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Overseas tax havens hurt Main Street

Posted: Tuesday, July 27, 2010

These days, the local businesses in your neighborhood probably pay a higher percentage of their income in taxes than U.S. Fortune 500 companies.

Over the last two decades, multinational companies have taken advantage of huge tax loopholes, moving income and assets between foreign subsidiaries to dodge taxes. Responsible Main Street businesses and individual taxpayers are stuck with the tab, paying the taxes that contribute to a healthy business climate and economy.

Yet these global corporations quickly turn to the U.S. courts when someone steals their intellectual property. They're happy to use our public infrastructure of transportation, energy and education institutions. And they're huge beneficiaries of our country's remarkable system of property right protections, law enforcement and taxpayer-funded investments in technological and scientific research. They just don't want to have to pay their fair share.

One way that U.S. companies avoid taxes is by creating subsidiaries in a tax-haven country such as Bermuda, Luxembourg or the Republic of Mauritius. In the Grand Cayman Islands, more than 19,000 of these subsidiaries have set up legal addresses in one building.

These companies shift earnings and assets between these subsidiaries so that profits appear to be generated overseas, while losses are deducted from U.S. taxes. Because of the lack of transparency, it's hard to assess just how much tax revenue is lost, but estimates range from $43 billion to $123 billion per year.

Rep. Lloyd Doggett, D-Texas, a fierce advocate of tax-haven reform in the House of Representatives, said, "I always find it impossible to explain why a pharmacist in Bastrop, Texas, or a small retail store in San Marcos (Texas) is having to pay higher rates on the income that their hard-working small business owners are earning than some multinational that can duck and dodge taxes in Bermuda or the Cayman Islands."

A growing number of small businesses, however, are pushing back. "Small businesses are the lifeblood of local economies," said Frank Knapp, president and CEO of the South Carolina Small Business Chamber of Commerce. "We pay our fair share of taxes, shop locally, support our schools and actually generate most of the new jobs. So why do we have to subsidize multinationals that use offshore tax havens to avoid paying taxes?"

Knapp and 400 other business owners have launched Business and Investors Against Tax Haven Abuse, a signal that Main Street is getting fed up with how porous the global corporate tax rules have become.

They argue that overseas tax havens foster an unlevel playing field where taxpaying enterprises are forced to compete against tax dodgers. For example, a local retailers selling groceries, clothing, appliances or hardware is forced to compete against a big-box conglomerate that can take advantage of subsidiaries in tax havens to reduce its taxes. A community bank that provides financing for local businesses and homeowners and pays federal taxes must unfairly compete against global Wall Street giants whose profit model is built on reducing taxes through tax havens.

Main Street business leaders argue these funds could be better used for public infrastructure and support to small businesses, which generate over 65 percent of new jobs. Recovered funds could pay for initiatives like the recently introduced Small Business Jobs Act, as well as the seed capital for a $30 billion small business lending program through community banks.

"As a small business person, I'm incensed that other companies in our country are able to game the system and force the rest of us to take up the slack," said Debra Ruh, founder and CEO of the Virginia-based TecAccess, a small business that adapts technology to be more accessible to people with disabilities. "When they avoid their normal tax obligations, that puts more of a burden on responsible and sustainable businesses like mine."

Many local businesses already pay their fair share of taxes. The fact that profitable multinational corporations aren't is a standing affront to basic fairness. Taxes are the price we pay to do business in our nation.

• Chuck Collins is a senior scholar at the Institute for Policy Studies and co-author of "The Moral Measure of the Economy." Readers may write to him at IPS, 1112 16th St. NW, Suite 600, Washington, D.C. 20036.



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