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State taxpayers are picking up a tab to the tune of $450 million annually to cover the revenue lost from corporations and wealthy individuals hiding their profits overseas, according to a report released last week by the Rhode Island Public Interest Group (RIPIRG).
The report found that offshore tax havens—areas outside the country where taxes are substantially lower than in the United States— cost the average Rhode Island taxpayer $532 per year and the average small business $2,766 each year. Nationwide, corporations and the wealthiest Americans avoid an estimated $100 billion in taxes each year by placing shifting their income to places like the Cayman Islands. A U.S. Government Accountability Office (GAO) recently found that 83 of the top 100 publicly traded companies use offshore tax havens.
“When corporations shirk their tax burden by using accounting gimmicks to stash profits legitimately made in the U.S. in offshore tax havens like the Caymans, the rest of us must pick up the tab,” said Ryan Pierannunzi, an associate with RIPIRG. “Responsible small businesses don’t just foot the bill for corporate tax dodging, they are put at a competitive disadvantage since they can’t hire armies of well paid lawyers and accountants to use offshore tax loopholes.”
Individuals in Rhode Island pay the ninth most in the country the cover the burden of offshore tax havens while state small businesses pay the eight most. Residents in Washington D.C. ($1,568) and Delaware ($1,317) pay by far the most in the country. At $153, Mississippi residents pay the least.
Major Companies Benefit
The report singles out several major companies for what it considers abusing offshore tax havens, including Google, Wells Fargo, General Electric, eBay and Boeing.
- Google uses techniques nicknamed the “double Irish” and the “Dutch sandwich,” involving two Irish subsidiaries and one in Bermuda – a tax haven – that helped shrink its tax bill by $3.1 billion between 2008 and 2010.
- Wells Fargo paid no federal income taxes between 2008 and 2010 despite being profitable all three years in part due to its use of 58 offshore tax haven subsidiaries.
- G.E. received a $3.3 billion tax refund in 2010 despite reporting over $5 billion in U.S. profits to shareholders. The company has $94 billion parked offshore and uses 14 tax haven subsidiaries.
- eBay received a refund of $131 million in 2010 and reported nearly $850 million in profits to shareholders. The report suggests the company uses 31 subsidiaries in nine tax havens.
- Boeing paid just $13 million in federal taxes last year and as 42 subsidiaries based in 14 tax havens.
“It is appalling that these companies get out of paying for the nation’s infrastructure, education system, security, and large market that help make them successful,” Pierannunzi said.
RI Delegation Sponsors Bills to Close Loopholes
The report calls for lawmakers to close a slew of offshore tax loopholes, including ending the ability for corporations to indefinitely defer paying U.S. tax on the profits they attribute to their foreign entities; requiring full and honest reporting of companies; eliminating the incentive for U.S. companiesto transfer intellectual property to shell companies in tax haven countries; and begin treating the profits of publicly traded “foreign” corporations that are managed and controlled in the United States as domestic corporations for income tax purposes.
Many any of the loopholes used would be closed if Congress were to support the Stop Tax Haven Abuse Act and the Cut Unjustified Tax Loopholes Act, according to the report. Congressmen David Cicilline and Jim Langevin are both cosponsors of the Stop Tax Haven Abuse Act, and Senator Sheldon Whitehouse is a cosponsor of the Cut Unjustified Tax Loopholes Act.
“RIPIRG’s report identifies multiple ways that offshore tax havens unfairly shift the tax burden to hardworking Rhode Island families and small business owners,” Cicilline said. “It’s long past time for Washington to stand up for working families and ensure corporations and wealthy individuals stop neglecting their obligations to society and pay their fair share, and I am committed to doing just that.”
A recent survey conducted by the Main Street Alliance, a small business advocacy group, found that nine out of ten small business owners believe offshore tax schemes are a problem. Texas Congressman Lloyd Doggett, who created the Stop Tax Haven Abuse Act, said the bill offers powerful new tools to combat offshore tax haven abuse and bring tax dollars back to the country.
“Families and small business unfairly bear a greater burden when offshore tax dodges game the system,” Doggett, a senior member of the House Ways and Means and Budget Committees said. “We cannot afford the revenue lost to these corporate tax avoidance schemes. “
Mazze: A Fair Tax System is the Answer
Still, other experts say there would be no need to shift income to offshore tax havens if there was a more fair tax system in the country. According to Dr. Edward Mazze, Distinguished University Professor of Business Administration at the University of Rhode Island, Congress should focus on restructuring the tax code if it wants to prevent the wealthy from shifting money overseas.
“If Congress wants to close these tax loopholes, they should revise and simplify the tax code so that it is understandable,” Mazze said. “With our current economic situation, individuals and businesses seek geographical places where they can get the best return on their investments and their funds are safe”
Mazze said Congress should approve a “special lower tax rate” to encourage U.S. companies to bring their profits back to the country so that funds can be used to create jobs, purchase capital equipment and expand plant facilities. He said simplifying the current tax system could help turn Rhode Island’s struggling economy around.
“Congress also needs to eliminate the federal estate tax and make the capital gains tax of fifteen percent permanent,” Mazze said. “Rhode Island also needs to do away with the state estate tax and reduce the state's corporate tax rate to keep and attract businesses. Imagine what the Rhode Island economy would look like if we had these private funds invested in creating jobs.”
The CUT Loopholes Act would put an end to the price and profit shifting that allows publicly traded companies to engage in pervasive tax avoidance.
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