The Paradise Papers: A Year Later

This week marks the one-year anniversary of the release of The Paradise Papers, a leak that included 13 million documents from a large offshore law firm.  The leak detailed a number of tax avoidance techniques used by the wealthy and multinational corporations to avoid taxes.  At the same time, Congress was rushing to pass the Tax Cuts and Jobs Act.

In light of the Paradise Papers revelations, we encouraged lawmakers to carefully review the information from the leak and consider whether their overhaul would address the tax dodging practices exposed.  They chose not to do so.

Unlike the earlier Panama Papers story, where Americans were notably absent, the Paradise Papers had clear U.S. connections.  There was extensive data on the tax avoidance schemes of at least 31,000 U.S. citizens, residents, and companies including household names like Apple, Nike, and Uber.  Rather than consider lessons to be learned around how policies might work in practice, lawmakers chose to ignore the warning signs.  The tax law passed just over a month later with minimal attention paid to any of the insights to be gleaned from the leak.  It should not be surprising that the law continues to encourage multinational corporations to engage in offshore tax schemes.

Proponents of the bill argued that the law would end offshore tax avoidance.  It did not.

The tax law’s few, overly complicated anti-tax avoidance measures fall flat and the new, unequal rates only work to create perverse incentives.  The law sets a 21% rate for domestic profits and, at most, a 10.5% rate on profits booked offshore.  Worse, corporations can lower their offshore tax rate to 0% by moving tangible assets (such as factories and jobs) overseas. The unequal rates further encourage companies to continue complex tax avoidance practices.

There is a simpler, more effective solution to aggressive corporate tax avoidance.  Congress should remove the incentive to shift profits by equalizing the tax rates for offshore and domestic profits.  Since the law effectively closed a problematic loophole allowing companies to defer paying taxes on their offshore profits, equal rates would effectively eliminate profit shifting incentives.

The congressional response to the Paradise Papers is part of a long running international race to the bottom in which countries fight for an ever shrinking share of corporate tax revenue.  Reducing tax rates has done little to stem the erosion of corporate tax revenue. Instead, we see the falling share of corporate income tax lead to a shift in the tax burden to smaller businesses and individual taxpayers forced to pick up the tab. In the U.S. austerity measures in response to rising deficits have left the U.S. with a crumbling infrastructure and a growing inability to pay for basic services.

As dangerous as this race to the bottom is for the U.S., the implications for developing nations are greater.  Internationally, Oxfam estimates that just 30% of the $100 billion annual loss in corporate tax revenue in poor countries is enough to cover the cost of essential healthcare that could prevent the needless deaths of eight million women and children.

Aggressive corporate tax avoidance is harmful but it is not inevitable.  It is the result of conscious policy choices.  That is why we are joining with our colleagues around the world this week to mark the Global Week of Action to Make Multinationals Pay Their Share.

Jacob Wills is a Communications Associate with the FACT Coalition.