Death and Taxes: Unavoidable?

One might be. It’s no secret what a complete and total mess our tax system has become. Not only is the I.R.S. one of the most unpopular organizations anywhere, but it seems to be rife with political corruption that was heavily slanted against conservative political action groups seeking tax exempt status. The I.R.S.’ official in charge of the division that decides these exemptions, Lois Lerner, tells us she did nothing wrong, but nevertheless insisted on taking the 5^th (the constitutional amendment that protects against self-incrimination in criminal matters) before a House committee investigating the debacle. Not cool.

The tax code itself is heavily slanted for the rich who generate the bulk of their wealth by trading stocks and derivatives, paying a tax rate that is a fraction of the rate paid by folks who earn a living (wages and salaries). What’s worse, that beneficial tax rate is applied to those who manage funds on behalf of the rich but who charge a fee based on asset appreciation… even if they do not invest a dime.

We’ve blogged about Apple’s massive use of the corporate loophole that does not charge taxes on foreign earnings until these moneys are repatriated to the United States… so they just don’t repatriate that money at all. If they need to pay a dividend, they borrow that money in the U.S., deduct the interest, and everyone is happy… except U.S. taxpayers. And no, it is hardly just Apple that used this ploy; most large U.S. corporations with significant international operations use this “planning tool” as well.

Some, not Apple, even resort to moving their patents and copyrights off-shore and charge their U.S. affiliates for the use of that intellectual property, effectively shifting domestic earnings to un-taxed off-shore affiliates. Since the domestic corporations are paying for the right to use that intellectual property, it is a deductible cost. But that deductible cost is a profit to the off-shore affiliate!

Parking your money where the rates are low is also “standard operating procedure” for too many American-based corporate operations. Allegations were made about Apple’s purported making a special deal with Ireland. Unsubstantiated sources reported that Ireland agreed to a fantastic negotiated tax rate (a practice permitted under Irish law) of approximately 2% if Apple (through various subsidiaries) parked its huge overseas holdings in that country.

Multiple countries in Europe, Singapore, Hong Kong and several Caribbean nations have enjoyed sucking massive “tax evasion” sums into their banking systems, perhaps even charging fees and a token tax (vastly less than what is required in the United States) with strong banking secrecy laws and exceptionally favorable tax charges. Some think this trend is about to change. “‘Bank secrecy is a relic of the past,’ said Algirdas Semeta, the European Union’s senior official responsible for tax issues. ‘Soon we will see the death of bank secrecy around the world.’

“From the rain-swept avenues of Luxembourg’s capital to the sun-spangled lagoons of the British Virgin Islands in the Caribbean, the authorities are scrambling to shed the stigma of enabling tax cheats and to figure out how to change their secretive ways without driving away lucrative foreign clients… The pressure, increased by the recent leak of a giant cache of confidential files relating to offshore havens, is ‘like a steamroller,’ said Egide Thein, former director of the Luxembourg Economic Development Bureau… [A recent] European Union summit meeting … produced no momentous decisions but did prod Austria, the union’s last stalwart defender of banking secrecy, to accept the idea of sharing information about bank accounts held by foreigners — so long as countries outside the union, notably Switzerland, agree to do the same.”  New York Times, May 22^nd.

But for many, it’s not about tax avoidance (legal) but about tax evasion (illegal), both in the United States and Europe: “[T]he current, escalating assault on secrecy began in 2010, when Congress passed legislation that requires foreign financial institutions to inform the Internal Revenue Service of all accounts held by American taxpayers and by foreign entities in which Americans have a substantial ownership interest… This provided a powerful lever to the European Union to [pry] open opaque financial sectors both inside the 27-nation bloc and beyond. At a meeting of finance ministers in Brussels last week, the European Commission was given the go-ahead to negotiate financial information sharing accords with Switzerland, Liechtenstein, Andorra, Monaco and San Marino.

“By one estimate, wealthy individuals hold unreported assets worth at least $21 trillion — far more than the entire annual economic output of the United States — in tax havens. Mr. Semeta, the European Union’s tax commissioner, estimates that Europe loses well over a trillion dollars a year through tax evasion and the more divisive and politically delicate issue of legal tax avoidance…

“Indeed, around $3 trillion is invested in mutual funds and other investment vehicles domiciled in Luxembourg [population: 515,000]. Only the United States has a bigger fund industry… Alain Steichen, a prominent Luxembourg lawyer who has worked closely with the financial sector here for years, predicts a potentially serious exodus by depositors who do not want their identities revealed... But, Mr. Steichen added, ‘we clearly have a legacy issue’ because many of those who stashed money in Luxembourg banks in the past to avoid taxes still have accounts — and may now bolt. Such bank clients, he said, will most likely shift to other locations that still offer secrecy. But the list of those is shrinking fast.

“Still very numerous, however, are opportunities for legal tax avoidance. Mr. Semeta, the European Union tax official, acknowledged that halting such practices is hard because fixing tax rates remains the prerogative of individual European states. This means, for example, that Ireland is entirely within its rights to set a corporate tax rate of 12.5 percent, less than half the level in Germany, France and Britain and just over a third the 35 percent rate in the United States.” NY Times.

Want a touch of irony back stateside? The Sequester shut down the entire IRS on May 24^th with four additional scheduled shutdown days scheduled in July and August. “The agencies' employees will not be paid. It is the largest closing of government offices since the government shutdowns of the 1990s.” Huffington Post, May 24^th. Seems like justice for an unfair system that is clearly unfairly administered.

It’s time to shift the massive tax liability from the backs of the middle class and on to those at the top of the food chain that avoid taxes or pay unfairly-set favorable rates.  We know that morality has long since left the building of corporate loophole-driven planners. And since they won’t pay unless forced, guess what?!! Force it! It’s our Congress that succumbed to corporate lobbying and the concomitant campaign contributions that pretty much exempted American companies with strong foreign earnings from paying their fair share. It is Congress that has to fix that problem!

I’m Peter Dekom, and sometime obvious really is!