Picking Up the Tab

Executive Summary

Some U.S.-based multinational firms or individuals avoid paying U.S. taxes by transferring their earnings to tax haven countries with minimal or no taxes. These tax haven users benefit from their access to America’s markets, workforce, infrastructure and security; but they pay little or nothing for it—violating the basic fairness of the tax system and forcing other taxpayers to pick up the tab.

Even when tax haven abusers act perfectly legally, they force other Americans to shoulder the burden in a variety of ways. The taxes they don’t pay must be balanced by other Americans paying higher taxes, coping with cuts to public spending priorities, or increasing the federal debt. 

Congressional studies conclude tax haven abuse costs the United States approximately $100 billion in tax revenues every year. Multinational corporations account for $60 billion and individuals the rest.

• If ordinary tax filers were to pick up the full $100 billion tab in the form of higher taxes, they would need to pay an additional $426 on average. That’s enough money to feed a family of four for three weeks.
• The states where taxpayers pick up the largest share of the tab are Delaware and Minnesota. On average, tax filers in those states would pay an additional $1,317 and $774, respectively.
• Based on the $60 billion multinational corporations avoided in taxes, small business in the United States would need to pay an average of $2,116 each in additional taxes. Small businesses can be hit particularly hard by the effects of tax havens because they are generally unable to use these tax schemes and are put at a competitive disadvantage.
• If the $60 billion burden from multinational companies using tax havens were shouldered entirely by small businesses, each state’s small businesses would have to chip in hundreds of millions or even billions of dollars more. The largest total sums would be shouldered by small businesses in California ($7.1 billion), New York ($5.2 billion), Texas ($4.9 billion), Illinois ($3.0 billion), Ohio ($3.0 billion) and New Jersey ($2.9 billion).
• Because some local counties have more small businesses than others, the tab from multinational corporations’ use of tax havens is not felt evenly throughout each state. The following five counties face the greatest extra burden: Los Angeles County, California ($2.1 billion); Cook County, Illinois ( $1. 4 billion); Harris County, Texas ($870 million); New York County, New York ( $790 million); Kings County, New York ($680 million).

Some of America’s biggest companies use tax havens, including many who have taken advantage of government bailouts or rely on government contracts. As of 2008, the most recent data available, 83 of the 100 largest publicly traded U.S. corporations maintained revenues in offshore tax haven countries.

• Wells Fargo avoided paying nearly $18 billion in federal income tax from 2008-10, in part by using 58 subsidiaries in offshore tax havens. During that same time period, the company reported about $49 billion in profit to shareholders. Even with those profits and tax subsidies, at the end of that period Wells Fargo still hadn’t repaid some $5 billion in bailout money.
• eBay received a tax refund of $131 million in 2010, despite reporting pre-tax profits of $848 million to their shareholders and paying its CEO $12.4 million. eBay’s tax avoidance strategies include 31 subsidiaries in 9 tax havens.
• Prudential Financial received a federal income tax refund of $722 million in 2010, despite reporting $2.4 billion in profits that year. Prudential uses 36 tax haven subsidiaries to help achieve that feat.

To restore fairness to the tax system by preventing corporations and wealthy individuals from avoiding taxes through the use of tax havens, policymakers should:

• End the ability of U.S. multinational corporations to indefinitely defer paying U.S. tax on the profits they attribute to their foreign entities. Instead, they should pay U.S. taxes on them immediately. “Double taxation” is not an issue because the companies already get a credit against their U.S. taxes for the foreign taxes they pay on these profits.
• Reject a “territorial” tax system. Tax haven abuse would be worse under a system in which companies could temporarily shift profits to tax haven countries, pay minimal tax under those countries’ tax laws and then freely bring them back to the United States without paying any U.S. tax.
• Require full and honest reporting to expose tax haven abuse. First, end the ability of multi-national corporations to avoid taxes by hiding the identity of their owners and the origins of their profits behind layers of shell companies. Second, require multinational corporations to report how they attribute their profits to other countries so they can’t mislead each nation about how much of the income was taxed in the other countries.
• Eliminate the incentive for U.S. companies to transfer intellectual property (e.g. patents, trademarks) to shell companies in tax haven countries for artificially low prices and then pay inflated royalties to use them in the United States. This manipulation masks what would otherwise be U.S. taxable income and can be addressed by implementing stricter transfer pricing rules with regard to intellectual property.
• Stop the ability of multinational companies to manipulate how they define their corporate status to minimize their taxes. Right now, companies can make inconsistent claims to maximize their tax advantage, telling one country they are one type of corpo rate entity while telling another country the same entity is something else entirely.
• Close the credit default swap loophole by treating swap payments made from the United States to offshore entities as taxable U.S. income.
• Treat the profits of publicly traded “foreign” corporations that are managed and controlled in the United States as domestic corporations for income tax purposes.
• Close the current loophole that allows U.S. companies that shift income to foreign subsidiaries to place that money in American financial institutions without it being considered repatriated, and thus taxable. This “foreign” U.S. income should be taxed when the money is deposited in U.S. financial institutions.
• Give the Treasury Department the enforcement power it needs to stop tax haven countries and their financial institutions from impeding U.S. tax enforcement.
• Stop companies from taking bigger tax credits than they are entitled to for the taxes they pay to foreign countries. Congress can stop companies from double counting some of their foreign taxes simply by requiring companies to report full information on foreign tax credits on a pooled basis.
• Fully implement the Foreign Account Tax Compliance Act (FATCA), which was adopted by Congress in March 2010. FATCA has been stalled by financial institutions in an extraordinarily protracted stakeholder process.