Federal Tax Loopholes: They're Like a Mafia Protection Scheme Where Big Corporations Profit

A year ago, Citizens for Tax Justice, a Washington, D.C., nonprofit, studied the tax returns of 280 corporations. What it found was a Beltway version of a Mafia protection scheme.

From 2008 to 2010, at least 30 Fortune 500 companies — including PepsiCo, Verizon, Wells Fargo, and DuPont — paid more for lobbyists than they did in taxes. They collectively spent $476 million sucking up to Congress, buying protection for tax breaks, loopholes, and special subsidies.

It didn't matter that these same 30 firms brought home a staggering $164 billion in profit during that three-year period. They not only managed to avoid paying taxes. They actually received $10.6 billion in rebates.

Republican presidential nominee Mitt Romney is the poster child of offshore tax schemes.
Austen Hufford/Creative Commons
Republican presidential nominee Mitt Romney is the poster child of offshore tax schemes.
Facebook founder Mark Zuckerberg took advantage of a multibillion-dollar tax scam during his company's IPO.
Guillaume Paumier/Creative Commons
Facebook founder Mark Zuckerberg took advantage of a multibillion-dollar tax scam during his company's IPO.

Welcome to the U.S. tax code, where companies like General Electric and Boeing contribute less to the federal treasury than a retired machinist living in Florida.

Defenders of the system argue that most deductions don't go to large corporations. That's true. By pure dollars, the lion's share goess for mortgage interest, employer-paid health insurance, retirement plans, and Medicare benefits.

The difference is these tend to benefit everyone. They're designed for the greater good, reinforcing the pillars of self-determination: homeownership, savings, and health care.

But there's another part of the tax code where 99 percent of America is barred from entry. It's where Congress sells loopholes and subsidies to those with the wallets to pay. They not only screw the rest of the country — which is forced to cover the tab — but turn any notion of a free market into situational comedy.

Even for companies within the same industry, the disparities are alarming. From 2008 to 2010, UPS paid a tax rate of 24 percent of its profits. Rival Fed­Ex paid less than 1 percent.

Monsanto managed to pay 22 percent — well below the supposed corporate rate of 35 percent. But that's nothing compared to DuPont, which paid no taxes and even received a $72 million refund — despite profits of $2.1 billion.

This sleight of hand extends even to retail. While Nordstrom paid 37 percent in taxes, Macy's rate is just 12.

You don't need a Wharton MBA to see how damaging this is to the nation's financial health. Big companies are given incentive to lard up on lobbyists, accountants, and lawyers, rather than use that money to improve products and services. And while small businesses may collectively be our largest and most stable employer, we've rigged the game against them, since they can't afford to buy congressmen of their own.

"The tax code is a mess," says Congressman Chris Van Hollen (D-Maryland). "I support tax reform but not reform that's simply a Trojan horse for giving another round of windfall tax breaks to the very wealthy."

And that's the problem. President Obama and Democrats have railed for years over this brand of favoritism, only to cave like the French army at the first whiff of resistance.

Republicans are worse, prattling on about free markets while protecting just about any market-distorting loophole if the money's right. Mitt Romney, the poster child of offshore tax schemes during his time at Bain Capital, claims he has a plan to close loopholes. He just refuses to say how he'll do it.

But if you're not being bought with weekend golf retreats at Augusta National, it's easy to find giveaways we can all agree must end. Introducing the ten most corrupt breaks, designed to do nothing but pervert America's economic strength:

10. I'm Irish. No, really.

Apple Inc. may have made Silicon Valley famous, but it prefers to let someone else pick up the check for Northern California's freeways, bridges, and airports.

How? By pretending to be Irish.

In the late 1980s, Apple decided that Ireland's 12.5 percent corporate tax rate was a much more comely figure than America's 35. But Steve Jobs didn't want to move to Dublin. Fortunately, Congress allowed him to fake it.

Apple created an Irish subsidiary. Then, with a flourish of paperwork, it transferred its most valuable assets — its patents — to Ireland, comically forcing its U.S. headquarters to pay leasing fees for its own inventions.

Nothing had actually changed in the way the company operated. Apple simply had new paperwork saying it was partial to warm beer and fiddles, allowing it to dodge a substantial part of its U.S. tax bill.

But that wasn't the end of the scam. The Irish subsidiary is partially owned by another company, Baldwin Holdings, which doesn't even publicly list an office address or a phone number. But it does have paperwork saying it's headquartered in the Virgin Islands, where it can stockpile its income tax-free, outside the reach of the IRS.

Most people associate such exhaustive money laundering with drug cartels. But it's now standard practice at firms like Eli Lilly, Google, Microsoft, Pfizer, and Facebook. The only difference is that when drug dealers do it, the government shows up with Kevlar and automatic weapons instead of a refund check.

Congress, meanwhile, is paid to look the other way, leaving the federal treasury open to serial molestation by our most prominent citizens.

"The original sin is that we treat a wholly owned subsidiary in the Cayman Islands as if it was an arm's-length separate entity," says Dr. Calvin Johnson, a tax expert at the University of Texas Law School. "A pocket transfer from the U.S. to the Cayman Islands is like a transfer from your left pocket to your right. Any system that treats a Cayman Island subsidiary as if it is a separate entity is just asking to be destroyed."

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Umm, Octopus is owned by Paul Allen, not Steve Ballmer


"Loophole" is a misnomer, and should not be used, as it creates the impression that the resultant deduction was not intended.  So the press does the public a disservice when it uses a word that allows people to infer that some tax advisers have arcane, specialized esoteric knowledge, that allows their ultra rich client to get around the substance and intent of the IRS Tax Code definition of income.


Socially engineered tax deductions (social engineering) are deductions to elicit certain types of behavior - to encourage investment in specific areas like multifamily housing in the 80s which caused havoc to real estate; and other tax incentives for former colleagues and friends who give to political campaigns, have riddled our tax laws with a maze of favoritism at the expense of tax fairness and revenue for government that has led to our current depression and vast chasm of income inequality. 


Only a few decades ago the substance and intent of the code controlled, and form versus substance was pierced by the IRS in going against the most abusive forms contrives to get around substance.

The "step transactions" described herein should be easy for the IRS to attack and prevail, however, today there is no resolve on the part of the IRS to seriously go after some members of the ultra rich who have overly aggressive tax "experts" designing forms to avoid which in fact are - evasion.  And evasion is a felony.


Of course people like Romney, and his tax preparers at Price Water House...confidently affirm there is nothing illegal.  What else would you expect when the substance is contrived form to avoid/evade the intent and substance of the code.  These people who claim "nothing is illegal" base their claim on the fact that their avoidance/evasion has not be overturned by the IRS and then by US Tax Court.  But the controlling issue has not been addressed or how could so many blatant step transactions remain in existence when the existence has been revealed on 1040s, including Romney's 1040s that have been released? 


To learn more: www.the5thestate.net





frankd4 topcommenter

this is why it's silly to talk tax rates as if corporations were paying their fair share anyhow - maurice greenberg of starr insurance (he previously ran A I G) estimates $2,5oo,ooo,ooo,ooo in off-shore profits yet to be repatriated and taxes paid on that amount - so even a small change in the current rate say 10% would automatically yield a $25,ooo,ooo,ooo SAVINGS - no wonder lobbyists seem over-compensated when compared to current issues - the big picture is profits previously earned YET TO BE taxed