Month: May 2013

Virtually None of Its $102 Billion Offshore Stash Has Been Taxed By Any Government

Apple Inc. CEO Tim Cook is scheduled to testify on May 21 before a Congressional committee on the $102 billion in profits that the company holds offshore. Citizens for Tax Justice has a new analysis of Apple’s financial reports that makes clear that Apple has paid almost no income taxes to any country on this offshore cash.

That means that this cash hoard reflects profits that were shifted, on paper, out of countries where the profits were actually earned into foreign tax havens — countries where such profits are not subject to any tax.

As CTJ explains, the data in Apple’s latest annual report show that the company would pay almost the full 35 percent U.S. tax rate on its offshore income if repatriated. That means that virtually no tax has been paid on those profits to any government.

Read the report.

First it was Mitt Romney, and now two more aspiring public servants are in the spotlight for questionable tax maneuvers – Penny Pritzker, President Obama’s Commerce Secretary Nominee, and Massachusetts Republican Senate candidate, Gabriel Gomez.  The complex tax avoidance strategies exercised by both these two candidates for federal office demonstrate the stunning extent to which wealthy individuals of all stripes can play by a different set of tax rules than everyone else.

Avoiding Every Last Penny of Taxes

While many wealthy families go to great lengths to avoid taxes, the Pritzker family (most famous for it’s ownership of the Hyatt hotel chain) is unique in its role as “pioneers” in the use of offshore tax shelters. Many of its existing offshore trusts were set up as long as five decades ago, and some have allowed the family to continue benefitting from tax loopholes that have long since been closed.

As the graphic below from a 2003 Forbes story details, one of the primary ways the Pritzker family uses offshore trusts to avoid taxes is by having income from their businesses funneled into offshore trusts. Those trusts then pay debt service to a bank, owned by the family trust, that loans that money right back to the business. The upshot is that all the taxable profits disappear and the family wealth accumulates unabated. A more recent Forbes article looking at the Pritzker family fortune notes that these trusts were not at the margin but rather “played a substantial role in the growth of the Pritzker fortune.” The same article notes that this fortune makes up the vast majority of Pritzker’s $1.85 billion empire and has allowed 10 members of the Pritzker family to earn a spot on the list of Forbes 400 richest people in America.

When the New York Times asked Penny Pritzker for her thoughts on the ethical implications of her family’s use of offshore trusts, she remarked that the trust was set up when she was only a child, after all, and that she does not control how the offshore trusts are administered. Her continued vagueness on these issues makes it likely that she will face more questions about her views of offshore tax avoidance more generally next week when she goes before the Senate for her confirmation hearing.

While Pritzker’s personal involvement with her family’s most infamous tax avoidance legacy is unclear, it is clear that she has actively used tax avoidance strategies in her own professional and private life. For example, a family member in this Bloomberg News profile from 2008 recounts one of her very first assignments working for Hyatt, which was to set up a like-kind property exchange to help avoid taxes on a property owned by Hyatt.

It turned out Penny was a natural at this particular tax avoidance scheme, in which a company takes deductions for the purported depreciation of their property and then sells the property at an appreciated price, but avoids paying capital gains tax by swapping the property for another like-kind property. (Originally created for use by farmers trading acreage, this tax break is a perfect example of a loophole in the tax code that is abused by companies and should be eliminated (PDF).)

In her personal finances, Penny Pritzker has run into criticism for making 10 appeals to lower the property tax assessment for her mansion in Chicago’s Lincoln Park. Like many wealthy taxpayers, Pritzker is able to retain lawyers who, through repeated appeals, have been able to save her an estimated $175,905 (PDF), even though their appeals have only succeeded half the time.

Gabriel Gomez and the Façade of Charitable Donations

While not on the same scale, according to the Boston Globe, U.S. Senate candidate Gabriel Gomez claimed a $281,500 income tax deduction in 2005 for “pledging not to make any visible changes to the façade of his 112-year-old Cohasset home” because the value of such an agreement is considered a charitable deduction by federal law. The only problem is that local laws already prohibit he and his wife from making any changes to the exterior of their home, meaning that his “agreement” to leave the façade alone is more like complying with local laws rather than a choice, so it may not have an actual “value” that is deductible.

In fact, just five weeks after Gomez claimed this deduction, the IRS listed the abuse of historic façade easements as one of its “Dirty Dozen” tax scams. Moreover, the organization with which Gomez made the agreement, the Trust for Architectural Easements, has been criticized by the IRS, Department of Justice, and Congress for encouraging tax avoidance. Altogether the IRS estimates that the Trust cost American taxpayers $250 million in lost revenue.

Fortunately for Gomez, the IRS did not challenge his use of this deduction, as it has with hundreds of others. If they had done so, they likely would have rejected the deduction and Gomez would have had to pay thousands in back taxes and an additional penalty. For his part, Gomez’s lawyer argues that the restrictiveness of the agreement goes further than local zoning laws, but it appears unlikely that the additional restrictions are so great as to justify such a substantial deduction.

It’s a remarkable thing to see somebody propose $2.3 billion in state and local tax cuts in a single press conference, with absolutely no ideas for paying for them.  That’s exactly what Virginia’s Attorney General, Ken Cuccinelli, recently did at a Richmond yogurt shop as part of his campaign to become his state’s next governor.

Under Cuccinelli’s 163-word plan, a commission would be appointed to identify any “loopholes that promote crony capitalism,” and the savings from eliminating those loopholes would be funneled toward cuts in the state corporate income tax and three local business taxes.  The single largest component of Cuccinelli’s tax plan, however, is eliminating the state’s top personal income tax bracket.  This change would lower Virginia’s top rate from 5.75 to 5.0 percent, and would dramatically flatten the state’s income tax structure; for example, the new top rate would kick-in at taxable income of just $5,000.

Our partner organization, the Institute on Taxation and Economic Policy (ITEP), recently analyzed the personal income tax cut in the Attorney General’s plan in a report just published by the Virginia-based Commonwealth Institute.  Unsurprisingly, ITEP found that this flattening of the income tax would overwhelmingly benefit Virginia’s most affluent residents, even as Virginia’s wealthiest taxpayers already pay far less of their income in state and local taxes than their less well-off neighbors. More specifically, ITEP found that:

• Almost 4 in 10 Virginians (39 percent) would see no change in their income tax bill.

• Lower and moderate income families are the groups least likely to benefit from this cut: nobody among the poorest 20 percent of Virginia families would receive a tax cut, and only half of all families among the next 20 percent would see their taxes reduced. 

• In fact, the Cuccinelli plan runs the risk of actually raising taxes on a significant number of Virginians because “loopholes” of the non-crony-capitalism kind  that benefit moderate income families would likely have to be scaled-back or eliminated to pay for the larger rate cut.

• Among the middle 20 percent of taxpayers, a majority (71 percent) would see their state income taxes fall, but by an average of just $98 per year.

• The state’s wealthiest taxpayers would receive the largest tax benefits by far.  Three-fourths (76 percent) of the benefits from repealing Virginia’s top personal income tax bracket would go to the wealthiest 20 percent of households.  The top 1 percent of earners alone would take home a full 27 percent of the benefits, for an average state tax cut of over $8,000 per household.

Read the report.

Colorado lawmakers recently decided to enact a pair of poverty-fighting tax policies: an Earned Income Tax Credit (EITC) and a Child Tax Credit (CTC). Both had been on the state’s books at some point but had either been eliminated or were often unavailable. The EITC, equal to 10 percent of the federal credit, will become a permanent feature of Colorado’s tax code once state revenue growth improves – likely not until 2016. Similarly, the CTC will not take effect until the federal government enacts legislation empowering Colorado to collect the sales taxes due on online shopping.

Kansas legislative leadership and Governor Brownback are in the midst of secret meetings to discuss how the House and Senate will reconcile their varying tax plans. The largest sticking point is whether or not to allow a temporary increase in the state’s sales tax rate to expire. But the larger issue, that is getting less attention, is that (as ITEP’s recent analysis points out) both the House and Senate plans could eventually phase out the state’s income tax altogether.

The Rockefeller Institute is warning (PDF) states and the federal government not to get too excited about the recent “surge” in income tax revenues. Rather than indicating an economic recovery, the surge is likely a result of investors realizing their capital gains a few months earlier than usual in order to avoid the higher federal tax rates that went into effect on January 1st. As the Institute points out: “over the longer term, this could be bad news — it could mean that accelerated money received now, used to pay current bills, will not be there to pay for services in the future.”

California is one state enjoying a sizeable revenue surplus this year. The state’s Legislative Analyst’s Office understands that a good portion of the bump is thanks to rich Californians cashing in on capital gains in 2012 to avoid higher federal tax rates in 2013. Yet as budget season kicks off, lawmakers are sure to be at odds over exactly what to do with the more than $4 billion in unanticipated revenues they will have to either spend or save.  

Here’s an excellent editorial from the Wisconsin State Journal urging Governor Scott Walker and the legislature to be wise about a projected uptick in revenues and invest any “surplus” in public schools, which have endured cuts in recent years. “Our editorial board is less convinced a showy income tax cut makes sense. Up is certainly better than down when it comes to revenue predictions. But some caution is required.” It seems that the Governor may not heed this caution, however, as he appears poised to propose an expansion of his current income tax cut proposal.

The Missouri House and Senate have hammered out a hybrid version of the tax bills each chamber recently passed, but with luck, it will never become law.  When the Senate passed its version in March, we wrote:

This package is billed as Missouri’s answer to the radical tax package passed last year by Kansas Governor Brownback. Its sponsor explained, “I’m trying to stop the bleeding. I’m trying to stop the businesses from fleeing into Kansas,” and then invokes the kind of magical thinking that almost always results in a deficit. According to the Associated Press, State Senator Kraus predicted his plan would “create an economic engine in our state” that would generate enough new tax revenues to make up for the losses.”

The bill the legislature will now send to Governor Nixon is a regressive income tax cut package that includes: a reduction in the corporate income tax rate, a 50 percent exclusion for pass-through business income, an additional $1,000 personal and spouse income exemption for individuals earning less than $20,000 in Missouri adjusted gross income, and a reduction in the top income tax rate from 6 to 5.5 percent.

In order for the legislation to become law, Governor Jay Nixon will have to give his okay, but he has signaled he’s going to veto the legislation. Recently he said, “Taking more than $800 million — literally the equivalent of what you spend on higher education, or literally more than you have for all of corrections or mental health — is not the fiscally responsible approach.”  He reiterated that message again this week.

Assuming Nixon, a Democrat, does veto this expensive tax package (its annual cost will be upwards of $700 million), the Republican-controlled legislature will put an override on their agenda when they return in September for a special veto session.

Senator Rand Paul of Kentucky, an opponent of efforts to crack down on offshore tax havens, is stepping up his efforts by introducing FATCA repeal, and is extending his help to tax-dodging corporations by proposing a repatriation amnesty.

Senator Paul’s Campaign for Individual Tax Cheaters: Repeal of FATCA

A year ago we explained that Senator Paul was blocking an amendment to a U.S.-Swiss tax treaty designed to facilitate U.S. tax evasion investigations:

The US and Swiss governments renegotiated their bilateral tax treaty as part of the 2009 settlement of the UBS case. That case charged the Swiss mega-bank UBS with facilitating tax evasion by US customers. Under the settlement agreement, UBS paid $780 million in criminal penalties and agreed to provide the IRS with names of 4,450 US account holders.

Before it could supply those names, however, UBS needed to be shielded from Swiss penalties for violating that country’s legendary bank-secrecy laws. The renegotiation of the US-Swiss tax treaty addressed that problem by providing, as most other recent tax treaties do, that a nation’s bank-secrecy laws cannot be a barrier to exchange of tax information.

Today Senator Paul is still blocking such treaties. Taking his efforts a step further, he has introduced a bill to repeal a major reform that clamps down on offshore tax evasion. That reform is the Foreign Account Tax Compliance Act (FATCA), which was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. Senator Paul says he opposes it because of “the deleterious effects of FATCA on economic growth and the financial privacy of Americans.”

His arguments are entirely unfounded and the only thing he is accomplishing is to help those illegally hiding their income from the IRS. FATCA basically requires taxpayers to tell the IRS about offshore assets greater than $50,000, and it applies a withholding tax to payments made to any foreign banks that refuse to share information about their American customers with the IRS.

For a country with personal income tax (like the U.S.), that kind of information-sharing is indispensible to tax compliance, as the IRS stated in its most recent report on the “tax gap”:

Overall, compliance is highest where there is third-party information reporting and/or withholding. For example, most wages and salaries are reported by employers to the IRS on Forms W-2 and are subject to withholding. As a result, a net of only 1 percent of wage and salary income was misreported. But amounts subject to little or no information reporting had a 56 percent net misreporting rate in 2006.

So why shouldn’t foreign banks that benefit from the business of U.S. customers report the assets they deposit to U.S. tax enforcement authorities? Without such reporting, people who have the means to shift assets offshore are able to evade U.S. income taxes, while the rest of us are left to make up the difference.

Senator Paul’s Repatriation Amnesty Would Help Corporations That Use Tax Havens

The same week he proposed repeal of FACTA, Senator Paul introduced a bill that would reward corporations for shifting profits overseas. What the corporations are doing is not actually illegal, but in some ways that is exactly the problem, and the Senator’s tax amnesty proposal would make it worse.

The general rule under current law is that U.S. corporations are allowed to “defer” paying U.S. taxes on their offshore profits until those profits are “repatriated” (until they are brought back to the U.S.). A significant tax benefit to corporations, “deferral” actually encourages them to disguise their U.S. profits as foreign profits generated in a country that has no corporate tax or a very low corporate tax — in other words, a tax haven.

Whereas now U.S. corporations do have to pay the U.S. corporate tax on those profits upon repatriation (minus whatever amount they paid to the other country’s government, to avoid double-taxation), a repatriation amnesty would temporarily call off almost all the U.S. tax on those offshore profits. Paul’s proposal would subject the repatriated profits to a tax rate of just five percent.

A similar repatriation amnesty was enacted in 2004 and is widely considered to have been a disaster. A CTJ fact sheet explains (PDF) why proposals for a second repatriation amnesty should be rejected:

■ Another temporary tax amnesty for repatriated offshore corporate profits would increase incentives for job offshoring and offshore profit shifting… One reason why the Joint Committee on Taxation concluded that a repeat of the 2004 “repatriation holiday” would cost $79 billion over ten years is the likelihood that many U.S. corporations would respond by shifting even more investments offshore in the belief that Congress will call off most of the U.S. taxes on those profits again in the future by enacting more “holidays.”

■ The Congressional Research Service concluded that the offshore profits repatriated under the 2004 tax amnesty went to corporate shareholders and not towards job creation. In fact, many of the companies that benefited the most actually reduced their U.S. workforces.

Completely ignoring JCT’s findings, Senator Paul claims that the tax revenue generated from taxing the repatriated profits (even at a low rate of 5 percent) could be used to fund repairs of bridges and highways.

We’d like to assume that Senators know you can’t use a tax proposal that loses revenue to pay for something. We would like to assume that, but, sadly, we can’t.  

Photo of Rand Paul via Gage Skidmore Creative Commons Attribution License 2.0

The Brewers Association, a lobbying group for craft beer brewers, has been trying to make a case for a reduction in the federal excise tax on small U.S. craft brewers. The group supports legislation – the Small BREW Act – introduced earlier this year which would cut in half the excise tax on the first 60,000 cases of beer a craft brewer produces. Significantly, the bill would also quietly redefine what the federal tax code considers a “craft brewer” to include companies producing up to 6 million barrels of beer a year. (Right now, companies making less than 2 million barrels a year are eligible for an already-existing, smaller excise tax break on the first 60,000 barrels.) This would have the effect of giving beer tax breaks to some companies that few Americans would think of as “craft brewers.”

That would make the Boston Beer Company, maker of tasty brews under the Sam Adams label which enjoyed more than $95 million in US profits last year, a craft brewer and take a big bite out of its already low tax bill.

Over the past five years, the Boston Beer Company has claimed $22 million in tax breaks for executive stock options, has cut its taxes by $9 million using a federal tax break for “domestic manufacturing” and it has even enjoyed millions of dollars in federal research and development tax breaks. The company’s effective tax rate on its $330 million in US profits over the past five years has been just 23 percent, well below the 35 percent corporate income tax rate. And in 2008, while it reported $16 million in US profits it managed not to pay a dime in federal income taxes on that income. (In fact, the company reported receiving a tax rebate of $2 million from Uncle Sam that year.)

Boston Beer would become eligible for “craft brewer” tax breaks under the proposed bill (courtesy of the Congressional Small Brewers Caucus). While the Boston Beer Company is certainly smaller than the two multinational giants it competes against (Anheuser-Busch Inbev and SAB Miller), the company with the ubiquitous Sam Adams products enjoys profits on a scale that dwarfs the true craft breweries dotting the American landscape.

At a time when Congress and the Obama administration are critically examining many of the unwarranted tax breaks that have been purchased with lobbying dollars over the years, one has to ask: are new tax breaks for a mid-sized tax-avoider beer company high on our national “to-do” list?

While major tax swap proposals have collapsed this year in Louisiana, Nebraska and Ohio, plans to pay for personal and corporate income tax cuts with a greater reliance on a regressive sales tax are still very much alive in North Carolina. This week, North Carolina’s Senate President and Senate Finance chairs released the latest version of a tax swap for the Tarheel State which they named the Tax Fairness Act. They are billing it as the largest tax cut in the state’s history.

Details of the plan are lacking despite the unveiling of a flashy website showcasing a tax calculator and video of the Senate President pontificating about the “plan.”  Vaguely, we know the proponents intend to flatten the income tax, reduce taxes on businesses, eliminate the estate tax, and expand the sales tax base to most consumer services, food and prescription drugs.

It is clear that the result of the plan will be threefold: a significant tax hike on low- and middle-income families; a large tax cut for the state’s wealthiest households and profitable corporations; and a loss of more than $1 billion in revenue annually for vital public investments.

An editorial in Wednesday’s Raleigh News and Observer suggested the proposal should be renamed the “Let Working Families Pay More And The Rich Pay Less Act”.  Indeed. Here is more from the editorial, which does an excellent job explaining the problems with the State Senate tax swap proposal:

“What’s being sold is North Carolina’s future. Berger, Rucho and Rabon promise it will be a future in which tax cuts for the wealthy and corporations will bring a flowering of new jobs. That promise, so often tested and always found wanting, will fail again. Tax cuts don’t create jobs, and they aren’t a primary reason why businesses come to this or any state. What fuels an economy and fosters business growth are a strong infrastructure, a clean environment and good schools. Those things would be undermined by tax cuts that would reduce public spending in a growing state with growing needs.

“To Berger, the new arrangement would be fair because the sales tax would be applied more broadly, services would be taxed equally and everyone would pay according to what they consume. “The more you spend, the more you pay,” he said. “The less you spend, the less you pay.” Berger tries to sweeten the bitter realities of the plan by touting the reduction in tax revenue as “the largest tax cut in state history.” But that claim doesn’t define the effect by income. Senate Democratic leader Martin Nesbitt did. “This plan actually amounts to the largest tax increase in North Carolina history on the middle class and working families,” he said….

Lowering income taxes on the rich and expanding the sales tax paid by all doesn’t make taxation fairer, no matter what you call it.”

In an excellent op-ed, Jason Bailey of the Kentucky Center for Economic Policy makes the case for real tax reform in Kentucky, and that means a tax code that can raise revenues to keep Kentucky thriving. He explains that after years of budget cuts and a sluggish economy, the Bluegrass State cannot make public investments needed to recover economically and get on a sustainable fiscal footing. Bailey lists the various stop-gap measures lawmakers have already deployed and concludes they are all out of tricks. With a good roadmap to reform available, Bailey writes, it’s time to begin that hard work.

This otherwise fine article in the St. Louis Post-Dispatch, about competing tax proposals in Missouri, provided online readers with a calculator – that utterly failed in calculating how those proposals would affect taxpayers. The state policy team at ITEP quickly responded with a Letter to the Editor pointing out that “the tax calculator omits some key information about who wins and who loses under these plans.”

Tax policy is taking center stage in Virginia’s gubernatorial race. Republican candidate Ken Cuccinelli is reportedly in the process of designing a major tax cut on which to campaign.  While precise details have yet to be announced, a 20 percent cut in the personal income tax and elimination of the corporate income tax altogether are under consideration. Watch this space for a full analysis of the plan’s impact on Virginians at different income levels once more details are announced.

The Center on Budget and Policy Priorities (CBPP) has a new report that clarifies a lot of misconceptions about the existence of fraud in the Earned Income Tax Credit (EITC). For starters, CBPP explains that most EITC overpayments “reflect unintentional errors, not fraud.”  On top of that, it turns out that IRS studies of EITC overpayments suffer from “significant methodological problems that likely cause them to overstate the actual EITC overpayments.”