How Corporations Use Offshore Havens to Avoid Paying Their Taxes

Current laws in the United States allow corporations to use offshore havens to avoid paying their taxes and, if it's up to many in Washington, the problem will only grow larger, particularly if the so-called "territorial" tax system is passed. The details of the use of such tax havens were discussed in a conference call with Campaign for America's Future (CAF), Americans for Tax Fairness (ATF) and Citizens for Tax Justice (CTJ).

Current tax laws encourage the offshoring of America's jobs, manufacturing and profit centers, which has led to the hollowing out of the middle class, manufacturing and much of the country, according to Dave Johnson of CAF. Changes in the tax code in recent decades have led to a series of dangerous statistics for America's working families:

  • Corporate tax revenues as a share of GDP are at near historically low levels.
  • In 2009, the U.S. share of GDP made up of corporate tax revenues was only 1.7%.
  • The top corporate tax rate in 1970 was 52.8%, now it is 35% (although the effective rate is much lower).
  • The United States has the third-lowest effective corporate tax burden in the world.
  • Corporate taxation as a share of total tax revenue was 26.4% in 1950 and was down to 7.4% in 2010.
  • Personal income, Social Security and Medicare taxes were 51.4% of total tax revenue in 1950, now they are up to 83.4%.

Congress is now proposing lowering corporate taxes even more and even, possibly, eliminating taxes on earnings reported as having been earned outside the country.

ATF has been working to highlight the massive corporate tax loopholes big corporations exploit, says the organization's campaign manager, Frank Clemente. Those loopholes allow some corporations, such as General Electric—who had an effective corporate tax rate of 12% in 2011—to pay less in taxes than individuals. There are currently $1.6 trillion in corporate revenues waiting offshore. The corporations who own those revenues want Congress to pass a new tax holiday (previous holidays taxed those profits at only 5%, instead of the standard corporate tax rate) or a territorial tax system, wherein U.S. corporations would pay no taxes on foreign profits. Clemente says that would create an incentive for corporations to ship more and more revenues overseas, as well as shipping manufacturing, patents and jobs to countries with no corporate taxes.

CTJ works to give ordinary people a greater voice in the development of tax laws. It focuses on exposing corporations that pay little or no taxes. CTJ argued that the tax code needs to be reformed, but in a way that ends incentives to shift profits and jobs offshore. Currently, corporations have heavy incentives to disguise U.S. profits as offshore profits to avoid paying taxes.

An example of this problem is a report from the Congressional Research Service that found in 2008 that American multinational corporations reported earning 43% of their $940 billion in foreign profits in five tiny tax-haven countries that house only 4% of their foreign workforce and 7% of their foreign investments.

The three organizations say they have three basic policies they favor to deal with tax havens and the offshoring of America's profits and jobs.

  1. Rejecting revenue-neutral tax plans that close loopholes and lower statutory tax rates. Instead they favor revenue-positive tax proposals that would increase government revenue.
  2. Closing tax loopholes that encourage the offshoring of profits, and making sure foreign profits for U.S. corporations are taxed at the same rate as domestic profits. One example of legislation that would accomplish this is a bill by Sen. Bernie Sanders (I-Vt,), the Corporate Tax Fairness Act, that would require corporations to pay the same tax rate on domestic or foreign profits and would raise $590 billion over 10 years.
  3. Rejecting the territorial tax system, which they call "tax havens on steroids."