The 10 Most Corrupt Tax Loopholes

If Mitt Romney won't tell you which need to be closed, we will

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 in 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, Vermont Democratic Senator Patrick Leahy 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.

U.S. Rep. Dave Camp (R-Michigan) has taken huge contributions from the financial sector. What did they get in return? Camp blocked legislation reforming the capital gains tax rates.
Michael Jolley/Creative Commons
U.S. Rep. Dave Camp (R-Michigan) has taken huge contributions from the financial sector. What did they get in return? Camp blocked legislation reforming the capital gains tax rates.
Sheryl Crow benefited to the tune of $2 million on a loophole put in place by Tennessee, Kentucky and Texas lawmakers.
Kevin W. Burkett/Creative Commons
Sheryl Crow benefited to the tune of $2 million on a loophole put in place by Tennessee, Kentucky and Texas lawmakers.

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." Though 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."

1. 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, since 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 each other 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 automaker, 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," says Johnson. "Yet they will make money off the fact that there is a line between them. It's just nonsense."

Of course it is. But nonsense is the calling card of the tax code.

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18 comments
roo_ster
roo_ster

Businesses ought not be taxed at _any_ rate.  Businesses are owned by folks, privately or publicly, who already pay taxes on profits and capital gains and fuel, etc.  No need to tax the same dollar multiple times.

 

And think of the reduction in lobbying for business tax loopholes...when there is no business tax to worry about.

primi_timpano
primi_timpano topcommenter

You neglected to mention the capital gains treatment of carried interest, the life blood of real estate developers, VC funds, and hedge funds. Billions and billions of taxes are avoided with this treatment.

UnCoverUp
UnCoverUp

Woops. Chris Parker forgot the most lucrative lawbyer (lawyer-lobbyer) inspired rat-hole of all--the  foreign tax credit (FTC). By far the biggest single contribution to the US federal tax receipt deficit is  US-incorporated international oil companies (IOCs) using fraudulent tax receipts issued by the corrupt dictatorial regimes (Saudi Arabia, Iran, Iraq, Libya, China,...) that own most of the worlds oil/gas resources coveted by IOCs. Although the FTC tax-scam has been "legal" for more than fifty years (see Daniel Yergin's "The Prize"), labeling of an IOC's foreign government partner's share of oil/gas profits as a foreign "tax" to give a US-incorporated IOC the benefit of the FTC is a fraud against the United States government. Furthermore, corrupt dictatorial regimes understand the value of the fraudulent tax receipts they issue and demand compensation (bribes) for aiding and abetting these multi-billion dollar tax FTC frauds.

 

Regulatory capture of the IRS by tax lawbyers has prevented that agency from prosecuting US-incorporated IOCs for FTC fraud. However if IOCs bribed foreign officials to obtain fraudulent tax receipts as ConocoPhillips did with the Gaddafi Regime in Libya (http://UnCoverUp.net), the Department of Justice (DoJ) and the Securities and Exchange Commission (SEC) can and should prosecute under the Foreign Corrupt Practices Act (FCPA). Although the DoJ and SEC also suffered from regulatory capture by lawbyers, the agencies may be more aggressive in prosecuting racketeer influenced IOCs to restore public confidence in the wake of revelations that the agencies employee-lawbyers knowingly allowed fraudsters Maurice Greenberg (AIG), Bernard  Madoff, and Allen Stanford (SIB) to carryout financial frauds that cost investors and tax-payers hundreds of billions of dollars in the collapse and resurrection of the US "financial services" industry in 2007-2009.

dlcole
dlcole

What the author failed to mention about Toyota closing the Ca plant that originally was a joint venture with GM.  GM bailed during the bankruptcy activities.  Toyota paid the UAW $250 million in benefits to close the Union plant and move activities to non-union Texas and Canada.  I find most of this tax article mis-leading and just plain wrong...full of 1/2 truths, etc.

 

 

http://online.wsj.com/article/SB10001424052748703909804575123941856957282.html

 

 

Lori312
Lori312

Ok, you are more business savy than I and you are more verbally on target than I.  You are right, and again, you are right.  I apologize for my sob comment - I just get so mad... Can't do anything about that.   So, you win,  I won't put my poor opinion on this site again....  Have a good one...

 

unify
unify

well written, well researched article.  thank you

Myrna.Minkoff-Katz
Myrna.Minkoff-Katz topcommenter

Romney is a loophole.  The man doesn't what the hell he stands for.  One day he's pro-choice, next day he says he'll get Roe v. Wade overturned.  One day he vilifies half the nation, the next he says he's totally behind all Americans.  One day he'll cut taxes on the rich.  Next day he says he won't.  Flip-flop.  That's what they said about him when he started his primary campaign, and he's proven it in spades.

bullard.randyj
bullard.randyj

The problem isn't that they pay too little, or that they pay too much.  It's that they pay anything at all.  The article talks about companies as though they're people, or entities with personalities.  A company is a collection of assets designed to generate and distribute profits to the OWNERS of the business.  Our tax code taxes OWNERS.  In my opinion, companies should pay 0% in taxes, because the OWNERS are already going to get taxed.  If the owners aren't getting taxed enough, then address the problem there.  But when Company X doesn't "pay fair their share" in taxes, that "fair share" instead goes to the retirement fund, or mutual fund, or whoever else owns those shares, and that's a good thing.

 

This article takes the typical liberal, anti-corporate, anti free enterprise mentality that companies are evil.  Companies aren't good or bad or evil or virtuous, any more than money itself is good or bad or evil or virtuous.  Companies are companies, and they operate in the best interest of their OWNERS, who are overwhelmingly me and you.  

Sotiredofitall
Sotiredofitall topcommenter

Yep that's right; the tax code is corrupt, a giant game of three card monte.    Who do you see running for office that has specifics on reforming the tax code; Gary Johnson does.   Keep railing aginst the Repukes and the Libertards, different flavor kool-aid is still kool-aid.

primi_timpano
primi_timpano topcommenter

@UnCoverUp Very true. I did not know about false tax receipts, but I do know that the oil companies convinced Saudi Arabia to take its oil royalties in the form of income taxes so the companies could take advantage of the foreign tax credit. If the payments were a 25% royalty, then a $100 of revenue would pay SA 25, leaving 75 to be taxed by the US. As a tax, SA and Exxon get the same revenues, but Exxon gets to claim a 25 credit from the US government, increasing its income back to 100.

dlcole
dlcole

 @unify

 Hardly researched...and full of 1/2 truths and incomplete stories...DO YOUR RESEARCH

primi_timpano
primi_timpano topcommenter

@bullard.randyj. . Without taxes there would be no government. Without government there would be nothing to establish property rights. Everything you own would be subject to conversion by the biggest, strongest, meanest, best armed person or persons. Since the rich receive greater benefits from government (the ability to enjoy and transfer their property) than regular people with jobs, a single home, and less than seven figure investment accounts, it makes sense the rich pay more. Look at it as insurance: a million of coverage costs more than a 1000 of coverage.

bifftannen
bifftannen

 @bullard.randyj The Supreme Court considers corporations as people. They should be taxed and subject to criminal law as such.

unify
unify

 @bullard.randyjWhat are you talking about??!  Corporations ARE people!  At least that's what the supreme court thinks and last I checked, they have a little bit of street cred.  Southern Pacific Railroad vs Santa Clara County circa 1886.  more recently citizens united.  if they are to be treated like people, they better pay taxes like people.

poppa_who
poppa_who

 @Sotiredofitall  Your statement might carry a little more weight if you could refrain from name calling,  "Repukes and the Libertards".  It makes you sound like a politician!

bullard.randyj
bullard.randyj

 @Lori312 Wow.  Such a warm and literate and "self righteous" response.

 

This isn't a "blue collar" / "white collar" issue.  That "blue collar" worker likely has a pension or a 401k.  And that pension or 401k is funded with assets.  And those assets are overwhelmingly equities in U.S. corporations.  And when Uncle Sam taxes the profits of those U.S. corporations, they're taking the money out of the 401k/pension of that "blue collar worker" you seem to be so concerned about.  So when you talk about "evil" corporations, just remember that the VAST MAJORITY of equities are owned by those 401Ks, and pensions, and insurance pools.  And you know who owns those?  YOU.  YOU own those.  

 

And you know who is going to get taxed on those assets already?  YOU are going to get taxed on those assets.  When you draw down your 401k, or your pension that you've worked so hard for all those years, YOU are going to pay Uncle Sam his fair share in the income taxes you file in those years.  The only question is HOW MUCH will be in those accounts for you to draw on as a function of Uncle Sam having already taxed the money going into them in the form of corporate profits.  

 

Your response shows a typical simplistic thought process on the topic - CORPORATION=EVIL.  "Blue Collar Workers"=VIRTUOUS.  CORPORATE PROFITS=BAD.  And most transparently "Anybody that has the audacity to make money and understand the economy" = "S O B"

 

What you clearly fail to understand is that corporate profits are what makes the economy work, and those profits are GOING TO BE TAXED ALREADY BY THE PEOPLE THAT RECEIVE THEM, which is you and me and all the "institutions" that we support with our insurance premiums and savings.

 
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