How Tax Havens Rip Off America …
And the poorest nations on Earth.
‘Tis the season of TurboTax, W-2s, and 1099s — yes, tax day will soon be upon us. Which, of course, means you’re probably still sweating over a stack of crumpled receipts or wishing the IRS had translated the alternative minimum tax instructions into modern English. Maybe next year you should just give up and look for a P.O. Box in the Cayman Islands or hire a lobbyist. Apparently everyone’s doing it.
The so-called “Panama Papers” have disgorged thousands of kaleidoscopic shards providing glimpses into the shadowy world where finance and power canoodle under a Caribbean moon. Each new revelation — from Putin’s cellist to David “Silver Spoons” Cameron’s family trust — is like a puzzle piece, with the grand portrait yet to be revealed. Until today.
A new report by Oxfam, titled, “Broken at the Top: How America’s dysfunctional tax system costs billions in corporate tax dodging,” gives some grand-scale insights into how the country’s biggest corporations hide profits around the world, avoiding hundreds of billions of dollars in taxes while spending (far fewer) billions to keep the system rigged in their favor.
When you add up what just the 50 largest companies are up to, the scale is staggering. A whopping $1.4 trillion is stashed in a secretive network of some 1,600 subsidiaries (that we know of). For example, American multinationals — including Bank of America and Office Depot — managed to book $104 billion in profits in Bermuda in 2012. That’s 18 times the GDP of the entire Caribbean country.
The result? An estimated $111 billion that should, by a plain reading of the tax code, be filling U.S. coffers each year. Think about that. According to an analysis by the American Medical Student Association, this amount would more than cover the 45 million Americans currently without health insurance. Or it could repair or replace all of America’s frighteningly deficient highway bridges, leaving enough in excess to overhaul the country’s antiquated national air traffic control system. All in one year.
The overseas impact might be even greater. By shifting profits into tax havens, these corporations not only dodge Uncle Sam, but, according to the Oxfam report, they also avoid paying another $100 billion in the countries where the real economic activity — like harvesting and mining — took place. These are often poor nations, home to poor people, that can ill afford the loss. A report by the Africa Progress Panel calculated that Africa alone loses $34 billion in revenues, annually, due to this practice. Cumulatively, these amounts are not far from what it would take to bring every last person on Earth above the extreme poverty line. Indeed, the education budget for 1 billion people in the world’s 47 poorest countries is only about one-quarter of that missing $100 billion.
People have been talking about these tax-avoidance and profit-stripping practices for years. Yet it’s getting worse, not better. Why? Perhaps the most profitable investment of all: lobbying. Oxfam reports that the 50 companies it profiled spent $2.6 billion on lobbying from 2008 to 2014 and that for every $1 invested in lobbying, these 50 companies collectively “received $130 in tax breaks and more than $4,000 in federal loans, loan guarantees and bailouts” — totaling $11.2 trillion dollars over the same period. As a General Electric spokesman explained to the New York Times in 2011: “We are a diverse company, so there are a lot of issues that the government considers, that Congress considers, that affect our shareholders.… So we want to be sure our voice is heard.” Don’t worry, your voice is heard loud and clear.
But this is not an easy problem to solve, especially since a lot of the tax avoidance is not strictly illegal. Look at the new rules by the Obama administration to slow down corporate inversions, the practice of U.S.-based companies reincorporating in lower tax jurisdictions. They tackle practices like “earnings stripping” (not as sexy as it sounds), which is basically when companies loan themselves money to shift profits and losses around the globe.
There are other legislative fixes proposed in the Stop Tax Haven Abuse Act, introduced by Rep. Lloyd Doggett (D-Texas), which is an attempt to pierce the veil of all these global shenanigans. It would enable the U.S. Treasury Department to look at what is really going on in transactions to ensure the underlying economic activity is taxed in the place where it happened.
Increasing transparency is also a big part of the long-term approach to solving this problem. We shouldn’t have to rely on law firm leakers or hackers or enterprising activists to reveal the truth. The Organization for Economic Cooperation and Development recently called for country-by-country earnings to be reported by corporations, which would show where their sales are taking place. This would allow both governments and consumers to make informed choices about what to buy and where to audit.
And speaking of other governments: One of the biggest things we need to do is strengthen the tax authorities in the poor countries that are being ripped off. A new effort, dubbed the Addis Tax Initiative — launched at a U.N. conference on development financing in Ethiopia last summer — has committed donors to invest more in building the capacity of developing countries to raise more of their own money. One of the best ways they can do that is by capturing existing revenues before they flow into the Bermudan sands.
The strong sense in the United States (8 in 10 Americans) that U.S. firms don’t pay their fair share of taxes is enough to generate pressure for real change. With the political winds blowing against inequality and the data following behind, we might just find a way to turn tax evasion back into something for mobsters rather than the great American brands. TurboTax insists you shouldn’t need a genius to do your taxes. Banana Republic shouldn’t need a shell corporation in, well, a banana republic, either.
Photo Credit: Joe Raedle / Staff