Laughing All the Way to an Offshore Bank?

The Bush Administration's tolerant mindset on taxes protects privacy but could make it easier for cheats to foil the IRS

By Howard Gleckman

What should the U.S. government do to keep Americans from dodging taxes by shuffling money out of the country? That question has generated tremendous controversy inside the Bush Administration and is leading to a fascinating rift between conservative theorists and some big U.S. banks.

Today, both individuals and businesses can reduce their U.S. taxes by moving assets to countries with low tax rates or by shifting dough to places with strict bank secrecy laws. And over the past couple of years, a growing international effort -- backed by the Clinton Administration -- has arisen to block such strategies.

Team Bush, however, is taking a much more tolerant view toward these tax havens. It developed this position despite a quiet but intense battle between its economists, who feel that anything that encourages lower taxes is good, and those responsible for enforcing the laws, who -– legitimately -- fear grand opportunities for cheating.

Treasury Secretary Paul O'Neill flatly opposes limits on the ability of any country to impose low taxes or no taxes on foreign capital. On June 12, he told my colleague Rich Miller and me that such decisions are out of his hands. "What would you have me do?" he asks (see BW Online, 6/15/01, "A Talk with Paul O'Neill").


  In Europe, attempts have been made to curb tax competition, where one country would lower its tax rates in an attempt to woo capital from another. In Ireland, for instance, some foreign companies could pay lower tax rates than their domestic competitors. Other places, such as the Cayman Islands, impose no tax at all on U.S. dollars sitting in local banks. U.S. opposition has, in large part, scuttled European efforts to curb such tax competition. Disclosure, however, remains a hot topic.

The Caymans, along with a number of other island nations in the Caribbean and Pacific, have enacted bank-secrecy laws that make it difficult for governments to trace the movement of money by those who want to dodge taxes. Such rules are similar to those that have benefited Swiss banks for years. And they've drawn sharp criticism from the Organization for Economic Cooperation & Development (OECD), a group of 30 developed nations that includes the U.S.

Secretary O'Neill says he wants "all information that's necessary to ensure that our tax laws are fully enforced." Conservatives, who have made the issue a cause celebre, fear that is still too much. The Heritage Foundation's Dan Mitchell says he has no objection to the U.S. "cooperating in the fight against crime while respecting civil liberties." But "we lose if information exchange means governments can indiscriminately obtain private financial data in order to enforce their tax laws."


  U.S. financial institutions don't want to take on the conservatives in public. But privately, they grumble that foreign bank secrecy laws put them at a severe disadvantage. After all, they must obey strict U.S. laws, while their overseas competitors do not. Says a lobbyist for one major U.S. bank: "There is a belief that we shouldn't be the only ones subject to these tough rules."

Placating these banks may be one reason why O'Neill now says he wants to review some U.S. privacy laws, including those that require financial institutions to disclose any cash transactions in excess of $10,000.

The U.S. and other industrialized nations have a fine line to walk here. On one hand, they do have an obligation to protect what little remains of consumers' financial privacy. But they need to recognize that the increasingly easy flow of money across borders vastly expands the opportunities for tax cheating and other criminal activity. And ultimately, if enough people cheat the IRS, the rest of us are going to pay higher taxes to make up for what those folks pocket.

Gleckman is a a senior correspondent in BusinessWeek's Washington bureau. Follow his views every Tuesday in Washington Watch, only on BW Online

Edited by Beth Belton

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