Can you guess which State is home to the most Fortune 500 companies? I bet Delaware was not obvious. That random State most people rack their brains to place on a map is taking the lead over the equally un-placeable Cayman Islands for best tax haven on Earth.
Delaware has more corporate entities than people – 945,326 to 897,934. Last year alone over 133 thousand businesses set up there, and they’re paying very very little in taxes.
About $9.5 billion in taxes is assumed to have been avoided just do to Delaware being a lousy teammate. “The Delaware loophole,” as businesses call it, let’s them plant an empty office in Delaware and run their money through it to get huge savings from the lowered tax rates.
It’s totally legal, and it’s costing other states a lot. The extreme mobility of these businesses into Delaware – it takes under an hour to set up a shell company – means the other 49 states plus the rest of the world are losing out on revenue that’s rightfully theirs.
What’s not legal is how many criminals are using this system to save a buck as well. “The merchant of death” russian arms dealer Viktor Bout had all his money cycling through there, and it’s the favorite location for eastern European smugglers.
That’s because Delaware also has some of the best secrecy laws in the world, meaning it’s nigh impossible to track who really owns the companies and money passing through. Other notable contenders include the Isle of Man, Cayman Islands, Wyoming, Nevada, and Oregon. Wow.
Mr. Geisenberger, chief deputy secretary of state of Delaware, makes the argument that enforcing stricter rules would mean a lot of people and companies move their operations into the black market, so absolutely no taxes would be collected on them.
I find that argument to be a poor economic analysis. Sure, many would-be shell companies owned by drug smugglers or embezzlers would instead turn to the black market, but that’s good. It means they’re no longer protected by the law, which means they’ll have a tougher time keeping their business afloat and the government can actually go after their assets.
Besides, having no option but the black market would be a major turn-off to would-be criminals, due to the increased dangers and costs, so many might simpy not do it. I bet ToysRUs for instance would be much more willing to pay more taxes than shift their company’s taxes underground.
Having a fair tax system in Delaware would also mean companies actually registering in the states they perform the most business in, because the increased costs of having a reasonable company established in Delaware would prove a large disincentive, and they’d pay their share of sales and income taxes.
It makes sense from Delaware’s perspective to be the jerk state. They’re rolling in the dough right now, collecting far more in taxes than they need from all these non-resident companies and individuals. Even though the taxes are low, there’s just so many businesses it adds up.
And these business will keep coming, quickly draining the life from everywhere else and marginally helping Delaware’s own pockes. I sure hope Delaware gets bonked on the head, wakes up, and has a moral spine. That, or legislators do their darn job and tax and pass laws.
Super interesting!