By Miguel De La Torre
Corporations eliminate paying portions of their taxes by registering their companies in tax havens like Bermuda or the Cayman Islands while keeping their working headquarters in the United States.
One tax haven island, the British Virgin Islands, is home to 30,000 people and 457,000 companies. The Cayman Islands population of 53,000 has 93,000 companies. One Cayman Island building, the Ugland House, is the business address for more than 19,000 businesses, leading then 2008 presidential candidate Barak Obama to exclaim, “either this is the largest building in the world or the largest tax scam in the world.”
According to an academic study conducted by U.S. Public Interest Research Group, tax haven abuses cost the federal government $150 billion a year in tax revenues, with multinational corporations representing $90 billion and private individuals $60 billion. One of those individual taxpayers who took advantage of these tax havens was Mitt Romney, the 2012 candidate for the presidency of the United States, whose tax returns revealed dozens of offshore holdings in places like Luxembourg and the Cayman Islands.
Because of these tax havens, the average taxpayer filing out a 1040 form must pay an additional $1,026 in federal taxes to make up the lost revenue. If we restrict the $90 billion loss due to multinational corporate tax havens to small businesses, then we can expect each small business to pay an extra $3,067 in taxes.
The three major corporate abusers of using tax havens are: 1) Pfizer, the world’s largest drug company, which due to its 172 subsidies in tax havens has reported no taxable income over five years, even though it has $73 billion parked in an offshore account; 2) Microsoft, who avoided paying $4.5 billion in federal income tax over three years, even though it has $60.8 billion parked offshore on which it would have had to pay $19.4 billion in U.S. taxes; and 3) Citigroup, beneficiary of the 2008 taxpayer funded bailout, who maintains 20 subsidies in tax havens with $42.6 billion sitting offshore on which it would have owed $11.5 billion in U.S. taxes.
In addition to taking advantage of tax havens, Romney was able to pay low taxes on millions of dollars in income by an accounting technique known as carried interest. This legal principle allowed private equity fund managers to treat most of the fees they earn for managing equity funds (management fees usually categorized as ordinary income) as though it was capital gain. As capital gain, even the tax liability can at times be deferred for years. This allowed Romney’s company, Bain Capital, to convert $1.05 billion in management fees from ordinary income into capital gain in 2009. Some legal scholars question the legality employed by Romney and company believing that if challenged, the IRS could win; thus leading a few private equity firms from not taking advantage of this accounting technique.
Some corporations are implementing a new tax strategy designed to aggressively reduce, if not eliminate, federal taxes. Diverse businesses like Corrections Corporation of America (CCA), a private prison, or Penn National Gaming, which operates casinos, are declaring they are really not an ordinary corporation, but instead a special trust that typically is exempted from federal taxes. Although the trust structure, specifically a real estate investment trust (REIT) used for years, is not new. Companies have filed recently for — and been approved by — the IRS to reclassify as a trust. For example, CCA is expected to save $70 million of federal taxes in 2013.
As of this writing, the Stop Tax Haven Abuse Act (S1346, HR 2669) has yet to pass Congress. The bill, if passed would close many of the abuses of tax havens resulting in an increase in annual tax revenue of about $100 billion. Furthermore, it would eliminate the incentive of moving jobs and profits offshore. The bill has languished in Congress since 2007. A cause for the House’s refusal to move on this Act might probably have to do with the millions of dollars leaders of private equity firms have spent lobbying to protect their privileged tax status.
During the 2012 presidential election it could be argued that because candidate Obama made raising taxes on the richest Americans a priority, his successful re-election amounted to a mandate by the majority of the voters. And yet, President Obama’s original plan of raising marginal tax rates on families with income over $250,000 will have little if no impact on families making up to $300,000, as well as hundreds of thousands of families with even greater incomes due to the complexity of a tax code littered with tax shelters and loopholes.
According to Citizens for Tax Justice, only about 32 percent of families with income between $250,000 to $350,000 will see a tax increase, while 77 percent with income between $300,000 and $350,000 will see a rise. Obama may have pledged to raise taxes on the top 2 percent, but the final deal struck in the waning hours of the 112th Congress only raised taxes on the top .7 percent, with the very rich still paying vastly lower rates than at any point from the 1940s through the 1970s.
