Earlier this week, news reporters and public officials expressed shock at the revelations from an unprecedented leak of files from one of the world’s largest law firms representing offshore investing. As The Guardian explains, the leaked documents, called the Panama Papers, show the myriad ways in which wealthy people – including 12 national leaders and 131 other politicians – exploit offshore havens to avoid paying taxes.
When news reports revealed the tax scofflaws included the prime minister of Iceland, citizens in that country were so angered they poured into the streets, banging pots and pans outside parliament, and forced his resignation.
The revelations caused President Obama to immediately call an impromptu press briefing in which he called for international tax reforms. According to USA Today, he called the data dump a “reminder … that tax avoidance is a big, global problem.” And he used the occasion to hail “new Treasury Department rules cracking down on corporate tax inversions,” whereby companies move their headquarters overseas to avoid taxation.
Treasury’s actions prompted two giants in the pharmaceutical industry, Pfizer and Allergen, to scuttle a planned merger deal.
The ripple effects of the Panama Papers are only just beginning as more recent reports about the data leak reveal that over 1,000 companies in the U.S. are linked to the Panamanian firm at the heart of the scandal.
But much of the reporting about the Panama Papers overlooks two critically important contexts. While the story of the scandal stands out for its grandiosity – involving world leaders, international corporations, and over $2 billion – tax avoidance at a much smaller scale is actually quite commonplace right where you live. And while the consequences of the revelations are so world shaking – toppling regimes, prompting government decrees, disrupting the dealings of mega-corporations – the effects of tax avoidance, in all its forms, are actually most consequential on the individual lives of the least powerful.
Tax Avoidance Is Very American
“Nobody should be surprised that rich people worldwide try to stash their money away or launder it through fake corporations,” writes David Dayen for Salon.
Indeed, as Dayen explains, the method of tax evasion the Panamanian firm used – the formation of “untraceable shell companies” – are commonplace in America.
“According to recent research,” Dayen writes, “the United States is the second-easiest country in the world to obtain an anonymous shell corporation account … Delaware, Nevada, South Dakota, Wyoming – specialize in incorporating anonymous shell corporations. Delaware earns between one-quarter and one-third of [its] budget from incorporation fees … Wyoming bank accounts are the new Swiss bank accounts.
“The term tax haven usually evokes an image of some faraway place like Belize or the Cayman Islands,” notes a report in The Guardian. “Yet in 2015, in a ranking of tax havens most attractive for those looking to hide assets, the US came in third – surpassing Cayman and Singapore.”
Further, the creation of shell companies is only one form of tax avoidance. There are many other ways to keep the taxman at bay. As Dayen notes, “America has become a lure, not only for foreign elites looking to seal money away from their own governments, but to launder their money through the purchase of U.S. real estate.”
The article Dayen links to, in the Miami Herald, pulled from the Panama Papers evidence of money laundering in Miami’s luxury property market, which found “19 foreign nationals creating offshore companies and buying Miami real estate.”
What reporters, and President Obama, uniformly stress in their comments on the Panama Papers is that none of these shenanigans are illegal. Corporations and wealthy individuals are simply using loopholes that are available to them in the system to dodge taxes.
In fact, the U.S. tax system itself is riddled with loopholes. As the Fiscal Times reported last year, 15 of the largest corporations in America – including CBS Corporation, Mattel, Prudential and Ryder System – paid almost no federal income tax on $107 billion in earnings from 2009-2014.
Many of these corporations play similar games to avoid paying billions in state taxes as well. As an article in the New York Times in 2012 reported, Apple, “one of the world’s most profitable technology companies,” might say it has its headquarters in Cupertino, California, but its office that collects and invests the company’s profits is in Reno, just 200 miles away, to avoid “millions of dollars in taxes in California and 20 other states.”
The article noted, “California’s corporate tax rate is 8.84 percent. Nevada’s? Zero.”
A more recent article in the Huffington Post reports wealthy individuals in some states can use a similar trick, the Incomplete Non-Grantor Trust, to avoid state taxes in their high tax states.
Avoiding Taxes Hurts Kids
If none of this is illegal, what’s the harm?
As President Obama pointed out in his impromptu briefing on the Panama Papers, according to The Guardian, “a lot of these loopholes come at the expense of middle-class families … It means that we’re not investing as much as we should in schools, in making college more affordable, in putting people back to work rebuilding our roads, our bridges, our infrastructure, creating more opportunities for our children.”
Tax avoidance is especially harmful to the lives of children. As Paul Bucheit writes for progressive news outlet Common Dreams, “Many of the largest U.S. corporations aren’t paying the state taxes that should be funding our schools.”
Bucheit cites examples from across the country. “Illinois lost over $1.3 billion (more than the $1.1 billion school budget shortfall) in 2015 state tax revenue to just six companies (Abbott, ADM, Boeing, Deere, Exelon, United), which together paid much less than 1% of their profits in state taxes, just pennies on the dollar for the required rate of 7.75%.”
In California, “Google took a $400 million refund on its $8 billion in U.S. profits.” Chevron took a refund, too. And “Intel managed to pay 1/2 of one percent in state taxes, on nearly $9 billion in U.S. profits.”
Bucheit writes. “Corporate annual reports never mention the need to support the U.S. educational system that helped make their companies prosperous.”
The withholding of funding from the nation’s education system comes at the worst time. As a recent report from the Center on Budget and Policy Priorities finds, “Most states provide less support per student for elementary and secondary schools – in some cases, much less – than before the Great Recession.”
So tax burdens on middle class families either go up at the local levels, or the funding shortfalls remain across the board – as is increasingly the case in communities of families who are least capable of bearing tax increases.
Consequently, across the country, per-pupil spending on K-12 public schools has dropped for three state years. Now, a rash of school budget crises seems all but certain in 2016 in cities such as Detroit, Baltimore, Los Angeles, and Chicago and throughout the most struggling districts in the states of Washington and Pennsylvania.
Actions that the Obama administration took to crack down on tax inversions are positive steps forward. But it’s not enough to address global problems and leave the local problems to fester. States need to take similar steps to crack down on schemes corporations and wealthy individuals use to avoid taxes at the state and local levels.
But as more from the Panama Papers continues to be revealed, remember, “Kids are the victims,” as Bucheit exclaims. Which is the biggest crime of all.