Our Indefensible Tax System
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MJ: You write that the increased flow of capital and goods around the world creates opportunities for tax evasion, because, among other things, corporate profits can be transferred to off-shore subsidiaries that don't pay American taxes. What are the implications of globalization on American tax policy?
DCJ: Let me give you some numbers. In 1990, about 1 percent of American corporate profits were taken in tax havens like the Cayman Islands. By 2002, it was up to 17 percent, and it'll be up to 20-25 percent very quickly. It's a major problem. Fundamentally, we have a tax system designed for a national, industrial, wage economy, which is what we had in the early 1900s. We now live in a global, asset-based, services world. And we need to have a tax system that follows the economic order or it's going to interfere with economic growth, it's going to reduce people's incomes, and it's going to damage our country.
MJ: For all your criticisms of the system, you don't come across in the book as an opponent of taxes.
DCJ: I dislike paying taxes as much as anyone, but yes, taxes are the price of civilization. There is no America without taxes. The question isn't, "Do we want to have taxes?" The question is, "How heavy is the burden, and who bears that burden?"
MJ: Large corporations seem the most adept at avoiding their share of the burden.
DCJ: That's correct. Sixty-one percent of large corporations paid no federal income taxes for the five-year period from 1996 to 2000, according to the Government Accountability Office, the investigative arm of Congress. The companies that pay the least tend to be capital-intensive and multinational.
And the tax code is totally skewed toward multinationals. When researching this book I started talking to local businessmen in Rochester, New York, and they told me stories about their dealings with the tax code. And one of things that emerged from it was that the tax code would favor multinational competitors against them. Some of them started opening up factories overseas because their tax advisor said, "You're going to get killed by the system."
What do members of Congress talk about all the time? They talk about the family businesses and the small businessmen they are trying to help. They are screwing the small businessman. And they are helping the multinationals because guess what, that's where the campaign money comes from. You don't get that money from Joe Sixpack who works in a factory and you don't get that money from the bourgeois businessman who is a fundamental force in stabilizing your local community. You get it from big corporations.
MJ: Explain how multinational corporations manipulate the system to pay little to no tax.
DJC: That's easy. They do it simply by having rules in place that allow them to do some fundamental things. First, they get to reach forward. I'm talking about deferrals. You, as a wage earner have to pay your taxes every year on your income for that year. So if you have a one-time windfall that makes you a lot money you could end up in the top tax bracket. But if you're a corporation you are allowed to reach forward with deferrals for years. Over a 45 to 50 year period, you can balance out the winning years and the losing years in such a way that you pay very little tax, especially considering the time-value of the money.
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