Unfair Advantage: The Business Case Against Tax Havens

Business Against Tax Havens, American Sustainable Business Council, Business for Shared Prosperity and Wealth for the Common Good, July 2010.

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Summary of Key Findings

Over the last two decades, there has been a marked increase in the use of international tax havens for the principal purpose of tax avoidance. Several hundred U.S. multinational banks and corporations utilize tax havens to reduce or eliminate their taxes and shift tax responsibilities onto the backs of domestic businesses and individual taxpayers. Our economy and domestic business sector is undermined when large companies are rewarded for financial manipulation rather than productive investment, innovation and job creation.

Closing Tax Haven Abuses Would Generate Revenue for Small Business and Job Creation.

We conservatively estimate that U.S. multinational corporations are using tax havens to avoid $37 billion in U.S. taxes per year.  This $37 billion could be used to fund initiatives to support America’s small businesses – the nation’s biggest job creators — by increasing their access to capital, increasing their opportunities to invest, and rewarding entrepreneurship through provisions like those found in the Small Business Jobs Act, recently introduced by Senators Max Baucus and Mary Landrieu. The Small Business Jobs Act is projected to cost $12.6 billion over the next ten years. For example:

• We could establish a $30 billion Small Business Lending Fund to provide capital investments to small community banks (those with less than $10 billion in assets) to increase lending to small enterprises.

Multinational corporations are using tax havens and other means to shift their tax burden onto small businesses and individual taxpayers.

Fifty years ago, corporate income taxes accounted for 23.2% of federal government receipts, and individual income tax payments were less than twice those of large corporations’ tax payments. Today, the U.S. Office of Management and Budget estimates corporate tax receipts will account for just 7.2% of federal revenues in 2010,with large corporations contributing less than one-sixth as much as small business and individual taxpayers to the Federal Treasury (small businesses most often pay taxes according to their owner’s individual tax rates). One significant reason for this shift is large corporations’ ability to shift domestic income to offshore subsidiaries in tax havens. For example:

• In 2008, Goldman Sachs, with 29 subsidiaries located in offshore tax havens, reported profits of over $2 billion and paid federal taxes of $14 million, an effective tax rate of just one percent, and less than one third what they paid their CEO Lloyd Blankfein ($42.9 million).
• In 1999, TransOcean, owner of the Deepwater Horizon oil platform that exploded, killed 11 workers, and devastated the Gulf of Mexico, moved its incorporation from the United States first to the Cayman Islands and later to Switzerland, with the stated purpose of lowering its taxes.

Corporate Tax Haven Cheats Use Our Infrastructure on the Cheap.

U.S. multinational corporations count on roads, airports, courts, telecommunications, public education and a whole host of other infrastructure and public services that are paid for by our tax dollars.  It is unfair for them to use this infrastructure for free or heavily discounted – subsidized by the rest of us.

Tax Haven Loopholes Enable an Unlevel Playing Field.

Tax Havens distort the economy by favoring Wall Street and global corporations over Main Street businesses and community banks. Tax havens foster an unlevel playing field that penalizes businesses that responsibly pay their taxes.  For example:

• A community bank that provides financing for local business and community development pays federal taxes yet has to compete against Bank of America or Citigroup, global banks that use tax havens to aggressively reduce their U.S. taxes.
• Local retailers compete against Big Box retailers who can take advantage of subsidiaries in tax havens to reduce their taxes.
• Domestic U.S. insurance companies are forced to compete against global insurance companies that dodge U.S. taxes through subsidiaries in tax havens such as Bermuda. Some respond by incorporating their own subsidiaries in tax havens.

Tax Havens Facilitate a Casino Economy.

Offshore tax havens have enabled Wall Street to evade taxes, freeing more money for speculation and enabling them to take more extreme risks without counting them on their balance sheets. Not only does this promote a culture of risky gambling and fraud, it encourages firms to structure shadowy, complex deals to peddle toxic assets globally, and build up leverage and risk more widely across the global financial system — leading to much more widespread, severe economic crises. For example:

• In 2007, Citigroup had 427 tax haven subsidiaries, Morgan Stanley had 273, Bank of America had 115, the collapsed Lehman Brothers had 57, JP Morgan Chase had 50, Goldman Sachs had 29 and AIG had 18.

Policy Recommendations

We recommend nine different legislative and regulatory actions to level the playing field between domestic businesses and U.S. multinational corporations. The top four are:

• Block All Transfers of Intellectual Property Designed to Evade Taxes (Revenue: $10 billion per year or $100 billion over ten years).
• Ban Phony Offshore Corporations that pretend to earn profits offshore when the primary management team remains in the U.S. (Revenue: Approximately $5 billion per year, $50 billion over ten years).
• Repeal the 80/20 Rule that allows corporations to escape U.S. taxation if 80 percent of their business occurs overseas.
• Create Disincentives and Penalties for U.S. Government Contractors Using Tax Havens to Avoid U.S. Taxes.