How Corporations Avoid Paying Their Fair Share
Every year at tax time, as we all do our civic duty by submitting our federal, state and local taxes, we should all be thinking about the many multinational businesses that are not pulling their weight because they have successfully avoided paying corporate taxes.
The key to progressive taxation is placing the greatest obligation of a tax on those who can pay the most. Certainly we are facing huge pushback to this idea from the super rich and Wall Street.
The truth is, corporations are paying less and less of their share of taxes. In 2014, corporations paid taxes equal to less than two percent of the Gross Domestic Product (GDP). In 1950s the corporate share was double that, at more than 4 percent share of the GDP. Meanwhile, individuals’ tax payments in 2014 equaled more than 8 percent of the GDP — four times the corporate share for the same year.
Loopholes in our tax code, passed at the behest of the multinational corporations they benefit, have shifted the lion’s share of tax responsibilities onto American small businesses and average taxpayers. Studies show each small business in the U.S. pays an average of more than $3,200 in taxes to cover the cost of taxes avoided by multinational corporations.
Armies of lobbyists and tax lawyers have made Big Business complicit in shrinking our nation’s revenue stream, even as they take full advantage of government largesse. We must correct this systemic unfairness, which exacerbates the economic inequality that holds so many back from achieving the American Dream.
To avoid paying U.S. taxes on global income, multinational corporations legally exploit the tax code by using chains of foreign subsidiary companies to shift profits around. Spinoff corporations are incorporated in tax haven countries—jurisdictions with low to no corporate taxes—and then the U.S.-based parent company finances investments, transfers valuable intellectual property rights like patents, or borrows money from itself and pays huge interest payments.
The tax concept that incentivizes profit shifting is called deferral, which enables corporations to postpone paying taxes indefinitely until foreign profits are “brought back” to the U.S. in the form of dividends or other shareholder payments (even if that money is actually already sitting in an American bank and not literally held offshore.)
Corporations can take advantage of these deferrals in certain circumstances. For example, two supposedly “temporary” tax breaks contained in the package of tax credits regularly renewed by Congress are referred to as “extenders.” The first, called the “active financing exemption,” allows U.S. companies to defer paying taxes on the foreign-made investment-related income of a subsidiary, despite the general ban on deferral for “passive income,” such as interest, dividends, rents and royalties. The second, called the “Controlled Foreign Corporation (CFC) Look-Through Rule,” allows U.S. multinational corporations to defer tax liabilities by disregarding income generated by its foreign subsidiaries.
Also, there is the tax avoidance strategy called inversions — when a company figuratively pulls up stakes by getting a Post Office Box in Bermuda and then reincorporating in the tiny island nation (or a similarly low tax country.) Because tens of thousands of other multinational corporations have headquartered in that one country alone, the profits of multinational corporations exceed Bermuda’s GDP by more than 1600 percent! Clearly, these companies are not really “doing business” through their overseas subsidiaries.
This type of corporate tax haven abuse costs the federal government $90 billion in lost revenue every year. In total, almost $2 trillion in profits are booked offshore. There is no moral justification for why hard-working Americans should sacrifice a strong social safety net or delay essential infrastructure investments that corporations can further line their already deep pockets.
These expensive tax avoidance schemes that are forcing our nation into unneeded austerity could be stopped by incorporating elements of the Stop Tax Haven Abuse Act (S. 174, H.R. 297). This comprehensive bill closes the most egregious loopholes.
It’s time for the little guy and gal to fight back against the legal tax cheats who are taking advantage of the gaping loopholes that have been slashed in the tax code, allowing them to avoid paying their fair share.
Let’s make sure that while Corporate America is complaining about taxes, your lawmakers hear from you, too.
Urge your representative and senators to support the Stop Tax Haven Abuse Act.
Susan Harley is the deputy director of Public Citizen’s Congress Watch division