Billions in Tax Revenue Lost Through Foreign Tax Havens

U.S. corporations have stashed profits totaling trillions of dollars in offshore tax havens, potentially avoiding billions in federal taxes, according to a new report issued by the Economic Policy Institute (EPI) and Americans for Tax Fairness (ATF). States also lose revenue when corporations and wealthy individuals avoid taxes through the use of foreign tax havens.

Tax havens are countries or jurisdictions that offer extremely low tax rates to corporations and wealthy individuals that shift earnings to financial institutions in these countries to reduce their federal and state income tax liability. According to a 2013 report from Citizens for Tax Justice (CTJ), U.S. law in regard to tax havens “creates an incentive for corporations to take profits that are really generated from business activity in the U.S. and claim that they are ‘foreign’ profits generated in countries with no corporate tax or a very low corporate tax.” In addition to low tax rates, tax havens can also offer the benefit of secrecy and the ability to circumvent financial regulations and criminal laws.

By shifting profits generated within the U.S. to overseas tax havens, corporations are able to avoid paying for their share of the public services they use. As noted in a 2015 report from U.S. PIRG:

While tax haven abusers benefit from America’s markets, public infrastructure, educated workforce, security and rule of law – all supported in one way or another by tax dollars – they continue to avoid paying for these benefits. Small business owners are hit twice by the effects of tax dodging by large multinational corporations. Since they almost never have the kind of subsidiaries in the Cayman Islands or armies of tax lawyers and accountants to exploit tax haven loopholes that their multinational rivals do, small businesses are routinely placed at a competitive disadvantage in the market place. In addition, small businesses, like average taxpayers, end up picking up the tab for offshore tax avoidance in the form of higher taxes, cuts to public services, or increases to the federal debt.

In addition to their impact on federal revenues, tax havens can also have a pernicious impact on the finances of states. In a 2013 letter to Minnesota legislators, former Montana Revenue Commissioner and tax haven expert Dan Bucks notes that:

When some multinationals artificially reduce their taxes, they gain an unfair competitive advantage over smaller enterprises that operate entirely within the U.S. and especially within a single state such as Minnesota. Taxes may shift to all other taxpayers, compounding the inequities. Lost revenue can also result in reduced investments in infrastructure, education, public health and safety and other services that support a growing economy and an orderly, healthy society.

According to the EPI/ATF report, corporate profits comprised 5.5 percent of U.S. Gross Domestic Product (GDP) in 1952, while corporate taxes were 5.9 percent. By 2015, corporate profits had climbed to 8.5 percent of GDP, while taxes had plummeted to just 1.9 percent. Over the same period, corporate taxes fell from 32.1 percent of federal revenue to 10.8 percent, as illustrated in the following chart from the report (ATF and EPI analysis of OMB data).

epi

Much of this decline in corporate tax liability is attributable to offshore tax havens. The EPI/ATF reports that U.S. corporations had $2.4 trillion in untaxed offshore profits in 2015, which is approximately a fivefold increase over the last ten years. The foregone federal revenue from these untaxed profits is estimated to be $695 billion. The utilization of offshore tax havens is concentrated in a handful of extremely large U.S. companies, with four companies—Apple ($200 billion unrepatriated foreign income in 2015), Pfizer ($194 billion), Microsoft ($108 billion), and General Electric ($104 billion)—holding a quarter of 2015 untaxed offshore profits, while fifty companies (including Minnesota-based Medtronic and 3M) hold three-quarters of these profits.

Comprehensive and current information on the tax revenue lost to U.S. states is not available. However, a 2013 U.S. PIRG report estimates that U.S. states lost nearly $40 billion in revenues from corporations and wealthy individuals who sheltered income in offshore tax havens in 2011. In that year, Minnesota lost an estimated $1.95 billion through the tax haven loophole—the highest per capita loss of any state in the nation. However, it is unclear how subsequent changes in state law have altered the extent of Minnesota’s tax haven revenue loss.

Defenders of tax havens argue that any increase in corporate taxes through the closing of tax haven loopholes would be shifted to other taxpayers because corporations do not pay taxes, only people do. This claim is not entirely correct; while a portion of a business tax can be shifted on to customers through higher prices or on to labor through lower wages and benefits, a portion is borne by shareholders and business owners.

Furthermore, a product’s price should include the costs associated with its production and one of these costs is taxes. When a corporation avoids taxes by shifting income to offshore tax havens, it gains a competitive price advantage over other—generally smaller—businesses. Eliminating elaborate tax dodges such as offshore tax havens increases tax fairness by helping to ensure that all businesses—regardless of size and structure—are subject to pricing considerations that reflect appropriate tax costs.

Tax haven defenders also contend that restrictions on the ability of corporations to shift income to tax haven nations would inhibit legitimate business transactions in these nations. However, a close look at the numbers reveals that the level of corporate profits attributed to these nations far exceed the level of what can be considered “legitimate business transactions.” For example, according to Congressional Research Service (CRS) findings cited in the CTJ report:

U.S. multinational profits in the five traditional economies averaged one to two percent of those countries’ total economic output. But the multinationals’ reported profits in the five tax-haven countries averaged 33% of those tax havens countries’ economies. More specifically, U.S. multinational foreign profits reported in Bermuda equaled a ridiculous 1000% of that tiny island’s total economic output. That was up by a factor of five since 1999. In even tinier Luxembourg, American business profits jumped from 19% of that country’s economy in 1999 to 208% by 2008. These preposterous disparities between “the profits reported by American firms in the two groups of countries… compared with measures of real economic activity in those locations,” CRS concludes, are further “evidence that American companies are shifting profits in an attempt to reduce their tax liabilities and that U.S. tax revenues suffer as a result.”

Public confidence in the tax system is undermined when large corporations and wealthy individuals are allowed to avoid taxes in ways that smaller businesses and average citizens cannot. The need for adequate public revenues and the principle of tax fairness demand that the inequities created through the tax haven loophole be eliminated.