Jumping Through Loopholes
Corporate tax loopholes are unethical and immoral. These loopholes allow big corporations, that annually make millions to billions of dollars a year, to use legal accounting practices to avoid paying taxes of a higher bracket or even avoid taxes entirely. This was the case with Amazon, a company that churned out 11.2 billion dollars in profit in 2018 and paid zero dollars towards federal taxes. This is also the second year in a row that they have been able to do this. The new tax law that just passed under President Trump, The Tax Cuts and Jobs Act, has made it much easier for companies to avoid paying their fair share of taxes. It reduced the tax rate that corporations pay on their income from 35 to 21 percent, reduced the tax rate that corporate income from overseas that companies bring back to the U.S pay from 35 to between 8 and 15.5 percent, and completely exempted the foreign income that American companies made from U.S tax. Despite these massive tax cuts for corporations, they continue to pursue loopholes to even further lower the taxes that they have to pay.
Companies can avoid taxes in a variety of ways. The most common way is for companies to relocate their headquarters overseas, to a country with very low taxes, but maintain most of their business in the United States. Other ways are a little more creative and complex than that. For example, Apple has recently increased its dividend payouts to shareholders to result in a lower net income and pay at a lower tax rate. Another way is for companies to increase their interest payments just to lessen the amount of taxes that they pay.
Now these forced expenses may seem to be counterintuitive to increasing profits at first. However, keep in mind that these corporations are valued in the millions or billions. Apple, which had its highest annual revenue ever of 265.6 billion dollars in 2018, used its dividend payouts and the new tax law to avoid paying around 40 billion dollars in taxes.
Corporations not paying their fair share of taxes is unethical because it is a social obligation that everyone partakes in. Every individual with an income in the United States must pay the federal government a percentage of that income, as taxes. When corporations avoid paying their fair share it is unjust to those who earn less and pay more. The more taxes that aren’t properly collected, the more it hurts the infrastructure of the country. The income from taxes that the federal government receives is supposed to go towards benefitting society in a variety of visible ways. “Paying a fair amount of tax in the countries where they operate is seen as the socially responsible thing for companies to do: providing the funds for public services such as healthcare, education, and infrastructure” (The Guardian). Corporations and individual people alike benefit from these, so for a corporation to avoid paying taxes and still enjoy these services is unfair to those who pay their share. It’s also detrimental to society as they aren’t fully contributing what they are supposed to. This leads to lower taxes collected and lower funding to go around for these public services. With lower taxes being collected, the rest of the country is left to pick up the slack, resulting in higher taxes for people. In the 1960s, corporate tax was at its peak at 52% and accounted for a third of federal revenues. However today, at 21%, corporate tax accounts for less than a tenth of federal revenues.
Another reason why corporations not paying their fair share is unethical is because they use aggressive means to circumvent the wording of the law. This puts other corporations that are paying their taxes, without using loopholes, at a disadvantage. The government passes tax laws with extensive attempts to anticipate certain maneuvers that a company can make, however they do not account for all of them. Certain corporations take advantage of this and make moves, such as switching headquarter locations overseas, to reduce their taxes.
Under the new tax law, most small businesses received a tax break, yet they are not able to qualify for many of the same benefits that corporations get. Big corporations get bigger and bigger, while small businesses do their best to maintain a small profit or break even. This is a big contrast to what Friedman dictates what the economic market should look like, “elementary morality rules out deception, force, and fraud, and the rules of the game are intended to promote open and free competition” (Shaw, Vincent 210). Tax avoidance is just a deceptive way for corporations to increase their profits, further widen the gap between them and small businesses, and decrease federal revenue.
In the spirit of the new tax law, the tax savings of a corporation were intended to be used as bonuses for its employees or to reinvest into the economy. Instead, corporations have used their tax savings to do massive stock buybacks worth billions and distribute large amounts of money back to shareholders. This insane level of greed just increases shareholders profits while not allowing smaller business owners a fair paying field, since smaller businesses are not set up for stock buybacks or dividends.
The moral theory that supports my argument is utilitarianism. Corporate tax loopholes hurt small businesses and individual people as the tax expense is reverted back to them. There is something just fundamentally wrong with big corporations avoiding taxes, it can almost be viewed as theft. Especially since ordinary families pay what the government demands of them. More harm is done from corporations avoiding their taxes than from them paying their fair share. The only way that corporate tax loopholes would be able to be ethical would be if the government planned to do something malicious with the revenue from those taxes collected. However, since the government uses its federal revenues to improve several aspects of the country and big corporations are just taking away from that funding, it is unethical to avoid taxes.
Despite it being viewed as unethical, tax avoidance is legal. This is the main argument for proponents of corporate tax loopholes. Technically speaking, corporations aren’t legally doing anything wrong. It is not specifically written and outlined in the tax laws of the United States, that corporations cannot use tax havens and relocations to lower taxes. Corporations also do have the primary priority of maximizing profit for its shareholders, as they are owners of the company. With maximizing profit in mind, there should be nothing wrong with corporations trying to make as much money as they can through legal means, including finding ways to lower the taxes they are required to pay. Advocates for corporate tax loopholes also use the argument that corporations paying their fair share and contributing to public services, is not the purpose of a corporation. Big corporations also already help the public in a variety of ways that is not through federal taxes, such as through charity and the creation of jobs.
Although just because something is legal, does not make it morally right. Corporations are responsible for paying their share, without the use of loopholes. Even though it is not in the law, word for word, the loopholes aren’t meant to be used so aggressively; they weren’t anticipated. Corporations do have the priority to maximize profit for shareholders, however, in today’s climate they also have a priority to society and are responsible for their consumers. These loopholes just help the rich get richer and contributes to the already growing inequality in the world. There are no benefits to anyone except for the shareholders, who are already well off. The lower classes are stuck paying higher taxes that should have been paid by big corporations.
In conclusion, tax avoidance is unethical because it is harmful to society and small businesses. The loopholes used are not authorized or encouraged by the federal government. It is extremely concerning to see how many corporations are partaking in these loopholes as well as how the government, banks, and other tax entities are allowing this go on. With the new corporate tax rate lower than most advanced economies, the focus now should be on closing all the loopholes, especially beginning to tax corporations’ foreign incomes. That should streamline the process of bringing companies back to the United States and discourage the use of tax havens.
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