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Diagnosis, treatment and prevention

Tax evasion

Part 2 of 2

The latest gimmick, known as “corporate inversion,” is for a U.S. corporation to buy or invent a small company overseas, rework the corporate paperwork, and make it appear (falsely) that the little foreign entity is now the holding parent or headquarters (even if the real headquarters executives and personnel actually remain in the U.S.), and then characterize sales and profits overseas as not reportable to, or taxable by, the U.S. government. Furthermore, the overseas gimmick can help the corporation remaining in the U.S. to reduce or escape U.S. taxes on domestic profits in the U.S. by fabricating service charges, management fees, and royalties charged against U.S. income, which the U.S. corporation can then take as business expenses to reduce or eliminate tax payments to the United States. The patriotism of all these tax cheats is more than questionable. 

The IRS is insufficiently staffed or funded to investigate and prosecute these kinds of non-payment of taxes, failures to file, under-reporting, bogus tax returns and refund claims, use of domestic and foreign tax havens, as well as complex, faked transactions within and between partnerships and subsidiaries. As a result, the IRS audits mainly the little people, not the fat cats. The motivation of some politicians in the U.S. Congress who vote to cut funding for the IRS is precisely to handicap that agency, and thus further protect the large scale tax cheats who fund their campaigns. 

What’s the overall magnitude of the tax avoidance and evasion problem? This is difficult to estimate, because, of course, the sums are concealed from the IRS and the U.S. public, but from what we do know it appears to exceed the total U.S. national budget deficit of $583 billion in 2015. According to official sources, multilateral corporations owe nearly $770 billion in taxes on the $2.2 trillion that they have been hiding offshore. That should be a show-stopper. Nevertheless, the debates in Washington are mostly about belt-tightening versus higher tax brackets, rather than fundamental reform and policing of the tax system.

Raising top tax bracket rates would not solve the revenue side of the budget deficit problem, because the individual and corporate tax cheats do not pay anything like those tax bracket rates anyway. The current Alternative Minimum Tax is missing the plutocrats, and beginning to hit the working middle class. The proposed flat tax on wages would not solve the problem, because it misses tax on capital gains, and falls disproportionally on the middle class and wage-earning workers instead. A consumption tax (a tax on what people consume, rather than what they earn) would put a disproportional burden on poorer Americans for whom consumption represents a much higher portion of family income. None of these approaches will solve the problem. So, what’s the answer?

The Congress has a huge task ahead. For starters, we should adopt an overriding, real, true Minimum Effective Tax rate, same for all, irrespective of otherwise legitimate deductions, depletion allowances and exemptions. It would operate in parallel with the regular Tax Code and tax tables, setting a threshold below which no taxpayer would be allowed to sneak. Congress needs to adopt a supreme law that makes the use of any mechanism, gimmick or haven simply to escape taxes a felony. Then we have to dismantle each and every tax cheat method mentioned above, to clear the deck for a new, simpler, fairer and more effective Tax Code. In effect, we are saying that many types of past tax avoidance methods are re-defined henceforth as the criminal tax evasion methods they really are. Finally, we have to give the IRS the necessary funding and police powers to collect taxes and enforce the law. Maybe we can stop oligarchy and plutocracy in their tracks, and bring back democracy and the American dream of equal opportunity for all.

Yes, the truth about tax evasion and inequity in today’s America is horrifying. But it can be dealt with. The starting place for reform is the voting booth. Shall we elect into office candidates who will represent ordinary, patriotic, law abiding, working Americans and their families, or shall we elect those well-funded politicians who depend on, represent and protect the elitist uber-wealthy special interests and big time tax cheats who bleed the U.S. economy and undermine our American democracy? The choice is ours to make, and our future as a nation depends on that choice.

 

Sharon resident Anthony Piel is a former director and legal counsel of the World Health Organization.