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Jewish World Review May 10, 2004 / 19 Iyar, 5764

Mort Zuckerman

Mort Zuckerman
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Corporate welfare — for foreign corporations!? | Here' s a real financial scandal — one presided over by your very own federal government. Wage and salary earners are paying an utterly disproportionate share of national taxes. They are carrying corporations and foreign companies that are getting away with daylight robbery. In the boom years from 1996 through 2000, when profits went through the roof, over 60 percent of American companies, doing nearly $2.5 trillion in gross income, paid no income taxes. None. Some 71 percent of foreign companies, doing three quarters of a trillion dollars, also paid no federal income taxes.

This is outrageous, intolerable, and unfair. And at a time when federal tax cuts are contributing to enormous budget deficits, this situation must be ended as quickly as possible. Adding insult to injury, the laws and regulations that favor corporations over individual taxpayers are being undermined by constraints placed on the Internal Revenue Service. Congress has cut funding to enforce compliance even as it adds more dizzying complexity to our tax laws. More complexity, obviously, benefits tax cheats, the rich, the well advised, and the well connected; ordinary taxpayers drown in the dense tax-code verbiage.

Just when we should be forcing tax cheats to pay their fair share, the gatekeepers of our financial system — investment bankers and accounting and law firms — are, in the words of former IRS Commissioner Charles Rossotti, "very busy selling a wide range of tax schemes and devices designed to improperly reduce taxes to taxpayers," based on the simple premise that they can get away with it.

According to both IRS officials and independent tax authorities, somewhere between $250 billion and $300 billion goes uncollected every year. The sobering reality is that dodging taxes, both legally and otherwise, is becoming deeply rooted in America's business culture. The IRS has today about half the law enforcement resources that it had in 1988. Fewer than 1 percent of individual returns are audited, and audits of corporate returns have dropped from 2.97 percent in 1993 to .73 percent last year. The audit rate for the 11,200 largest corporations has fallen by nearly 50 percent in the past decade, as has the audit rate for unincorporated businesses and partnerships. In 2000, more than $5 trillion passed through some 7.5 million partnerships, many created just to save taxes. The IRS audited fewer than 30,000 of them.

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One of the most glaring loopholes is that to avoid taxes companies move billions of dollars of profits overseas — profits earned here. How? Simply by allocating profits between their U.S.-based operations and foreign subsidiaries to jurisdictions that have a lower tax rate or no tax rate at all. Some corporations even create offshore shell companies while giving subsidiary status to the U.S.-based company, where the real headquarters are, so that the company can reap its profits in the tax-free jurisdiction and not here. That was just one of the scams ascribed to Dennis Kozlowski's infamous Tyco operation.

Loopholes. In the past two decades, the number of offshore companies has exploded. In 1983, the tax havens held $200 billion. Now it's over $5 trillion. In Panama alone, there are 370,000 offshore corporations, of which only 340 filed reports to the IRS in 2001, according to Accounting Today. In the Netherlands Antilles, there are 21,000 offshore corporations, of which only 200 reported. No wonder corporate tax receipts have declined so dramatically over the past few years. Last year, corporate tax receipts accounted for just 7.4 percent of overall federal receipts — the lowest since 1983 and the second lowest since 1934, according to federal budget officials. The nominal tax rate for big corporations, 35 percent, has been so eroded by loopholes and credits that the real rate is really about a third of that.

What's to be done? Here are some thoughts:

Browse through an archive of columns by Mortimer B. Zuckerman. First, fund the IRS so that it can do its job. Recommendations to that effect have already been made by the IRS Oversight Board, a panel of business experts Congress established to monitor the IRS. Enact them now.

Second, change the rules so that ostensible foreign corporations whose shares are mostly owned by Americans are treated for tax purposes as American companies.

Third, stop U.S. companies shifting profits made here to subsidiaries or affiliated companies overseas. Companies should be given full credit for any tax they pay in foreign countries, but they should still be obligated to treat profits earned here as taxable here in the year they are earned.

Corporate America has been awfully well treated by recent revisions of the tax laws. The very least corporations can do is agree to comply with these lenient tax laws.

A gross injustice is being perpetrated on the vast majority of the population, and it must be stopped.

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JWR contributor Mort Zuckerman is editor-in-chief and publisher of U.S. News and World Report. Send your comments to him by clicking here.


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© 2001, Mortimer Zuckerman