How Corporate Tax Evaders Get Away with Billions

In a global economy, countries need to coordinate tax enforcement. But Washington is refusing to cooperate with the EU

By Robert Kuttner

Worried about escalating budget deficits? Want Congress to extend more tax relief to low-income families? You're not the only one. So why is the Bush Administration leaving $200 billion or more of uncollected taxes on the table? Answer: lax enforcement.

Start with international tax avoidance and evasion. Anywhere from $70 to $100 billion is lost to the U.S. Treasury every year when corporations and individuals fictitiously book in tax havens income that is actually earned in the U.S. or Europe. Legal tax avoidance often blurs into illegal tax evasion, because America has inadequate tax treaties with offshore havens -- reporting may not be truthful, and investigation is often impossible. Last November, departing Internal Revenue Service Commissioner Charles O. Rossotti said that of an estimated 82,100 known cases of offshore tax evasion, the IRS has pursued only 17,000 for lack of resources.

The most flagrant of the offshore schemes is the reincorporation of U.S.-owned and -based corporations in havens such as Bermuda. Tyco International boasted that it saved $400 million in corporate tax payments from this in 2001. Last year, when New Britain (Conn.)-based Stanley Works announced plans (later rescinded) to reincorporate in Bermuda, there was indignation, but Congress never cracked down on corporate sunshine patriots.

A less publicized, but far more costly, evasion involves abuse of the loophole allowing U.S. corporations to "defer" indefinitely taxes on income earned overseas. In theory, since the income is taxed in the country where it's earned, it would not be fair to tax the same income in the U.S. In practice, because of lax reporting requirements and creative accounting, much of the profit earned in Europe gets booked in tax havens and evades taxation entirely.

In a global economy, just as we are harmonizing rules for trade, accounting, and intellectual property, we need to coordinate tax enforcement. Countries could still have different tax systems and rates, just as U.S. states do. But they should act in concert to prevent companies from spuriously booking income to escape taxes.

President John F. Kennedy, lionized by today's supply-siders for his 1963 tax cut, first proposed closing the deferral loophole 40 years ago, when it was a far smaller drain. Kennedy wanted to treat U.S. offshore subsidiaries as U.S. companies for tax purposes. But Congress balked. Let's enact Kennedy's plan now; better late than never. Professor Reuven Avi-Yonah, an international tax expert at the University of Michigan, would also require that companies document that they've paid tax overseas on foreign-source income or pay it in the U.S.

Avi-Yonah points out that if the great powers chose to act, offshore tax havens could be put out of business overnight. The U.S., the European Union, and Japan could enact complementary rules, information-sharing procedures, and enforcement systems. But rather than cooperating with other nations to fight international tax avoidance and evasion, the Bush Administration has thrown cold water on multilateral initiatives.

On June 3, EU authorities issued a directive, reflecting more than a decade of negotiation, requiring banks in EU nations to report interest earnings to the home-country tax authorities of account holders. Ever since the rise of the Eurodollar market in the 1960s, tax cheating on income from assets held outside residents' home countries has been endemic. Collaborative tax enforcement is part of Europe's march to an integrated market and system of commercial law. Tellingly, however, the directive contains a clause specifying that it won't take effect unless the U.S. cooperates. (Without Washington's participation, Europeans intent on tax evasion would move their accounts across the Atlantic.) But the Bush Administration, characteristically, is resisting this and other tax enforcement measures that Europe wants.

It's one thing to believe that low tax rates are good for economic growth. It's quite another to collude in tax evasion. The former is the subject of a fair debate between liberals and conservatives. The latter undermines the rule of law and the transparency that we preach to the rest of the world. Today, corporations can book the same income differently in different countries. International tax planning is part of the same corporate culture of creative accounting that led to the Enron (ENRNQ ) Corp. scandal.

Conservatives and liberals alike ought to favor consistent tax enforcement. For every dollar owed but not collected by the IRS, either taxes must rise or budget deficits must widen, sending interest rates higher and placing a heavy burden on our children to pay down the debt.

You would also think, given worries about terrorists' laundering money, that the Administration would welcome closer international information-sharing among banking and tax authorities. But evidently tax favoritism for corporations and high-bracket individuals trumps even antiterrorism.

Robert Kuttner is co-editor of The American Prospect and author of Everything for Sale

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