Closing tax loopholes can be done through enforcing existing rules or enacting new legislation. It can involve eliminating tax breaks and preventing methods of avoiding tax on investment income. Closing loopholes could bring the US government an additional $1 trillion in revenue annually. Massachusetts raised revenue by closing tax loopholes, including prosecuting banks that invested in tax shelters. Tech companies use overseas investment to avoid taxes, costing an estimated $60 billion annually. Strong new tax legislation is needed for long-term change.
Closing tax loopholes usually involves one of two approaches by the government. First, the government can start actively enforcing rules in the tax code that have been ignored in the past in order to raise revenue. Second, it can enact new legislation that has the effect of closing tax loopholes, which can be a variety of previous government incentives such as subsidies, credits, and deductions that are no longer considered useful. Closing a tax loophole may also involve eliminating methods of avoiding tax on investment income where it was previously classified as deferred income, or refusing tax breaks for divisional business losses or overseas investments , where a company’s total profits were recent year.
As tax legislation has become increasingly complex, it has become necessary to periodically amend the provisions of the tax code for special cases to avoid creating large tax loopholes for companies or individuals. It is estimated that, in the United States, closing tax loopholes completely could bring the federal government an additional $1,000,000,000,000 in annual US dollars (USD) in revenue starting in 2011. A significant portion of this revenue loss comes from major US corporations. A prominent example of a company that made $6,320,000,000 in annual profits paid taxes to the government on only 7%, or $445,000,000, of this profit for fiscal year 2011. It did so by channeling a large portion of its sales earnings through offshore tax havens in nations such as Ireland, Singapore and Puerto Rico to reduce its federal tax liability to the United States.
Using overseas investment and earnings as a funnel process to avoid paying taxes is known as Double Irish and Dutch Sandwich schemes, which are widely leveraged by major tech companies and are estimated to cost $60,000,000,000 in annual revenue starting since 2011. Closing tax loopholes like this requires strong new tax legislation to be created and enforced for the long term. The same tech companies owed average corporate taxes above 30% in 2006 and have managed to use these tax loopholes in the law to reduce them below 10% without violating the law.
Another important approach to closing tax loopholes can be to thoroughly examine existing tax laws and their weaknesses that have been largely ignored by the government in the past. In the US state of Massachusetts, Governor Mitt Romney did exactly that as soon as he was elected to office. Within months of taking office as governor in 2003, Romney’s staff went through the tax code to raise state revenues by $110,000,000 USD in corporate taxes. Closing tax loopholes in the state over the next three years brought in hundreds of millions of dollars in additional revenue.
A striking example of how Massachusetts accomplished this was to prosecute banks that had reduced the tax they owed to the state by investing their profits in real estate investment trusts, which by law were essentially not subject to tax. In parallel to what tech companies were doing with overseas branches to avoid the federal tax, state-owned banks were legally avoiding taxes by arguing that real estate trusts were part of normal banking. In reality, these “investments” were a form of tax shelter that banks exploited until it became illegal, when state law was overhauled by Governor Romney to ban the practice.
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