The Betrayal of the American Dream (17 page)

Another GAO study identified eight tax havens that were home to anywhere from 123 to 569 offshore subsidiaries of major corporations. In one instance, 372 subsidiaries were owned by just four corporations. Businesses establish foreign subsidiaries for reasons other than taxes, but the tax appeal is much stronger in some countries than others—like the Cayman Islands, where no direct tax is imposed. Hence, you may keep your money there and invest it around the world essentially tax-free. Mitt Romney maintains personal trusts in the Cayman Islands, a fact that became public after he released his tax returns during his presidential campaign.

The Caymans are home to far more corporations than they are to people. The islands have a population of 53,000. But 93,000 companies exist there, at least on paper. One five-story office building is the official address of more than 18,000 corporations. One of the more prolific Cayman Islands corporations in the 2008 GAO report was Citigroup, which boasted 427 subsidiaries in tax havens, with nearly 20 percent of them in the Caymans. That’s par for the course for Citigroup. The company and its various affiliates have long contrived the use of secret bank accounts for Third World dictators, a strategy it pioneered.

Bank of America counted 115 subsidiaries in tax havens, with 59 of those in the Caymans. Bank of America and Citigroup, of course, were among the financial institutions that contributed to the economic trashing of the middle class and then shared in the government bailout for their handiwork.

It’s one thing to escape payment of most federal income taxes. It’s something else to extort tax favoritism. That’s effectively what a group of U.S. multinational corporations are doing. Because they conduct business around the world and move money in and out of tax havens and other countries to secure the lowest possible rate, many stash their cash offshore rather than bring it home, where they would be obliged to pay taxes on it.

They will bring it back only if Washington will agree to a tax holiday. They want the 35 percent corporate tax rate waived and would like Washington to impose a onetime rate of, say, 5 percent. If Washington refuses to accommodate them, well, they will keep the money offshore and allow it to accumulate until a more pliable administration comes along. Or they might just take the money and invest it someplace else, like China. If you want to understand the differences between you and the ruling class, try that ploy with the IRS someday. Just tell them if they don’t lower your tax rate you are going to move your money to another country.

The huge corporations that conduct business in multiple countries do pay income taxes in those countries, albeit at a much reduced rate. But the United States levies its income tax on the global income of U.S. corporations. It then allows a credit for taxes paid abroad. In theory, this means that U.S. global businesses should never pay less than 35 percent of their profits in income taxes—a sum shared by other countries and the United States. But when it comes to taxes, things are never as they seem. Google stirred up controversy when its overseas tax rate was shown to be 2.4 percent, according to a global study by
Bloomberg News.
The company claims write-offs for money moved around the tax havens of the world, so it never shows up as “income” on its U.S. tax returns.

So how much corporate cash is sitting abroad? Possibly as much as $2 trillion. That’s
trillion.
Even at a tax rate of 25 percent, that would generate $375 billion in revenue, or the equivalent of all the taxes paid by everyone earning less than $100,000 a year—that is, all of Middle America and the working poor, more than 100 million individuals and families. This one issue illustrates why the corporate elite always win—and why Middle America always loses, why the future is so bleak. As companies lobby for legislation to give them a mammoth tax break, there is no one in power in the U.S. government to speak—and act—for working America to counterbalance corporate power.

While some in the GOP would prefer to include repatriation in a broad overhaul of the Internal Revenue Code, others don’t want to wait. “Repatriation is an interim step that we can take to encourage businesses to bring investment back into our country,” says Eric Cantor, the House majority leader. “Such a step adds capital that would otherwise go overseas directly into our economy which will help create jobs, investment, and growth.” Many Democrats also have signed on to the cause, among them Barbara Boxer of California: “By bringing back the more than $1 trillion that’s sitting overseas, we will create jobs, strengthen the economy, and reduce the deficit,” says Boxer.

Neither Cantor nor Boxer, nor many others in Congress, have much concern for tax fairness. If they did, they’d oppose this giveaway to big business, which would reward a handful of American corporations at the expense of all other companies, most of them domestically based. More than 95 percent of U.S. corporations would not benefit from a tax holiday. Just as the tax code overflows with provisions that benefit wealthy individual taxpayers over average citizens, the holiday for overseas earnings rewards the largest corporations over smaller companies.

A coalition of small businesses, which always end up paying taxes at the highest rates, wrote Congress explaining the inequity of a tax holiday:

When powerful large U.S. corporations avoid their fair share of taxes, they undermine U.S. competitiveness, contribute to the national debt and shift more of the tax burden to domestic businesses, especially small businesses that create most of the new jobs. A transparent corporate tax system that assures all companies—large and small—pay for the services upon which our businesses, our customers, our workforce and our communities depend, would help restore the economic vitality and domestic job creation we all seek.

Nonetheless, the lobbying power, as always, rests with Big Business, which in this case has adhered to the rich tradition of giving its lobbying organization a name that means just the opposite of what the words suggest.

WIN America—a catchy acronym for “Working to Invest Now in America”—has very little to do with creating jobs, but a great deal to do with securing a tax break worth billions of dollars for its corporate clients.

Among those working on the WIN America campaign is SKDKnickerbocker, a public relations and political consulting firm that, by its own account, has “a track record of taking on the most difficult communication challenges—and helping our clients reach their goals.” As the firm says on its website, “It is important to have a partner who understands how to strategically structure and deliver the right message on the right platform. It’s your message, and we work with you to develop it through research and then help you implement it through a strategic communications plan, advertising, print and direct mail. The stakes have never been higher.”

In the kind of coincidence that occurs all the time in Washington, a managing director in the SKDKnickerbocker office overseeing the WIN America project is a veteran political operative, Karen Olick, who helped Boxer win her first term as a U.S. senator from California in 1992 and then spent eleven years as Boxer’s chief of staff. Another SKDKnickerbocker managing director in Washington is Anita Dunn, a senior adviser in President Obama’s first presidential campaign and later White House interim communications director. Thus, while Obama pledges to make those at the top pay more taxes, one of his former top aides is working the other side of the street.

The onetime staff members to the people who make the laws, as well as the former members of Congress themselves who enacted legislation, are masterminding the campaign to return as much as $2 trillion to their corporate benefactors. Industries with the most to gain—pharmaceuticals, technology, and energy—have thrown their weight behind a massive $50 million (and counting) lobbying effort. Under the WIN America banner, executives of fifteen corporations signed a letter to President Obama and House and Senate leaders of the two parties, urging passage of legislation to bring home $1 trillion in profits free of significant U.S. taxes. Among the signers: Steve Ballmer, Microsoft CEO; Paul Jacobs, Qualcomm chairman and CEO; Ian Read, Pfizer president and CEO; Jim Rogers, Duke Energy chairman, president, and CEO; John Chambers, Cisco chairman and CEO; and Safra Catz, Oracle president and chief financial officer.

The letter contained a veiled threat of what might happen if Congress failed to act favorably on their request:

In 2011 alone, U.S. companies have spent more than $150 billion of their overseas earnings on acquisitions of foreign companies or other foreign investments—money that otherwise could have been invested here at home to create new jobs and strengthen our economy. The simple truth is that the longer we wait, the more money will be spent overseas, and these foreign investments are unlikely to return to the U.S. even if our tax policies are changed to encourage domestic investment in the future.

These executives fully expect their companies to be given preferential treatment by the U.S. government. After all, they usually get what they ask for and they have been here before. In 2004 lawmakers enacted a tax holiday that allowed $312 billion back into the United States at a token tax rate of 5.25 percent—less than the rate actually paid by individuals and families earning $30,000 to $40,000. The only beneficiaries were the select corporations, their bottom lines, and their executives, who pocketed tens of millions in stock options. There was no surge in new hires. There was no dramatic increase in new plant construction. Essentially, there was no measurable benefit for the nation.

A 2011 study by the Permanent Subcommittee on Investigations of the Senate Committee on Homeland Security and Governmental Affairs concluded that just 843 corporations took advantage of the tax freebie. Those 843 companies represented a microscopic 0.015 percent of the 5,557,965 corporations that filed U.S. tax returns in 2004. Of the $312 billion brought home largely free of taxes, the Senate committee found that $157 billion, or half, “went to multinational corporations in just two industry sectors, the pharmaceutical and technology industries.” In most cases, the money was channeled through corporate subsidiaries in tax havens that served little purpose other than to avoid the tax collector. The pharmaceutical giant Merck & Company brought back $16 billion, but to add insult to injury, the Senate committee found that, after bringing money back to the United States, Merck started the process all over again, stockpiling an additional $40 billion offshore in anticipation of another tax holiday at some point in the future.

Eli Lilly, another pharmaceutical company, brought $9.5 billion back to the United States, most of it from a holding company in Switzerland that, with its twelve subsidiaries, had a total of eighty-six employees. Some money came back through an investment holding company in the British Virgin Islands. It had no employees.

Oracle, which describes itself as “the world’s largest enterprise software company and a leading provider of computer hardware products and services,” brought back $3.3 billion the last time. The money came largely from an Irish subsidiary that had no physical office. It was designed, Oracle told the Senate committee, to “facilitate business operations outside of the United States.”

When Senate committee staffers asked the repatriating companies if the subsidiaries sitting on the untaxed cash had ongoing operations, most said that they were holding companies “designed primarily to hold funds or facilitate the movement of funds among a network of foreign subsidiaries.” But don’t go looking for them. “A number of those tax haven subsidiaries,” Senate investigators found, “had no physical office and few or no full time employees in the tax haven jurisdiction.”

And that is how profits actually earned in the United States can be routed through shell companies in tax havens that impose minimal or no corporate income tax. Paul Egerman, a Boston entrepreneur, has no sympathy for the global businesses. “It is simply wrong,” he says, “that a U.S.-based multinational company is able to report profits to their shareholders and losses to Uncle Sam.”

THE UNITED STATES AS TAX HAVEN

One might almost feel sorry for American banks at the sight of all those dollars fleeing the United States for sunnier (and less taxed) bank accounts overseas. But any pity would be misplaced. Often the money ends up in a foreign branch of the same bank. Additionally, it is frequently replaced in the American branch by new money pouring into the banks from foreign corporations. Think of what’s happening as a two-lane electronic superhighway. On one lane, trillions of dollars—and yes, that’s trillions—are gushing out of the country and into and out of tax havens around the world. On the other lane, trillions of dollars are flooding into the United States—the world’s newest, largest, and most secretive tax haven. The United States a tax haven? Don’t our elected leaders bemoan the existence of tax havens like the Cayman Islands, Switzerland, Jersey and Guernsey in the Channel Islands, and the Isle of Man? They do indeed. But never confuse what Washington and Wall Street say with what either is really up to.

For years foreign investors have used the Internet to invite wealthy Americans to open secret accounts in tax haven countries, most with the clear goal of avoiding U.S. taxes. Now those invitations are urging wealthy people around the world to establish such accounts
in the United States.
Like this one by Connex International Services, headquartered in the United Kingdom, with a U.S. branch in Wilmington, Delaware:

Many people do not realize the enormous tax benefits given to “non-resident aliens” making passive income in the United States, or earning income outside the United States and simply using the USA as their own personal “offshore tax haven.” The United States does not tax non-resident aliens for any interest income or dividend income derived from the United States. There is zero capital gains on profits from investments. There is zero tax on income earned outside the USA.