As conversation regarding the looming sequester infiltrates most of the political conversations these days, it is surprising that the U.S., in an estimate quoted by the CRS report, loses billions in revenue each year due to corporate loopholes. Between $57 billion to $90 billion was lost in 2008, the last year with complete data, due to corporations shifting their profits overseas via loopholes. To put things in perspective, the amount of money that is due to be cut thanks to the sequester next month is $110 billion.
The loopholes that allow the corporations to shelter their profits in tax havens overseas force the U.S government to lose billions of dollars in revenue — revenue that could help the U.S. close the budget deficit and tackle issues such as the sequester, which Congress can’t agree upon a replacement for.
Companies such as Dell, Nike, Apple, and Microsoft have been dodging billions of dollars in taxes each year by moving their profits offshore, but they aren’t alone. Most multinational companies pay a tax rate far below the 35% rate that is mandated by U.S. law; last year they paid an average of 9%. Some even avoid paying taxes altogether by securing their profits in other countries such as Bermuda and Luxembourg. In fact, in 2011, Citizens for Tax Justice found that 30 corporations collected money off of their income taxes rather than giving it to the government. From 2008 to 2011, the 30 companies had in fact made $6.5 billion on their taxes. If they had paid the tax rate of 35% during that time, they would have provided the government $78.3 billion in revenues.
There is little to no economic efficiency in shifting profits abroad. Instead, this financial engineering and scheming is done solely to avoid U.S. corporate taxes.
The solution to this seems simple enough: cut the corporate income tax rate as an incentive for the big corporations to bring their profit back home. That’s one of the few things both President Obama and Mitt Romney agreed upon last year. While the President wants to lower the flat rate down to 28%, Romney wanted to push it a little lower than that to 25%. But that’s not where it would end in order to pay for the tax cuts, all loopholes would have to be closed. Those are also the main provisions of the three major bipartisan tax reform plans. The Bowles-Simpson debt plan, the Wyden-Coats plan and the Domenici-Rivlin plan all require similar measures.
Some corporations are also holding out for a tax amnesty like the one that was temporarily enacted in 2004. While the creation of a "repatriation tax holiday" was debated last year because of its benefits such as bringing billions of dollars back home, in the end it didn’t create jobs or stimulate the economy in the long run.
The only long-term solution, as simple as it sounds, is to lower corporate tax rates and close loopholes to prevent the U.S from losing billions upon billions in revenue as corporations continue to find tax havens abroad.
Editor's note: to read more on U.S. tax policy, see Mike Montafia's piece on why Democrats and Republicans Have the Same Vision For Tax Policy.