Corporations have become more powerful economically than nations. Their donations to candidates has come to overwhelm citizens and threatens to destroy democracy. Money is the problem, but size counts. American firms alone hold over $1,25 trillion in tax havens abroad today (Though the International Monetary Fund estimates it is over $5 trillion) according to Helen Thomas writing in the Financial Times (July 28th 2011) with Jeremy Lerner from data provided by Moody's Investors Services. This is a huge leap when American firms with international operations held over 25 billion dollars in profits abroad in 2002 (http://www.finfacts.ie/...). An increasing number of American corporations moved their headquarters to low tax states or to off-shore "tax havens" in the past two decades. Multi-national corporations have followed suit with the result of a race to the bottom in lowering tax rates across the globe by nations and states. Hiding profits is the name of the game. Some of this money is actually being held in American banks but has been listed as foreign income by tax lawyers for the corporations due to a change in reporting law in recent years.
Instead of racing to the bottom nations should act to make illegal such "tax havens." Another route is to institute a unitary tax system that taxes a company's profits on a world-wide basis. Such tax programs (as the one in California in the 1980s) act to decrease the ability of large corporations to undercut small businesses by dumping cheap goods into their market while compensating for the loss by their international profits.
A unitary tax system for the 21st century would ignore the nation of origin or "home state" of a multinational corporation. All corporations would be treated as residing in each country if they did business there and would be required to pay taxes on in country sales as if they only did business there. They would be required to report international sales so proof of "dumping" could be assured. In such a tax regime tax havens would disappear. No local jurisdictions would be recognized.
We should keep in mind that from 1996 to 2000 most American and foreign corporations paid no income tax in America according to the IRS. In 2000 94% of American corporations and 89% of foreign corporations paid less than 5% of their total incomes in taxes.
Mr. Richard Waters reported in the February 11th issue of the Financial Times, "Tax drives US tech groups to tap debt," that tech companies like many US companies operating abroad are holding large sums off-shore to avoid paying taxes. This kind of tax avoidance is unfortunately considered by many to be legal but it is just an extension of the everyday variety of some citizens inside the USA who try and hide their income in various ways. In the last analysis, no matter what the excuse, tax avoidance by some raises the tax burden on all the responsible taxpayers. One only has to recall the arrogance of someone like Leona Helmsley who argued that, "Only the 'little people' pay taxes, to under some of the rationalizations behind these efforts.
As Waters notes, many companies are using their cash hoards in stock by-backs, dividends or take-overs. While all these actions may be good for the stockholders they are no reason for shirking tax responsibilities.
Vannessa Houlder's article, "Trouble to avoid," Financial Times, 7 February, addresses companies' and private citizens' efforts to avoid taxes by registering in low tax nations or in cantons of Switzerland. It is clear that countries are in a futile pursuit of an ever sophisticated tax avoidance culture.
Tax avoidance is part of the economics of the past 20 years that has led to increasing wealth inequality. Questions of the cost of chasing tax money and of uncovering it are bound up in complex issues of national sovereignty. Efforts to replace lost business tax and income tax hidden abroad are not cost effective. But there is an answer. The Unitary Tax System.
Conflicts in discovering secret accounts between neighboring nations like Germany and Lichtenstein, the USA and tax havens like the Cayman Islands and Bermuda, Britain and France and the Netherlands and Ireland as well as internal segments like the cantons of Switzerland and some USA states, are in the news and seem to only produce more conflict. Though Germany received concessions from Lichtenstein by simply threatening to cut off the transfer of goods and services into the tiny country. The same action could be taken with island tax evaders like the Cayman Islands. Low-tax countries not only reduce global tax revenues by acting as legal havens, but encourage continued downward pressure on tax revenues. A related problem is the poor access to income and expenses within global corporations. Transfer pricing within corporate units are notoriously unreliable as Mark Granovetter demonstrated from a number of studies in the 1970s and 1980s. This problem has escalated with globalization of commerce and finance as well as the crisis in audit standards as was at the core of the Enron and Worldcom frauds. Small companies cannot compete with large international corporations who can hide income and avoid taxes. There must be an equitable solution.
This problem was discussed two years ago by Raymond Baker (Financial Times 24 April 2009) regarding the levels of “black money” or illicit financial outflows estimated in India. Partly, as Mr. Baker argues, trade mispricing is also involved to avoid both tax and earnings to either shareholders or creditors. An answer to this both problems, the race to the bottom of low-tax countries and tax avoidance as well as the problem of transfer pricing and mispricing, could be an international Unitary Tax System. California had an effective system in place in the 1980s where corporate taxes were levied based on international sales. International cooperation in audits could hold down tax cheating and maximize tax collection producing a level playing field for all nations and all corporations big and small. The system could work like sales tax collection among different counties in California with redistribution back to states from an international body made up of representatives of the participating states. Sampling studies of bar codes and radio labels of various products could act as cost efficient controls on sales monitored by the individual states to check flows of sales.