Paying Their Fair Share

What's painful about the KPMG indictment is that it reminds us Congress recently passed up [1] a chance to reign in one of the most blatant forms of corporate tax evasion: offshore headquarters. Through tax shelters and moving revenues offshore, corporations are shirking their share of the tax burden. I'll leave it to CitizenWorks' Lee Drutman to put the KPMG misdeed in context. Drutman described the tax evasion problem [2]---and how to fix it: <!--StartFragment --> <!--StartFragment -->

In the larger context, tax shelters are one part of a massive effort by corporations to lower their tax bills, an effort that has been quite successful in recent years. In 2003, for example, corporate tax revenues fell to only 7.4 percent of federal tax receipts, the second-lowest level on record. (In the 1940s, corporations contributed almost half of federal taxes.) And though corporations are technically taxed at 35 percent, large corporations on average pay about half that. All this while the federal deficit sinks deeper into the red and government dollars dry up for education, health care and other essential social programs. Because abusive tax shelters are pursued so brazenly, and as a form of tax evasion they are among the most egregious, they're a good place to start cracking down. Still, righting the tax shelter ship is not going to be easy. The federal government needs to make a serious effort to give the IRS the tools and resources it needs. One obvious place to start, however, would be to hike the fines for tax shelter promoters. The government also needs to devote more resources to detecting tax shelters, working with federal bank regulators and the Department of Justice. Meanwhile, accounting regulators need to start cracking down on accounting firms, who earn billions each year by selling tax products. These firms are supposed to guarantee honest financial statements, not abet tax shelter abuse.

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Finally, the rules on what counts as an illegal tax shelter need to be tightened. Many of the tax schemes peddled these days skirt the boundaries of legality by exploiting loopholes for purposes never intended. Though they are sometimes technically legal, the IRS can crack down using what is known as the "economic substance" doctrine, which basically disallows transactions that are done purely for tax purposes and have no legitimate economic substance. Strengthening this "economic substance" doctrine is an important way to battle tax shelter abuse.

At stake are basic issues of economic justice and tax fairness. There is simply no justification why honest, working-class taxpayers should have to shoulder more of the burden while greedy corporations and their avaricious accountants, lawyers and financial professionals are FLIPing and BLIPing their way to new heights of tax trickery.