A year ago Citizens for Tax Justice, a Washington, D.C., nonprofit, studied the tax returns of 280 corporations. What it found was a Beltway version of a Mafia protection scheme.
From 2008 to 2010 at least 30 Fortune 500 companies — including PepsiCo, Verizon, Wells Fargo and DuPont — paid more for lobbyists than they did in taxes. They collectively spent $476 million sucking up to Congress, buying protection for tax breaks, loopholes and special subsidies.
It didn't matter that these same 30 firms brought home a staggering $164 billion in profit during that three-year period. They not only managed to avoid paying taxes. They actually received $10.6 billion in rebates.
Defenders of the system argue that most federal tax breaks don't go to large corporations. That's true. By pure dollars, the lion's share goes for mortgage interest, employer-paid health insurance, retirement plans and Medicare benefits.
The difference is these tend to benefit everyone. They're designed for the greater good, reinforcing the pillars of self-determination: home ownership, savings and health care.
But there's another part of the tax code where 99 percent of America is barred from entry. It's where Congress sells loopholes and subsidies to those with the wallets to pay. They not only saddle the rest of the country to make up the difference, but they also turn the notion of a free market into a sitcom.
Even for companies within the same industry, the disparities are alarming. From 2008 to 2010, UPS paid a tax rate of 24 percent. Rival FedEx paid less than 1 percent.
Monsanto managed to pay 22 percent — well below the supposed corporate rate of 35 percent. But that's nothing compared to DuPont, which received a $72 million rebate — despite profits of $2.1 billion.
This sleight of hand even extends to retail. While Nordstrom paid 37 percent in taxes, Macy's rate was just 12 percent.
You don't need a Wharton MBA to see how damaging this is to the nation's financial health. Big companies are given incentive to lard up on lobbyists, accountants and lawyers, rather than use that money to improve products and services. And while small businesses may collectively be our largest and most stable employer, we've rigged the game against them, because they often can't afford to wine and dine congressmen on their own.
"The tax code is a mess," says Congressman Chris Van Hollen, a Democrat from Maryland. "I support tax reform, but not reform that's simply a Trojan horse for giving another round of windfall tax breaks to the very wealthy."
And that's the problem. President Obama and Democrats have railed for years over this brand of favoritism, only to cave at the first whiff of resistance.
Republicans are worse, prattling on about free markets while protecting just about any market-distorting loophole if the money is right. Mitt Romney, the poster child of offshore tax schemes during his time at Bain Capital, claims he has a plan to close loopholes. He just refuses to say how he'll do it.
But if you're not being bought with weekend golf retreats at Augusta National, it's easy to find giveaways we all can agree must end. Introducing the ten most corrupt breaks, designed to do nothing but pervert America's economic strength.
10. I'm Irish. No, really.
Apple Inc. may have made Silicon Valley famous, but it prefers to let someone else pick up the check for Northern California's freeways, bridges and airports.
How? By pretending to be Irish.
In the late 1980s, Apple decided that Ireland's 12.5 percent corporate tax rate was a much more comely figure than America's 35. But Steve Jobs didn't want to move to Dublin. Fortunately, Congress allowed him to fake it.
Apple created an Irish subsidiary. Then, with a flourish of paperwork, it transferred its most valuable assets — its patents — to Ireland, comically forcing its U.S. headquarters to pay leasing fees for its own inventions.
Nothing had actually changed in the way the company operated. Apple simply had new paperwork saying it was part Celtic, allowing it to dodge a substantial part of its U.S. tax bill.
But that wasn't the end of the boondoggle. The Irish subsidiary is partially owned by another company, Baldwin Holdings, which doesn't even publicly list an office address or a phone number. But it does have paperwork saying it's headquartered in the Virgin Islands, where it can stockpile its income tax-free, outside the reach of the IRS.
Most people associate such exhaustive money laundering with drug cartels. But it's now standard practice at firms such as Eli Lilly, Google, Microsoft, Pfizer and Facebook. The only difference is that when drug dealers do it, the government shows up with a SWAT team instead of a refund check.
Congress, meanwhile, is bribed to look the other way, leaving the federal Treasury to serial molestation by our most prominent citizens.
"The original sin is that we treat a wholly owned subsidiary in the Cayman Islands as if it was an arm's length separate entity," says Dr. Calvin Johnson, a tax expert at the University of Texas School of Law. "A pocket transfer from the U.S. to the Cayman Islands is like a transfer from your left pocket to your right. Any system that treats a Cayman Island subsidiary as if it is a separate entity is just asking to be destroyed."
Actually, it already has been destroyed. Despite declaring $18 billion in profits in 2010, Apple paid just 17 percent in federal taxes. It socked away another $74 billion offshore and tax-free.
9. How to lower your taxes by sitting on your ass.
Back in the 1970s "hard work" wasn't just something candidates yammered about during campaigns. It was actually embedded in the tax code. Capital gains — investment income created by things like stock dividends — were taxed at a higher rate than wage income for a very simple reason.
"The theory was that it was tougher to dig a ditch than to watch somebody do it," says Robert McIntyre, director of Citizens for Tax Justice.
Even Ronald Reagan knew that someone shouldn't pay less for sitting on his ass. He made the capital-gains tax the same as the highest personal rate.
But heavy protection payments have since whittled that notion of "hard work" down to a toothpick. George W. Bush finally hacked it to its current low of just 15 percent.
Officially, the theory is that lowering capital gains will spur investment, creating new companies, new jobs and prosperity for all. But most economists have found it does little to spur savings and investment.
What it does do is deliver a fortune to investment bankers and financiers. So outlandish is this arrangement that the nation's most revered investor, Warren Buffet, has called on the federal government to tax him and his super-rich friends at a higher rate.
Over 70 percent of the $100 billion that capital-gains tax breaks cost the government each year goes to those with incomes in excess of $1 million, according the Joint Committee on Taxation. Even more shocking, the 400 highest-income Americans received 16 percent of all net capital gains in 2009, a total of $37 billion.
Congressman Sander Levin, a Democrat from Michigan, has tried to shear this golden lamb by requiring those taking capital gains breaks to prove they actually invested. Yet Congressman Dave Camp, a Michigan Republican and chairman of the House Committee on Ways and Means, has blocked the bill from ever coming up for a vote.
It's probably just coincidence that since Camp entered Congress in 1993, he's taken a whopping $631,916 from the financial industry. Camp did not respond to repeated interview requests.
8. The Sheryl Crow loophole.
It pays to have low friends in high places. Six years ago legislators from Tennessee, Kentucky and Texas wanted to reward those who provide the star power to their fundraisers: country musicians. So they passed a law allowing songwriters to avoid income taxes and sell their publishing catalogs at capital-gains rates.
Suddenly, Nashville's elite could not only avoid the taxes everyone else must pay; they could also skirt their Social Security and Medicare bills.
Three years later, Sheryl Crow sold her publishing rights to one of Australia's largest banks for nearly $10 million. Her estimated savings courtesy of this congressional giveaway: $2 million.
The law, however, curiously omitted other creative types who weren't hosting congressmen's rallies. Authors, for example, still must pay standard income taxes for selling the copyrights to their books. The same goes for painters, photographers, screenwriters and sculptors.
7. Getting rich, Facebook style.
Before Facebook offered its first publicly sold stock in May, CEO Mark Zuckerberg grabbed 120 million shares for himself, then threw another 67 million shares to his employees.
It may have seemed an unusual act of generosity for a man not known for his grace. That's because it was also a multibillion-dollar tax dodge.
The public paid $38 a share for Facebook stock in initial trading. Yet via a sweet little loophole created by Congress, Zuckerberg claimed the shares he gave employees were worth just six cents a piece. By law, Facebook was allowed to deduct the difference — more than $7 billion — as a business expense.
In reality, the employee giveaway cost Facebook nothing. It neither expanded the company's expenses nor increased its liabilities. McIntyre, of Citizens for Tax Justice, compares it to an airline letting workers fly free in seats that would otherwise have been empty. The airlines don't receive a break because it doesn't cost them anything.
But thanks to some inventive paper shuffling, Facebook will receive a $500 million tax refund next year.
A similar loophole encourages companies to offer executives those bloated compensation packages.
When CEO wages began to spur outrage in the early Clinton years, Congress decided that companies could no longer deduct executive salaries over $1 million as a business expense.
But it also created a loophole that rendered its crackdown meaningless. Exempted were "performance-based" bonuses that surpass that $1 million threshold. A grand new corporate giveaway was born.
Suddenly, CEOs were being slathered with stock options. Companies expensed the giveaway without ever opening their wallets.
Last year, the five highest-paid CEOs collectively took home $232 million — while their companies received a tidy $81 million in tax breaks.
6. My other home's a yacht.
Established in 1913, the mortgage interest deduction is one of the oldest and most sacred breaks in the code. It's meant to encourage home ownership and stabilize communities.
It doesn't really work, because most people will buy homes whether they receive a break or not. Countries such as Australia and Canada have similar ownership rates to ours without offering the deduction.
But at least congressmen back in 1913 occasionally tried to do something beneficial for the country. Today's Washington is more interested in exploiting those good intentions. Take the yacht deduction.
The luxury sailing industry was able to buy its way into the mortgage break when Congress officially declared boats as homes. But not just any boat. The rules require they have sleeping quarters, a kitchen and toilet, leaving just 3 percent of U.S. boat owners to qualify.
"The mortgage deduction was never targeted for that," says Congressman Tim Walz, a Democrat from Minnesota. "It was meant to make home ownership more affordable for the middle class."
So Walz wrote the Ending Taxpayer Subsidies for Yachts Act, hoping to bar the über-wealthy from sponging off the mortgage deduction. Once again Congressman Dave Camp refuses to let it come up for a vote.
That leaves everyday taxpayers to subsidize toys such as Microsoft cofounder Paul Allen's $200 million yacht, which comes equipped with an indoor pool, basketball court and its own submarine.
"It's a loophole in the tax code that benefits a few people at the very top," says Walz, a sergeant major in the National Guard and former teacher. "I certainly feel if they want to grab their luxury liners, I'm glad they do. And I'm glad we have people making them. I'm just not certain we subsidize that."
5. Big Oil's Cadillac welfare.
In August, Mitt Romney traveled to Iowa, where wind energy has become an economic force, responsible for 7,000 jobs and 20 percent of the state's electricity.
The Republican nominee dodged questions about what he'd specifically do as president with the $3.3 billion in tax incentives that now go toward spurring development in wind energy. Romney's campaign aide was less evasive.
"He will allow the wind credit to expire, end the stimulus boondoggles and create a level playing field on which all sources of energy can compete on their merits," Romney spokesman Shawn McCoy told the Des Moines Register.
But Romney has announced no similar crackdown on a much older and larger welfare queen: Big Oil.
The five largest U.S. oil companies collect a spectacular $20 billion a year in tax breaks. And they'd prefer that wind farms not compete for that lucrative welfare dollar. During this year's presidential race, the industry has paid Romney $3.4 million to ensure wind goes away.
Technically, the oil giveaway is supposed to defray the cost of searching for new sources. But even George W. Bush realized the industry didn't need subsidies back in 2005, when the price of a barrel was at $55. "We don't need incentives to oil and gas companies to explore," he said at the time. "There are plenty of incentives."
These days the price of a barrel routinely hovers around $100. But the five biggest companies — BP, Chevron, ConocoPhillips, ExxonMobil and Shell — still get their breaks, despite collective record profits of $137 billion last year.
"The oil industry is doing fine," says Johnson, the University of Texas tax expert. "They don't need or deserve a dime of subsidy. It's all money thrown away to make shareholders richer. The private market will provide any subsidies by increasing the price. It's time to get the government out of the business of special subsidies. It's like Cadillac welfare."
4. A break for shipping your job to China.
In April 750 workers at a Kimberly-Clark paper mill in Everett, Washington, lost their jobs when the company shipped their work to a lower-cost facilities overseas.
Steelworkers in Stevens Point, Wisconsin, suffered the same fate. Their mill's owner, Joerns Healthcare, took away 150 jobs last month by moving operations to Mexico.
Another 170 people making auto sensors at a Sensata Technologies plant in Freeport, Illinois, will be out of work by year's end. Their jobs are being carted off to China.
In each case American taxpayers will subsidize the evacuation.
It's not just cheap labor that pushes work overseas. The U.S. tax code allows companies to expense every last cost of sending your job abroad.
At a time of 8 percent unemployment, one would think Congress would rush to kill a loophole that actually encourages economic misery. One would be wrong.
This summer Senate Democrats introduced the Bring Jobs Home Act, which would kill the loophole and offer a 20 percent tax credit to companies that bring work back to America.
Republicans filibustered the bill to death. Senator Orrin Hatch of Utah went so far as to call the measure "a joke."
3. The behaving-like-an-asshole deduction.
In 1989 third mate Gregory Cousins was negotiating the 986-foot Exxon Valdez through Bligh Reef in Alaska while Captain Joe Hazelwood slept off a bender below deck.
The vessel crashed, spilling upward of 25 million gallons of oil into Prince William Sound. The disaster could have been avoided if the ship's collision avoidance radar was working. It had broken a year before, but Exxon chose not to fix it owing to the cost of repair and operation.
Overnight, 1,300 miles of pristine shoreline turned into a gooey tar pit. The remote locale made cleanup difficult, and 23 years later fish stocks have yet to return to their pre-spill levels.
A court would eventually level $5 billion in punitive damages against Exxon — equal to a single year's profit at the time. The company appealed, chipping away at the sanction until the U.S. Supreme Court slashed that figure to $500 million in 2008.
Yet through the miracle of the tax code, Exxon would only end up paying 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, Senator Patrick Leahy of 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.
Just outside of Philadelphia sits a tax haven so egregious the Cayman Islands complains about it. 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 junkies in 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 last 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, questions the state's unscrupulous 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, of University of Texas, 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, because 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 such as 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."