A year ago, Citizens for Tax Justice, a Washington, D.C., nonprofit, studied the tax returns of 280 corporations. What it found was a Beltway version of a Mafia protection scheme.
From 2008 to 2010, at least 30 Fortune 500 companies—including PepsiCo, Verizon, Wells Fargo, and DuPont—paid more for lobbyists than they did in taxes. They collectively spent $476 million sucking up to Congress, buying protection for tax breaks, loopholes, and special subsidies.
It didn’t matter that these same 30 firms brought home a staggering $164 billion in profit during that three-year period. They not only managed to avoid paying taxes, but they also actually received $10.6 billion in rebates.
Welcome to the U.S. tax code, where companies like General Electric and Boeing contribute less to the federal treasury than a retired machinist living in Florida.
Defenders of the system argue that most deductions don’t go to large corporations. That’s true. By pure dollars, the lion’s share go for mortgage interest, employer-paid health insurance, retirement plans, and Medicare benefits.
The difference is these tend to benefit everyone. They’re designed for the greater good, reinforcing the pillars of self-determination: home ownership, savings, and health care.
But there’s another part of the tax code where 99 percent of America is barred from entry. It’s where Congress sells loopholes and subsidies to those with the wallets to pay. They not only screw the rest of the country—which is forced to cover the tab—but they also turn any notion of a free market into situational comedy.
Even for companies within the same industry, the disparities are alarming. From 2008 to 2010, UPS paid a tax rate of 24 percent. Rival FedEx paid less than 1 percent.
Monsanto managed to pay 22 percent—well below the supposed corporate rate of 35 percent. But that’s nothing compared to DuPont, which received a $72 million rebate—despite profits of $2.1 billion.
This sleight of hand even extends to retail. Although Nordstrom paid 37 percent in taxes, Macy’s rate is just 12.
You don’t need a Wharton MBA to see how damaging this is to the nation’s financial health. Big companies are given incentive to lard up on lobbyists, accountants, and lawyers, rather than use that money to improve products and services. And though small businesses might collectively be our largest and most stable employer, we’ve rigged the game against them, because they can’t afford to buy congressmen of their own.
“The tax code is a mess,” says Congressman Chris Van Hollen (D-Maryland). “I support tax reform but not reform that’s simply a Trojan horse for giving another round of windfall tax breaks to the very wealthy.”
And that’s the problem. President Obama and Democrats have railed for years over this brand of favoritism, only to cave like the French army at the first whiff of resistance.
Republicans are worse, prattling on about free markets while protecting just about any market-distorting loophole if the money’s right. Mitt Romney, the poster child of off-shore tax schemes during his time at Bain Capital, claims he has a plan to close loopholes. He just refuses to say how he’ll do it.
But if you’re not being bought with weekend golf retreats at Augusta National, it’s easy to find giveaways we all can agree must end. Introducing the 10 most corrupt breaks, designed to do nothing but pervert America’s economic strength.
10. I’m Irish. No, really.
Apple Inc. might have made Silicon Valley famous, but it prefers to let someone else pick up the check for Northern California’s freeways, bridges, and airports.
How? By pretending to be Irish.
In the late 1980s, Apple decided that Ireland’s 12.5 percent corporate tax rate was a much more comely figure than America’s 35. But Steve Jobs didn’t want to move to Dublin. Fortunately, Congress allowed him to fake it.
Apple created an Irish subsidiary. Then, with a flourish of paperwork, it transferred its most valuable assets—its patents—to Ireland, comically forcing its U.S. headquarters to pay leasing fees for its own inventions.
Nothing had actually changed in the way the company operated. Apple simply had new paperwork saying it was partial to warm beer and fiddles, allowing it to dodge a substantial part of its U.S. tax bill.
But that wasn’t the end of the scam. The Irish subsidiary is partially owned by another company, Baldwin Holdings, which doesn’t even publicly list an office address or a phone number. But it does have paperwork saying it’s headquartered in the Virgin Islands, where it can stockpile its income tax-free, outside the reach of the IRS.
Most people associate such exhaustive money laundering with drug cartels. But it’s now standard practice at firms like Eli Lilly, Google, Microsoft, Pfizer, and Facebook. The only difference is that when drug dealers do it, the government shows up with Kevlar and automatic weapons instead of a refund check.
Congress, meanwhile, is paid to look the other way, leaving the federal treasury to serial molestation by our most prominent citizens.
“The original sin is that we treat a wholly owned subsidiary in the Cayman Islands as if it was an arm’s length separate entity,” says Dr. Calvin Johnson, a tax expert at the University of Texas Law School. “A pocket transfer from the U.S. to the Cayman Islands is like a transfer from your left pocket to your right. Any system that treats a Cayman Island subsidiary as if it is a separate entity is just asking to be destroyed.”
Actually, it already has been destroyed. Despite declaring $18 billion in profits in 2010, Apple paid just 17 percent in federal taxes. It socked away another $74 billion offshore and tax-free.
Who covers the difference when Apple pretends to be Irish? That would be you.
9. How to lower your taxes by sitting on your ass
Back in the 1970s, “hard work” wasn’t just something candidates yammered during campaigns. It was actually imbedded in the tax code. Capital gains—investment income created by things like stock dividends—were taxed at a higher rate than wage income for a simple reason.
“The theory was that it was tougher to dig a ditch than to watch somebody do it,” says Robert McIntyre, director of Citizens for Tax Justice.
Even Ronald Reagan knew that someone shouldn’t pay less for sitting on his ass. He made the capital gains tax the same as the highest personal rate.
But heavy protection payments have since whittled that notion of “hard work” down to a toothpick. George W. Bush finally hacked it to its current low of just 15 percent.
Officially, the theory is that lowering capital gains will spur investment, creating new companies, new jobs, and prosperity for all. But most economists have found it does little to spur savings and investment.
What it does do is deliver a fortune to investment bankers and financiers like Romney and Warren Buffett, both of whom pay lower rates than their secretaries.
More than 70 percent of the $100 billion that capital gains tax breaks cost the government each year goes to those with incomes in excess of $1 million, according the Joint Committee on Taxation. Even more shocking, the 400 highest-income Americans received 16 percent of all net capital gains in 2009, a total of $37 billion.
Congressman Sander Levin (D-Michigan) has tried to shear this golden lamb by requiring those taking capital gains breaks to prove they actually invested. Yet Congressman Dave Camp, a Michigan Republican and chairman of the House Ways and Means Committee, has blocked the bill from ever coming up for a vote.
It’s probably just coincidence that since Camp entered Congress in 1998, he has taken a whopping $631,916 from the financial industry. Camp did not respond to repeated interview requests.
8. The Sheryl Crow loophole
It pays to have low friends in high places. Six years ago, legislators from Tennessee, Kentucky, and Texas wanted to reward those who provide the star power to their fundraisers: country musicians. So they passed a law allowing songwriters to avoid income taxes and sell their publishing catalogs at capital gains rates.
Suddenly, Nashville’s elite could not only avoid the taxes everyone else must pay, but they could also skirt their Social Security and Medicare bills.
Three years later, Sheryl Crow sold her publishing rights to one of Australia’s largest banks for nearly $10 million. Her estimated savings courtesy of this congressional giveaway: $2 million.
The law, however, curiously omitted other creative types who weren’t hosting congressmen’s rallies. Authors, for example, still must pay standard income taxes for selling the copyrights to their books. The same goes for painters, photographers, screenwriters, and sculptors.
7. Getting rich, Facebook style
Before Facebook offered its first publicly sold stock in May, CEO Mark Zuckerberg grabbed 120 million shares for himself, then threw another 67 million shares to his employees.
It might have seemed an unusual act of generosity for a man not known for his grace. That’s because it was also a multibillion dollar tax scam.
The public paid $38 a share for Facebook stock in initial trading. Yet via a sweet little loophole created by Congress, Zuckerberg claimed the shares he gave employees were worth just six cents apiece. By law, Facebook was allowed to deduct the difference—more than $7 billion—as a business expense.
In reality, the employee giveaway cost Facebook nothing. It neither expanded the company’s expenses nor increased its liabilities. McIntyre compares it to an airline letting workers fly free in seats that would otherwise have been empty. The airlines don’t receive a break because it doesn’t cost them anything.
But thanks to some inventive paper shuffling, Facebook will receive a $500 million tax refund next year.
A similar loophole encourages companies to offer executives those bloated compensation packages.
When CEO wages began to spur outrage in the early Clinton years, Congress decided that companies could no longer deduct executive salaries over $1 million as a business expense.
But it also created a loophole that rendered its crackdown meaningless. Exempted were “performance-based” bonuses that surpass that $1 million threshold. A grand new corporate giveaway was born.
Suddenly, CEOs were being slathered with stock options. Companies expensed the giveaway without ever opening their wallets, leaving taxpayers to subsidize caviar compensation plans.
Last year, the five highest-paid CEOs collectively took home $232 million—while their companies received a tidy $81 million in tax breaks.
6. My other home is a yacht
Established in 1913, the mortgage-interest deduction is one of the oldest and most sacred breaks in the code. It’s meant to encourage home ownership and stabilize communities.
It doesn’t really work, because most people will buy homes whether they receive a break or not. Countries like Australia and Canada have similar ownership rates to ours without offering the deduction.
But at least congressmen back in 1913 occasionally tried to do something beneficial to the country. Today’s Washington is more interested in exploiting such beneficence. Take the yacht deduction.
The luxury sailing industry was able to buy its way into the mortgage break when Congress officially declared boats as homes. But not just any boat. The rules require they have sleeping quarters, a kitchen, and a toilet, leaving just 3 percent of U.S. boat owners to qualify.
“The mortgage deduction was never targeted for that,” says Congressman Tim Walz (D-Minnesota). “It was meant to make home ownership more affordable for the middle class.”
So Walz wrote the Ending Taxpayer Subsidies for Yachts Act, hoping to bar the über-wealthy from sponging off the mortgage deduction. Once again, Congressman Dave Camp refuses to let it come up for a vote.
That leaves everyday taxpayers to subsidize toys like Microsoft co-founder Paul Allen’s yacht, which comes equipped with an indoor pool, basketball court, and its own submarine.
“It’s a loophole in the tax code that benefits a few people at the very top,” says Walz, a sergeant major in the National Guard and former teacher. “I certainly feel if they want to grab their luxury liners, I’m glad they do. And I’m glad we have people making them. I’m just not certain we subsidize that.”
5. Big Oil’s Cadillac welfare
Last month, Mitt Romney traveled to Iowa, where wind energy has become an economic force, responsible for 7,000 jobs and 20 percent of the state’s electricity.
He announced that, as president, he would kill the $3.3 billion in tax incentives that now go to this nascent form of electricity. In Romney’s eyes, the industry has had more than enough time to stand on its own two feet.
“He will allow the wind credit to expire, end the stimulus boondoggles, and create a level playing field on which all sources of energy can compete on their merits,” Romney spokesman Shawn McCoy told The Des Moines Register.
It’s a laughable position. After all, Romney has announced no similar crackdown on a much older and larger welfare queen: Big Oil.
The five largest U.S. oil companies collect a spectacular $20 billion a year in tax breaks. And they’d prefer that wind farms not compete for that lucrative welfare dollar. During this year’s presidential race, the industry has paid Romney $3.4 million to ensure wind goes away.
Technically, the oil giveaway is supposed to defray the cost of searching for new sources. But even George W. Bush realized the industry didn’t need subsidies back in 2005, when the price of a barrel was at $55. “We don’t need incentives to oil and gas companies to explore,” he said at the time. “There are plenty of incentives.”
These days, the price of a barrel routinely hovers around $100. But the five biggest companies—BP, Chevron, ConocoPhillips, ExxonMobil, and Shell—still get their breaks, despite collective record profits of $137 billion last year.
“The oil industry is doing fine,” says Johnson, the University of Texas tax expert. “They don’t need or deserve a dime of subsidy. It’s all money thrown away to make shareholders richer. The private market will provide any subsidies by increasing the price. It’s time to get the government out of the business of special subsidies. It’s like Cadillac welfare.”
4. A break for shipping your job to China
In April, 750 workers at a Kimberly-Clark paper mill in Everett, Washington, lost their jobs when the company shipped them to a lower-cost facilities overseas.
Steelworkers in Stevens Point, Wisconsin, suffered the same fate. Their mill’s owner, Joerns Heathcare, took away 150 jobs last month by moving operations to Mexico.
Another 170 people making auto sensors at a Sensata Technologies plant in Freeport, Illinois, will be out of work by year’s end. Their jobs are being carted off to China.
In each case, American taxpayers will subsidize the evacuation.
It’s not just cheap labor that pushes work overseas. The U.S. tax code allows companies to expense every last cost of sending your job abroad.
At a time of 8 percent unemployment, one would think Congress would rush to kill a loophole that actually encourages economic misery. One would be wrong.
This summer, Senate Democrats introduced the Bring Jobs Home Act, which would kill the loophole and offer a 20 percent tax credit to companies that bring work back to America.
Republicans filibustered the bill to death. Senator Orrin Hatch (R-Utah) went so far as to call the measure “a joke,” ensuring another nervous Christmas for the country’s blue-collar workers.
3. The behaving like an asshole deduction
In 1989, third mate Gregory Cousins was negotiating the 986-foot Exxon Valdez through Bligh’s Reef in Alaska while Captain Joe Hazelwood slept off a bender below deck.
The vessel crashed, spilling upwards of 25 million gallons of oil into Prince William Sound. The disaster could have been avoided if the ship’s collision-avoidance radar were working. It had broken a year before, but Exxon chose not to fix it due to the cost of repair and operation.
Overnight, 1,300 miles of pristine shoreline turned to blacktop. Wildlife caked in oil looked like a Hollywood casting call for an Al Jolson biopic. The remote locale made cleanup difficult. Twenty-three years later, fish stocks have yet to return to their pre-spill levels.
A court would eventually level $5 billion punitive damages against Exxon—equal to a single year’s profit at the time. The company appealed, chipping away at the sanction until the Supreme Court (natch!) slashed that figure to $500 million 2008.
Yet through the miracle of the tax code, Exxon would only end up paying about $325 million. No matter how negligent a company is, court judgments are considered nothing more than a business expense, and therefore tax deductible.
Last year, Senator Patrick Leahy (D-Vermont) introduced the Protecting American Taxpayers from Misconduct Act. If a court orders damages for malfeasance, U.S. taxpayers would no longer be forced to grab a piece of the tab.
Yet even in the Democratically controlled Senate, liberals realize that exposing their corporate patrons to more tax liability will go over like a dieting booth at the county fair. Leahy’s bill never made it out of committee.
2. Delaware, the Cayman Islands of America
Just outside of Philadelphia sits a tax haven so egregious the Cayman Islands complain about us. It’s called Delaware, a tiny state that allows American companies to set up fake headquarters so they can avoid taxes in their own states.
Delaware does it by asking fewer questions than a needle exchange. Like the Caymans, it doesn’t tax assets such as royalties, leases, trademarks, and copyrights. So U.S. companies create shell firms in Delaware, then “sell” their intellectual property to them. By leasing their own inventions from these fake companies, corporations have dodged $9.5 billion in state taxes over the last decade.
The trailblazer for such schemes was WorldCom, the famed telecommunications company that imploded in 2002 after being caught cooking its books. In one scam, WorldCom pretended to pay its Delaware shell company $20 billion in royalties for the questionable asset of “management foresight.” Although there were no managers in Delaware, and no real money changed hands, WorldCom was able to reduce its state taxes by hundreds of millions.
Such scheming is so commonplace that Delaware is home to more corporations (945,326) than it is people (897,934). Even the patron saint of tax evasion, the Cayman Islands, sniffs over the state’s corrupt practices.
“There should be a level playing field, and Delaware should have to comply with the same standards as the Caymans,” says Anthony Travers, chairman of the Cayman Islands Stock Exchange.
Johnson likens the Delaware strategy to one first professed by Clyde Barrow, the Depression-era bank robber.
“Near the end of Bonnie and Clyde, they’re lying around in bed after making out, and Bonnie says, ‘Anything you’d do different?’ And Clyde says, ‘I think we shoulda lived in one state and done our bank robbery in another state,'” says the professor.
“The answer is if you’re a corporation, that’s exactly what you do.”
The corporate blackmail exemption
In 2006, Starbucks chieftain Howard Schultz sold the Seattle Supersonics to Clay Bennett for $350 million—with the “understanding” he would keep the team in Seattle.
Almost immediately, Bennett—who made his money by marrying the daughter of billionaire Edward Gaylord, owner of Country Music Television—asked Seattle to pony up $300 million for a new arena. The city wasn’t eager because it had already spent $75 million renovating the existing arena a decade before.
Bennett decided to blackmail Seattle, using Oklahoma City as leverage. Oklahoma had no major sports team of its own. So its otherwise conservative legislature offered Bennett a huge welfare package: $120 million for arena renovations and a new practice facility.
Seattle balked. Oklahoma had a new basketball team.
Yet according to the tax code, not all entitlements are created equal. While a laid off electrician still pays taxes on his $500-a-week unemployment check, Bennett didn’t pay a dime on his $120 million welfare bonanza.
This exemption only sweetens corporate incentive to blackmail states and cities whenever they consider moving. Take Toyota.
In 2002, it decided to build an assembly plant for its Tundra pickup, taking advantage of cheap labor in the south. Just like Oklahoma, otherwise anti-entitlement states like Alabama, Arkansas, Mississippi, Tennessee, and Texas stumbled over one another with monstrous welfare packages.
Texas ultimately won by offering $227 million in subsidies. The state had purchased the right to host 2,000 workers at a plant in San Antonio—at a cost of $110,000 per job.
Yet for America as a whole, the deal was a spectacular loss.
It wasn’t long before Toyota closed a similar plant in California, killing 4,700 jobs and shifting production to San Antonio and Canada.
The net result: Texas taxpayers forked over $227 million so America could lose 2,700 jobs. The only winner was the Japanese auto maker, which walked away with a tax-free welfare package.
Still, Congress continues to offer blackmailers this lucrative break, though it provides no benefit to the country.
“There isn’t one bit of improvement whether the Toyota plant goes north or south of the Tennessee-Alabama border,” Johnson says. “Yet they will make money off the fact that there is a line between them. It’s just nonsense.”
Unfortunately, nonsense is the calling card of the tax code. Surely even Mitt Romney can see that.