The Business Case Against Overseas Tax Havens

Kate's Cafe 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.