Politicians are lining up to revamp the tax code. However, it’s kind of like what they say about nuclear fusion – it’s 10 years away and always will be.
Decades of politicians being bought off by lobbyists have produced loopholes on top of loopholes, and the result is a tax code that runs more than 72,000 pages. Big business has been successful in buying a low tax rate. The highest corporate tax rates in the world are saddled on small and medium-sized U.S. businesses which can’t afford to buy off Washington, D.C.
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The large tech companies have a very simple (and legal) process of hiding money in several tax havens. A big company with a high degree of intellectual property is able to sell or license IP that is developed in the U.S. to a low-tax jurisdiction country. That means that foreign profits based on that IP technology will be attributed to the offshore unit and not the parent unit in the U.S. where the IP was developed.
Ireland is the country of choice currently for the selling or licensing of IP rights developed in the U.S. The money stays there for less time than the AIG bailout stayed with AIG. It’s quickly passed on to the business-friendly tax haven of Bermuda, where the parent company can legally claim they have their “effective center of management.”
Bermuda, where I currently live, has no corporate or personal tax - only a consumption tax.
Another transaction helps obfuscate the tax process further by pushing the money through a shell company in the Netherlands.
All of this is 100% legal. So you have technology developed in the U.S. and licensed overseas and profit that should be going to the U.S. going instead to a low tax jurisdiction and then passed on to a zero tax jurisdiction. Great for big companies with good tax lawyers. But the people left holding the bag are small and medium-sized businesses which have to make up the lost revenue to the U.S. Treasury.
The beneficiaries of these loopholes are predominantly large multinational tech and pharma companies. Re-insurance and hedge funds don’t need a complicated system, they can just base out of Bermuda (or the Caymans or another zero tax country) and run their business from there legally.
These are not your oil companies. The oil companies get vilified over their tax rate. If we closed loopholes for oil companies we would add an extra $4 billion or so to the U.S. Treasury. Not quite enough to pay for our national deficit for one day. By the way, the tax breaks these oil companies get led to the shale gas boom in the U.S. when Texas businessman George Mitchell used a tax break to discover how to horizontal drill the Barnett Shale in Texas.
Again, big business buying off our government. If you close the loopholes for oil and gas exploration you only kill the small independents because the big guys won’t be affected. Similar to the roll-your-own cigarette tax implemented in 2009 through the lobbying efforts of big tobacco that hurt the independent grower and greatly benefited big tobacco.
What to do? The answer is simple. Lower the tax rate to make it comparable to the rest of the world, where large companies don’t have to hide their income to remain competitive.
Lowering the tax rate to 20%-25% for all -- but especially for small and medium-sized businesses -- would be a real stimulus for job growth in America. LLCs, your traditional mom and pop businesses, in New York City pay at a tax rate over 50%; small and medium-sized C corporations in the U.S. pay the highest corporate tax rate in the world. Imagine the stimulus if that small business tax rate was cut in half and big business no longer had an incentive to leave money overseas.
The only problem? To do this, you have to have a Congress and White House that both have a backbone and are willing to work together. Until then, we’ll just vilify the big guys while giving them every advantage money can buy.