Statement of the U.S. Public Interest Research Group
The following testimony represents the views of the U.S. Public Interest Research
Group (PIRG), the federation of state Public Interest Research Groups, which is a
non-profit, non-partisan public interest advocacy organization.
The Need for Real Reforms, and Why They Matter to Taxpayers
Even as many American families are struggling to make ends meet and businesses
are fighting to keep their doors open, Main Street still manages to pay their
Taxpayers have also made an unprecedented investment in the banking, auto and
insurance industries. These industries have made increasing use of complex
schemes to avoid paying their own taxes. For instance, over 80% of the biggest U.S
corporations maintain revenues in offshore tax haven countries.(1) The names on the
list are familiar: American Express, A.I.G, Boeing, Cisco, Dow, Hewlett-Packard,
J.P. Morgan Chase and Pfizer—among others.
In U.S. PIRG’s report, ‘‘Who Slows the Pace of Tax Reforms,’’ it’s been found that
even a modest number of corporations—just twelve—that oppose tax reforms of any
kind, have over 440 subsidiaries in tax haven countries.(2)
These corporations move their revenues, manipulate their costs and take generous
deductions in order to pay minimal, if any, U.S. taxes. In fact, Goldman Sachs,
which received $10 billion in federal bailout dollars, paid just a 1% tax rate in
The Senate’s Permanent Subcommittee on Investigations concluded that the U.S Treasury loses up to $100 billion per year because of tax haven abuse.(4) U.S. PIRG
has further analyzed that figure to establish the state shares of these revenue losses
in its April 15, 2009 Report, ‘‘Tax Shell Game: The Cost of Offshore Tax Havens
The massive losses in revenue must ultimately be made up by taxpayers. When
companies ‘‘change the geography’’ of their earnings, their headquarters or their
subsidiaries to tax haven countries—the taxpayers must pick up the tab by paying
higher taxes themselves or suffering from reduced public services.
When big businesses abuse tax havens, it puts ordinary businesses—especially
small businesses—without elaborate tax schemes and access to havens at a competitive
disadvantage. Businesses should thrive based on their ability to be efficient and
innovative, not their access to the best tax lawyers or their aggressiveness in hiding
assets offshore. Companies that create jobs here in the United States should not be
at a competitive disadvantage against other companies that are nominally registered
in tax havens or that move their earnings to such places. Companies that
share the same access to U.S. markets and U.S. consumers should compete on a
level playing field.
The negative impact of offshore tax havens extends beyond the burden it places
on other taxpayers. According to the IRS, ‘‘At least 40 countries aggressively market
themselves as tax havens. Some have gone so far as to offer asylum or immunity
to criminals who invest sufficient funds. They permit the formation of companies
without any proof of identity of the owners, perhaps even by remote computer connection.’’
(5) Corporate and bank secrecy set up breeding grounds for money laundering,
drug trafficking and terrorism—both offshore and here in the United States.
Similar alarm has been sounded by Nobel-prize winning economist Joseph
Stiglitz, who chairs the Commission of Experts of the U.N. General Assembly on reforms
of the international monetary and financial system. He makes clear that tax
havens are a losing proposition on all sides. ‘‘Secret tax havens . . . are bad for developing
countries, bad for money laundering, drugs corruption—bad in every dimension.’’
(6) Mr. Stiglitz indicates that the secrecy assists terrorists using these
shadow markets to finance their agenda.(7)
Finally, many bills making their way through Congress so far this year could use
the additional revenue that would be retained in this country by restricting tax havens
as a way to pay for other programs. U.S. PIRG does not advocate using revenues
that would be recaptured from shedding light on tax haven abusers for any
particular program. However, when Congress is struggling to find ways to find revenue
sufficient for two wars, an economic recovery effort, and other major reforms,
how can it look the other way when companies that benefit heavily from government
contract work and government bailouts fail to pay their fair of taxes?
Corporate Tax Rates and Competition
When lobbyists defend the existence of offshore tax havens, they typically argue
that American corporations are already taxed enough. They refer to a claim that
corporations pay a statutory tax rate of 35%, which is simply based on the law or
‘‘statute.’’ However, the amount corporations actually pay is instead indicated by
their effective tax rate, which is the percentage of their profit that they actually pay
in taxes. And after corporations use myriad deductions, credits for business-related
expenses and depreciation allowances, the amount of tax they actually pay on profit
decreases dramatically—in some cases to nothing at all.(8)
In 2008 the GAO reported that effective taxes rates end up varying greatly across
corporations depending on their ability to use such tax-reduction techniques.(9) Another
2008 GAO study showed that 25% of U.S. corporations with more than $250
million in assets or $50 million in sales paid no federal income taxes at all in 2005,
the most recent year for which such data is available.10 It has been widely reported
that Goldman Sachs paid an effective tax rate of just 1% in 2008, citing they had
made ‘‘changes in geographic earnings mix.’’
But this is really a separate issue. Whatever one thinks is the proper rate of corporate
taxation, there should not be a parallel shadow system of tax avoidance that
leaves other taxpayers shouldering the burden. When secrecy keeps individuals,
governments and other banks from knowing exactly what is on the books and behind
bank assets, it creates a false sense of security, making businesses more susceptible
to the downward spiral we’ve seen over the last year.
The mythical threat of ‘‘double taxation’’ is often re-circulated by businesses that
oppose reform. This is a baseless threat, because the foreign tax credit already protects
against double taxation—and no one is proposing repealing that. There’s a proposal
by the Obama Administration to make this tax credit reflective of the average
of all the tax rates that apply to a business so businesses cannot effectively choose
which rate they want to pay, regardless of where they do business.
Reforming the Broken System
The Foreign Account Tax Compliance Act is a step in the right direction to
reform a broken system where tax dodging individuals and corporations offload their
burden on ordinary taxpayers. Holding foreign banks and corporations accountable
for their clients can only help the process of ending bank secrecy.
When it is reported that Cayman Island financiers are breathing a giant sigh of
relief and making official gestures of ‘‘congratulations to Chairman Baucus and
Chairman Rangel,’’ then Congress should stop to see what’s missing.11 The following
are U.S. PIRG’s recommendations for comprehensive reform.
Codify the Economic Substance Doctrine
The bill should change the IRS code to ensure that a transaction has a purpose
aside from reduction of tax liability in order to be considered valid. This covers any
tax avoidance scheme into the future—which is a critical tool for law enforcement.
Address the Offshore Shell Companies and Collect Taxes
Companies that exist only on paper or via a Post Office box in the Cayman Islands—but
take advantage of American markets, have access to our consumer base,
use our physical and financial infrastructure and are protected by the U.S. military—should
pay U.S. taxes.
Specific quantitative standards can be established to determine if a company is
owned and controlled here in the United States in order to apply the correct level
Repeal ‘‘Check the Box’’
A provision should be added to keep companies from being able to simply check
a box on a form to determine their business entity classification (to be most advantageous
based on their location and tax treatment). This loophole has been abused
in order to have the advantages and protections associated with incorporation, but
not have to be taxed as such.
Ban ‘‘Tax Strategy’’ Patents
As we said in a coalition letter to this Committee earlier this year, U.S. PIRG
supports banning patents on complex tax transactions and strategies used to avoid,
reduce or defer taxes.
Our government should not be in the business of rewarding tax lawyers who help
clients dodge their taxes. There is no patent protection for finding new ways to steal
cars, and there shouldn’t be protection for finding new ways to dodge taxes. These
patents pose a significant threat to taxpayers and their advisors.
Legislation to accomplish this was passed in the House last year by a vote of 220
to 175 as part of larger patent reforms. As of the writing of the letter, 82 tax strategy
patents had been issued, with 133 pending.
By taking on this issue in a serious way Congress can demonstrate that it puts
Tax haven abuse is only legal because the law has not caught up to reality. It
used to be legal to use other people’s credit card numbers, dump raw sewage in rivers,
and import radioactive materials—until we updated laws to stop it.
(1)Government Accountability Office, International Taxation: Large U.S. Corporations and Federal
Contractors with Subsidiaries in Jurisdictions Listed as Tax Havens or Financial Privacy
Jurisdictions, Dec 2008.
(4) Committee on Homeland Security and Governmental Affairs, Permanent Subcommittee on
Investigations. TAX HAVEN BANKS AND U.S. TAX COMPLIANCE STAFF REPORT
(5) Internal Revenue Service website. Viewed 4 April 2009 http://www.irs.gov/businesses/small/article/0,,id=106568,00.html
(6) ‘‘Economist calls for tax havens to be closed down.’’ Cayman News Service. 26 Aug. 2008 http://www.caymannewsservice.com/business/2008/08/26/economist-calls-tax-havens-be-closed down
(7) ‘‘Economist calls for tax havens to be closed down.’’ Cayman News Service. 26 Aug. 2008 http://www.caymannewsservice.com/business/2008/08/26/economist-calls-tax-havens-be-closeddown
(8) Huang, Chye-Ching. Putting U.S. Corporate Taxes in Perspective. Center on Budget and Policy Priorities. 27 Oct. 2008
(9)Government Accountability Office, Effective Tax Rates Are Correlated with Where Income Is Reported. Aug. 2008
(10)Government Accountability Office, Comparison of the Reported Tax Liabilities of Foreignand
U.S.-Controlled Corporations, 1998–2005. July 2008