For the past century, the paying of taxes has been met in a variety of ways (both legal and illegal) by individuals and companies trying to avoid paying what they owe. Loopholes have generally been the clearest form of this approach, but with respect to international companies, such avoidance is also focused on accounting tricks that shift profits overseas.
In 2015, there were 27 companies that made millions (and billions) in profits, yet paid no federal taxes in the United States. These included media entities like News Corp, real estate-based firms such as General Growth properties and airlines like United Continental.
To magnify the problem, those companies also ended up receiving tax refunds. That meant that approximately $11 billion in revenue that ordinarily would have gone for government services instead went back into those companies’ coffers.
Such a strategy is possible because of the federal system whereby if an international firm is able to legally establish their company in a specific territory that’s tax-free, they don’t have to pay taxes on their profits.
That’s allowed a vast number of companies (such as Apple, Bank of America and Qualcomm) to list their operations as being in the Cayman Islands or Bermuda, where there are no taxes. While those companies did pay some taxes in the United States, the amount that they were able to avoid paying on was estimated collectively at over $2.1 trillion.
A previous effort has been made toward trying to get companies to pay at least some of the taxes that they owe in the United States. The first came in 2005 when then-President George W. Bush offered companies a tax holiday by reducing the tax rate from 35 to five percent. This would only be available once, and a vast number of companies took advantage of the offer.
However, what resulted was that the 30 percent savings that these companies enjoyed was not used to create job growth. Instead, the opposite effect took hold as stock buybacks and job cuts were how those companies dealt with the issue.
Two specific companies received severe criticism for their actions. Hewlett Packard was repatriating over $14.5 billion in profits made overseas during the tenure of then-CEO Carly Fiorina while also firing 14,500 employees. Ford Motor Company was able to save hundreds of millions in taxes after having lobbied for such legislation. Their response was to reduce their workforce by 30,000 jobs.
Currently, the Obama administration is pushing a similar approach, with companies seeing their tax rate reduced from 35 to 14 percent when they bring home their overseas profits.
The problem with this plan is that critics are charging that the United States would be giving up tax revenue of over $400 billion. That money could be used to fund free higher education at public colleges by eliminating tuition. That would allow students to avoid being saddled with heavy debts once they leave school and instead allow them to use the money to further fuel the economy.
This issue has become part of the 2016 presidential campaign, more prominently on the Democratic side. Senator Bernie Sanders of Vermont has proposed eliminating the tax loopholes that companies currently are using, which would amount to approximately $100 billion a year.
Sanders believes that over the course of a decade, the $1 trillion that could be brought back into the government would help fund infrastructure across the country that’s badly needed. That would mean that 13 million jobs could be created, not to mention save lives from the potential disasters that would be avoided by such fixes.