Tax Havens Hurt Small Businesses

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Americans For Tax Fairness Executive Director Frank Clemente speaks to protestors outside of Pfizer’s headquarters.

In a recent report published by the US PIRG (Public Interest Research Group), authors Alexandria Robins and Michelle Surka confirmed what small business owners have known for a long time: big corporations are getting the gold, while we’re getting the shaft. Their report is titled “Picking Up the Tab 2016: Small Businesses Bear the Burden for Offshore Tax Havens”.

Most United States multinational corporations use a wide range of tax havens, tax deferment, and other tax avoidance schemes to knock their taxes down as far as possible. They are all perfectly legal, but that doesn’t make them right.

The biggest offender, in terms of shielded overseas profits, is Apple, which booked $214.9 Billion in offshore profits in 2016. If these profits were booked in the United States instead of offshore, Apple would have to pay an estimated $65.4 Billion in US Taxes. Instead they paid almost nothing.

Pfizer, another serial offender, booked $193.6 Billion in offshore profits. Pfizer accomplished this partly by setting up 181 tax subsidiaries in foreign countries. Yet Pfizer boasts on their website that they “are committed to upholding the highest ethical standards in everything from research and development to sales and marketing. We are focused on nurturing a workplace of diversity and inclusion for our colleagues, maintaining a customer-centered approach to our business, and giving back to the communities where we work and live.” So much for living your values.

Of course, General Electric deserves honorable mention here: they booked $104 Billion in 20 offshore tax havens in 2015, and they paid an effective federal tax rate of -1.6% over the past 10 years (in other words, the federal government paid net taxes to General Electric). If they had paid taxes at a rate of 30%, they would have paid $31.2 Billion. Instead, they received over $1.6 Billion.

Citizens for Tax Justice estimates that US corporations have socked away over $2.4 Trillion in offshore profits, none of which is taxable by the US unless it is “repatriated”. At a nominal tax rate of 30% that amounts to $720 Billion in revenue lost by the United States. Leaders in both political parties of the United States are talking about giving these companies a huge tax break if they repatriate their offshore profits. The only question is how many hundreds of Billions of dollars will be given away to the corporations.

The above numbers are based on years of accumulated savings, but the annual numbers are pretty staggering in themselves. Each year, the federal government loses an estimated $128.5 Billion through tax havens, and the states lose an additional $18.5 Billion. The combined total lost by the federal and state governments each year comes to $147 Billion.

At first glance this all sounds very reasonable. Large corporations are saving huge amounts of money through perfectly legal tax avoidance methods. They aren’t doing anything wrong, or at least nothing illegal. The problem is that somebody else has to make up the difference, and that somebody else is small business owners. The authors of the PIRG report say it best:

“Small business owners are hit twice by the effects of tax dodging by large multination­al corporations. First, small businesses are placed at a competitive disadvantage because they rarely have subsidiaries in tax havens and the armies of tax lawyers and accountants nec­essary to exploit the loopholes that come with such subsidiaries. Meanwhile, nearly 73% of Fortune 500 companies operate subsidiaries in tax haven countries. Small businesses are forced to compete with multinational corpo­rations based on the cleverness of their tax gimmicks rather than on their innovation or quality of product.”

If small businesses across the United States made up the entire amount not paid by the large corporations, the hit would be $5,186 per business each year. That may not sound like much to a wealthy CEO, but $5,186 a year to a typical small business owner is huge, and if it happens year after year, it adds up fast.

US PIRG, Citizens for Tax Justice, and other organizations recommend a number of policy changes to rein in these abuses. These include reducing incentives for corporations to license intellectual property offshore, stopping corporate inversions, ending tax deferrals, and ending the territorial taxation system whereby corporations avoid taxes on profits booked offshore.

Polls reveal that the majority of Americans, and the majority of small business owners feel that our tax system has become unfair. It isn’t so much that people don’t want to pay taxes, it is that they feel THEY pay high taxes, while wealthy individuals and the largest corporations do not.

The US PIRG report references Reshonda Young, owner of a small business called Popcorn Haven in Waterloo, Iowa. According to Reshonda, “Taxes are a shared responsibility that funds programs and infrastructure that all of our businesses depend on. We must work to level the playing field between large and small businesses and one way to do that is to ensure we are all playing by the same set of rules.”


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