Reining in Corporate Tax Evasion

The most innovative part about this age-old problem is the ever-changing vocabulary that has been created to describe it. Tax evasion has become tax “avoidance.” The latest cause célèbre is tax “inversion.”

Unfortunately, “enhancing” the English vocabulary in such nebulous ways with new terms is about the only thing that is going on with regard to tax reform in the Untied States.

True, at 35% of profit, the United States has one of the highest nominal corporate tax rates in world. But don’t be confused by that statement.

As a report published by the non-partisan Government Accounting Office (GAO) found in May 2013, lawyers and accountants employed and retained by all those profitable U.S. corporations made sure that their clients paid U.S. federal income taxes amounting to no more than about 13% of their pretax worldwide income in 2010 (latest data available).

What’s worse, the Citizens for Tax Justice reported that 26 major U.S. corporations paid no net federal corporate tax at all between 2008 and 2011.

Astonishingly, these companies made more money after taxes than before taxes. Savor the prominent names among them: Boeing, Verizon, Mattel and Duke Energy.

All these fine companies consider themselves icons of the American business firmament. Their patriotic garb notwithstanding, they are relentless in their intent and action to undermine American society and its future prospects by engaging in their favorite sport — ruthlessly gaming the tax system.

Lack of will

So let’s get real: The only reason why U.S. corporations can evade and avoid fair taxation is our collective lack of political will. Perversely, Democrats and Republicans alike in the U.S. Congress – supposedly the representatives of the “people” — are actively aiding and abetting that process.

Why? Because owing to the dysfunctions of the U.S. political system, they are critically dependent on donations from corporate America.

In the process, other than in terms of (false) rhetoric, they have sold out the original promise underpinning of the American Dream — fairness and equality — to the narrow interests of their donors.

What could be done if we had a functioning political system that was truly established to serve the legitimate interests of the American people, rather than just pretending to do so?

Simple solutions

It’s really quite simple. First, mergers and acquisitions should not allow U.S. corporations to become corporations of more “tax-friendly” jurisdictions (a process now referred to as tax inversion). They should be taxed in the United States, provided they continue to be managed here and maintain business in the U.S.

You see, it is matter of law how we define “headquartered” or “subject to U.S. taxes,” not some God-given classification.

Second, the United States should tax all foreign income of U.S. companies – just as it is actually done to all U.S. citizens who work outside the United States. A series of bilateral tax treaties would make sure that any unfairness (in the form of double taxation) is avoided. Such treaties exist with regard to U.S. citizens working abroad.

Third, tax havens should be shut down permanently. It is as tiring as it is misleading to hear the whining from policymakers about the existence of tax havens and how they destroy the tax culture of corporations. In fact, it is totally within our own control to render these perverse structures useless.

Tax terrorism

When it comes to terrorist financing, the U.S. government has proven quite capable of monitoring and freezing all financial flows to and from so-called “sanction countries” through the Office of Foreign Assets Control (OFAC).

The only reform that is required is a straightforward step: Just add all tax havens to the so-called OFAC list. This one measure makes U.S. corporations instantly criminally liable, should they choose to invest or place their assets there. That will surely get their attention – and, likely, ensure compliance.

Fourth, once tax revenues owed to the U.S. government have been successfully repatriated, then the politicians in the U.S. Congress can look at the country’s corporate tax code.

A roadmap to prosperity

As it stands, small and medium size enterprises (SMEs) were the only ones who really bore the brunt of the United States’ high corporate tax rates because they lack the means of evasion, avoidance or inversion.

Here again, the solutions are straightforward. One could either create a progressive corporate tax code, one that doesn’t effectively exempt large corporations or reduce the current rate to somewhere around 15%, without losing a dime of revenues.

How might this all end? Lower tax rates would help SMEs to become more profitable allowing them to create jobs. But guess what: The United States might even become an attractive destination to foreign companies because of new and low marginal tax rates.

So, Republicans and Democrats: You want to create jobs, improve inequality and set us up on a course for sustainable growth? Here is a roadmap. Now get on with it.