ataxingmatter

Short term success and long-term failure? FBAROffshore Bank Account Disclosure Deadline ; Swiss US information exchange (not)

As readers are aware, the revelation of a widespread practice in Lichtenstein and Swiss banks of fostering tax fraud through positive outreach to US taxpayers has led to a deferred prosecution of  UBS, a big Swiss bank, taxpayers' guilty plea, indictments of bankers, and investigations of many more taxpayers and the bankers and lawyers who assisted them in hiding assets offshore to avoid paying taxes. 

There are some short-term signs that this first leak in the dam of Swiss banking secrecy will be fruitful for the U.S. fisc.  Some 4500 names will be revealed to the IRS, and those individuals may be criminally prosecuted and heavily fined.  That litigation will likely reveal more--more activity, more names, more bankers and lawyers who assisted the deception--and that may lead to more prosecutions and fines.  It's a snowballing effect that is having a respectable impact on the thousands of US taxpayers who thought they could get away with defying the laws on reporting, and paying tax on, their hidden assets and income.  Tomorrow is the deadline for participation in the voluntary disclosure program announced by the IRS.  A participant who satisfies the requirements will face confiscation of only 20% of the assets in the hidden account and will not face criminal prosecution.  Someone who fails to disclose and is caught faces potentially crippling penalties--half of the assets in the account for each open year not disclosed, criminal prosecution, and public humiliation through media disclosure.  Apparently, the fear that their accounts may be revealed in the next group UBS discloses has been a significant motivator:  the IRS reported today that 7500 have voluntarily disclosed these accounts under the IRS's leniency program, with accounts ranging up to $100 million.  See BNA Daily Tax RealTime (Oct. 14  4:07 pm);  Donmoyer, IRS steps up offshore money hunt as 7,500 disclose, Bloomberg (Oct. 14, 2009).  The IRS and the DOJ have made clear that they intend to glean as much information as possible from these disclosures, to try to reveal the identities of others that have failed to come forward.

But that's a short-term triumph.  Has this disclosure issue, and the media attention given it, made a difference for long-term behavior of US taxpayers who've hidden money offshore?  Note that many of those accounts are from businessmen who are illegally skimming profits from their businesses.  Those sorts of accounts aren't likely to be voluntarily revealed in other contexts.  So what else can put a permanent hurdle in the way of Americans using offshore accounts in banking secrecy jurisdictions to hide their assets?  Treaty information exchange provisions don't come near what is needed--including the bragged-about new treaty information exchange provision with Switzerland.  There is a reason that the Swiss finance minister has made clear that Swiss banking secrecy is alive and kicking and intends to be so well after this crisis passes.  Banking secrecy--in large part helping other countries' citizens evade those other countries' tax laws--is a lucrative business, and it is not about to go away on the signing of the flimsy tax information exchange agreement supported by the OECD.  

What do I mean?  Here's the Treasury's release (Sept. 23, 2009), and here's the new US-Swiss tax information exchange protocol.  And here's my play by play analysis of how well these provisions really forward the ball of genuinely useful tax information exchange.

• Article 26 says in part that the authorities "shall exchange such information as may be relevant for carrying out the provisions of this Convention or to the administration or enforcement of the domestic laws concerning taxes covered by the Convention insofar as the taxation thereunder is not contrary to the Convention.  The exchange of information is not restricted by Article I."  That, by itself, is a promising start and does remove the earlier exchange provision's limitation to exchange in respect of tax fraud.  But the rest of the protocol makes clear that the new provision does little that genuinely upsets the status quo of banking secrecy. 
• In particular, paragraph 3 of Article 26 states that the agreement to exchange information will not be construed to impose an obligation on Switzerland "to carry out administrative measures at variance with [its] laws and administrative practice" or "to supply information which is not obtainable under the laws or in the normal course of administration of [Switzerland] or to supply any information that would disclose "trade business, industrial, commercial or professional secret or trade process, or information the disclosure of which would be contrary to public policy."  It no longer has to be a crime in Switzerland as well as the United States, but that doesn't go very far towards solving the disclosure problem.  Domestic bank secrecy laws still appear to trump these agreements (in spite of some of the celebratory rhetoric coming out of the signing of the protocol). Revealing otherwise unknown identities and other information about accounts would be both contrary to Swiss administrative practice and supplying information not ordinarily obtainable under Swiss law: that is a significant hurdle to greater transparency.  
• But then Paragraph 5 sounds heartening, perhaps a back door undoing of paragraph 3.  It states that paragraph 3 (on not providing information not obtainable under the law) shall not "be construed to permit [Switzerland] to decline to supply information solely because the information is held by a bank, other financial institution..." and goes on to say that the Swiss tax authorities shall have the power to enforce dislosure of information covered, notwithstanding paragraph 3 or any contrary provision in its domestic laws."  That is what makes the OECD model appear to have some teeth.  It is a move apparently well beyond where the older provision stood (only revealing information if there was tax fraud recognized as such by the Swiss). 
• But then the existence of the domestic banking secrecy hurdle comes back to bite, nonetheless, in Art. 4 paragraph 10, which requires specificity in the request itself.  It provides that the US "shall provide the following information" to the Swiss authority when making a request: "information sufficient to identify the person under examination or investigation (typically, name and, to the extent known, address, account number or similar identifying information)."  Paragraph 10(b) of Art. 4 justifies these restrictions by claiming that it will avoid "fishing expeditions."  As my colleague Mike McIntyre has said, this is an unjustifiable slam on fishing expeditions.   Surely we should be able to search in likely waters for likely culprits--the Swiss banks have held themselves out as offering a tax evasion service for taxpayers, so they are clearly likely waters.  The whole point of the John Doe summonses is that the Treasury does not, in most cases, yet know the names, account number or other identifying information of those who have successfully created hidden Swiss bank accounts, so the requirement to provide identifying information is a generally insurmountable hurdle to breaching the dam of banking secrecy.

The only way an information exchange provision can ensure that one country is not using its banking laws to profit out of another country's  taxpayers' tax avoidance is to require routine information exchange that does not permit the maintenance of secret accounts.  The OECD model doesn't accomplish the job.  In fact, paragraph 10(d) states explicitly that Article 26 "does not commit [Switzerland] to exchange information on an automatic or spontaneous basis."   That's why all of these offshore secrecy jurisdictions can actually sign these agreements and pretty much continue business as usual.  Looks like the Swiss got the better of us to me.

Here are a few relevant links:

TAx Information Exchange Agreements (TIEAS), OECD (list of agreements, and model TIEA in English)

The agreement between the US and Swiss governments in connection with the UBS John Doe summons (mentioning the signing of  the new protocol that was initialed on June 18, 2009 and the various arrangements regarding the UBS case)

The 1998 Tax Treaty between US and Switzerland (Article 26 and Article 4 paragraph 10 are replaced by the new information exchange provisions--note that it provided for exchange of information, without restricting the exchgange under Article 1 (personal scope) for "tax fraud" but only if "specifically requested")

"The Pluses and Minuses of the US-Swiss Tax Treaty," Sept. 25, 2009, Task Force on Financial Integrity and Economic Development (government and NGO consortium, with Global Financial Integrity, a think tank that has commented on the lack of transparency in the shadow financial system as a key problem in cross border illicit transfers of resources and the reckless speculation that led to the global financial crisis)

Geithner Signs Protocol to US-Switzerland Treaty, BNA News Article (Sept. 24, 2009)

Why Tax Information Exchange Agreements are 'Toothless', Kristofer Neslund, AICPA, www.cpa2biz.com (July 16, 2009) (noting that a Cayman Islands banker testified that 95% of his 2000 clients were US residents engaged in tax evasion but that the OECD model is not very good, though covering both civil and criminal tax matters--in the past the Swiss only revealed information about affirmative tax fraud, which is a crime, and wouldn't provide information about tax evasion, which is not a crime in Switzerland)

Tax Information Exchange Agreements, Tax Justice Network Briefing Paper (Apr. 2009) (a good discussion of the limitation s of existing arrangements and standards)

Martha Fineman on the illusion of (gender) equality (and some not directly related "links worth noting")

As some of you may be aware, the philosophical underpinning of this blog--the core concerns that determine the issues that I blog about and, in some way, what I say about them--is something I have called "democratic egalitarianism".  That is a view of the importance of thinking about equality in the context of thinking about what it means to have a sustainable democracy where the people's voice counts, rather than just some people's thinking on the issues.

The year since the financial meltdown and the first nine months of Obama's term as president have been interesting times.  We have gone from having a president who clearly cared not a whit about equality or the vulnerable and cared an awful lot about privilege and wealth and accumulation and use of power to a president who eloquently voices our desires for a restoration of community built on inclusion and a toning down of rhetoric about power, replacing it with rhetoric about peace. 

But the fact that lobbyists for the wealthy and powerful continue to have access to, and influence over, those in offices of responsibility is disheartening.  It suggests that the same old powers exert the same old influence over the laws to shape them in their favor.  So the health industry is working behind the scenes to ensure that there is no public option, even though a clear and strong majority of the people want such an option.  So multinational corporations are lobbying their favored Senators and Representatives to disregard the Obama proposals for more appropriate taxation of multinationals on their foreign income, and bragging--see today's Wall Street Journal--about their success in putting what seemed like a hot topic ready to be enacted by the new Democratic majority right back on the back burner where it was under the Republican majority. 

The Democrats are proving, in other words, that they are about as beholden to the powerful lobbies as the Republicans, that what matters is money, and not the good of the people.   That's not democratic egalitarianism at work--instead, it is the corruption of the democratic process through money and power, the same old game of influence peddling and disregard for ordinary citizens that leads to wrong-headed decisions that support redistribution upwards--wealth for the wealthy and continuing declines in standards of living for the rest of us.

Martha Fineman has some interesting thoughts on equality that are worth considering in this context.  IN a new paper, titled "Equality: still illusive after all these years" (available on SSRN), she suggests that we've let equality take a back seat to autonomy--treating the two as ideals that are to be balanced with the not surprising outcome, in a gendered environment that has long put the powerful in the driver's seat, of a balance that ultimately furthers the status quo of conceding power to the powerful.   (These aren't her words, but mine to describe the gist of the argument she makes.)  She notes that geneder equality has been "strangely illusive"  in part because the struggle has been "constrained by philosophical and jurisprudential concepts shaped and handed down to us by our forefathers."  We need, she says, to talk about dependency and vulnerability, not just formally equal treatment.  The latter can simply reinforce the status quo, while the former can lead us to make the needed changes to address genunine equality. 

In one sense, she notes, women have attained equality with men.  They have ensured political and civil rights and access to opportunity.  They "can get an education, practice a profession, earn money, own property, vote, serve on a jury, hold office, and so on, all on a par with men."  But this achieved equality is "crude and nondiscerning" since "[m]en also can claim the protection of gender equality...even if they are privileged as an individual or as a member of an advantaged group...and even against a member of a subordinated group."  Ultimately, this very foundational vision of equality is problematic--because "it rejects (at least in regard to gender) affirmative governmental measures designed to raise the unequal to a more equal position."  "Our equality is weak, its promise largely illusory, because it fails to take into account the existing inequalities of circumstances created both by inevitable and universal vulnerability inherent in the human condition and the societal institutions that have grown up around them, most notably the family and the state."

To address this problem, she suggests understanding (1) the way that equality has been "tamed" by other concepts (such as autonomy) and (2) the need to anchor equality discourse in an understanding of the human condition--that we are all vulnerable, and that we each may be dependent on others at some point.

As to (1), Fineman points out that the relationship between equality and autonomy--the proper balance between the desire to create an inclusive, equal playing field for all and the demands for self-sufficiency and independence and individual freedom of will and action--varies across time.  In fact, "[t]he right to determine the nature and weight given to equality in that balancing is the battle for every generation....[and] In recent years, the promise of equality has increasingly been eroded by the ascendancy of a narrow and impoverished understanding of autonomy."  further on she provides a description of an overemphasis on autonomy that sounds very much like the "free marketarian" code of the Friedman acolytes at the Chicago School who have held such sway over our legal academies and legal players (judges, legislators) since Reagan's presidiency, when she says:

 "Autonomy demands freedom from unnecessary or excessively constraining rules and regulations.  These constraints turn out to include almost everything of a positive and progressive regulatory nature.  The role of the state, we are told, is to stay out of the way, to facilitate competitiveness in a meritocracy that rewards individual initiative and talent.  When there is a distortion, such as arises from discrimination, the state shouild act to correct the problem and then revert to the free market nonintervention stance.  If we start from a perspective that values individual autonomy above equality (an individualistic perspective), we take the inequality of the status quo as a given.  If however, we start with the objective of enhancing individual equality (a comparative perspective), we may see more of a need for protection from human fragility and failings than abandoning individuals to undefined, crude autonomy might provide."

***

"If we factor into the equality-autonomy mix the universality of human vulnerability and the shared possibility of any of us becoming dependent as we age or become ill, for example, it is apparent that the problem the state should address is not always, or even predominantly, that of discriminatory treatment.  ... If we  were forced to take vulnerability and dependency into account, it would reveal the inadequacies of our conception of equality as not focused on substance, but rather concerned merely with the formality of treatment.  ... Substantive equality would require state intervention, een methods for the reallocation of some existing benefits and burdens.  To have more equality (for greater numbers--a collective ideal), we would have to sacrifice some adherence to the dictates of individual autonomy."

***

"Unless confronted with the challenges presented by vulnerability and dependency, equality is nothing more than a measure or standard for opportunity and access.  It guarantees the right to strive for self-sufficiency and independence to an abstract individual shorn of limiting human characteristics and potentially debilitating social and historical inequities.  Waulity is not now a standard with which to assess contexts and conditions--the circumstnaces under which an individual competes in the markets.  Nor is it to be used as a levelling notion, employed to even up the playing field before the games begin--a tool to ensure some degree of equality of opportunity and access.  Some argue that this sense of individualized, formal equality that dominates our law and culture is as much as we can expect in our post-Ronald Reagan United States, where we are trapped in scripts that presuppose both a meritocracy and a functioning free market in an ahistoric and context-free articulation of the American dream of the self-made man."

I (Beale speaking now) like this approach, since it coincides with much that I have been saying from a tax- and economics-centric perspective.  (And it is perhaps not really that different from what Catherine McKinnon was saying decades ago when she talked about the need for different treatment to achieve equality, rather than same treatment, since the advantaged versus subordinated roles were relevant.) We cannot just look at the status quo and apply horizontal equity rules to ensure consistent treatment of taxpayers in the same position.  We need instead to think about how to achieve democratic egalitarianism--how to push towards a genuine equality that will help to sustain our democratic institutions.  To do that, in thinking about tax or economic policy, we need to ward off efforts to redistribute upwards (such as tax expenditures that favor some multinational corporations and their managers and owners over individuals--like the active financing exception that favors multinational banking institutions; tax provisions that favor owners of capital over those who must work for a living--like the capital gains preference) and we must favor provisions that permit us to achieve some redistribution of the allocation of resources within society (such as an estate tax that actively cuts off the continuing accumulation of concentrated resources within families by taking a tax bite from an accumulated estate before it passes to heirs who haven't earned it--ideally, a significantly bigger tax bite than the mere 35% after $10 million exemption that the GOP is now pushing).

Links worth noting:

If you've made it this far, you might find the following interesting as well:

Naked Capitalism, on financial services compensation (a good discussion of the way the banks are increasing their risk taking and the mistake of thinking that tamping down pay at a few of them will do anything to prevent the key problem--privatization of gains and socialization of losses--that makes risk-taking so lucrative for them)

Economist's View (Mark Thoma), on Supply Side Economics, may it RIP (a good excerpt from Republican economist Bruce Bartlett's regeneration as a thinker who realizes that the Bush administration and Republicans went haywire when they concluded that tax cuts are always the answer, noting the inconsistency in arguing against spending but supporting tax cuts that are the equivalent of spending for a favored constituent, etc.)

Sustainable Middle Class, Serious Implications, Big Coal gets Big Subsidies (a brief illustration of the tax subsidies for the Coal Industry)

Angry Bear's Ken Houghton,What is a bank, then? (Oct. 6, 2009) (good commentary on the favoritism towards Goldman Sachs in connection with becoming a bank holding company that had access to the Fed tap for funds).

CBO reports and the home buyers tax credit

CBO reports provide an interesting glimpse of economic activity that we should all be more familiar with as we discuss tax policies--especially tax policies that tend to favor particular industries or income distributions. 

Consider, for example, the CBO's January 1, 2009 report. issued after the financial crisis had hit and in the midst of a beginning debate about economic stimulus.  The CBO foresaw a contracting economy (GDP falling by 2.2% in 2009, gorwing by only 1.5% in 2010); increasing unemployment (exceeding 9% in 2010--we're already there); drop in housing prices; a 1% drop in consumption; a "strained" financial system; deficits for 2009 of $1.2 trillion or 8.3% of GDP;  a decline in federal revfenues by 6.6% from 2008; and the longest and possibly deepest recession since WWII.  The report noted the significant uncertainty in its outlook due to "the degree and persistence of turmoil in financial markets" where new financial instruments and practices and worldwide linkages made it diffficult to use historical patterns as the basis for predictions about future trends.  That uncertainty is heightened by the Fedearl Reserve's unprecedented interventions, and the Treasury's attempts to improve the solvency of financial institutions (and other industries) through TARP funds.

Then there's the CBO October 2009 documentation of changes in the distribution of earnings for male and female workers between 1979 and 2007, including a look at the annual earnings of workers between the ages of 25 and 54 (without counting defined benefit retirement, 401(k) contributions by employers, or health care). 

• men earned more than women at every position (10th, 50th and 90th percentiles of their earnings distributions) but the differences did decrease some in 2007 compared to 1979
• Even within the high end, earnings of the 99th percentile were increasing more than earnings for those at the 95th percentile, just between 1989 and 2005.
• About 50% of the men and women remained in the same distributional grouping in 2005 that they had been in in 2000.  
• Real earnings (inflation adjusted) for the 10th, 50th, and 90th percentiles declined between 2007 and 2008:  men in the 10th percentile made 14% less in 2008 than their counterparts in 2007--the largest year-to-year decline for that group since 1979--while men at the median and 90th percentile groups earned 3% less than their counterparts in 2007.   (Not surprisingly, hourly wages for men near the 10th percentil were lower in 2007 than in 1979 even while they worked longer hours--1790 rather than 1700.)   For women, the respective figures are 4%, 3% and 2% (their earnings were, of course, lower to start with).
• Men and women in the top percentiles, however, earned much more--with men in the 95th earning $123,400 in 2005, in increase of 24% over 1989 (in inflation adjusted numbers) and men in the 99th percentile earnings $278,100, and increase of 30% over their 1989 counterparts.  For women, the numbers are $79,400 (37% increase) for the 95th percentile and $139,100 (60%  increase) for the 99th percentile.
• And, not surprisingly, the share of earnings going to those at the top is increasing--the top 1% of working men got 13% of all earnings in 2005, up from 10% in 1989.
• We are jailing more and more of our population--in 1979, .26% of male U.S. residents were in prison, but in 2007 that figure had more than tripled, to almost 1%.

So how should we use this information in thinking about tax policies?  One of the proposals on the table over the last couple of weeks has been a proposed extension of the $8000 new home buyer credit.  The original credit seemed oxymoronic to me.  We already had a financial crisis caused in part by overinvestment in housing by people  who couldn't afford their loans, and inflated pricing reflecting the various subsidies for housing and the construction industry that are especially beneficial to the wealthiest taxpayers (home mortgage interest deduction (for both primary residences and vacation homes) on up to $1 million dollars of acquisition debt; home equity interest deduction on up to an additional $100,000 of home-secured debt;  property tax deductions; exclusion of up to half a million in GAIN on sales of residences).  Then we added had a financial crisis caused by runaway banks' ability to shift securitization losses to investors and give wacky loans to people at usurious rates while speculating on everything from corproate debt to securitizations with credit default swaps and other exotic derivatives.  So of course we decided to add to the pile of tax benefits to home ownership with the $8000 new buyer credit (with no repayment necessary for 2009 purchases, assuming used as a home for three years).  At least that temporary credit was for those who had never owned a home before and had an income restriction that limited its benefit to the lower four quintiles (credit began to be phased out for couples with $150,000 and phased out entirely at $170,000).  But Congress is said to be considering extending that to those who already own homes, and no matter what their income.  The current program costs about $1 billion a month, and the extension would cost significantly more (especially if it also included an increase in the amount to $15,000, the industry's preference).  See Industry Makes Case for Home Buyer Tax-Credit Extenision, Wall St. Journal (Oct. 7, 2009); Homebuyer Tax-Credit Extension gains Lawmaker Support, Bloomberg.com, Sept. 16, 2009;  teamJodi (July 2009), with a rundown of bills under consideration already in July for expanding the credit.   What can they be thinking?  How to add to an already worrisome income inequality problem while exacerbating the crisis that started it all?  Again, if you look at the income data, it seems to shout for another solution--allowing modification of home mortgage loans in bankruptcy, and ending the artificial lifeboat for the real estate industry.

What these pushes by the realtors and builders for a tax break that mostly benefits their industry confirms is that we have too much lobbying going on.  From health reform to giving money away to rich people who buy houses, our policies seem to be shaped much more by the influence of paid lobbyists than by what the people want.  (65% of Americans want a strong public option, but it is not even on the table for some in Congress.  Probably the views on the home tax credit is more of a mixed bag--if you expect to buy or sell, you might support it; if you think we need to end favoritism for the home building industry, you might oppose it.)  Put simply, though, we have too little real deliberation among our representatives about the long-term good of the country, rather than the short-term benefit for some industry group or another.  These CBO statistics need to be more widely shared, reported in the media, and commented upon by bloggers and others so that we understand the way the economy has been working under the policies we have put in place over the last few decades, to disfavor those in the middle and lower distributions.

A Year and Counting: re-regulation of Wall Street

On Monday night, I participated in a symposium on the Financial Crisis: One Year Later, sponsored by the Center for the Study of Citizenship and others.  With me were Larry Ingrassia, Business Editor of the New York Times, and Chip Dickson, CFO of W2Freedom, a private equity fund that purchases community banks.  We talked about the causes and potential solutions to the financial crisis and the Great Recession that it had spawned.  Much of our focus was on the way financial institutions had grown "too big to fail", creating a "casino mentality" that assumed that the government would come to the rescue if needed, thus socializing losses while privatizing gains.

As Amity, a commenter on Salon's post by Andrew Leonard on Wall Street's risk-taking, noted:

The whole point of society is to moderate and channel wild animal impulses into productive forms. In keeping with that purpose, we as a civilization once saw fit to impose on high finance a series of regulatory restrictions and frameworks for oversight so as to moderate and channel the risk-taking behaviors of financiers.

Then we as a civilization saw fit to remove those restrictions and oversight. The result was as foregone, and as predictable, as if we were stalling an aircraft and letting gravity take over.

I kicked off the discussion session of the symposium with the following question:

It's been a year now since we were hit with a financial system tsunami, and recognized that we had let banks get “too big to fail” and speculation in derivatives explode.  Yet here we are, one year later—we’ve actually encouraged banks to grow larger; we have not yet enacted any regulation of derivatives; we have not yet enacted any tighter regulation of hedge funds and private equity funds or the "shadow banking" system generally, we have not yet formed a consumer financial protection agency—in fact, we’ve done essentially nothing to change the conditions that apply.  What does this mean, in terms of the stability of the financial system?

I'm not sure that there is a satisfactory answer to that question.  Because it suggests that our political processes are now so beholden to the corrupting influence of the financial behemoths that we will not be able to find the will to rein them in.  See, e.g., Robert Reich, so much happening in D.C., so little to show for it, Salon.com (Oct. 9, 2009) (lamenting the fact that "Congress is overwhelmed with corporate and Wall Street lobbyists").

More on UBS-related indictments

At the fall meeting of the ABA tax section, government officials from Department of Justice and IRS speaking on a panel addressing offshore accounts and FBAR filing requirements were almost gleeful about their prospects for finding out just who has been hiding money away offshore.  Even the practitioners on the panel were joining in the clear message--if your client has an undisclosed foreign bank account, you'd really better be trying to get disclosure done or his goose may be cooked.  Disclose voluntarily, and you probably face only low fines.  Wait and be found, and you may go to jail, plus pay 50% of the account balance for open years.

To a packed audience (very unusual for a Saturday panel), the government speakers noted their clear delight with the unprecedented release by UBS of banking account information and the agreement, in response to the summons, to release  information on more than 4000 additional accounts/accountholders.  By the way, we're not only going after account holders, they noted, but also their bankers and lawyers.  And everybody we go after is being asked to  give us names of anyone else they know about. 

It's like that "six degrees of separation from everybody on the planet" idea.  Once the DOJ has its foot in the door, it has a good chance of kicking it wide open and revealing everything that is inside.  A person with an account can lead to a party in Hong Kong that helped the person establish a corporation to hide assets.  That party in Hong Kong can lead to 40 more people who hid assets, each of whom may provide a link to another party in the secrecy parade who can provide links to yet more individuals who hid assets.  While one suspects that the accounts revealed by UBS will be the largest ones and ones that expressly stated that they did not want their tax information revealed to the US, the account holders who are revealed through the investigative tracing of these many revealed links will also include a number of relatively small fry.  So those who established such accounts should come clean by the "last chance" October 15 deadline.  Or else they are playing a very high risk version of the audit roulette.

At the session, it was particularly interesting to see the kinds of cases that the practitioners thought were sympathetic.  Every attendee that I talked to told me that they had "lots" of clients struggling with the question whether to come forward voluntarily or not.  (Many of these practitioenrs with FBAR clients were as gleeful as the government reps--there is business to be had doing tax law, they told me, even in down times.  Something of which I frequently remind my students...)

One or two said their clients had quite substantial sums secreted abroad and were trying to decide the odds of their being revealed as the DOJ investigation goes forward: it was clear that, for these clients, there was no desire to comply with the law, no valuing  of the integrity of the tax system, but rather it was purely a matter of self-interest and the odds of getting caught (and paying, perhaps with a criminal prosecution) versus continuing to enjoy the tax-free status of income on the secret offshore account. One doesn't feel much sympathy with such taxpayers.  I could only think to myself "Go, DOJ."  Hope those leads take you to these guys."

But several said they thought their clients had good cause for not having reported the accounts--they were elderly Jews who had left Europe to avoid the Holocaust and just never  had done anything about accounts left behind, or they were unsophisticated taxpayers who'd inherited a small account and simply had no idea about the reporting requirement, or the accounts didn't really earn much income anyway, etc.  One came to the mike to ask about her client, who had immigrated to the US from a home country where the client felt politically persecuted.  The client had left family behind.  The client happened to have some money (I got the impression the figure was perhaps one or two million but I'm not sure that was stated and I don't have the audio tape) in a foreign bank account that had never been declared in the US.  The client indicated to the tax adviser that he didn't use it for himself but, according to the practitioner, had retained signing authority on the account since his folks back home really needed the money and he was the only one who could safely sign for the money and have it made available to them.  This sounds like a more sympathetic case--maybe even one in which DOJ prosecutorial discretion might come into play.  Interestingly, a panelist was not so accepting of the tale.  Noting that clients almost always seem to claim some sympathetic reason for having the account, he added that almost always when you dig deeper into the facts you find some additional information that may not be so sympathetic--for example, that the client used the funds in the account for himself.  And the government authorities reiterated that the voluntary disclosure program was for a specific penalty, and that should be contrasted with the potential for much stiffer penalties and even criminal prosecution if the taxpayer doesn't take advantage of the voluntary disclosure program.

The DOJ is continuing to build pressure on taxpayers to come forward.  Just yesterday, we learned about the guilty plea of  retired Boeing sales manager Roberto Cittadini, who secreted nearly $2 billion through UBS using a Hong Kong corporation set up with the help of the Swiss banker Schumaker (already charged in August) and Swiss lawyer Rickenbach (also indicted in August).  Cittadini was accused of filing a false tax return and failing to report the account.  He faces up to 3 years in jail and a fine of $250,000 as well as a civil penalty of 50% of the highest account balance between 2001-2007, per the DOJ release.  See Former Executive Guilty in Swiss Tax Scheme, NY Times, Oct. 5, 2009.

What's Your Top Ten List for Tax Reforms?

Tax Prof's ongoing discussion of potential tax reforms to be suggested to the Volcker Commission got me thinking what my own "top ten" would be.  I'll list them here, but I invite readers to provide their own as well.  (Much of my reasoning is expanded in prior posts on most of these issues.)

1.       Eliminate CG preference (and in the process repeal 1(h)(11) providing dividend taxation at preferential rates).

You can read my prior posts on this, too, of course.  But briefly. 

Capital gain preferences are enjoyed primarily by the wealthy, who hold the vast majority of the financial assets.  The country has witnessed massively increasing inequalities, with ordinary workers' wages stagnating while top earners salaries and bonuses soar to egregiously overblown heights (especially when one considers that those very earners are often the ones whose speculation was a key factor in the Great Recession).   The theory behind capital gains preferences--according to all those pundits, Chicago School economists, and conservative supporters--was that it would free up capital for entrepreneurial investment, creating broad-based economic growth that would benefit everyone with jobs and better standards of living.  Well, we tried that experiment for several decades.  It simply hasn't worked.  What better proof than the Great Recession, which took place after eight years of generous tax cuts for capital?

Given the power of corporations and their managers’ and shareholders’ abilities to use the corporate form to aggrandize and use that power, I do not think that corporate integration is the right answer.  Even if we don't eliminate the capital gain preference, we should eliminate section 1(h)(11) preferential treatment of corporate dividends.

2.       Tax holdings of marketable securities under 475 mark-to-market accounting

 Those who hold lots of stocks and bonds of publicly traded companies currently get to defer their tax until they have some reason to dispose of assets--which may be to recognize a loss that they can use to offset other income.   They currently can cheat fairly easily if they want to on the amount of gain reported, since third parties don't track and report their basis.  (Academic studies say significant cheating on basis takes place.)  If they are lucky (and many are), they will not sell much of their holdings and will pass on the assets at a stepped up basis at death to their heirs, who can then sell tax free.  Ordinary workers, however, must pay tax concurrently on receiving their income (and it is even taken out by withholding).  This timing favoritism for capital income should end.  Mark to market accounting for publicly traded financial assets would be relatively simple and permit third party reporting.  (This is something that Mary O'Keeffe and others have recommended before.)

3.       repeal  the R&D credit

 

Much of the basic research that underlies real development is done by universities anyway.  Drug companies shouldn't get an R&D credit for adding a tiny change to a patented compound in order to extend a patent beyond its current life, etc.

 

4.       repeal  the special manufacturing deduction section 199

 

This is easy.  This manufacturing deduction is really just a complicating corproate tax giveaway.  Set the rates where they should be.  No reason for manufacturers (especially as defined in this code section) to get special breaks.

5.       repeal the various subsidies for the natural resources extractive industry

If we want clean energy, we need to direct our incentives towards developing clean energy.  Why don't we let the energy department do that with directly funded subsidies--can you imagine the increased citizen involvement and transparency that would result?  Get rid of these subsidies in the Code--especially for the dinosaur technologies that are wreaking havoc on our environment, from mountaintop coal removal (and stream destruction) to deep water oil drilling.

6.       phase out the mortgage interest deduction

This subsidy was a part of the housing bubble that was a part of the systemic financial system disruption that cause the Great Recession.  It benefits the wealthiest taxpayers the most.  It's time to phase it out and quit using the code to support real estate developers and construction companies.

7.       Increase rates for estate returns back to 2001 levels (maybe with a $2M exemption). 

I've written about this many times before.  In an age of growing inequality, the estate tax is one way to tamper down the power and wealth of the superrich.  We should let the 2001 law return, at most with a slightly increased exemption amount.

8.       Increase the number of rate brackets by at least 2 or three levels, so that CEOs making $700 million pay about  55%

Base broadening is all fine and good, but the fact is that the compensation to those at the top--whether salaries of CEOs making 400 times their average worker (compared to less than 30 times their average worker in the 1970s) or capital income to those with substantial financial assets--is so high that a return to the higher tax rates that existed before the 1986 tax reforms could serve an important stabilizing function.  Democracy has trouble existing in a context ripe for oligarchy/plutocracy.

9.       Enact partnership reform so private equity/hedge fund managers and others who earn a “profits” interest for services are taxed on that income at ordinary rates

When a service partner gets paid for services and is able to claim capital gains rates (as well as deferral), something is wrong.  Let's fix it.  Service partners who get profits interests should be treated as receiving only ordinary income distributive shares on those profits interests. 

10.   Rethink corporate restructurings.   Maybe we should enact a continuity of interest provision for reorgs that requires 80% continuing shareholders to qualify for reorg treatment—except for truly divisive spins (ie spins that do not include the acquisition of either controlled or distributing in a related transaction). 

This relates to the first point.  Given the power of corporations and their managers and shareholders and the systemic risk caused by monster industries (think—investment banks, car manufacturers, oil companies)  that are no longer capable of flexibly responding to changed economic contexts, it is possible that the tax code should encourage the development of smaller, more entrepreneurial firms, rather than relying on the “economies of scale” notions that have underlain permitting corporate consolidations on a tax-free basis.