Corporate Tax Dodges Grow

Talking about abusive corporate tax shelters at a Senate panel earlier this month, Democratic Sen. Max Baucus from Montana offered the kind of economic populism that one likes to hear from a senator: "I am simply unwilling to tell the school teacher in Montana that he needs to pony up a little more because Congress is unwilling to shut down a loophole that is costing tens of billions every year," Baucus said. "Congress cannot ignore this problem any longer." Finance Committee Chairman Charles Grassley (R-Iowa), who led the hearing, was equally fiery in addressing those accountants, lawyers and bankers who promote tax shelters: "Finally, I say to the hucksters, it's time to find an honest living."

This kind of vitriol is nothing new for members of the Senate Finance Committee, who have been railing for years about all kinds of abusive corporate tax deceptions. As Grassley testified, "There is hardly a bill passed by this committee that hasn't contained anti-shelters legislation."

Despite such efforts, corporate tax shelters are more virulent than ever. Baucus said that tax shelters cost the government $18 billion a year. Experts say that's a conservative estimate.

Shirking Their Tax Burden
At a time when the federal budget is sinking into needless deficit and states are shutting down schools and slashing healthcare benefits, large corporations are making a mockery of the notion they should be paying their fair share of taxes. And it's not just tax shelters. Corporations also creatively exploit a massive array of special credits, exemptions and loopholes that are all perfectly legitimate, even if they are terrible public policy. The result of all this tax avoidance is that in 2003, corporate revenues represented only 7.4 percent of federal tax receipts, the second-lowest level on record, according to the Congressional Budget Office. Sixty years ago, corporations paid half of the U.S. tax bill. Corporate income tax revenues, meanwhile, fell from $207 billion in 2000 to $132 billion in 2000, according to CBO estimates.

Although the statutory corporate income tax rate is 35 percent, few companies pay anything close to that. In 1998, the top 250 companies paid an effective tax rate of just 20.1 percent in 1998. That's down from 22.9 percent in 1996 and 26.5 percent in 1988, according to Robert McIntyre of the Institute on Taxation and Economic Policy (ITEP) and Citizens for Tax Justice. And between 1996 and 1998, 41 of those 250 companies paid less than zero federal income taxes in at least one year, earning a whopping $3.2 billion in Treasury rebates between them despite combined profits of $25.8 billion.

Still, tax shelters stand out as the most egregious form of tax avoidance, perhaps because of the pure brazenness behind them. As Michael Hammersley, a former employee of KPMG who was suspended for refusing to endorse a tax shelter, put it in his testimony: "Many of these tax shelter promoters openly proclaimed their disregard for the law by making statements to clients and colleagues such as 'It's like stealing candy from a baby.' 'You'll never pay tax again.' 'Our clients do not pay federal income tax, paying tax is optional.'";

IRS Can't Compete With Wiley Tax Attorneys
But while corporate tax departments and accounting firms aggressively use and peddle ever more sophisticated tax avoidance strategies, the IRS severely lacks in the resources, knowledge and tools necessary for anything resembling a fair shot at collecting what the government is legitimately owed.

IRS Commissioner Mark Everson described the agency's predicament: "Abusive transactions...present formidable administrative challenges. The transactions themselves can be creative, complex and difficult to detect. Their creators are often extremely sophisticated, as are many of their users, who are often financially prepared and motivated to contest the Service's charges."

Much of the blame goes to the coterie of accountants, lawyers and bankers, who have been perfecting the art of complex transactions for the sole purpose of confusing the IRS and reducing taxes. For them, it's big money. According to Bowman's Accounting Report, the Big Four accounting firms brought in $5.6 billion from tax-related services in 2001. Enron, for example, paid $88 million to bankers, accountants and lawyers to help it develop the tax strategies that allowed it to pay no federal income taxes between 1996 and 1999. According to a report by the Congressional Joint Committee on Taxation, Enron paid $40.2 million to Bankers Trust (now part of Deutsche Bank), $16.3 million to Deloitte & Touche, and $12.7 million to Chase Manhattan for tax-shelter schemes. Discussing the Joint Committee Report, Senator Grassley said that it "reads like a conspiracy novel, with some of the nation's finest banks, accounting firms and attorneys working together to prop up the biggest corporate farce of this century."; But, as Grassley explained at last week's hearing, "Enron wasn't an exception."

The $18 billion question, of course, is whether the U.S. government can do anything about the problem. After all, the leadership in Congress has proven utterly uninterested in cracking down on corporate tax cheats. Even the most egregious tax loophole-the one where U.S. corporations move their headquarters to Bermuda by opening up a P.O. box and save tens of millions of dollars-has proven decidedly resistant to closure.

Cracking Down On Shelters
One step in the right direction would be to pass the Tax Shelter and Auditor Independence Act, which makes it illegal for an accounting firm that audits a public company's books from also selling that company tax shelter services. Sen. Carl Levin (D-Mich.) introduced this bill to target the fundamental conflict of interest created when the accounting firm that guides a company through a series of deceptive transactions is then responsible for verifying that the company's books are accurate.

More broadly, however, the IRS needs more resources, more tools and more focus. Now free to speak his mind, former IRS Commissioner Charles O. Rossotti told the New York Times recently that the agency would need 29,000 more auditors to address the problem. In 2002, the IRS only had about 200 full-time employees working on tax shelters. And though a recent GAO report found that the IRS was starting to devote more attention to corporate tax shelters, the agency "faces challenges, especially in the near term in addressing abusive shelters due to a growing workload and limited information about how long it takes to examine shelter cases." More direction from Congress, including more funding and tools to go after shelters and tougher penalties for tax shelter users and promoters, could help. Currently, the IRS is budgeted for only 6.6 percent more money for all law enforcement activities.

To some extent, corporate tax shelters will always be a bit of a cat and mouse game, with legislators and tax collectors responding to the latest scheme. But with more tools and resources, the IRS can start pouncing on more mice and sending the message to corporate America that the tax code is not intended to be a piece of Swiss cheese. The result will be that honest, hard-working Americans won't have to feel like suckers when they continue to pay their fair share of taxes every April.

Lee Drutman is communications director for Citizen Works. Drutman and ReclaimDemocracy.org director Jeff Milchen will team up to present a workshop on "Strategies for revoking corporate power over government" at the Claim Democracy conference in Washington D.C. November 21-23, 2003.

© 2003 TomPaine.com

Addendum: The House Ways and Means committee last week approved a bill that would reduce the corporate tax rate for manufacturers from 35 to 32 percent, would give about $40 billion in new tax relief for multinationals, and offer other big tax breaks to everybody from movie studios to logging companies to oil pipeline companies. All told, the bill could cost at least $60 billion over the next decade, according to the Joint Committee on Taxation. The bill offers $128 billion in tax breaks, but would remove other subsidies to lower the cost to the Treasury.The bill, which was approved on a 24-15 party line vote (Republicans favoring the bill).

The Senate Finance Committee has passed a different version. Though Congress has an incentive to pass something to avoid the WTO penalties, conflicting interests among different corporate coalitions as to whichsectors will get the gifts may ultimately be difficult to work out. See Citizen Works' Corporate Reform Weekly Vol II, #41 for more on the current legislation.

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