Should We Take Shelter in Tax Shelters?
It's Impossible to Avoid Them
“Taxes” is a word that nearly everyone dreads; every paycheck is cut down before we even see it. After a long week of work, we look to see what our income was and nearly a third of it is already gone and the frustration begins to creep in. Although these taxes are meant to help other people in the country, the tax payer sees no returns for paying these taxes for many years or even not at all. For example, the Social Security tax is meant to help the elderly have a steady income without having to work, an opportunity we all hope to have one day. However, because of the way it has been handled by the American government, that fund is quickly drying up. Many programs have been created by the government to lift the burden of paying for services in full and by having every working person help pay for others to alleviate the pain. In theory, these types of programs are a great idea, but no one enjoys the money they made taken away from them; this creates juxtaposition of setting these tax rates while still managing ones own cost of living. Along with a multitude of corporate regulation through the government created the concept of double taxation: where the initial income of businesses are taxed and then taxed again when distributed to shareholders. Double taxation has created a huge burden for the corporations because their primary motive is to make money, so their response is to either get the government to lower the tax rates or to escape to tax havens in different countries. By using these tax havens, there is a loss in tax revenue and the government suffers, thus leading to the question of where the limit for taxes should be set giving corporations incentive to stay in the United States..
The Ongoing Struggle
Every year, more and more multinational corporations are moving their headquarters in to low-taxed nations to avoid paying American taxes. In 2012 alone, these corporations reported that over 60% of their profits were from countries like the Netherlands, Cayman Islands, and Ireland (TaxPolicyCenter). If vast numbers of corporations engage in this practice, then the United States misses out on a exorbitant amount of income from tax revenue. These tax havens began popping up in the late 1970’s and 1980’s as corporations realized the advantages they gained by going multinational. This lead to the Tax Reform Act in 1986 that was passed to simplify taxes overall and eliminate the use of tax shelters. However, the Bush and Clinton administrations both struggled with corporations who kept finding loopholes in these laws and passing on their profits to other countries (Scholes). Late in the Clinton administration, there were finally laws passed creating a penalty for hiding profits in these tax havens. Additionally, the George W. Bush administration passed laws that forced corporations to disclose more information on their financial sheets that could indicate whether they were hiding money in these tax havens (Rostain). These were all major steps for the United States because they could now dictate where the taxable money was located. Another problem that arose during this era was the use of the internet: hard cash was becoming less and less dominant as transactions all began to be done online. Leading to an increasing burden on tracing the funds as they could easily by transferred in a moments notice. It was getting more and more difficult to trace this money and the government was being forced to retroactively solve the problems associated with it.
It's Not All Bad
Tax havens aren’t the worse thing in the world, however; they often help growing business survive. The United States already has high taxes and it is becoming increasingly difficult for smaller businesses to grow. By putting some of their funds into another country, a business can save, invest, and expand their growth in order to create more revenue in the future. For many big businesses, a tax haven is the only way to survive and maintain a revenue stream because people are so unwilling to spend money. Corporations already need to create incentives for people to make purchases, so they created "sales" holidays such as Black Friday. Tax havens are given a bad reputation because corporations are hiding their money, when they are already being taxed so heavily they are just trying to keep some of their profits for future use. With the extra cash they can pay their employees more, who will spend more on products, which will bring in more revenue for all corporations, which in turn is more taxable revenue for the government. By saving their money now, these corporations are helping the government make revenue in the long run.
Not All Solutions Are Simple
No matter what, no one like taxes. This hatred has resulted in many corporations resorting to drastic measures (such as finding tax havens) in order to protect their profits from taxes. In the short term, the country suffers because this cash will not be taxable. However, if we wait a few years, this saved revenue can be converted into even more taxable income. On the other hand, if we tax these companies now and they have little room to expand. The results being a slow in economic growth overall. Either way there is not a clear cut answer, but if the United States keeps raising taxes on big corporations, they will continue to move their headquarters away from the United States.
Rostain, Tanina. Sheltering Lawyers: The Organized Tax Bar and the Tax Shelter Industry. EbscoHost. Yale Journal on Regulation, 1 Jan. 2006. Web. 16 Nov. 2016.
Scholes, Myron S., and Mark A. Wolfson. The Effects of Changes in Tax Laws on Corporate Reorganization Activity. National Bureau of Economic Research, n.d. Web. 16 Nov. 2016.
“What Are the Consequenses of the US International Tax System?” Tax Policy Center. N.p., n.d. Web. 16 Nov. 2016.