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When It Comes to Tax Avoidance, Donald Trump’s Just a Small Fry

Not paying taxes "makes me smart," Donald J. Trump said last week. His surrogates called him "a genius" for his recently revealed tax avoidance strategies.

Well, if they are right, the executives running corporate America are absolute virtuosos.

An exhaustive study being released on Tuesday by a group of researchers shows in detail how Fortune 500 companies have managed to shelter trillions of dollars in profits offshore from being taxed. Mr. Trump's efforts pale by comparison. Worse, the companies have managed to hide many of their tax havens completely, in many cases reporting different numbers to different government agencies to obfuscate exactly how they've avoided Uncle Sam.

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And, yes, it is all legal.

Donald Trump
Carlo Allegri | Reuters
Donald Trump

The immediate response from many readers may be ire for the companies avoiding taxes — or for Mr. Trump. But that's not the goal of this particular column. In this case, that kind of thinking may even be counterproductive.

Instead, the study — which notes that 58 Fortune 500 companies would owe $212 billion in additional federal taxes, "equal to the entire state budgets of California, Virginia and Indiana combined," if they were taxed properly — should be a five-alarm call to voters and lawmakers to finally fix the tax system. If all the attention on Mr. Trump's tax bill (or lack of one) isn't enough to inspire a complete rewrite of the tax code, this study may be.

The authors of the report, which include the U.S. PIRG Education Fund andCitizens for Tax Justice, combed through the filings of the Fortune 500 for 2015 and found an astonishing 73 percent "maintained subsidiaries in offshore tax havens."

Maybe it is to be expected. Companies and individuals complain bitterly that taxes are too high and the rules too complicated, but many corporations and the wealthiest members of our society have found ways to make the tax code work for them.

If all the Fortune 500 companies paid taxes on their sheltered profits, the researchers tallied, the government would receive a whopping $717.8 billion windfall. To put that number in context, the 2015 federal budget deficit was $438 billion. However, fixing our corporate tax system alone isn't the answer to reducing our red ink; it might only be a drop in the bucket given that our total federal debt is nearing $20 trillion.

The researchers reported that Apple holds $214.9 billion offshore and would owe $65.4 billion in taxes if that money came back to the United States; Nike holds $10.7 billion offshore and would owe $3.6 billion in United States taxes; Goldman Sachs holds $28.6 billion offshore, and the report says the company "reports having 987 subsidiaries in offshore tax havens, 537 of which are in Bermuda despite not operating a single legitimate office in that country, according to its own website."

Rather than moralize about whether it is patriotic to pay taxes — which seems to be a rather polarizing question these days — let's focus on understanding exactly how companies keep money offshore and find an appealing way to bring back that money to help spur our economy and create jobs for those without them and higher incomes for those who do.

It is worth noting that Apple's recent $14.5 billion tax bill levied by the European Union, which contended that Ireland undertaxed the company, is a good example of money kept offshore to benefit from lower rates. Perhaps it is a twist of irony, but given the European Union's efforts to collect — which Apple's chief executive, Tim Cook, called "total political crap" — one question that has emerged is whether United States companies may be more inclined to bring money back home rather than risk shifting tax rules in Europe (think Brexit, for example) and elsewhere.

Perhaps not surprisingly, it's hard to figure out exact numbers for money stored abroad because there is so little transparency in how offshore profits are reported. So, the first element of making a better tax system is simply creating a more transparent way to report offshore profits so policy makers aren't in an information vacuum.

Here's just one example of the problem: The Securities and Exchange Commission "only requires that companies report all 'significant' subsidiaries, based on multiple measures of a subsidiary's share of the company's total assets. By only requiring significant rather than all subsidiaries, this allows companies to get away with not disclosing many of their offshore subsidiaries and creates the potential for gaming because avoiding disclosure simply requires splitting a significant subsidiary into several smaller subsidiaries," the report says.

It also points out that "the penalties for not disclosing subsidiaries are so light" that it is very likely that companies choose to muddle the numbers and consider the potential for being fined simply the cost of doing business.

The challenge of transparency is exemplified by this finding: "27 companies reported 16,389 total subsidiaries and 2,836 tax haven subsidiaries to the Federal Reserve, while only reporting 2,279 total subsidiaries and only 410 tax haven subsidiaries to the S.E.C."

The headquarters building of the U.S. Securities and Exchange Commission (SEC) in Washington.
Joshua Roberts | Bloomberg | Getty Images
The headquarters building of the U.S. Securities and Exchange Commission (SEC) in Washington.

How is that possible?

It isn't because these companies are lying to the S.E.C. (at least, not that we know about). It is because the S.E.C. has been so vague about the definitions of a subsidiary that it's almost laughable. All agencies should require the same definitions; the Federal Reserve, for example, is much tougher.

Once we have the actual information, we need to figure out what to do with it. No doubt, companies in the United States — and frankly any business that benefits from our markets — should pay some form of taxes. (Having said that, there are some economists who argue that corporate taxes should be very little or nothing at all — assuming that individuals and shareholders then pay more.)

Citizens for Tax Justice advocates a litany of rules to end the deferral of foreign income, stop tax inversions and remove loopholes like inconsistent guidelines that allow companies to tell "one country that a subsidiary is a corporation while telling another country the same entity is a partnership or some other form."

These are laudable goals. How we resolve the disgraceful patchwork of tax rules and loopholes remains an open question. Democrats want policies that create more revenue, and Republicans want policies that create less revenue in the immediate term (they want lower tax rates and suggest that such rates would spur the economy and therefore ultimately create more revenue).

Whatever the ultimate resolution, whoever ends up being the next president has the chance to be considered a true "genius" if he or she tackles the issue in a meaningful and sensible way.