff:

1.) Each American taxpayer could receive a $1068 tax cut.  These additional funds in the hands of American consumers would likely result in additional consumer spending, reducing at least some of the anticipated drop in GDP after December 31, 2012.  While I'm not a huge fan of consumers adjusting their consumption ever-higher, that's how the economy grows in the 21st century.

2.) These funds would more than cover the $109 billion in automatic spending cuts that will take place if Congress does nothing to avoid the fiscal cliff (as they are sure to do).

3.) Ten years worth of this missing tax revenue would cover 37.5 percent of the $4 trillion debt reduction goal and 75 percent of the deficit reduction needed to stabilize the debt-to-GDP ratio at its current level (of just over 100 percent).

How could Washington fix the tax code to prevent the use of tax havens by highly profitable corporations? 

1.) Require corporations to report on foreign government-sourced tax credits.

2.) Prevent U.S.-based multinational corporations from deferring the payment of American taxes on profits made by overseas entities.

3.) Treat the foreign profits of U.S.-owned corporations the same as those of domestic corporations for tax purposes.

4.) Eliminate the loopholes that allow U.S. corporations to transfer intellectual property to overseas subsidiaries to avoid domestic taxation.

If Washington really is serious about reducing the fiscal gap and avoiding the fiscal cliff, perhaps Congress should give serious consideration to some of U.S. PIRG's rather basic suggestions.  After all, why should companies that make billions in profits render nothing to the taxman?  We should all be paying our share.

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