Tax Havens and Other Pursuits

A few weeks ago, in Getting to the Top Line, I wrote about the ways corporations and the wealthy have of not even getting their gross income reported to IRS, much less having it taxed.  That means that the tax rates argued about so pyrotechnically are not even all that significant to those capable of keeping income off of the Adjusted Gross Income line; if they pay 20 percent of one-tenth of their actual gross, it looks good from a public relations point of view, but is actually trivial.  An article by Larry Summers, former Treasury Secretary and President of Harvard, was the source of some general information I used.  Now Senator Bernie Sanders of Vermont has come forward with some even more revealing specifics.

Sanders reports that “In 2010, Bank of America set up more than 200 subsidiaries in the Cayman Islands (which has a corporate tax rate of 0.0 percent) to avoid paying U.S. taxes. It worked. Not only did Bank of America pay nothing in federal income taxes, but it received a rebate from the IRS worth $1.9 billion that year. They are not alone. In 2010, JP Morgan Chase operated 83 subsidiaries incorporated in offshore tax havens to avoid paying some $4.9 billion in U.S. taxes. That same year Goldman Sachs operated 39 subsidiaries in offshore tax havens to avoid an estimated $3.3 billion in U.S. taxes. Citigroup has paid no federal income taxes for the last four years after receiving a total of $2.5 trillion in financial assistance from the Federal Reserve during the financial bailout.”  Sanders goes on to note, “Pharmaceutical companies like Eli Lilly and Pfizer have fought to make it illegal for the American people to buy cheaper prescription drugs from Canada and Europe. But, during tax season, Eli Lilly and Pfizer shift drug patents and profits to the Netherlands and other offshore tax havens to avoid paying U.S. taxes. “  In short, Sanders concludes, corporations and wealthy individuals avoid over 100 billion dollars annually in U.S. taxes by shifting income to tax havens abroad through use of “shell corporations.” He further states that at the same time taxes are avoided by shifting income to tax havens, the same corporations have shipped 56,000 jobs abroad and closed 2000 American factories.  Recall that Larry Summers also wrote of the large role in tax avoidance played by trusts, multi-million dollar insurance policies, gifts, like-kind exchanges, etc.  Summers notes that only one billion in taxes is realized from the transfer of 1.2 trillion by inheritance each year.  That’s a less than one-tenth of one percent effective tax rate for the “death tax” everyone worries about. 

The net result on the tax side is that federal tax revenue only accounted for 14.8 percent of GDP in 2011, the lowest rate since 1950, and the effective corporate tax rate was 1.8 percent.  Compare that with “socialized” Britain, whose corporate tax rate was 3.6 percent.  In 1945, the last year of another global war, the effective U.S. federal rate was about 21 percent.  Yet taxes have gone down while we fought major wars in Iraq and Afghanistan. The deficit works out to about 10 percent of GDP, while we have reduced the effective tax rate by about 6 percent from its 1945 level.  A billion here, a billion there, and its beginning to add up to a number approaching the federal deficit. 

But the same people worrying so hard about the deficit, death taxes, etc., are expressing grave concern about raising the minimum wage to a point that would put income for a full-time working individual above the poverty level.  All this, while there seems to be a growing arms race on size of yachts, with the latest winner boasting a $1.5 billion yacht that’s the largest in the world.  And GDP data indicates that all growth in GDP goes to those with in the top ten percent, with income for the other 90 percent staying flat.  The picture that’s emerging of the top ten percent is not flattering.

Senator Sanders is sponsoring legislation aimed at reducing the tax avoidance problem, the Corporate Tax Dodging Prevention Act (S.250).  It’s a step forward, and deserves support.  But of course, it covers only part of the problem.  Many other loopholes will remain.  The top line will remain the line that counts.  President Obama, in the State of the Union Address, reminded us that we are all citizens with a share in governing.  We need to stay aware and informed of the big picture of governing, and let our voices be heard at home and in D.C.  Washington is where reform occurs, but those who decide in D.C. are elected locally.