EPI: Corporate Tax Avoidance Close To $700 Billion
Taking advantage of big loopholes in the U.S. tax code, corporations have stashed so much of their profits in overseas subsidiaries -- and sometimes by shifting their official headquarters abroad -- that they evade almost $700 billion in U.S. taxes, the Economic Policy Institute calculates.
Furthermore, EPI says, the firms could easily invest in the U.S. and its workers with the $2.4 billion overall that they've stashed overseas and without having to pay increased taxes on that sum, the report says. Its data were based on federal and corporate figures.
But the important point of the corporate tax evasion – which is perfectly legal under the tax code right now -- is that the rest of us have to pick up the tab, substituting our tax payments for theirs for such things as schools, fire fighters, infrastructure and even the military, EPI says.
The EPI report comes as corporate tax payments, or lack of them, has become an issue in the presidential campaign.
Business mogul Donald Trump, the Republican nominee, has boasted of the tactics he uses to avoid paying taxes, saying they're good business and that his goal is to maximize income for himself and his investors while minimizing taxes.
Meanwhile, Democratic nominee Hillary Rodham Clinton has vowed to tax profits that firms shift overseas and to impose new taxes on firms that shift jobs abroad, too.
"While the statutory tax rate on corporate income is 35 percent, estimates of the rate corporations actually pay put the effective rate at about half the statutory rate," EPI reports. "Multinational corporations pay taxes on between just 3 percent and 6.6 percent of the profits they book in tax havens" -- countries such as Panama and the Bahamas.
Led by big drug makers and information technology firms, "Corporations have become increasingly adept at making their profits appear to be earned in these tax havens. The share of offshore profits booked in tax havens rose to 55 percent in 2013," the report continues. The two leading industries accounted for almost half of the total offshore profits of $2.4 billion.
One big loophole the firms use is in valuing -- and thus writing off -- the cost of developing "intellectual property" such as new drugs, which are often just little-altered variants of existing medicines.
Since it's hard to assign a precise price to such property, "It is relatively easy for these companies to manipulate the rules so that U.S. profits show up in tax havens," by deferring the profits to subsidiaries in those countries, EPI adds. "Multinational companies are allowed to defer paying taxes on profits from an offshore subsidiary until they pay them back to the U.S. parent as a dividend,” the report points out. It does not say how infrequently that occurs.
"Proponents of cutting the corporate tax rate refer to profits held offshore as 'trapped.' This characterization is patently false. Nothing prevents corporations from returning these profits to the United States except a desire to pay lower taxes."
The firms also use "pass-through" business entities to evade corporate taxation, by paying the profits to such shadow subsidiaries, EPI notes.
"This intentional erosion of the U.S. corporate income tax base has real consequences," EPI warns. "Rich multinational corporations avoiding their fair share of U.S. taxes means domestic firms and workers have to foot the bill.” Other findings in the 35-page report, include:
• In 1952, corporate profits were 5.5 percent of the economy, and corporate taxes were 5.9 percent of gross domestic product. Today, corporate profits are 8.5 percent of the economy, and corporate taxes are 1.9 percent of GDP. Corporations used to contribute $1 out of every $3 in federal revenue. Today, they contribute $1 out of every $9.
• Offshore untaxed corporate profits rose more than five-fold in the last decade, from $434 billion in 2005 to the current $2.4 trillion.
• Rich companies get richer: Just 50 companies hold over 75 percent of untaxed offshore profits. Four -- Apple, Pfizer, Microsoft, and General Electric -- hold one-quarter of all untaxed offshore profits. The report did not say so, but GE, under retired CEO Jack Welch, also was expert at offshoring U.S. jobs, after Welch infamously said he wanted to put factories "on a barge" to escape U.S. taxes, workers, unions and labor and environmental laws.
• Firms stash about 55 percent of their corporate offshore profits in tax-haven countries. They're taxed there: 6 percent to 10 percent. U.S. tax deferral lets the firms avoid paying U.S. taxes on those offshored profits until the profits return to the U.S., if they ever do. Such deferrals will cost the U.S. Treasury $1.3 trillion in taxes over 10 years, EPI reports.
• Income shifting of U.S.-earned profits overseas erodes the U.S. corporate tax base by over $100 billion a year, further lowering the U.S. firms' tax payments here. "U.S. corporations increasingly manipulate transfer pricing and bilateral tax agreements to make their U.S. profits appear to be earned in tax havens," the report says.
• If, after credits for taxes paid abroad, the firms were to pay 25 percent-29 percent in U.S. taxes on offshored and shifted profits, the firms would owe $695 billion to the Treasury.
The report notes President Barack Obama (D) proposed legislation he says would solve the problem, but it wouldn't.
“Obama proposed taxing the current stock of offshore profits at 14 percent -- less foreign taxes paid -- which could give corporations a tax cut of $500 billion on their offshore profits. Republicans propose an even bigger tax break. A 14 percent tax rate would raise just $195 billion. This is $500 billion less than the up to $695 billion they owe. That’s a tax cut of up to 72 percent for the country’s worst tax dodgers,” EPI reports.
