Tax policy is guaranteed to remain at center stage in Washington for years to come for a host of reasons.
For one thing, the tax code has become increasingly complex, making it much harder for individuals and businesses to understand. All that complexity is prompting calls in Congress and elsewhere for another round of tax reform – perhaps akin to the Tax Reform Act of 1986, which cut individual and corporate income tax rates and eliminated scores of deductions — or perhaps something more dramatic, like the creation of a tax on consumption that would bring the U.S. tax system more in line with those of many other industrialized nations.
For another thing, President Bush’s big tax cuts for individuals from 2001 and 2003 are due to expire by 2010, and Congress will have to consider whether to extend some or all of them. In addition, Congress continues to make annual adjustments in the alternative minimum tax (AMT) to ensure that it does not raise the taxes of tens of millions of middle-income households. Eventually, lawmakers will have to fix the AMT permanently.
For still another thing, the coming retirement of the baby-boom generation and the continuing explosion in healthcare spending will send costs soaring for Social Security, Medicare, and Medicaid. That, in turn, will transform today’s troubling budget deficits into truly frightening deficits in the coming years. That’s true whether or not Congress extends the 2001 and 2003 tax cuts.
As Congress turns to these challenges, the search for revenues will not be far behind. If Congress wants to reform the tax code, lawmakers will need to offset the costs of cutting tax rates. If Congress wants to extend the 2001 and 2003 tax cuts, fix the AMT, or close the budget gap, lawmakers will need more revenues, because they cannot, or will not, cut spending enough to fully offset the costs.
On the hunt for revenues, the nation’s leaders will turn first to what they consider “low-hanging fruit.” They will consider how to close the tax gap, the estimated $345 billion a year that taxpayers owe but do not pay. Then they will consider raising taxes on “the rich.” But they will find that closing the tax gap is no easy matter and that there are not enough rich people to solve the problems, even if Congress literally confiscated all the money of the rich.
At some point, a future president and Congress will have to look elsewhere to generate more revenues. They would be wise to consider the issues covered in this briefing book – the tens of billions of dollars of potential tax revenues that are lost because individuals and corporations find ingenious ways to transfer their assets, their investments, and their earnings to overseas locations.
We have been writing about these issues for some time in the pages of Tax Notes and Tax Notes International, two of our weekly magazines. The articles in this collection date back to 2004. What they reveal is a gold mine of potential revenues and opportunities to improve the fairness of the tax system, although the federal government would have to get a lot more serious about enforcing the nation’s tax laws and cooperating with other countries to share important information.
On the individual side, the wealthy park their assets in offshore trusts and other structures. Many do not comply with federal reporting requirements on those assets. So, they can evade income, capital gains, and estate taxes.
On the corporate side, U.S. multinationals shift their operations, their profits, or both, to low-tax, low-wage countries. The federal government is losing its battle to stem the growing abuse of transfer pricing rules. As a result, corporate tax revenues as a percentage of profits are falling.
The next president and Congress will be strapped for revenues. As these articles make clear, the place to look may be overseas. Whether Congress will enact new laws to tackle the issue, forcing wealthy individuals and U.S. multinationals to pay more in federal taxes, is an open question. But we think a serious debate about offshore tax evasion and tax avoidance is almost inevitable.
Click for a PDF of the Briefing Book or link to the articles below.
Part 1: Multinational Corporations, Tax Avoidance & Offshore Jobs
- International Tax Planning: A Guide for Journalists
- The IRS Multibillion-Dollar Subsidy for Ireland
- Drug Firms Move Profits to Save Billions
- High-Tech Companies’ Tax Rates Falling
- The Effective Corporate Tax Rate Is Falling
- Reported Corporate Effective Tax Rates Down Since Late 1990s
- Why Reported Effective Corporate Tax Rates Are Falling
- U.S. Multinationals Shifting Profits Out of the United States
- U.S. Multinationals Paying Less Foreign Tax
- Offshore Jobs and Taxes: Will Democrats Attack?
- U.S. Multinationals Moving Jobs to Low-Tax, Low-Wage Countries
Part 2: Individual Tax Evasion in Offshore Tax Havens
- Offshore Account Reports Rising, but Compliance Remains Low
- Keeping Score on Offshore: U.K. 60,000, U.S. 1,300
- Lessons From the Last War on Tax Havens
- Tax Analysts Offshore Project
- Offshore Explorations: Guernsey
- Offshore Explorations: Jersey
- Offshore Explorations: Isle of Man
- Offshore Explorations: Switzerland
- Offshore Explorations: Caribbean Hedge Funds, Part 1
- Offshore Explorations: Caribbean Hedge Funds, Part 2