Wednesday, April 23, 2014

Corporate tax breaks are criminal

This piece was written by Notre Dame freshman Dan DeToro and originally published as an article in Common Sense on April 23, 2014.

Remember when Mitt Romney demonized the 47% of Americans whom he claimed lacked personal responsibility and did not pay income tax? 

A quarter of these people are elderly and don’t work while a further 17% are students or disabled. The rest of the 47% still pay federal payroll tax.

These “freeloaders” refrain from income taxes under various programs including the Earned Income Tax Credit, a policy championed by conservatives Ronald Reagan and Milton Friedman.

But what about the people who contribute to low tax revenues and a burgeoning deficit because they avoid taxes unlawfully? According to Kentucky Senator Rand Paul, they should be given an award.

Companies like Caterpillar, which was recently the subject of a Senate investigation, use dubious measures to defer paying what they truly owe in corporate tax. According to the majority report from the Senate Permanent Subcommittee on Investigations, chaired by Senator Carl Levin (D-MI), Caterpillar has avoided paying $2.4 billion dollars in mandated taxes.

This comes on the heels of similar inquiries into Microsoft, Apple, and Hewlett-Packard. Caterpillar paid an effective tax rate of 4%-6%, in contrast to the required 35%. Although the U.S. corporate tax rate is the highest among the countries that are a part of the Organization for Economic Co-operation and Development (OECD), the actual rate paid on US corporate income has been estimated at 13%.

Who picks up the slack? The working man (or woman). In 1952, corporate tax contributed to 32.1% of federal tax revenue while payroll taxes only amounted to 9.7% of revenue.

Today those numbers are opposite. Corporate tax contributes 8.9% of revenue and payroll tax puts up 40% of federal tax revenue. (Federal income tax is down from 1952, from 42.2% to 41.5% in 2011) While corporations are paying millions to accountants to help them hide billions in taxable income, workers of both collar color are subject to increasing tax burdens to cover the gap.

Caterpillar evaded taxes through an elaborate scheme that said most of the profits from their parts selling business came from a Swiss subsidiary that was subject to Swiss taxation. The subsidiary, CSARL, posted large profits from the parts business even though no parts were manufactured in, or shipped from, Switzerland, where Caterpillar had 65 employees in the parts division. 

A licensing agreement with CSARL allowed Caterpillar to hide $8 billion in taxable income from the IRS. As postulated by tax professionals within Caterpillar, and now alleged by Senator Levin and the Committee, CSARL had no legitimate business purpose other than hiding taxable income from the United States.  

So should Caterpillar and other “US-centric” multinationals be getting awards? No, they should be getting indictments. If you break the law, the price must be paid.

The Internal Revenue Service and the Department of Justice have a responsibility to ensure that everyone subject to US taxes pays said taxes. In a time where the deficit is at an unprecedented level relative to GDP, taxes are vital to ensure a functioning government.

Rather than raising taxes or cutting programs, the government should focus on the income and assets of American individuals and corporations that unlawfully evade their tax obligation. The problem is not a small one. Previous reports put the amount of hidden assets in the hundreds of billions to trillions of dollars.

Why do the rich and the corporate overlords get to flout the tax code? Do they not benefit from infrastructure, law enforcement, national security, education of the work force, and research that is directly funded by public tax dollars?

I would argue that they benefit greatly, more so than the average worker. Corporations and their owners have roads and bridges upon which their goods can travel, police forces to prevent theft, and the world’s most powerful navy that ensures the oceans are always open for business.

So while corporations have an obligation to their shareholders to minimize costs and maximize profits, they have obligations to the country that enabled their success. Corporations like CAT that break the law and deprive the country of rightful tax revenue should be prosecuted, as would any other tax evader.

The Department of Justice has an obligation to enforce the tax code no matter how big a company’s bottom line is. A crime is a crime and creating a subsidiary with the intent of hiding taxable income is a criminal offence. It’s time the government started treating it like one.

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