Too Big to Pay Its Fair Share of Taxes?

Goldman Sachs’s latest financial report shows that the company avoided paying federal income taxes on almost half its United States profits in 2014. In fact, the company paid an effective tax rate of just 18.6 percent on $6.8 billion in U.S. profits.

Most of Goldman’s low tax rate (about half the statutory rate of 35 percent) can be attributed to a tax break that allows corporations to write off the so-called cost of issuing stock options to their executives in lieu of salaries. Goldman disclosed saving a whopping $782 million in income taxes through this break in 2014.

The stock option tax break allows corporations to give lavish compensation to employees in the form of undervalued stock and then take a tax write off for the difference between the stock option and its true value (e.g. give an employee stock at $10/per share stock for a stock ultimately valued at $18 per share). As we have noted, Goldman is just one of hundreds of Fortune 500 corporations benefiting from this scheme.

Tax reformers on Capitol Hill have had financial institutions such as Goldman squarely in their sights for higher taxes. Rep. Chris Van Hollen’s proposed financial transaction tax seeks to reduce the volume of financial speculation. And President Obama recently announced a plan to tax liabilities of “too big to fail” banks. While these proposals have merit, there are more straight-forward ways to ensure financial institutions are paying their fair share: close egregious loopholes, including the stock options break, that allow banks and other corporations to whittle away their federal tax bill. 

Another window into Goldman Sachs’s tax minimization strategies comes from its tax haven subsidiaries. The company has subsidiaries in 20 foreign countries, including nine in the Cayman Islands, that levy little or no corporate taxes. These subsidiaries may harbor much of the company’s large and growing stash of permanently reinvested foreign earnings—profits on which Goldman has not withheld U.S. taxes because, it says, it intends to keep these earnings offshore.  In the past year, Goldman added more than $2 billion to its offshore hoard, bringing its total permanently reinvested offshore profits to $24.9 billion. The problem with this, of course, is too often companies claim they have reinvested the profits through a subsidiary that does no real business—an obvious tax dodge.

Eliminating the excess stock option tax break, and ending the ability of U.S. multinationals to indefinitely defer paying U.S. taxes on domestic profits they’re hiding in beach-island tax havens, would help restore the federal income tax rates paid by Goldman and other profitable Fortune 500 companies to something resembling the tax rates paid by many middle-class American families.