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Opinion

August 28, 2011

Abolish tax loopholes to rebuild economy

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Written by: Brody Burns

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The corporate tax rate in the United States is approximately 35 percent, and stands as one of the highest rates in the world. As a result, a staggering number of tax havens are utilized to pay a lower rate, which sends American jobs and money abroad to more appealing tax rate destinations. Corporations shift headquarters abroad, and employ tax loopholes to avoid paying more expensive American rates.

Given the current economic climate, the tax haven effect has been significantly damaging to the U.S. Treasury, as losses of more than $100 billion in tax revenue are experienced annually. If corporations are allowed to blatantly exploit loopholes and utilize havens, then the American economy will continue to suffer. An overhaul of the corporate tax system and drastic regulations on tax dodgers are desperately needed.

Simply reducing the tax rates does not solve the larger problems. In 2004, corporations convinced Congress to temporarily institute a corporate tax holiday rate. The promised economic benefit was substantial enough to solve numerous economic problems and a one-time corporate tax rate of 5.25 percent was adopted. According to the Center of Budget and Policy Priorities, the economic problems persisted, and the 2004 holiday rate failed to deliver on any promises. No job or economic growth occurred: Corporations simply reinvested the additional earnings in stock, distributing larger dividends to shareholders. Despite claims of having concerns for the state of the economy, a corporation is ultimately responsible to its shareholders. Profitability is all that matters. A corporation may advocate for another holiday rate, but it did not work in 2004 and would not work now.

The current climate operates as follows. Take General Electric, one of the largest corporations in the country and a serious tax dodger. According to its own financial reports, GE earned $14.2 billion in profits last year, $5.1 billion of which came from domestic operations. According to The New York Times, GE did not pay one cent in U.S. taxes in 2010. In fact, the company was extended a $3.2 billion tax benefit from the Internal Revenue Service. The New York Times further credited “innovative accounting” and fierce lobbying as the mechanisms employed by GE to avoid paying any taxes.

The innovative accounting tactics involve shifting the ownership, intellectual property rights or physically moving headquarters abroad. In some cases the moves are into simple P.O. Boxes, despite the fact that the corporation may still employ thousands and, in some cases, tens and hundreds of thousands of employees in America. Transocean Ltd., the oil drilling company responsible for polluting the Gulf of Mexico with more than 200 million gallons of oil in 2010, is officially a Swiss corporation. Transocean boasts more than 4,500 employees in the U.S. and only 40 employees in Switzerland; yet it is a Swiss company. This is just one of the many innovative accounting measures which allow corporations to pay lower tax rates, all while directly draining money and jobs from the American economy.

While innovative accounting involves a lot of manipulation behind the scenes, fierce lobbying is much more obvious in its corruption. President Barack Obama holds a close relationship with Jeffrey Immelt, the chairman of the board and CEO of GE. In 2009, Obama appointed Immelt to the President’s Economic Recovery Advisory Board. The board was created to offer counsel and ideas to the president on impending economic issues. Immelt must have supplied some useful ideas because in January Obama appointed Immelt as a chairman in his outside panel of economic advisers. Their cozy relationship eventually landed Immelt as chairman of the President’s Council on Jobs and Competitiveness.

In February, Obama discussed his intentions concerning corporate tax rates, saying he would “simplify, eliminate loopholes, treat everybody fairly.” Judging from his actions, fair treatment is only extended to those working within his administration. Lobbying has allowed GE to gain numerous tax breaks and green energy credits, and lease and lend billions of dollars overseas while paying no American taxes, as long as the money remains abroad. Last year, GE spent more than $39 million on lobbying and another $2 million in political contributions, and paid nothing in U.S. taxes. This preferential treatment is disgusting.

An interesting dichotomy exists, one in which a company will contribute vast sums of money to American elections all while retaining the status of being headquartered abroad. Foreign corporations are avoiding payment of billions of dollars in taxes, but are contributing millions of dollars to American political campaigns and lobbyists to control the domestic economic climate. Any claims of so-called patriotism by these corporations are lies, since greed is the main motivator. A foreign entity should not be allowed to funnel millions into American elections, and exporting money and jobs are not the moves of a company with America’s best interests at heart. Consumers should hold these mega corporations responsible.

Realistically the current rates in America, which are the second highest in the world behind Japan, must be reduced. Corporations will continue to flee until this is done. A figure ranging from 20 to 30 percent should work for all parties involved. But that is only part of the solution: If a lower rate is extended, then the numerous loopholes also must be closed. Otherwise the economic woes related to the loss of corporate tax income will only get worse.

On July 26, Representatives Lloyd Doggett, Sander Levin and Rosa DeLauro introduced legislation into the House of Representatives aimed at reducing the outflow of corporate tax money. The Stop Tax Haven Abuse Act would grant the Treasury Secretary power to “take special measures against foreign jurisdictions or financial institutions that impede U.S. tax enforcement, close offshore tax loopholes, and increase penalties on tax shelter promoters.”

This legislation is only a start in the complete overhaul and regulation needed for the entire system. Blatant corruption is occurring and it is sending crippling shockwaves through the economy. In the 1950s, corporate taxes constituted 29.8 percent of federal revenues. Last year they only contributed 6.6 percent. Business is booming, money is fleeing and the federal government is allowing it all to happen.

— Brody Burns is seeking his MBA in business.

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