Who loses when big companies funnel $699 billion to tax havens

It’s legal but it looks so bad.
It’s legal but it looks so bad.
Image: Reuters/Nyimas Laula
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New analysis from economists Gabriel Zucman, Thomas Tørsløv, and Ludvig Wier shows that tax avoidance by big companies has preserved billions in revenue that could have gone to government coffers.

They find that $408 billion (€350 billion) is shifted each year to tax havens in the EU (Luxembourg, Ireland, the Netherlands, Belgium, Malta and Cyprus) alone. Stretching their analysis worldwide, Zucman and his colleagues discover that more than $699 billion (€600 billion) wells up in tax havens globally each year. (A report released by Oxfam in 2016 showed that offshoring cost the US government about $111 billion each year in revenue.)

While it’s tricky to track money that floods into tax havens, the Paradise Papers leak of 13.4 million files that tracked 56 years worth of off-shore investments—of both the ultra-wealthy and big corporations—has helped. Tax havens in the EU are also forced to disclose some information because of EuroStat requirements.

It looks bad but it’s legal

Tax avoidance, on its face, feels instinctively wrong. Still, what corporations are doing is perfectly legal, exploiting loopholes or broad definitions to pull down their effective tax rates. This sometimes means creating a bundle of shell companies housed in countries with lower rates. Other times, companies are working within the system, relying on tax deductions or credits.

Google, for instance, moved all its search and transfer technologies to Ireland under a subsidiary, “Google Holdings,” a year before its IPO. What’s more puzzling—for Irish tax purposes, the subsidiary resides in Bermuda (which also happens to have a 0% corporate tax rate).

How small countries benefit

The biggest winners are the small countries who cut their corporate rates to near zero. Some 30 years ago, Ireland’s corporate rate was 50%, and it brought in less revenue from corporations relative to its national income than the US or the EU. Today, the Irish government brings in far more from corporate taxes, though its rate sits at just 12.5%.

“Is it because low taxes have spurred domestic activity, employment and growth? Not at all: the extra revenue ​originates from the fictitious profits that multinationals park in Dublin or Cork: profits generated by workers in other countries,” argues Zucman. “The Irish government thus gets more income to spend on roads or hospitals; other countries get less. Nothing in the logic of free exchange justifies this theft.”

The money missed at home

The biggest losers? Small companies, who can’t afford the resources to create complex systems of tax avoidance, and the population as a whole, which misses out on millions in spending for roads, schools, and much else.

Offshoring creates additional problems, especially for large countries with high corporate taxes that also are home to big companies. The US is a prime example. Revenue from corporate taxes has been declining for a half-century. In 1952, corporate income taxes financed about a third of the federal government—by 2015, it was a little over 10%. This forces the tax burden to fall on, yes, wealthy, individuals, but also on the goods and services bought by all, as well as on smaller companies.

To Zucman and his colleagues, the biggest injustice behind global tax avoidance is how it perpetuates inequality. Bad enough that Irish roads are getting paved with what may have been US tax dollars. Worse, corporations as a whole are holding onto more cash. And the biggest beneficiaries from tax avoidance and corporate tax cuts are far more likely to be company shareholders rather than their workers.