How is it possible that the Ula Café and City Feed & Supply pay a higher percentage of their income in taxes than profitable Wall Street firms and Fortune 500 companies? Multinational corporations—but not mom-and-pop businesses—are able to make use of overseas tax havens to avoid paying their fair share.

Tired of picking up the slack, small businesses are coming together to demand a level playing field.

A new campaign, Business and Investors Against Tax Haven Abuse, is the result of an interesting convergence of domestic manufacturers, community banks, and small businesses that are fed up with how porous the global corporate tax code has become.

A Broken System

Over the last two decades, multinational companies have taken advantage of huge tax loopholes to move income and assets between foreign subsidiaries in order to dodge taxes. Responsible Main Street businesses and individual taxpayers are left to pay for U.S. infrastructure and the public investments that contribute to a healthy business climate, economy, and commons.

How does this work? A U.S. company creates a subsidiary in a secretive low-tax haven such as Bermuda, Luxembourg, or the Republic of Mauritius. In the Grand Cayman Islands, one building provides a mailbox haven to over 19,000 of these corporate subsidiaries.

These corporations shift assets and income between their subsidiaries. Profits appear to be generated overseas while losses are deducted from U.S. taxes. Because of the lack of transparency, it is difficult to assess just how much money is lost, but estimates range from $43 billion to $123 billion per year, including both individual and corporate tax avoidance.

That’s a major loss for the federal budget, with small businesses and individual taxpayers picking up the slack. Fifty years ago, one-fourth of federal revenue came from corporate income tax. Now, only seven percent does, says the U.S. Office of Management and Budget.

Fixing the Leak

Scratch the surface of the most shady dealings of the phantom economy in the last decade, and you’ll find an overseas tax haven.

Which is why small businesses are joining the fight for tax justice, launching a petition drive on July 20th with 400 initial business signers.

Networks of businesses like the American Independent Business Alliance and the Business Alliance for Local Living Economies include tens of thousands of new economy businesses. These enterprises are rooted in localities, pay their taxes and donate to local charities. Yet they are hurt by the unlevel playing field created by tax havens.

“Small businesses are the lifeblood of local economies,” said Frank Knapp, President and CEO of the South Carolina Small Business Chamber of Commerce and one of the lead signers. “We pay our fair share of taxes, shop locally, support our schools, and actually generate most of the new jobs. So why do we have to subsidize multinationals that use offshore tax havens to avoid paying taxes?”

Senator Carl Levin (D-MI), a long-time champion of closing tax havens, told The New York Times that the “campaign represents the first time in recent years that business people who believe tax havens are bad for business are mobilizing publicly to end the abuse.”

The campaign estimates that corporations using tax havens avoid between $37 billion and $60 billion in taxes (a number that does not include wealthy individuals). These funds, they argue, could be better used for public infrastructure and support for small businesses, which generate over 65 percent of new jobs. It could pay for initiatives like the recently debated Small Business Jobs Act; provide the seed capital for a $30 billion Small Business Lending Program through community banks; or fund a direct lending program through the Small Business Administration.

The coalition’s first report, Unfair Advantage: The Business Case Against Tax Havens, includes several examples of how responsible, tax-paying U.S. businesses are forced to unfairly compete against tax dodgers. For example, Wainwright Bank, a socially responsible local lender based in Boston, paid 11.8 percent of their income in federal taxes in 2009. Yet they have to compete against Bank of America—which paid no federal taxes in 2009 (despite $4.3 billion in profits), thanks in part to overseas tax havens.

Taking Financial Reform into Our Own Hands We can’t let this financial reform bill be our only response to the economic crisis.

The report, which I helped co-author, points out that tax havens contributed to the global economic meltdown by permitting companies to hide risky investments and behavior. Scratch the surface of the most shady dealings of the phantom economy in the last decade, and you’ll find an overseas tax haven. In a special investigative series, McClatchy News documented how Goldman Sachs, working through Cayman Island subsidiaries, “peddled billions of dollars in shaky securities tied to subprime mortgages on unsuspecting pension funds, insurance companies and other investors when it concluded that the housing bubble would burst.”

TransOcean, owner of the Deepwater Horizon oil platform that exploded, killed 11 workers, and led to a devastating oil disaster in the Gulf of Mexico, was designed to dodge taxes. In 1999, TransOcean moved its incorporation from the United States to the Cayman Islands and then later to Switzerland, with the stated purpose of lowering its taxes.

Some progress has been made in closing these loopholes: The Foreign Accounts Tax Compliance Act of 2009 increases transparency of cross-border transactions. The “Economic Substance Doctrine,” which was included in the health care reform bill, requires companies to have a business reason—other than tax avoidance—for shifting assets.

But there is plenty of further work to do. Congress should ban phony offshore corporations and block transfers of intellectual property, such as patents, designed to evade taxes. And Business and Investors Against Tax Haven Abuse have identified nine specific policies to ban shady practices and generate tens of billions in revenue.

If local businesses are waking up, so should ordinary taxpayers. We can’t build healthy and economically vibrant communities when our wealthiest citizens and corporations maintain an unfair advantage.

Chuck Collins is a senior scholar at the Institute for Policy Studies.

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