rabble blogs are the personal pages of some of Canada's most insightful progressive activists and commentators. All opinions belong to the writer; however, writers are expected to adhere to our guidelines. We welcome new bloggers -- contact us for details.

Weekly Audit: Debt and taxes

Please chip in to support more articles like this. Support rabble.ca in its summer fundraiser today for as little as $5 per month!

by Zach Carter, TMC MediaWire Blogger

Earlier this month, President Barack Obama rolled out a new plan to limit the use of offshore tax havens and crack down on corporate abuse of the tax system. These tax havens siphon over $100 billion a year from the government, and have allowed many U.S. banks to duck paying taxes despite receiving massive, taxpayer-funded bailouts. The president's plan is far from perfect, but comes as a welcome acknowledgment of the unfairness embedded in the current tax code.

Corporate taxes are precisely the type of issue that mainstream media outlets prefer to avoid. Even though the government's tolerance of corporate tax evasion is a major scandal, it takes time to explain the issue's intricacies, and it's easier to resort to pundit-jousting than to provide a detailed report on how companies are cooking the books.

Most discussions of corporate taxes are quickly distorted by focusing on the overall income tax rate for the wealthiest corporations. This rate is 35% in the U.S., which is relatively high when compared to other developed nations with complex economies. But corporate lobbyists have successfully pushed thousands of complex loopholes into the U.S. tax code, making the actual, paid tax rate much lower. In a battle between pundits, a talking head screaming "Thirty-five per cent!" tends to be more persuasive than an academic talking about offshore deferred compensation.

This sheer density of the tax code creates a destructive feedback loop for policymakers. "If the loopholes are very complicated, then the only people who know enough to argue over them will be the lobbyists dedicated to their preservation," Ezra Klein writes for The American Prospect.

As a result of this information imbalance, lobbyists can convince Congress to gouge ordinary citizens, even when those lobbyists are representing companies dependent on taxpayer largess for their very existence. Financial firms are particularly fond of establishing small sub-corporations in the Caribbean to shield their income from the U.S. Treasury. By registering their headquarters in these tiny nations, companies pay tiny fees to their "home" country and shirk being taxed in the U.S.

Citigroup has received over $45 billion in direct capital injections from taxpayers and billions more in federal insurance, but as Jim Hightower notes, the banking behemoth has a total of 427 sub-corporations scattered around the globe, and they serve no purpose other than avoiding taxes.

It's not as if these companies have actually moved their employees or their trading houses or their factories to these remote locales. Their existence outside the United States entirely a fiction of paperwork crafted by clever corporate lobbyists. About 400,000 companies are headquartered in the British Virgin Islands, and none actually do any business there.

"All 400,000 companies are located in one gray, two-storey building in the town of Tortola," Hightower notes.

Similar situations exist in dozens of other tax-haven nations. The Cayman Islands have over 12,000 companies "housed" in a single building. As David Cay Johnston explains in The Nation, the Caymans bar these pseudo-firms from engaging in any business beyond hiding profits.

Corporate tax-dodging has real consequences. "Honest taxpayers have to make up for the revenues lost through this offshore cheating in three ways: we pay more in taxes, we get fewer government services and we incur rising government debt," Johnston writes.

The practice also helps artificially inflate corporate profits—and fake profit-taking was one of the chief drivers of the current financial crisis. In an illuminating interview with GritTV's Laura Flanders, former banking regulator William Black explains how top-level executives at major financial institutions used accounting gimmicks to score record bonuses at the expense of the greater economy.

"It was an epidemic of fraud lead by the CEOs, and they were using accounting to commit that fraud," Black says.

Subprime loans have much higher interest rates than ordinary prime loans. This means subprime loans are actually worth more to banks, provided the borrower can actually pay the loan. An executive with an eye to his own paycheck might urge his company to gobble up massive quantities of subprime loans, according to Black, enabling the bank to book record profits for the few months or years that borrowers could actually keep up with their mortgage payments. Giant profits generate gigantic bonuses for the executives, so even when the company is destroyed by all this subprime binging, the executive walks away rich.

Executives also aligned the pay incentives of employees lower on the corporate food chain with this strategy, ensuring that lenders churned out as many loans as possible, regardless of quality. The result is a devastating chain of fraud starting at the Wall Street CEO and ending at the mortgage broker. In a video for American News Project, Lagan Sebert outlines the operations subprime mortgage giant Ameriquest and their Wall Street enablers, Citigroup.

Obama deserves some credit for acknowledging that corporate tax-scamming is a problem—Presidents Bill Clinton and George W. Bush were happy to sign-off on laws that made it easier for wealthy companies to evade taxes. But Obama's crackdown doesn't go nearly far enough. His plan would only bring in about 10% of the revenue the U.S. Treasury Department thinks it is losing through these scams. If Obama is serious about restoring accountability to Wall Street, that commitment does not end with the tax code. It is equally essential for Obama to secure new regulations on CEO pay that tie compensation to meaningful, long-term profits instead of short-term risk-taking, and to hire financial regulatory officials who will not tolerate endemic fraud.

This post features links to the best independent, progressive reporting about the economy.

Visit StimulusPlan.NewsLadder.net and Economy.NewsLadder.net for complete lists of articles on the economy, or follow us on Twitter.

And for the best progressive reporting on critical health and immigration issues, check out Healthcare.NewsLadder.net and Immigration.NewsLadder.net.

This is a project of The Media Consortium, a network of 50 leading independent media outlets, and was created by NewsLadder.

Thank you for reading this story…

More people are reading rabble.ca than ever and unlike many news organizations, we have never put up a paywall – at rabble we’ve always believed in making our reporting and analysis free to all, while striving to make it sustainable as well. Media isn’t free to produce. rabble’s total budget is likely less than what big corporate media spend on photocopying (we kid you not!) and we do not have any major foundation, sponsor or angel investor. Our main supporters are people and organizations -- like you. This is why we need your help. You are what keep us sustainable.

rabble.ca has staked its existence on you. We live or die on community support -- your support! We get hundreds of thousands of visitors and we believe in them. We believe in you. We believe people will put in what they can for the greater good. We call that sustainable.

So what is the easy answer for us? Depend on a community of visitors who care passionately about media that amplifies the voices of people struggling for change and justice. It really is that simple. When the people who visit rabble care enough to contribute a bit then it works for everyone.

And so we’re asking you if you could make a donation, right now, to help us carry forward on our mission. Make a donation today.

Comments

We welcome your comments! rabble.ca embraces a pro-human rights, pro-feminist, anti-racist, queer-positive, anti-imperialist and pro-labour stance, and encourages discussions which develop progressive thought. Our full comment policy can be found here. Learn more about Disqus on rabble.ca and your privacy here. Please keep in mind:

Do

  • Tell the truth and avoid rumours.
  • Add context and background.
  • Report typos and logical fallacies.
  • Be respectful.
  • Respect copyright - link to articles.
  • Stay focused. Bring in-depth commentary to our discussion forum, babble.

Don't

  • Use oppressive/offensive language.
  • Libel or defame.
  • Bully or troll.
  • Post spam.
  • Engage trolls. Flag suspect activity instead.