Our Most Corrupt Tax Breaks: 10 Loopholes to Close Right Now

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Illustration by Justin Renteria


A year ago Citizens for Tax Justice, a Washington, D.C., nonprofit, studied the tax returns of 280 corporations. What it found was a Beltway version of a Mafia protection scheme.

From 2008 to 2010, at least 30 Fortune 500 companies — including PepsiCo, Verizon, Wells Fargo, and DuPont — paid more for lobbyists than they did in taxes. They collectively spent $476 million sucking up to Congress, buying protection for tax breaks, loopholes, and special subsidies.

Sheryl Crow benefited to the tune of $2 million on a loophole put in place by Tennessee, Kentucky, and Texas lawmakers.
Kevin W. Burkett/Creative Commons
Sheryl Crow benefited to the tune of $2 million on a loophole put in place by Tennessee, Kentucky, and Texas lawmakers.
Facebook founder Mark Zuckerberg took advantage of a multi-billion-dollar tax scam during his company’s IPO.
Guillaume Paumier/Creative Commons
Facebook founder Mark Zuckerberg took advantage of a multi-billion-dollar tax scam during his company’s IPO.

It didn't matter that these same 30 firms brought home a staggering $164 billion in profit during that three-year period. They not only managed to avoid paying taxes; they actually received $10.6 billion in rebates.

Welcome to the U.S. tax code, where companies like General Electric and Boeing contribute less to the federal treasury than a retired machinist living in Florida.

Defenders of the system argue that most deductions don't go to large corporations. That's true. By pure dollars, the lion's share go for mortgage interest, employer-paid health insurance, retirement plans, and Medicare benefits.

The difference is these tend to benefit everyone. They're designed for the greater good, reinforcing the pillars of self-determination: home ownership, savings, and healthcare.

But there's another part of the tax code where 99 percent of America is barred from entry. It's where Congress sells loopholes and subsidies to those who can pay. They not only screw the rest of the country — which is forced to cover the tab — but turn the notion of a free market into a joke.

Even for companies within the same industry, the disparities are alarming. From 2008 to 2010, UPS paid a tax rate of 24 percent. Rival FedEx paid less than 1 percent.

Monsanto managed to pay 22 percent — well below the supposed corporate rate of 35 percent. But that's nothing compared to DuPont, which received a $72 million rebate despite profits of $2.1 billion.

This sleight-of-hand even extends to retail. While Nordstrom paid 37 percent in taxes, Macy's rate is just 12.

You don't need a Wharton MBA to see how damaging this is to the nation's financial health. Big companies are given incentive to load up on lobbyists, accountants, and lawyers, rather than use that money to improve products and services. And while small businesses may collectively be our largest and stablest employer, we've rigged the game against them, since they can't afford to buy legislators of their own.

"The tax code is a mess," says Rep. Chris Van Hollen (D-Md.). "I support tax reform, but not reform that's simply a Trojan horse for giving another round of windfall tax breaks to the very wealthy."

And that's the problem. President Obama and Democrats have railed for years against this brand of favoritism, only to cave in at the first whiff of resistance.

Republicans are worse, prattling on about free markets while protecting just about any market-distorting loophole if the money's right. Mitt Romney, the poster child for off-shore tax schemes during his time at Bain Capital, claims he has a plan to close loopholes. He just refuses to say how he'll do it.

But if you're not being bought with weekend golf retreats at Augusta National, it's easy to find giveaways we all can agree the must end. Introducing the 10 most corrupt breaks, designed to do nothing but pervert America's economic strength:


10. I'm Irish. No, really.

Apple Inc. may have made Silicon Valley famous, but it prefers to let someone else pick up the check for Northern California's freeways, bridges and airports.

How? By pretending to be Irish.

In the late 1980s, Apple decided that Ireland's 12.5 percent corporate tax rate was a much comelier figure than America's 35. But Steve Jobs didn't want to move to Dublin. Fortunately, Congress allowed him to fake it.

Apple created an Irish subsidiary. Then, with a flourish of paperwork, it transferred its most valuable assets — its patents — to Ireland, forcing its U.S. headquarters to pay leasing fees for its own inventions.

Nothing had actually changed in the way the company operated. Apple simply had new paperwork saying it was partial to warm beer and fiddles, allowing it to dodge a substantial part of its U.S. tax bill.

But that wasn't the end of the scam. The Irish subsidiary is partially owned by another company, Baldwin Holdings, which doesn't even publicly list an office address or a phone number. But it does have paperwork saying it's headquartered in the Virgin Islands, where it can stockpile its income tax-free, outside the reach of the IRS.

Most people associate such exhaustive money-laundering with drug cartels. But it's now standard practice at firms like Eli Lilly, Google, Microsoft, Pfizer, and Facebook. The only difference is that when drug dealers do it, the government shows up with Kevlar and automatic weapons instead of a refund check.

Congress, meanwhile, is paid to look the other way, leaving the federal treasury defenseless against the machinations of our most prominent citizens.

"The original sin is that we treat a wholly-owned subsidiary in the Cayman Islands as if it was an arm's length separate entity," says Dr. Calvin Johnson, a tax expert at the University of Texas Law School. "A pocket transfer from the U.S. to the Cayman Islands is like a transfer from your left pocket to your right. Any system that treats a Cayman Island subsidiary as if it is a separate entity is just asking to be destroyed."

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22 comments
rgracom
rgracom

No wonder everything is made overseas!! Thats where the money goes...... and stays!! Close these black holes now!! Excellent reporting!! You never really know just how badly your gettin' screwed until someone steps up and says "what the hell is this?"

mtnplover
mtnplover

This is a refreshing article about tax policy that describes some of the tricks used by tens of thousands of companies and wealthy individuals to reduce their tax obligations. The techniques described are a little broad and overstated, but for a relatively short, well-explained article about complex tax issues, the author should be highly commended.

 

Most of the "loopholes" described involve tax deductions, which is one reason to support a gross receipts tax. It's fairly difficult to evade any tax based on gross receipts. Questionable tax deductions and loopholes are irrelevent under a gross receipts tax system and progressive tax rates can apply by exempting small businesses and taxing the largest businesses higher tax rates.

 

Another discussion worth having is whether any company or corporation actually "pays" taxes. My thought is that only "people" pay taxes. Thus, any taxes imposed on a business are actually paid by the business owners, employees, and/or business customers. For example, if Apple's effective tax rate goes from 17% to 35%, the company will send more money to the government, but it's really the investors and/or Apple customers/employees who will pay the tax.  Companies may be very efficient for collecting taxes for us, but that doesn't mean the companies are actually "paying" the tax.

 

Over the next year or two there are significant proposed changes to federal and state tax systems being proposed, including a national VAT (a sales tax on steroids) and "territorial taxation" of businesses that would exclude US taxation on any foreign sales made by US companies. Neither tax will benefit the lower and middle income groups in the US, but since there is very little consensus among the lower-income groups for alternative taxing systems, it's quite likely these negative taxes will be imposed at the federal level.

 

Of the hundreds of policy issues that face local, state and federal governments every week, tax issues may be the most important of all. Tax policy helps determine the cost of housing; how much working people have left from their paychecks; and whether business invest locally or shift jobs overseas.

CourtenayGass
CourtenayGass

@AdmStrange @LucasLilieholm "the uygur" cannot stop laughing

csalt
csalt

Will closing the loopholes cause companies to locate off shore? Costing the ecomony jobs, jobs, jobs? And costing the government what little taxes it collects now from them?

abys37
abys37

Where did you get that 1% tax rate for FedEx? I don't think that number is supported.

red.marcy.rand
red.marcy.rand topcommenter

There's nothing wrong with selfishness which merely means concern with one's own self-interest.

Why should anyone be forced to pay for government miseducation in the schools and government mismanagement of roads ? Taxation is legalized theft and there is nothing fair about it. Producers are being forced to support nonproducers or even anti-producers. Vote NO on 39.

red.marcy.rand
red.marcy.rand topcommenter

Why does my refutation to manylessons keep disappearing ?

manylessons
manylessons

If Proposition 39 closes these bogus tax loopholes for the rich, It has my vote.  While our state and nation wither away, these companies continue to rake in immense profits and hide away  their fair portion of taxes.  Money used to protect their companies in case of Fire, Theft or Threat, money used to pave roads for their trucks, money used to maintain schools to educate their children.  Plain selfishness is the cancer of the rich and their ultimate destruction.

red.marcy.rand
red.marcy.rand topcommenter

Why would any sane person have any interest in the government getting more of our money ?

These 'loopholes' are all that's left of our freedom and money. We need more of them !

This is the kind of nonsense that caused me to stop reading the Bay Guardian and the East Bay Express aka The Gammon Gazette, mostly one man's recycled boring leftism.

csalt
csalt

 @mtnplover

 The corporate tax rate is supposed to be 35%. That is why they try to get out of with loopholes and deductions. The other thing that everyone confuses is the 15% capital gains tax. That tax is on already-taxed money that purchased the capital to begin with. I am not for taxing the middle class more, either, it is just everyone is muddying the waters with misinformation. I have a small business, an LLC and I definitely get taxed both ways, personally and in the company.

cliche_guevara
cliche_guevara

 @abys37

I guess you missed the very first sentence in the article? Here I copy and pasted it for you.

"A year ago Citizens for Tax Justice, a Washington, D.C., nonprofit, studied the tax returns of 280 corporations..."

 

cliche_guevara
cliche_guevara

  Okay, I don't think I can put crazy back in the bottle for you.

Taxation is a necessity for a advancing society. Where do you think the roads come from, the street lights, clean drinking water, your sewer system, etc... It's called taxation. Some of it is misappropriated, that's why there are watchdog groups to point out extravagances and errors, but a majority does what it needs to in order to keep order.

If you don't like taxation then move to a third world country and live off the land, but if you don't like the politics here, believe me it doesn't get any better in a less advance society.

As for nothing being wrong with selfishness you couldn't be more wrong. But a point for your side, you are being a great example of it.

 

"Every man must decide whether he will walk in the light of creative altruism or in the darkness of destructive selfishness."  (Martin Luther King Jr.)

 

"Great achievement is usually born of great sacrifice, and is never the result of selfishness." (Napoleon Hill)

 

 

 

red.marcy.rand
red.marcy.rand topcommenter

 @manylessons Selfishness means concern with one's own self-interest. It's a great thing. Stealing money via the legalized theft of taxes is evil. The government miseducation and road maintenance is something no one should be forced to pay for. It should be totally privatized with no strings. We need more companies with more profits, not more lousy government services. I wasn't aware of Prop 39 but I will now vote against it because of your recommendation.

powertothepeople
powertothepeople

 @red.marcy.rand

 Here is an excellent example of pure unadulterated greed, with no  trace of compassion or empathy.  Some people can only think of themselves, but  thank goodness its limited to the 1%.   Fortunately the 99% is dumping the 1% and their self serving tax exemptions, by voting yes on Propostion 39.

cliche_guevara
cliche_guevara

 @csalt  "...everyone is muddying the waters with misinformation", including yourself.  A capital gains tax is just that a tax on gains made from capital.  If you invest $100,000 and that investment doubles to $200,000 you get taxed on the gains of $100,000 not the entire amount. The next year if it doubles again you get taxed on the increased $200,000 not the entire amount of now $400,000.  If you are... you need a better accountant.

abys37
abys37

 @cliche_guevara ...and yet it appears no to be an accurate percentage.  Financial statements are publicly available.  I didn't mean to ask who provided that number. I meant to ask how.....

cliche_guevara
cliche_guevara

 @red.marcy.rand  Actually the word that means concern for one's own interest or welare is egoist, but what do I know, I didn't make that up, I got that from the Oxford English Dictionary. 

jefemuygrande
jefemuygrande

 @powertothepeople  @red.marcy.rand 

PTP, ARE YOU AWARE THAT THE TOP 1% OF EARNERS PAY OVER 37% OF ALL FEDERAL INCOME TAX WHILE EARNING ONLY 22% OF THE INCOME? AND THAT THE TOP 10% PAY OVER 70% OF ALL FEDERAL INCOME TAX? OR DOES THAT EVEN MATTER TO YOU AS THERE IS NO SUCH THING AS THE "GREEDY RICH" EVER PAYING THEIR FAIR SHARE? TO WHICH GOVERNMENT  TEAT(S) ARE YOU  ATTACHED? 

jefemuygrande
jefemuygrande

 @cliche_guevara  @csalt CHE, YOU TOTALLY MISSED THE POINT (OR ARE COMPLETELY IGNORANT OF THE DIFFERENCE) THAT THE INITIAL INVESTMENT OF CAPITAL WAS ALREADY TAXED, EITHER AS ORDINARY INCOME OR CAPITAL GAINS.

 
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