Nothing is Certain but Death: Closing Corporate Tax Loopholes

The United States public has been hearing about tax inversions in which a domestic corporation officially moves its headquarters to another nation where tax rates are lower or can be more easily sheltered. The inversion usually does not usually result in a mass exodus of suppliers, employees, markets, or other important factors but is done primarily to avoid what has become a high corporate tax rate by international standards. Some of the moves have been quite cynical, starting in the late 1990s when Fruit of the Loom packed its legal undergarments off to the Cayman Islands although it still generates millions of dollars in sales from American consumers. 2014 has seen companies like Medtronic, a Fortune ‘500’ manufacturer of medical devices, and, inexplicably, Chiquita, attempt to move to low tax Ireland. Google and Apple have been using loopholes in Ireland to avoid the American taxman for longer periods of time. Most recently Burger King has entered into a merger with the Canadian doughnut shop chain Tim Horton’s, but will retain its American home office in Miami.

Tax avoidance schemes have been around as long as companies have been able to utilize shrewd accountants working with ineffectively written codes. In some ways the emigration of U.S. companies to foreign soil is merely a larger and modern version of past domestic attempts to avoid state taxes by incorporating in lower tax states like Delaware and Nevada. The incorporation process in those days often involved setting up a non-descript office, or even post office box, while a corporation’s research, sales, manufacturing, and so on remained elsewhere.
Clearly, when corporations seek to avoid taxes, or avail themselves of as many loopholes as the code appears to allow, the common good can be hurt since the government loses revenue that can be put to service for the public interest. It would be a little simplistic, however, to say that organizations are becoming deadbeats for purely selfish or even unpatriotic reasons. Of the 34 members of the international Organization for Economic Co-operation and Development (OECD) the U.S. has the highest corporate tax rate at 35%. [1] Additionally, the U.S. is unique among elite economies by taxing all of the income companies make around the world, whereas other countries tax only revenue earned within their own borders. Larger companies, particularly ones with multinational operations, are being taxed twice – first by the nation in which they earned the money, and then, when they bring the profits back to the United States. The attitude some companies have taken appears to be that if they are going to be taxed on overseas sales then relocating their home offices elsewhere at least saves them from paying the higher domestic tax rate.

The outcry in the United States led by the Barack Obama administration and Treasury secretary Jack Lew over the notable tax avoidance by giants like Google and Apple with legal operations in Ireland and elsewhere has made European politicians uncomfortable as they have not wanted to appear to be weak on cheaters. The British journal The Observer quoted the United Kingdom’s Chancellor of the Exchequer (Lew’s counterpart) George Osborne to say “(s)ome of the biggest technology companies in the world…go to extraordinary lengths to pay little or no tax here…we will put a stop to it.” [2]  The Observer notes that the effective tax rate Google and Apple had last year was 15.7% and 26.2% “way below the…corporation tax in most of the markets where search engine adverts and iPhones are developed, marketed or sold.” Google and Apple may be some of the most egregious offenders, especially in lieu of the fact that they each trade on a reputation as progressive, forward-thinking organizations. But as Citizens for Tax Justice put it in a recent report, approximately 30 Fortune ‘500’ corporations alone may be sheltering $1.2 trillion dollars overseas. [3]
The fact is, as long as there are different tax rates, companies will continue to look for the lowest foreign rates they can legally procure. The G20 forum (comprised of the world’s largest economies and their central banks) may develop part of an international solution to the problem of countries competing against each other in this manner by collaborating on an equitable and acceptable framework that would equalize rates and, hopefully, thereby lessen evasion. [4]  Some business-friendly politicians and commentators have called for the U.S. to drop its corporate tax rate to a much lower level than the current 35% so that companies would have less incentive to “emigrate,” and also be more profitable in the long run. A lower rate might indeed achieve those outcomes, but the question would become whether corporations were paying a fair share in relation to their revenues. When corporations (or individuals for that matter) avoid taxes there is an obvious blow to the commonweal of society. The government may become (more) indebted to try to maintain services to the public with less revenue. Smaller companies that don’t transact business overseas, or have the accounting chutzpah to shelter taxes, may pay more than their fair share. President Obama has proposed dropping the corporate tax rate to 28% but keeping the current system in which foreign-earned profits are still taxed. The opposition Republican Party plan, proposed by Congressman Dave Camp of Michigan, would cut the tax to 25% (the OECD nation average) and end the “double taxation.” [5] The Economist notes that these plans seem close enough to be within reach of compromise, but the two major parties tie other political plans into their proposals. Obama would like to see the revenues gained from a lowered tax put to use on national infrastructure projects, whereas the GOP would prefer the savings to go towards cutting personal taxes.  Furthermore, the Democratic Party has proposed tightening one loophole that companies have taken advantage of to allow tax inversions in the first place. The current tax code permits a corporation to shift ownership to a foreign location so long as the overseas operation controls 20% of the entire stock. The new proposal is to more than double that requirement to 50%, which would give many multinationals pause since the “relocation” would require a more intentional uprooting of a company’s equity stake than just an accounting sleight of hand. [6]
The highly partisan nature of Washington politics today may make these proposals difficult to be adopted. There are other loopholes in the current corporate tax code, however, which are worth taking a look at. CNN Money points out that the corporate tax code is riddled with ambiguities that corporations take advantage of, or have outcomes legislators never intended. The domestic manufacturing deduction is so elastic that many companies use it to the tune of $80 billion over 5 years so that certain “expenses” can be deducted. [7] Re-writing this legislation is key to prevent the film production companies, fast–food restaurants and others from identifying as manufacturers, as well as defining what types of expenses can legitimately be deducted. Apple and some of the other multinationals are also able to get away with profit-shifting, in which the company can direct or share research and development with one of its foreign offices or subsidiaries and then is given an allowance of the profits, even if the lion’s portion of the work was done in the United States. It thereby appears to the taxman that the company is less profitable than it is in reality. [8]  The U.S. also allows a variety of industry-specific tax breaks that may help with foreign competition on the one hand, but might also favor pet projects in a particular district.

Large companies have advantages over their smaller counterparts when it comes to tax avoidance and sheltering. Small Business Majority, an advocacy organization, outlines ending tax loopholes and the offshoring of company headquarters in its tax policy portion of its agenda. [9] The SBM also points out that 99% of domestic firms are small businesses, employ half of the private employment sector, and are responsible for 40% of private payroll. If “Main Street” can be convinced that Washington is favoring the interests of “Wall Street” instead of providing a fair environment for all, there may be an important political constituency to push for closing loopholes. Indeed, a poll of SBM members found 90% believed that big corporate interests use tactics to avoid taxes that small businesses will have to pay. [10]  Business Insider, the popular market and technology website, catalogs what it calls the “10 Giant Loopholes” and the costs in revenue to public coffers over a five year period. Below is a quick gist of the beneficiaries of these ill-advised and inadequate loopholes. Full synopses of these can be found here:

“Inventory Property Sales”: $16.7 billion (favors multinational companies manipulating sales in high-tax foreign countries)

“Graduated Corporate Income”:  $16.4 billion (favors the owners of a corporation)

“Exclusion of Interest on State and Local Bonds”: $59.8 billion (favors wealthy investors and large corporations)

“Research and Experimentation Tax Credit”: $29.8 billion (referred to above) (favors multinational pharmaceutical, agri-businesses, high-tech companies, and others)

“Deferred Taxes for Financial Firms on Certain Income Earned Overseas”: $29.9 billion (favors financial services companies with operations in foreign countries)

“Alcohol Fuel Credit”: $32 billion (favors food processors and agri-conglomerates in the Midwest)

“Credit for Low-Income Housing Investments”: $34.5 billion (favors real estate developers)

“Accelerated Depreciation of Machinery and Equipment”: $51.7 billion (favors airlines and heavy industries using large machinery)

“Deduction for Domestic Manufacturing”: $58 billion (referred to above) (favors any company who produces a product in the U.S.)

“Deferral of Income from Controlled Foreign Corporations”: $172.1 billion (The granddaddy of all loopholes. This one favors any multinational company who opts to defer bringing profits earned overseas back to the U.S.)

One novel approach to corporate tax loopholes is to simply eliminate corporate taxes. Former U.S. Secretary of Labor Robert Reich has suggested ending corporate taxes and increasing taxes on capital gains. Eliminating the corporate tax would do away with the need for accounting chicanery, since there would be no incentive to shelter revenues. An important consideration in this connection is that the shareholders of these corporations benefit when their company turns a profit, but, under the current code, are often shielded from at least some of the burden of paying the tax on that gain. In fact, Reich points out, costs are usually deflected away from the investors to employees (when their wages could otherwise be higher) or customers (who may have to pay higher prices) to insure profitability. [11] The possible outcome of this sort of scenario is that the shareholders will need to pay income tax at the same rate as others, or perhaps more, if the capital gains tax is raised. If the investors don’t want to expose themselves to added taxation, then they can keep more of the money in the venture, perhaps even in the form of additional hiring, pay raises for employees, or investing in new research, supplies, or other opportunities in which there would be a net benefit to the overall economy.  It also means that small businesses will not be at a competitive disadvantage.

The public, as well as the business community, believes that tax avoidance has gone too far. A recent CNBC poll determined that 70% of Americans agreed that corporations should pay their “fair share” of taxes. The poll also reported that two-thirds (67%) of business executives agreed. Those polled were also aware of the fact that loopholes made avoidance easier. Sixty-two percent of the general population and more than half of the businessmen (56%) agreed that the elasticity of the tax code allowed companies to take advantage of loopholes to avoid paying their fair share. [12]  
Catholic social teaching holds that paying taxes is part of the responsibility of all to uphold the common good. In Mater Et Magistra Pope Saint John XXIII wrote that “as regards taxation, assessment according to the ability to pay is fundamental to a just and equitable system.” [13] Similarly, Pope Saint John Paul II, in reference to the compiling of private wealth, said that there must be a “social mortgage” paid on it. In Laborem Exercens he elaborated: “The right to private property is subordinated to the right to common use, to the fact that goods are meant for everyone.” [14]
Catholics and other citizens of faith should advocate the closing of the loopholes that have made it too easy for the companies, and shareholders that are the legal owners of large firms, to shelter wealth and avoid their responsibility to the rest of the society that has helped them become prosperous.

Kirk G. Morrison 

Kirk Morrison is chairman of the National Committee of the American Solidarity Party.