Obama's Tax Haven Reform Amounts to Chump Change

By Charlie Cray, CorpWatch. Posted June 17, 2009.

Framing the Corporate Tax Debate

In 2008 some 15,000 registered lobbyists spent more than $3.25 billion influencing the U.S. Congress. Corporations were represented by many of most wealthy and powerful among them.

The sheer power of the multinational corporate lobbyist is one reason why the corporate tax debate has been distorted for decades. For instance, the standard gripe among corporate lobbyists and their allies—that U.S. corporations pay the highest taxes in the developed world—is a canard that regularly goes by unchallenged in congressional committee rooms and the many quasi-academic roundtables where corporate tax policies are discussed. 

In fact, while the statutory corporate tax rate is 35 percent, most corporations are effectively taxed at much lower rates because of the many loopholes and exemptions their lobbyists have carved into the tax code. Corporate lawyers, accountants, bankers and consultants have created an entire financial engineering and tax planning industry around specific provisions of the corporate tax code, such as transfer pricing.

For example, the Big Four accounting firm Ernst & Young alone has more than 900 partners in its offices around the world working on this scheme by which corporations use intra-firm transactions to reduce their profits in high-tax jurisdictions. Experts estimate that transfer pricing alone costs the government at least $50 billion in lost revenues each year.

The result is that, while the statutory rate may be 35 percent, in 2004 (the most recent year for which data was available) large corporations paid an effective rate of only 25.2 percent on domestic income, according to the General Accounting Office (GAO). Moreover, most large multinationals pay far less. In January, the GAO reported that U.S. multinationals paid just $16 billion in U.S. taxes on $700 billion of foreign active earnings in 2004—an effective U.S. tax rate of just 2.4 percent.

The question of whether corporations are paying their fair share cannot be answered simply by examining statutory or effective rates of taxation. Any calculation must also consider the other side of the ledger: the various benefits, contracts, foreign assistance, loans and other forms of corporate welfare that corporations receive from governments—that is, taxpayers—not to mention extraordinary disbursements such as the recent banking, auto industry and other corporate bail-outs. (Neither the Bush administration nor the Obama administration required public disclosure of the companies’ books – including their offshore subsidiaries—as a condition of the bail-out.)

In fact, as measured by the OECD, the United States collects less in corporate taxes as a percentage of GDP than most other industrialized countries, despite claims to the contrary. In 2007 (the most recent year for which the Congressional Budget Office has data), corporate income taxes totaled $370 billion—or 2.7 percent of GDP. The Congressional Budget Office projects that, “as a result of a projected decline in taxable profits as a share of the economy, corporate receipts relative to GDP [will] weaken steadily … reaching 1.7 percent of the economy in 2017 and 2018.”

One of the key ways multinationals achieve this low tax rate is by operating many “brass plate” subsidiaries (i.e., paper-only companies with no real physical operations) in one of dozens of offshore tax haven and bank secrecy jurisdictions. The GAO reported in January that 42 of the 100 largest U.S. corporations structure their operations to make use of subsidiaries located in at least ten different tax havens. Certain locations are especially popular, including the Cayman Islands, where the GAO discovered 18,000 corporate subsidiaries at one address.

There are clear links between the large numbers of tax haven subsidiaries and the decline in corporate taxes, says Martin Sullivan, a tax economist and author of  “Multinational Corporations, Individual Tax Evasion & Offshore Tax Havens” (2008). Multinationals have lowered their foreign taxes further than other large companies by shifting foreign source income from places where they have real investments to low-tax jurisdictions.  “The lion’s share of income shifting is tax-motivated,” says Sullivan, who adds that multinationals’ increased use of offshore tax havens threatens to push the entire U.S. corporate tax system toward “breakdown.”

Without a major course correction and bold new initiatives, Sullivan and others say, it may not be long before corporations effectively pay no taxes at all. That outcome would be consistent with the accelerated rates of globalization and concurrent declines in the rate of corporate taxation. According to the Center for Budget and Policy Priorities, the 25 percent effective rate of corporate taxation in 2004 is down significantly from the 33 percent average rate that corporations paid in the 1970s, the 38 percent they paid in the 1960s, and the 49 percent they paid in the 1950s.

Real Change, Not Chump Change

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Charlie Cray is director of the Center for Corporate Policy in Washington, DC.

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