Closing tax loopholes can be done through enforcing tax code rules or enacting new legislation. It is estimated that closing tax loopholes in the US entirely could generate an additional $1 trillion in revenue annually. Major corporations use offshore tax havens to reduce their tax liability, costing billions in revenue. Closing tax loopholes requires new legislation and long-term enforcement. Massachusetts increased revenue by closing tax loopholes, including going after banks that invested in real estate trusts to avoid taxes.
Closing tax loopholes generally involves one of two government approaches. First, the government can begin to actively enforce tax code rules that have been ignored in the past to increase revenue. Second, you can enact new legislation that has the effect of closing tax loopholes, which may be formed by a variety of past government incentives such as subsidies, credits, and deductions that are no longer considered valuable. Closing a tax loophole may also involve eliminating methods of avoiding tax on investment income where it was previously classified as deferred income, or by not allowing tax breaks for divisional business losses or foreign investments, where overall earnings of a corporation have been positive in a recent year.
As tax law becomes increasingly complex, special case tax code provisions need to be changed periodically to avoid creating large tax loopholes for corporations or individuals. It is estimated that, in the United States, closing tax loopholes entirely could generate an additional $1,000,000,000,000 United States dollars (USD) in revenue for the federal government annually beginning in 2011. A significant portion of this revenue loss comes from Major Internationally Recognized US Corporations. One prominent example of a corporation that made $6,320,000,000 USD in annual profit paid taxes to the government on only 7%, or $445,000,000, of these profits for fiscal year 2011. It did so by funneling much of its sales profits through offshore tax havens in countries like Ireland, Singapore, and Puerto Rico to reduce their federal tax liability in the United States.
The use of overseas investment and profits as pipeline processes to avoid paying taxes is known as the Irish and Dutch double-sandwich schemes, which are heavily exploited by major technology companies and are estimated to cost US$60,000,000,000 in annual revenue as of 2011. Closing tax loopholes like this requires the creation of vigorous new tax legislation and its long-term enforcement. The same tech companies owed average corporate taxes of more than 30% as recently as 2006, and were able to use these tax loopholes to bring it down to less than 10% without violating the law.
Another important approach to closing tax loopholes can be to take a hard look at existing tax laws and their weaknesses that the government has largely ignored in the past. In the US state of Massachusetts, Governor Mitt Romney did exactly this as soon as he was elected to office. Within months of taking the governorship in 2003, Romney’s staff reviewed the tax code to increase state revenue by $110,000,000 in corporate taxes. Closing tax loopholes over the next three years in the state generated hundreds of millions of dollars in additional revenue.
One prominent example of how Massachusetts did this was by going after banks that had reduced the tax they owed to the state by investing their profits in real estate investment trusts, which by law were subject to virtually no tax. Parallel to what tech companies were doing with offshore branches to avoid federal taxes, state banks were legally avoiding taxes by claiming that real estate trusts were part of normal banking business. In fact, these “investments” were a form of tax shelter that banks exploited until it became illegal, when state law was revised by Governor Romney to outlaw the practice.
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