The 10 Most Corrupt Tax Loopholes

If Mitt Romney won't tell you which ones need to be closed, we will

Yet through the miracle of the tax code, Exxon would end up paying only about $325 million. No matter how negligent a company is, court judgments are considered nothing more than a business expense, and therefore tax deductible.

Last year, Sen. Patrick Leahy (D-Vermont) introduced the Protecting American Taxpayers from Misconduct Act. If a court orders damages for malfeasance, U.S. taxpayers would no longer be forced to grab a piece of the tab.

Yet even in the Democratically controlled Senate, liberals realize that exposing their corporate patrons to more tax liability will go over like a dieting booth at the county fair. Leahy's bill never made it out of committee.

2. Delaware, the Cayman Islands of America.

U.S. Rep. Dave Camp (R-Michigan) has taken huge contributions from the financial sector. What did they get in return? Camp blocked legislation reforming the capital gains tax rates.
Michael Jolley/Creative Commons
U.S. Rep. Dave Camp (R-Michigan) has taken huge contributions from the financial sector. What did they get in return? Camp blocked legislation reforming the capital gains tax rates.
Sheryl Crow benefited to the tune of $2 million on a loophole put in place by Tennessee, Kentucky and Texas lawmakers.
Kevin W. Burkett/Creative Commons
Sheryl Crow benefited to the tune of $2 million on a loophole put in place by Tennessee, Kentucky and Texas lawmakers.

Just outside of Philadelphia sits a tax haven so egregious the Cayman Islands complain about us. It's called Delaware, a tiny state that allows American companies to set up fake headquarters so they can avoid taxes in their own states.

Delaware does it by asking fewer questions than a needle exchange. Like the Caymans, it doesn't tax assets like royalties, leases, trademarks, and copyrights. So U.S. companies create shell firms in Delaware, then "sell" their intellectual property to them. By leasing their own inventions from these fake companies, corporations have dodged $9.5 billion in state taxes over the past decade.

The trailblazer for such schemes was WorldCom, the famed telecommunications company that imploded in 2002 after being caught cooking its books. In one scam, WorldCom pretended to pay its Delaware shell company $20 billion in royalties for the questionable asset of "management foresight." Though there were no managers in Delaware, and no real money changed hands, WorldCom was able to reduce its state taxes by hundreds of millions.

Such scheming is so commonplace that Delaware is home to more corporations (945,326) than it is people (897,934). Even the patron saint of tax evasion, the Cayman Islands, sniffs over the state's corrupt practices.

"There should be a level playing field and Delaware should have to comply with the same standards as the Caymans," says Anthony Travers, chairman of the Cayman Islands Stock Exchange.

Johnson likens the Delaware strategy to one first professed by Clyde Barrow, the Depression-era bank robber.

"Near the end of Bonnie and Clyde, they're lying around in bed after making out and Bonnie says, 'Anything you'd do different?' And Clyde says, 'I think we shoulda lived in one state and done our bank robbery in another state,'" says the professor.

"The answer is if you're a corporation, that's exactly what you do."

1. The corporate blackmail exemption.

In 2006, Starbucks chieftain Howard Schultz sold the Seattle Supersonics to Clay Bennett for $350 million — with the "understanding" he would keep the team in Seattle.

Almost immediately, Bennett — who made his money by marrying the daughter of billionaire Edward Gaylord, owner of Country Music Television — asked Seattle to pony up $300 million for a new arena. The city wasn't eager, since it had already spent $75 million renovating the existing arena a decade before.

Bennett decided to blackmail Seattle, using Oklahoma City as leverage. Oklahoma had no major sports team of its own. So its otherwise conservative Legislature offered Bennett a huge welfare package: $120 million for arena renovations and a new practice facility.

Seattle balked. Oklahoma had a new basketball team.

Yet according to the tax code, not all entitlements are created equal. While a laid-off electrician still pays taxes on his $500-a-week unemployment check, Bennett didn't pay a dime on his $120 million welfare bonanza.

This exemption only sweetens corporate incentive to blackmail states and cities whenever they consider moving. Take Toyota.

In 2002, it decided to build an assembly plant for its Tundra pickup, taking advantage of cheap labor in the South. Just like Oklahoma, otherwise anti-entitlement states like Alabama, Arkansas, Mississippi, Tennessee, and Texas stumbled over each other with monstrous welfare packages.

Texas ultimately won by offering $227 million in subsidies. The state had purchased the right to host 2,000 workers at a plant in San Antonio — at a cost of $110,000 per job.

Yet for America as a whole, the deal was a spectacular loss.

It wasn't long before Toyota closed a similar plant in California, killing 4,700 jobs and shifting production to San Antonio and Canada.

The net result: Texas taxpayers forked over $227 million so America could lose 2,700 jobs. The only winner was the Japanese automaker, which walked away with a tax-free welfare package.

Still, Congress continues to offer blackmailers this lucrative break, though it provides no benefit to the country.

"There isn't one bit of improvement whether the Toyota plant goes north or south of the Tennessee-Alabama border," says Johnson. "Yet they will make money off the fact that there is a line between them. It's just nonsense."

Unfortunately, nonsense is the calling card of the tax code. Surely even Mitt Romney can see that.

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2 comments
j_m_jae
j_m_jae

To all you French hating  xenophobes! It's outrageous how uneducated and short-sighted people can be. _Joe_ is right. Read his comment for a bit of education. BTW, I am NOT french.

_Joe_
_Joe_

Does no one ever remember that the US would never have gained it's independence without the help of the French?  Or that nearly every special forces unit in every major army in the world is modeled after the French?  Or that throughout all of history, they've kept up a resistance movement during EVERY occupation?  Not many countries can say that.

 

Even one of America's most widely known symbols, The Statue of Liberty, was a gift from France.

 

Please consider this before disparaging the French armed forces.  Choosing not to grab guns and charge headlong into every war that comes along is NOT the same as fearing to do so.

 
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