The Tax (Avoidance) Day is Approaching

By Yaroslav Pustarnakov

On Tuesday, Americans Will Pay More in Taxes Because One Group Shirks its Civic Responsibility: Multinational Companies

Though they probably don’t all agree on every detail, most Americans see paying taxes as a civic duty.  Even so, it’s unlikely very many enjoy the paperwork and stress involved with Tuesday’s looming tax deadline. With few days left to go, millions of Americans are sitting down to get everything just right, and make sure they are paying what they owe—and not a penny more.

Wanting to minimize your tax liability is not unreasonable. Less reasonable is spending billions lobbying congress to create loopholes to be exploited in order to avoid nearly all of the taxes you would have otherwise been required to pay.  Playing within the rules to reduce liability is one thing, but actively changing the rules of the game to eliminate liability altogether — while middle-class Americans and small businesses pay full fare — is objectively unfair.

In recent years, multinational companies have done just that, investing increasingly in larger accounting departments and legal teams at the expense of research and development — choosing tax avoidance over innovation as their primary source of growth.  A recent study by the Institute on Taxation and Economic Policy (ITEP), puts this in perspective: while Americans hustle to get their taxes in on time, multinational companies are stashing an estimated $2.6 trillion in untaxed profits offshore with no deadline to pay the taxes they owe on it.

A common argument made in defense of these practices is that no one should pay more in tax than the law asks them to pay, but this fails to consider the reality of how some of these laws were created. Many of our tax laws were not the outcome of sincere debate about a fair tax code, but rather the result of multinational companies actively crafting laws that allow them to pay nearly nothing in taxes.

Loopholes abused by multinational companies are a huge burden on the middle class and small business — costing taxpayers an estimated $150 billion every year in lost state and federal revenue according to the U.S. Public Research Interest Group (PIRG).  To cover this enormous gap, they either require increased taxes on middle-class taxpayers and domestic businesses, demand cuts to much-needed programs, or increase the national budget deficit.

Either way, when they don’t pay, someone is making up the difference.

In fact, U.S. PIRG estimates that every year, each individual taxpayer would owe $1,026 in additional taxes to make up for the taxes that were skirted by multinationals booking profits offshore. This sizable sum of taxpayer money goes towards paying off the tab of those who game and cheat the system, all whilst you lose out on opportunities to use these $1,026 dollars to go on a vacation, pay for your children’s college tuition, or put money away in a retirement fund.

Tax avoidance loopholes are not only a burden on the middle class, but put small business at a competitive disadvantage. PIRG similarly estimates that the average small business pays an additional $5,186 in taxes each year, due to multinational tax avoidance.

Unlike Multinationals, small business owners can’t afford armies of lawyers and accountants, who exploit loopholes in the tax code to boost short-term profits. And small business owners are even less likely to have offshore subsidiaries; meanwhile 73% of Fortune 500 companies operate in tax havens, where they shift profits to avoid tax.  Meanwhile, these same small domestic businesses are forced to compete with multinational companies that are able to undercut prices — not because of innovation or efficiency, but due to their lobbying prowess and the cleverness of their tax gimmicks.

This problem is only getting bigger, and to solve it, we need real comprehensive tax reform. Reform that includes a debate on the realities of the flaws in our current tax code — with a focus on the multinational companies that have lobbied to manipulate them.  Unfortunately, current tax reform blueprints proposed by House leaders only add to the problem. A recent report by the Institute on Taxation and Economic Policy finds that the House tax reform plan actually increases the carve-outs for multinationals — further adding to the burdens on the middle class and wholly domestic companies.

Lawmakers are right to want to reform the tax code, but so far their proposals miss the point. To rightfully be called tax reform, any plan needs to include the following:  stop giving multinationals an advantage over wholly domestic and small businesses; stop U.S. companies from claiming foreign residence simply to dodge taxes; ensure multinationals play by the rules by publicly reporting their profits and taxes paid; and, at the very least don’t make things worse.

Yaroslav Pustarnakov is an advocacy intern with the FACT Coalition.