The great tax evasion

January 8, 2013

The fiscal cliff deal slightly increases taxes on the super-rich--but as Elizabeth Schulte explains, that's nothing compared to what they've gotten away with in the past 30 years.

TAXING THE rich. That's what Barack Obama and the Democrats promised at stop after stop on the campaign trail last year, and then again starting out the weeks of negotiations over how to avoid the "fiscal cliff" of tax increases and automatic spending cuts on January 1.

But in the end, the Obama administration didn't even stick to the income threshold it set for increasing taxes--$200,000 for individuals--and gave in to twice that amount. The tax rate will go up only for income over $400,000 for individuals and over $450,000 for joint filers.

Maybe Obama was convinced by Mitt Romney when Romney told ABC News' George Stephanopoulos back in September that "middle income is $200,000 to $250,000." Or maybe Obama and the rest of the Democrats are hiding behind the threat of "hostage-taking Republicans" to explain away why they caved in yet again.

All the hue and cry amounted to very little. In addition to the tax increase for those making more than $400,000, there will be a modest increase in estate taxes--though only for people inheriting estates worth more than $5 million--and tax rates on capital gains and dividends.

Protesters stand up to the banks, the corporations and the wealthy in California
Protesters stand up to the banks, the corporations and the wealthy in California

In the end, the fiscal cliff negotiations ended up doing something both Democrats and Republicans can be comfortable with--protecting Corporate America from ever having to make a real sacrifice.

On the other hand, working-class families will endure a significant tax increase--because Democrats didn't lift a finger to fight for an extension of the cut in payroll taxes, passed in 2010. The portion of the payroll tax that funds Social Security will rise from 4.2 percent to 6.2 percent. A worker who earns $50,000 will pay an extra $1,000 in federal taxes in 2013. That's losing about a week's pay.

This spells particularly bad news for low-wage workers, some of whom thought they could look forward to bigger paychecks as the minimum wages in 10 states were set to increase.

A worker making $15,000 a year--which is what many full-time, minimum-wage workers make--will now pay $300 more in payroll taxes. According to the National Employment Law Project, $300 is about the amount of additional earnings that minimum-wage workers would have gained in most of the 10 states that increased their minimums.

In other words, Washington's refusal to extend the payroll tax cut will cancel out the benefits from the increases in minimum wages.

This is obviously not what millions voted for when they overwhelmingly re-elected Barack Obama in November. Extending the payroll tax holiday was a popular demand for many workers. According to a HuffPost/YouGov poll, 52 percent of respondents said the payroll tax cut should be extended, while just 22 percent said that it should be allowed to expire to help reduce the deficit.

Support for extending the payroll tax cut actually crossed partisan lines--64 percent of Democrats and 57 percent of Republicans supported it.

Democrats claimed they had to let the payroll tax holiday expire and accept the compromise on a higher threshold for taxing the rich--greater taxes for the rich in order to keep Republicans from axing important provisions that working-class people need, such as supplemental unemployment insurance for 3 million people and tax credits for low-income working families.

But the fact that Republicans could cynically wheel and deal with the workers' living standards during the fiscal cliff debate speaks volumes about the other party of big business--the Democrats, who also bargained away workers' futures.

THE DEMOCRATS were never committed to any meaningful increase in taxes on the rich--and Corporate America knows it. That's because both the wealthy and the politicians who serve them know the tax laws are written with just their needs in mind.

Everyone knows that even if a tax exists on paper that could threaten to cut into corporate profits, there's a loophole designed so businesses can safely maneuver around it.

In the early part of the 20th century, socialist Eugene Debs described the American justice system as a strange and backward system whose "nets are so adjusted as to catch the minnows and let the whales slip through." The same could be easily said of the American tax system--and the whales are getting fatter with every passing year.

During the last 30 years, vast wealth has flooded up to the top echelons of society. Yet even as the rich have become richer, they have also gotten away with paying disproportionately less in taxes.

In 1961, families with annual incomes of at least $1 million paid on average 43.1 percent of their income in federal income taxes. By 2011, that percentage had fallen to 23.1 percent. As for Corporate America, according to the Institute for Policy Studies, corporations paid on average 47.4 percent of their profits in federal taxes in 1961. In 2011, that fell to 11.1 percent.

When it comes to Washington's obsession with reducing the deficit, every social program--from "entitlements" such as Medicare and Social Security to "discretionary spending" like Head Start and environmental enforcement--is on the table for cuts. But the real cash cows never enter the conversation.

Take, for instance, tax breaks for the profits U.S. companies earn overseas. According to the actual tax code, corporations can defer taxes on foreign income, so they do--some of it indefinitely.

According to a Senate subcommittee investigation released in September, Microsoft saved $6.5 billion over the last three years by booking profits with offshore subsidiaries in Puerto Rico, Ireland, Singapore and Bermuda.

Likewise, between 2007 to 2009, Google avoided paying $3.1 billion in taxes by moving its profits through countries like Ireland and the Netherlands. Lawyers who specialize in this international shell game have given their techniques nicknames such as the "Double Irish" and the "Dutch Sandwich."

In fact, Google works to escape even Ireland's 12.5 percent income tax rate--which is much lower than the official U.S. corporate rate of 35 percent. Google's earnings go to island tax havens where there are no corporate income taxes. This is how Google maintains an effective tax rate of just 2.4 percent.

Companies like Google also rely on transactions called "transfer pricing"--paper transactions among corporate subsidiaries that allow companies to allocate income to tax havens while they attribute expenses to higher-tax countries.

It's estimated that if transfer pricing didn't exist, the U.S. would collect as much as $60 billion more a year in corporate taxes. That's the total amount allocated to relief for the effects of Hurricane Sandy in a bill that was expected to pass last month, until John Boehner decided to postpone it to 2013.

IF CONGRESS is looking for places to save, closing corporate loopholes is the obvious place to start. While the U.S. corporate tax rate of 35 percent may be high, few if any corporations ever pay at this level thanks to the many advantages for business written into the tax code.

According to Citizens for Tax Justice (CTJ), "Congress could raise $583 billion over 10 years by closing the huge loophole in the corporate income tax allowing U.S. corporations to indefinitely 'defer' paying U.S. taxes on profits that they generate offshore or that appear to be generated offshore because of dodgy accounting methods."

As Reuven Avi-Yonah, director of the international tax program at the University of Michigan Law School, told Bloomberg News, "The system is broken, and I think it needs to be scrapped. Companies are getting away with murder."

But instead of thinking of ways to stop the corporate tax evaders from running wild, the discussion in Washington is about how to lure back corporate profits that have gone overseas--with, you guessed it, more tax breaks. Republican lawmakers propose "tax holidays" and lowering corporate tax rates to entice corporate profits back to the U.S.

During the campaign, Republican Paul Ryan--Mitt Romney's running mate--suggested decreasing the corporate rate to 25 percent and installing a "territorial tax system," in which corporations wouldn't be taxed at all for foreign earnings when they return to the U.S.

For its part, the Obama administration, which has in the past opposed such schemes, has recently shown his willingness to reconsider--thanks to support for the idea among some of the administration's big backers in Silicon Valley, like Google and Microsoft.

During a similar tax holiday in 2004-05, some corporations did take up the U.S. government on a 5.25 percent rate, bringing back some $300 billion in profits that were returned from offshore subsidiaries.

And what did the corporations do with the money? Create new jobs? Build new factories? Certainly not. They used the extra money to feather their own nests, pay out dividends and make stock repurchases, among other things. "The repatriations did not increase domestic investment or employment," according to a 2009 congressional report. Instead, "much of the repatriations were returned to shareholders through stock repurchases."

So the problem isn't that taxes are too high for corporations to invest in the U.S. The problem is that the government lets companies off with grand theft tax evasion.

THERE ARE few other countries where the rich are as skilled at avoiding taxes as the United States. According to Organization for Economic Cooperation and Development, the U.S. ranks lower than almost every other industrialized country (except Chile and Mexico) in the amount it collects in taxes as a percentage of its gross domestic product.

Of the 25 OECD nations with tax revenues higher than those of the U.S., 22 have revenues that are at least 25 percent higher, and 15 are at least 50 percent higher.

And rather than acting to redistribute wealth, the numbers show that the U.S. tax system simply mirrors the gross inequality in U.S. society as a whole. In stark contradiction to the conservative myth that the wealthy pay more than their share of taxes, according to CTJ, "the share of total taxes paid by each income group is very similar to the share of total income received by each group."

So, for instance, the share of total taxes (including federal, state and local taxes) paid by the top 1 percent of the population in 2010 was 21.5 percent--about the same share of total income received by this group, which was 20.3 percent.

According to the CTJ, the total effective tax rate for the richest 1 percent (30 percent) is only about 5 percentage points higher than the total effective tax rate for the middle one-fifth of earners (25.1 percent).

And when you're a wealthy corporation, you can avoid paying taxes altogether.

A 2011 study of 280 of America's most profitable companies found that 30 paid absolutely no federal corporate income taxes from 2008 through 2010. According to the report, 78 companies paid no federal income tax in at least one of the last three years.

Most of these lucky and well-connected corporations--many of them on the Fortune 500 list--continued to make profits over these three years, even while they dodged taxes. The distinguished list included Boeing, Wells Fargo, General Electric and Verizon.

The report also showed that the average effective tax rate over the three-year period for those 280 companies was around half--18.5 percent--the official U.S. corporate income tax rate of 35 percent.

The money is there--all the Obama administration has to do is collect it. Eliminating corporate tax loopholes and making corporations pay the money they owe would go a long way toward paying for the social programs that working-class people need and deserve.

Programs like Social Security, Medicare and unemployment benefits don't need to be on the chopping block--as Congress has guaranteed they will soon be once again--when rich corporations and individuals are hoarding away what is rightfully the people's money. The money should go to creating the services and infrastructure that people need. It's time to start making Corporate America pay for a change.

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