Each April, a new round of news stories appears bemoaning how corporations exploit offshore tax havens to reduce or eliminate U.S. taxes. However, these corporations are doing nothing illegal — they are simple taking advantage of long-available tax-reduction techniques. The real culprits are not the companies that are saving money for their shareholders (likely including you and me through our mutual funds or pension investments). Politicians, Democrats and Republicans alike, have allowed this situation to occur and have actually encouraged it by their willingness to yield to the entreaties and contributions of their corporate constituencies. Politicians create tax law encouraged by the contributions of interested parties, and corporations then exploit the rules they have helped create. Insidious but effective. Yes, corporate tax reform and an end to corporate welfare seem fundamental to make the tax code fairer, but how likely is it that it will occur anytime soon?
Here is the current situation. Over 80 of the 100 largest U.S. companies take advantage of offshore tax havens that the U.S. Public Interest Research Group (PIRG) estimates cost $150 billion in yearly tax revenue. This is an international issue. A UK source estimates that 98% of the UK’s biggest businesses use tax havens as well. An Institute for Policy Studies report asserts that in effect, small businesses subsidize the biggest companies with small businesses paying an average of 27% in federal taxes while the largest companies pay an average of 11%.
Companies achieve these lower tax rates by a combination of actions: They operate subsidiaries in low-tax regions offshore; they effectively lobby for tax breaks aimed at their specific company’s needs; and they shift income from the U.S. to low-tax countries. American companies using tax havens comprise a who’s who of major players such as GE, Pfizer, and Microsoft. GE spends over $40 million yearly on lobbying and campaign contributions and was the subject of a 2011 New York Times article titled, “GE’s Strategies Let It Avoid Taxes Altogether.” Ironically, that article quotes President Obama as citing GE’s CEO as understanding “what it takes for America to compete in the global economy.” PIRG also lists Citicorp, bailed out by taxpayers in 2008, as ranking eighth for most money offshore and estimates that if brought back to the U.S., Citi would owe $11.5 billion in taxes.
When questioned, each company defends itself, stating that they “comply with the appropriate tax law" (Pfizer), or support tax reform to lower corporate rates and close loopholes (GE), or they “abide by U.S. and foreign tax laws as written” (Microsoft). The fact is that not only are these companies following the law, they would be both irresponsible and foolish not to take advantage of these gifts that lawmakers provide them. As one commentator noted, corporate tax departments operate as profit centers, and from their perspective they are right to do so. Those without powerful friends in all the right places (namely, us) are left holding the bag.
However, before we aim our populist pitchforks at the leaders of corporations, we need to consider which of us would voluntarily pay taxes that we did not have to pay. Particularly around April 15, multibillionaire Warren Buffett may be the only person in the crowd to raise his hand on that one.
This is an international problem. The U.S., UK, France, and other developed nations need to close loopholes that cost them billions in tax dollars. A largely clueless public combined with an aggressive corporate lobbying effort and an all-too-acquiescent group of politicians has created this problem. Solving it requires a bright and constant spotlight to be shined on this issue both by the media and an enlightened and enraged public. Companies are acting in their own interest. It is time for the larger public to do so as well.