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Growing Apart

A Political History of American Inequality

Colin Gordon, Author

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Dodges, Loopholes, and Refunds

Effective tax rates (what the wealthy and corporations actually pay) are dramatically lowered by loopholes and tax dodges which make it possible for many to skirt all or most of their tax burden.  The most egregious of these are:

  • The offshore tax loophole. Intended to encourage overseas expansion, this loophole is now widely used to evade tax by allocating profits to subsidiaries in overseas tax havens (this loophole is replicated in state tax codes, which allow firms to move profits to tax havens like Delaware).  
  • The excessive CEO pay tax dodge. In 1993, Congress capped the tax deductibility of executive compensation to no more than $1 million per year per executive. But a loophole exempts pay that is “performance based”--allowing firms to shift compensation to stock options and claim the full deduction.  
  • The corporate malfeasance tax dodge. Corporations can deduct most of the costs legal and other claims against them, a loophole that rewarded Exxon after the Valdez spill, and the Bank of America in the wake of the foreclosure crisis.
  • The “carried interest” loophole. Brokers take their salary in the form of a share of their firm’s returns on investment. Because this “carried interest” salary is at risk (it depends on the returns), it is taxed at the capital gain rate of 20 percent. Closing this option (taxing such salaries as regular “W-2” income) would generate something on the order of $2 billion in annual revenues. 

See Sarah Anderson et al, Corporate Pirates of the Caribbean (IPS, 2013); Sarah Anderson et al, Corporate Tax Dodgers: 10 Companies and Their Loopholes (IPS, 2013); US PIRG, Corporate Tax Loopholes; Mark P. Keightley, An Analysis of Where American Companies Report Profits: Indications of Profit Shifting, Congressional Research Service ( January, 2013); Citizens for Tax Justice, Corporate Tax Dodging in the Fifty States (2011); Lynn Forester de Rothschild, A Costly and Unjust Perk for Financiers, New York Times (February 14, 2013); Benjamin Landy, How Closing the Carried Interest Loophole Would Save Billions, The Century Foundation (March 2013); Congressional Budget Office, Reducing the Deficit: Spending and Revenue Options (March 2011); Department of Homeland Security, Subcommittee on Investigations, Offshore Profit Shifting and the U.S. Tax Code (2013).

Back to Who Pays: Taxes and American Inequality
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