Kate’s Café and AAA Appliance probably pay a higher percentage of their income in taxes than profitable Fortune 500 companies.

In the U.S., thanks in part to overseas tax havens, we have one tax system for multinational companies and wealthy individuals –and another for small businesses and ordinary taxpayers.   

Tax havens enable the rich and U.S. multinationals to move income and assets between global subsidiaries and dodge taxes.  Responsible businesses and individual taxpayers are left to pay for U.S. infrastructure, defense, education and all the public investments that contribute to a healthy business climate and economy.

How does this work?  A U.S. company creates a subsidiary in a secretive low tax haven such as the Luxemburg, Bermuda or the Republic of Mauritius. In the Grand Cayman Islands, one building called Ugland House, houses over 19,000 of these corporate subsidiaries.

These corporations moving assets and income between these subsidiaries so that profits appear to be generated overseas while losses are deducted from U.S. taxes.  Because of the lack of transparency it is difficult to assess just how much money is loss, but estimates range from $43 billion to $123 billion per year for both individual and corporate tax avoidance.

A new campaign, Business and Investors Against Tax Haven Abuse, signals an interesting convergence of domestic manufacturers, community banks, and small businesses that are fed up with how porous the global corporate tax code has become.  They launched a petition drive on July 20th with 400 initial business signers.

“Small businesses are the lifeblood of local economies,” said Frank Knapp, President and CEO of the South Carolina Small Business Chamber of Commerce and one of the lead signers.  “We pay our fair share of taxes, shop locally, support our schools and actually generate most of the new jobs.  So why do we have to subsidize multinationals that use offshore tax havens to avoid paying taxes?”

Senator Carl Levin (D-MI), a long-time champion of closing tax havens, stated that the “campaign represents the first time in recent years that business people who believe tax havens are bad for business are mobilizing publicly to end the abuse.”

The campaign estimates that corporations using tax havens avoid over $37 billion in taxes (a number that does not include wealthy individuals).  These funds, they argue, could be better used for public infrastructure and support to small businesses which generate over 65 percent of new jobs.  It could pay for initiatives like the recently introduced Small Business Jobs Act and the seed capital for a $30 billion Small Business Lending Program through community banks.

In the coalition’s first report, Unfair Advantage: The Business Case Against Tax Havens, they argue that overseas tax havens foster an unlevel playing field where small and domestic U.S. businesses that pay taxes are forced to compete against tax dodgers. For example, Wainwright Bank, a socially responsible local lender based in Boston, paid federal taxes of 11.8 percent of their income in federal taxes in 2009.  Yet they have to compete against Bank of America who paid no federal taxes in 2009, thanks in part to overseas tax havens.

The report points out that tax havens contributed to the global economic meltdown by permitting companies to hide risky investments and behavior.  Scratch the surface behind the most shady dealings of the last decade and you’ll find an overseas tax haven. In a special investigative series, McClatchy News documented how Goldman Sachs, working through Cayman Island subsidiaries, “peddled billions of dollars in shaky securities tied to subprime mortgages on unsuspecting pension funds, insurance companies and other investors when it concluded that the housing bubble would burst.”

TransOcean, owner of the Deepwater Horizon oil platform that exploded, killed 11 workers, and led to a devastating oil disaster in Gulf of Mexico, is itself an overseas tax haven.  In 1999, TransOcean moved its incorporation from the United States to the Cayman Islands and then later to Switzerland, with the stated purpose of lowering its taxes.

There is some progress in closing these loopholes, thanks to the Congressional leaders such as Sen. Levin and Rep. Lloyd Doggett.  The Foreign Accounts Tax Compliance Act of 2009 increases transparency of cross border transactions.  The “Economic Substance Doctrine,” which was included in the health care reform bill, requires companies to have a business reason for shifting assets other than tax avoidance.  

But there is plenty of further work to do.  Congress should ban phony offshore corporations and block transfers of intellectual property, such as patents, designed to evade taxes.  The campaign, Business and Investors Against Tax Haven Abuse, have identified nine specific policies to ban shady practices and generate tens of billions in revenue.

If local businesses are waking up, so should ordinary taxpayers.  We can’t build healthy and economically vibrant communities when our wealthiest citizens and corporations maintain an unfair advantage.