Tax Loophole, With a Beach
Enron has become the shorthand reference for what’s wrong with American business. Among its most recently revealed shenanigans is that, despite paper profits of almost $2billion between 1996-2000, it paid no corporate federal income taxes in four of the past five years. Indeed, it received a net tax rebate of $381million and a $278-million tax rebate in 2000. Enron also created no less than 800 “subsidiaries” in tax havens such as the Cayman Islands to make this possible.
It may have all been narrowly legal, but ordinary taxpayers who ended up footing Enron’s tax bill aren’t rushing forward to say, “Here’s my hard-earned pay, Enron, and you’re welcome.”
Enron’s use of foreign tax havens is not new or unique. It is merely symptomatic of how American corporations are increasingly avoiding income taxes. Becoming a corporation in Bermuda is as easy as creating a mail drop. Corporations don’t need to set up an office, but under U.S. tax law they get all the benefits of operating abroad. Any income earned abroad by the offshore “subsidiary” is not taxed by the U.S. government. These loopholes need fixing.
The corporations employing, or about to employ, legal offshore tax-avoidance include Ingersoll Rand and Foster Wheeler Corp., manufacturers of heavy machinery. There is no downside: They keep their headquarters in the U.S., allowing them to benefit from the U.S. legal system, roads and universities, not to mention the protections of its huge military. They just don’t have to pay a fair share for all of these benefits. Ingersoll-Rand expects to cut its tax bill by $60million in 2002, and Stanley Works, which makes tools and aims to incorporate itself in Bermuda, calculates that its corporate income tax bill will drop by $30million this year.
These individual sums are not gigantic given the $2-trillion federal budget, but there is something corrosive about businesses going through ever-slicker machinations to avoid taxes while wage-earners pay for the nation’s defense, transportation, federally subsidized health care and schools.
An Institute on Taxation and Economic Policy study indicates a resurgence in corporate tax avoidance. The most recent data, from 1996-98, show that the top 250 companies paid only 20.1% in 1998, down from 26.5% in 1988, following a landmark tax reform. In Business Week magazine, Robert McIntyre, one of the study’s authors, says that General Motors, Navistar International and El Paso Energy, among other companies, have continued to slash their payments.
Offshore tax shelters harm individual taxpayers and the infrastructure of the nation. Congress needs to approve legislation that would either impose a worldwide minimum tax on U.S. corporate profits or make it prohibitively costly for companies to incorporate themselves in havens like Bermuda. Until then, Enron won’t be the last company to avoid paying taxes altogether.
