02/15/2011 04:55 pm ET | Updated May 25, 2011

In The Public Interest : A (Non)Taxing Issue

The president's budget released this week follows up on several promises he made in his State of the Union a few weeks ago. The budget calls for ending some wasteful subsidies to big agriculture and the oil and gas industry, as well as improved management and IT upgrades for Defense Department purchases of equipment and supplies. These changes, if enacted, would save taxpayers billions in the coming years.

While spending through the appropriations process is important, it's only a part of the story. We also spend billions through the tax code and the offshoring of profits by the nation's largest corporations. As the debate over the budget and our national priorities heats up, the discussion should not stop, both literally and figuratively, at our shores.

Many large U.S. companies use offshore subsidiaries and creative tax planning to lower their tax rates at the expense of the rest of us. As taxpayers and legislators wring their hands over missing budget funds, it is eye-popping to see where much of the money has gone.

The list of players using offshore tax havens to shift profits overseas reads like a Who's Who among big businesses and banks. For starters, there's Google, which has paid an overseas tax rate of 2.4 percent since 2007. Then there's Goldman Sachs, which in the same year received a $10 billion taxpayer bailout and paid just a 1 percent effective tax rate on their profits. The "Big Four" audit firms, such as Ernst & Young, not only advise clients on tax haven strategies, but use them to also ship their own profits overseas. Most recent exposés give a frightening peek into the aggressive tax maneuvering of companies such as General Electric, Carnival, Boeing, Yahoo and Southwest Airlines. Official estimates by the GAO show at least 83 percent of the largest 100 companies have created offshore subsidiaries in places like the Cayman Islands that are officially listed as tax havens.

Offshore tax havens cost the Treasury over $100 billion per year. It's the equivalent of a massive annual bailout for America's largest, and often times, least scrupulous corporations. We should never have tolerated it and can no longer afford it.

Rampant tax avoidance by corporations is not even good for business. Capitalism works best when companies thrive based on their efficiency and capacity to innovate; not based on the number and aggressiveness of their tax lawyers.

Curiously, some of the most vocal defenders of tax havens seem to forget about the lost revenue while issuing strong warnings about the size of our deficit. For instance, John Castellani, president of the Roundtable, a vocal critic of large deficits calls closing tax haven loopholes, "the wrong idea at the wrong time for the wrong reasons." For those who oppose reform, the shifting of tax burdens onto already struggling taxpayers and small businesses doesn't even seem to deserve a shoulder shrug.

Despite opposition from some of special interests that benefit from the loopholes, there is reason for optimism. Tea Party followers as well as progressives on the left support making corporations pay their share. Small business and investors similarly support tax reform. In the United Kingdom, people have been protesting on the street and closing down businesses because their jobs, their tax dollars and valued public services are being sacrificed for lack of tax revenue during the economic crisis, while tax-dodging corporations and banks sacrifice nothing.

And tax havens are getting the attention of lawmakers. Sen. Carl Levin (D-MI) has introduced measures to close tax havens in the past and is expected to do so again in this Congress. From across the political aisle, Sen. Charles Grassley (R-IA) maintains on his website a history of his opposition to tax havens. We should also look to the candidates who rode into Washington preaching about fiscal responsibility. They too need to understand that unwise spending through the tax code is just as dangerous as unwise spending through the appropriations process.

The facts about corporate tax avoidance belie the constant, deceptive drumbeat funded by some of the same corporations decrying America's statutory corporate tax rate as one of the highest in the world. The issue shouldn't be the statutory rate - it should be what actually gets paid, known as the effective tax rate. As heiress Leona Helmsley famously opined, "only the little people pay taxes." The oft-mentioned 35 percent statutory tax rate is very unevenly applied, with different industries paying much lower rates dipping into the single digits.

The nation's budget situation may be reason enough to close these loopholes but the argument goes much further. U.S.-based companies that benefit from easy access to American markets, workforce, infrastructure and security should not be allowed to skirt their responsibilities by shipping their profits overseas. Congress needs to close the loopholes and make these large corporations pay taxes in the same country that provides them with the benefits and legal protections that make it so profitable to operate in the United States in the first place.

Phineas Baxandall is a senior tax and budget analyst at U.S. PIRG. Nicole Tichon is executive director of Tax Justice Network USA.