ECON 101 On Process

Tax Avoidance vs. Evasion: A Lesson in Semantics | Raven Rucker

The onset of tax season creates a mix of excitement and dread for most Americans. The prospect of an income tax return bringing a little extra money is good to fix that temperamental car or, better yet, spring break in Mexico. The general confusion surrounding the yearly tax process creates mutual understanding among America’s lower economic class: that tapping a few buttons on TurboTax might just land someone in federal prison instead of Cabo. 

So, how is Jeff Bezos able to both avoid taxes and frolic, scalp in the wind, on his super mega yacht? According to a financial statement filed through the Securities and Exchange Commission (SEC), Amazon has paid zero dollars in federal income tax for fiscal years 2017 and 2018. But why is it that the guillotine has not yet been readied? Because, technically, all of this is legal. 

Less Is Always More 

The United States tax code is subject to change with each new administration. The lowest ever recorded corporate income tax rate was 1 percent in 1910, when corporate income tax was first established by President William Howard Taft. The highest marginal tax rate of 53 percent came under Franklin D. Roosevelt’s presidency in the face of World War II, and then again, reaching a high of 52.8 percent under Lyndon B. Johnson in 1968 at the height of the Vietnam War. 

The United States corporate income tax rate didn’t see any consistency until Bill Clinton signed the Omnibus Budget Reconciliation Act of 1993, in hopes to cut the deficit in half by 1997, steadying the variable quality of the tax rate at a healthy 35 percent until 2017.

Echoing the general shock and awe of his entire term, President Donald Trump was consistent to his particular brand of politics by carrying his “America First” rhetoric into the reformation of tax policy. The passing of the Tax Cuts and Jobs Act of 2017 made an effort (with little success) to change the way America’s tax system operates from a worldwide system to a territorial one. This policy effectively eliminated taxes for multinational enterprises receiving repatriated foreign income and brought down the twenty-four-year-strong corporate income tax rate of 35 percent to 21 percent. 

In an effort to bring back such a profound loss in revenue, President Biden’s Build Back Better framework, met with resistance from his own party and his conservative counterparts, implemented a minimum 15 percent tax on billion-dollar corporations, and raised the maximum marginal rate to 28 percent.

Despite the frequently changing policy and corporate income tax rate, whether high or low, the tax rate is constantly undercut. It is rare that any company actually contributes the highest rate, due to tax avoidance strategies that bring down the company’s overall effective tax rate. For example, Amazon paid zero dollars in federal income tax from 2017 to 2018 according to the 10-K form submitted to the SEC. Not only did Amazon not pay any federal taxes, the effective tax rate for the corporation in 2017 was -3.6 percent, meaning it received a rebate from the federal government to the tune of hundreds of millions of dollars. The same thing happened in 2018 where Amazon’s effective tax rate was -1.1 percent. Amazon did end up paying federal taxes in 2019 at an effective tax rate of a whopping 1.2 percent, as opposed to the already lowered 21 percent established by Donald Trump’s Tax Cuts and Jobs Act. 

Tax Planning 

There is a name for this: Base Erosion and Profit Shifting (BEPS), and it is, in fact, an established issue. It has a cute little acronym and everything. The Organization for Economic Cooperation and Development (OCED), a hopeful harbinger of economic order and the punisher of corporate greed, defines BEPS as tax planning strategies used by multinational enterprises to exploit gaps in tax law.. The relationship between the United States legislative body and the multibillion-dollar corporations that are to abide by its law, can be understood, at surface level, as an overindulgent parent to a petulant, know-it-all child. The government, an authority figure, makes the rules and corporations follow; when those rules are carefully avoided to the benefit of the corporations, a very soft reprimanding via congressional hearing happens every once and a while.

“It’s a well-known show of cat and mouse,” says Danielle Davis, an incoming tax consultant for the international tax group of the Hartford, Connecticut branch of Deloitte. “Legislatures make rules to minimize tax loopholes and increase the amount of taxes that businesses and corporations pay and corporations will utilize tax planning strategies to adjust to new laws and still reduce their tax liability.”

“It’s a well-known show of cat and mouse.”

The one thing that an average American does know is that tax evasion is bad. Whereas tax evasion is the illegal underpayment or nonpayment of taxes, tax avoidance is the perfectly legal underpayment or nonpayment of taxes. Corporations employ groups of accountants who analyze and make decisions on how resources should be utilized to minimize tax liability, while maximizing pretax income. 

Image courtesy of Early Church History

Treaty Shopping 

I discovered the article “​​Navigating Optimal Treaty-Shopping Routes Using a Multiple Network Model” in the open-source journal Plos One. The authors detail optimal treaty-shopping routes to provide an in-depth report on how companies treaty shop. Companies such as Apple, Google, Starbucks, Facebook, and Microsoft exploit provisions of interjurisdictional tax arrangements, not hesitating to direct income flows surreptitiously or through various financial vehicles. The number of treaties that the United States government has with other countries, and the stipulations of those treaties, are alphabetically organized and accessible through the IRS website. The language and math is impossible for the layman to decipher, but that’s what a corporate team of tax-planning accountants is for. Falling under the umbrella of tax planning, treaty shopping is the technique of avoiding taxes by parsing and layering these treaties, working over percentages and submission and payment dates to find “optimal detour routes” to pay the perfect number. Zero. Really, the companies that engage in the treaty-shopping process are considered a statistical anomaly. This isn’t a common practice. According to the Plos One article, “countries lose about 100–240 billion US dollars in tax revenues annually due to global profit shifting, equivalent to between 4 percent and 10 percent of global corporate income tax revenues.” The scale of income tax revenue being lost by federal governments all over the world makes it a noteworthy issue. 

Double-Irish-Dutch Sandwich 

Piggybacking on the concept of treaty-shopping and how corporations increasingly use worldwide tax codes is the way companies essentially store profits in shell corporations or even legitimate subsidiaries in countries considered tax havens to reduce tax liability. Tax haven countries such as the Cayman Islands, Bermuda, and Switzerland have practically zero tax liability for individuals and corporations alike making them perfect places to house profits overseas and render them untouchable to the United States federal government. Not quite as glamorous or high stakes as Margot Robbie’s character strapping stacks of cash to her body with duct tape and flying to Switzerland in the film The Wolf of Wall Street, but absolutely more efficient and infinitely more effective. 

One of the most notorious ways to store these profits wasn’t even masterminded by the finest accountants money can buy, it was simply a loophole. The “Double-Irish-Dutch Sandwich,” a tax-avoidance technique feasible through an obscure intellectual property licensing policy, allowed companies to channel cash flow through an Ireland-based subsidiary, then through the Netherlands to yet another subsidiary headquartered in Ireland. This loophole allowed corporations like Google and its parent company, Alphabet Inc., to avoid paying taxes on forty billion pounds of revenue over two years. However, in 2017, Google in a show of true virtue, shortly after legislation under Ireland’s minister of finance Michael Noonan put an end to the loophole, announced that they would stop using the Double-Irish-Dutch Sandwich. This effort proved to be futile because shortly after the loophole was closed it was quickly replaced with the Capital Allowances for Intangible Assets tool. Apple, subject to investigation, was found to have used the tool and was slapped with a thirteen-billion-pound fine and Ireland was officially blacklisted by the European Union for their status as a tax haven. 

Tax Credits 

Image courtesy of Getty Images

Perhaps one of the easiest ways that companies avoid taxes is through tax credits. Tax credits are breaks built into the tax code, and possibly, according to Danielle Davis, the easiest and most effective way that corporations achieve a much lower effective tax rate than the listed tax rate. Tax credits reduce tax liability dollar for dollar; simply put, if you owe two thousand dollars in taxes and have fifteen hundred dollars in tax credits, then the amount owed is reduced to five hundred. 

Facebook’s 10-K form filed in 2018 stated that the tax benefits that exist from compensation that is supplemented by shares of ownership in the company and  employee salary and decreased their income tax provision by 717 million dollars as well as decreasing the effective tax rate for that year by three percentage points. 

“There are credits for all sorts of things,” Davis explains. “There are tax credits for research and development, credits for employing veterans, even for electric vehicles. Usually tax credits are there to incentivize corporations into behaving in a manner that the current administration wants.” She explains that a large part of President Biden’s platform is environmental consciousness and green energy, and tax credits are offered accordingly. 

Legal Tax Avoidance 

As of 2021, the United States is staring  down the barrel of a 3.1-trillion-dollar deficit. Given that that number continues to increase, it doesn’t make sense that tax avoidance continues to be tolerated. While the United States government is the proverbial parent, overseer and regulator of the corporations it requires taxes from, it is also a partner. There are always people working in the vested interest of corporations. Lobbyists for the corporate sector have deep pockets and don’t hesitate to open them up to politicians to sway the vote on legislation helpful to the corporation they lobby on behalf of. Groups like the American Legislative Exchange Council, a non-profit organization generally backing conservative legislature and legislation, drafts model bills for a wide array of issues including corporate taxation where unfortunately, conservatives lean to ease the already light burden of corporations. However, there are independent organizations, such as the OCED, which was founded in 1961 and consists of thirty-eight member countries, that strategize on ways to keep the global economy healthy by finding out how corporations avoid paying taxes through certain treaties and loopholes and then introduce policy to stop it. 

Drawing the Line

“In a perfect system, people who can afford to survive would subsidize the cost of the people who cannot.”

“Any federal program or any program where you have to apply through the government is funded by federal income taxes: EBT, WIC, FAFSA grants, Medicare and Medicaid. In a perfect system,” Davis says, “people who can afford to survive would subsidize the cost of the people who cannot—the disabled, underprivileged youth, single parents, homeless people, etc., the people that need programs.”

Looking through the state and federal deductions on a standard-issue check from any service-industry job is disheartening. Watching hundreds of dollars trickle away to programs that are needed to sustain the very people it’s being taken away from deepens the confusion and resentment of a tax process that has been a foundational pillar of America since the Boston Tea Party. The consequences of tax avoidance by multibillion-dollar, multinational enterprises is something that trickles down into the everyday lives of Americans. The vague worry that filling out a 1040 form incorrectly doesn’t hold a light to the failings of health care and food insecurity due to a lack of funding of social programs due to low tax revenue from corporations that utilize tax policy in a way that the regular American never could. If you have to pay your fair share—why can’t they?

Header Photo Credit: Anderson & Boback Family Law Attorneys

Raven Rucker is a Staff Writer for Blue Muse Magazine

Blue Muse Magazine is a general interest literary magazine published by the students of the English Department at Central Connecticut State University in New Britain, Connecticut. We publish poetry, fiction, and a gamut of creative nonfiction on anything and everything the blue muse inspires us to write.

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