Through the miracle of the tax code, Exxon would only end up paying about $325 million. No matter how negligent a company is, court judgments are considered nothing more than a business expense, and therefore tax deductible.

Last year, Sen. Patrick Leahy (D-Vt.) introduced the Protecting American Taxpayers from Misconduct Act. If a court orders damages for malfeasance, U.S. taxpayers would no longer be forced to foot part of the bill.

Yet even in the Democratically controlled Senate, liberals realize that exposing their corporate patrons to more tax liability will go over like a salad booth at a county fair. Leahy's bill never made it out of committee.


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.

2. Delaware, the Cayman Islands of America.

Just outside of Philadelphia sits a tax haven so egregious the Cayman Islands looks askance at it. It's called Delaware, a tiny state that allows American companies to set up fake headquarters so they can avoid taxes in their own states.

Delaware does it by asking fewer questions than a needle exchange. Like the Caymans, it doesn't tax assets like royalties, leases, trademarks and copyrights. So U.S. companies create shell firms in Delaware, then "sell" their intellectual property to them. By leasing their own inventions from these fake companies, corporations have dodged $9.5 billion in state taxes over the last decade.

The trailblazer for such schemes was WorldCom, the famed telecommunications company that imploded in 2002 after being caught cooking its books. In one scam, WorldCom pretended to pay its Delaware shell company $20 billion in royalties for the questionable asset of "management foresight." Though there were no managers in Delaware, and no real money changed hands, WorldCom was able to reduce its state taxes by hundreds of millions.

Such scheming is so commonplace that Delaware is home to more corporations (945,326) than it is people (897,934). Even the patron saint of tax evasion, the Cayman Islands, sniffs over the state's corrupt practices.

"There should be a level playing field and Delaware should have to comply with the same standards as the Caymans," says Anthony Travers, chairman of the Cayman Islands Stock Exchange.

Johnson likens the Delaware strategy to one first professed by Clyde Barrow, the Depression-era bank robber. "Near the end of Bonnie and Clyde, they're lying around in bed after making out and Bonnie says, 'Anything you'd do different?' And Clyde says, 'I think we shoulda lived in one state and done our bank robbery in another state,'" he says.

"The answer is if you're a corporation, that's exactly what you do."


1. The corporate blackmail exemption.

In 2006, Starbucks CEO Howard Schultz sold the Seattle Supersonics to Clay Bennett for $350 million — with the "understanding" he would keep the team in Seattle.

Almost immediately, Bennett — who made his money by marrying the daughter of billionaire Edward Gaylord, owner of Country Music Television — asked Seattle to pony up $300 million for a new arena. The city wasn't eager, since it had already spent $75 million renovating the existing arena a decade before.

Bennett decided to blackmail Seattle, using Oklahoma City as leverage. Oklahoma had no major sports team of its own. So its otherwise conservative legislature offered Bennett a huge welfare package: $120 million for arena renovations and a new practice facility. Seattle balked. Oklahoma had a new basketball team.

Yet according to the tax code, not all entitlements are creating equal. While a laid-off electrician still pays taxes on his $500-a-week unemployment check, Bennett didn't pay a dime on his $120 million welfare bonanza.

This exemption only sweetens corporate incentive to blackmail states and cities whenever they consider moving. Take Toyota. In 2002, it decided to build an assembly plant for its Tundra pickup, taking advantage of cheap labor in the South. Just like Oklahoma, otherwise anti-entitlement states like Alabama, Arkansas, Mississippi, Tennessee, and Texas stumbled over each other with monstrous welfare packages.

Texas ultimately won by offering $227 million in subsidies. The state had purchased the right to host 2,000 workers at a plant in San Antonio — at a cost of $110,000 per job. Yet nationally, the deal was a spectacular loss.

It wasn't long before Toyota closed a similar plant in California, killing 4,700 jobs and shifting production to San Antonio and Canada. The net result: Texas taxpayers forked over $227 million so America could lose 2,700 jobs. The only winner was the Japanese automaker, which walked away with a tax-free welfare package.

Still, Congress continues to offer blackmailers this lucrative break.

"There isn't one bit of improvement whether the Toyota plant goes north or south of the Tennessee-Alabama border," says Johnson. "Yet they will make money off the fact that there is a line between them. It's just nonsense."

Unfortunately, nonsense is the calling card of the tax code. Surely even Mitt Romney can see that.

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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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