ataxingmatter

The Tax Foundation--at it again with bunk about overtaxed corporations

Ok, I'm tired of it.  Aren't you?  The Tax Foundation--an organization that claims bipartisanship but these days seems to be a shill for corporate managers and owners--is at it again, claiming that US businesses "are paying the second-highest corporate tax rate in the world."  That's misleading at best, and maybe just downright hypocritical. 

The Tax Foundation knows that the US statutory tax rates (set at 35% for the biggest corporations, but at much lower rates for the majority of corporations that have less than $10 million in assets) are not paid on the full amount of income by corporations, and in fact the effective tax rates (amount of tax paid as a percentage of income earned) are much much lower--enough lower so that the US counts as a tax haven on the tax rates scale.  

Further, the US taxes for US businesses are plenty competitive.  Taxes are most likely not the reason they go abroad: it seems to be much more likely that they do so to get away with paying their workers near slave-labor wages rather than enough for a decent standard of living.  And even that isn't passed on to customers--it provides the moolah to pay managers ridiculously high salaries and pay rent dividends to shareholders. 

Moreover, tax cuts for corporations don't really create jobs.  If they did, we wouldn't have had the great recession, since the Bush tax bills included a whole smorgasboard of tax cuts for businesses, including the infamous "American Jobs Creation Act of 2004" that cut corporate rates (almost tax-free repatriation of foreign-earned income, manufacturing deduction that lowered the corporate rate for most US industries, all kinds of tax expenditures for extractive industries, various changes to subpart F that favored corporate taxpayers, bonus depreciation, etc.).  If tax cuts for businesses worked, those bills should have resulted in millions upon millions of new jobs.  Instead, it looks like most of the benefit of the low-taxed repatriation of profits went to stock buybacks and other manager/owner-friendly provisions, not job creation.  IN fact, as pointed out in earlier postings, many of the corporations employing the low-taxed repatriation laid off workers!  So much for tax cuts as a way to create jobs.....

But the organization continues putting out one press release after another claiming that our business tax system is "out of line with the rest of the industrialized world" or that we don't have jobs because of a too-high corporate tax rate.

Bunk.  Hoopla.  Exaggeration. 

The Tax Foundation press release then goes on to commit even worse sins.  It complains about "playing one class against another" in setting tax policy.  Fact is, the wealthy class has been engaging in class warfare in this country for decades.    Talking about appropriate distributive policies is the right thing to do.  We need to address the growing problem of income inequality and the resulting diminishing standards of living for many in a country that is extraordinarily wealthy in the aggregate.

On the corrupting influence of wealth in politics: Pappas is Mauled Again--and I agree

There's been an interesting three-way on wealth in politics, and concern for the vulnerable poor, among Peter Pappas, Jim Maule, and yours truly.  Pappas' latest foray is here.  He makes a number of unwarranted assumptions, perhaps the most egregious being that "high moral character generally ...is a predictor of material success."  Obviously, since character is a matter of judgment, this is an opinion and not something easily disprovable.  However, I can only suspect that Pappas has not had the opportunity that some of us have had to get to know many poor or low income people and understand how they have managed to hold onto principles and yes, "high moral character" through extraordinarily trying times.  I suspect also that most of Pappas' clients are of the "material success" variety, and he would find himself (as a commenter on my blog suggested earlier) naturally leaping to their defense, even if he were not utterly convinced of their "high moral character".  Pappas also engages in the old habit of answering a concern that those with wealth tend to engage in morally/socially questionable behavior that exploits others by asserting that his targeted group (the poor and middle class) are also likely to behave badly, missing the point that the translation of wealth into power means that the bad behavior by the wealthy (especially those who use their wealth to influence politicians in their favor) is likely to have a much broader and deeper impact on society through exploitation of otherwise vulnerable and relatively powerless people (workers, customers, underlings).

Maule answers Pappas well in Is it any wonder the tax law is a mess? (Jan 25, 2010).

The critical issue is understanding the harmful results to society when a privileged and wealthy elite can use their inordinate control of resources to influence the norms, laws, and remedies of society to their benefit, while a large number of economically deprived citizens remain vulnerable to exploitation through those very norms and laws that should protect them, and even powerless to redress actual harms committed against them.   This is why the Supreme Court's decision in Citizens United is so disastrous for democracy--it gives those with the power over huge corporate resources the ability to buy laws to suit themselves, under cover of a flimsy argument about free speech that misunderstands that the essence of what free speech must mean in human society is freedom from control by corporate wealth.

Job creation--tax cuts are not the right tool

Not unexpectedly, the "think tanks" that claim to be nonpartisan but that conduct research sponsored by corporate interests and support "capital market" solutions to economic problems are at it again pushing more tax breaks for the huge corporations that just gained more legislative clout with the Supreme Court's foolish decision in Citizens United.   See, for instance, the Milken Institute's, Jobs for America: Investments and policies for economic growth and competitiveness (Jan. 2010) (sponsored by one of the biggest of the "bad guys" pushing corporate tax cuts all the time, the National Association of Manufacturers). 

The Milken report wants the government to do the following:

• reduce the corporate tax rate  (The section 199 manufacturing credit--which amounts to a significant rate reduction for most US companies--has already been passed by Congress under the same argument that reducing taxes will result in job creation. but there not much in the way of new jobs to show for the tax reduction; this report claims that reducing the rate to 22% versus the current statutory rate of 35% would cause a .3 percentage point growth in GDP from 2011 to 2013, with an increase in employment of 2.13 million.   These sorts of claims are made for all kinds of tax cuts, but seldom pan out in practice.)
•  increase the R&D credit (we've already done that--the R&D deduction was made a credit and it didn't have a significant impact on job creation.  It's a stretch to think it would, since the research is either going to be done anyway or just tweaking around the edges in ways that doesn't require significant expansion of research facilities.  Most of the basic research done at universities is much more important to the core of job development and innovation expansion.
• let companies export technology products to produce products abroad (that will help overseas job production, but will essentially increase the flow of jobs to low-labor-cost countries and do nothing to create jobs here)
• invest in infrastructure projects (now, that one has real potential, butprobably NOT the projects recommended here, which include an expansion of offshore drilling and onshore exploration and coal usage--projects that do nothing to move us towards better use of energy and prevention of global warming). 
  

The Milken report, in other words, espouses many of the same policies applied by the Bush II administration.  They didn't create jobs under Bush and there's no reason to think they would be more successful now--in fact, we've tried tax cuts as job stimulus for years without success.  A recent Congressional Research Service (CRS) report notes that business tax incentives don't do much to stimulate the economy.  See Hungerford & Gravelle, Business Investment and Employment Tax Incentives to Stimulate the Economy (Jan. 22, 2010) (available on BNA).  The report notes that the February 09 economic stimulus package included $286 billion in tax cuts, many directed towards business, and that the administration has advocated futher business incentives.  However, it reports that "the evidence ... suggests that a business tax subsidy may not necessarily be the best choice for fiscal stimulus."   It considers, for example, the idea of tax credits--the two most common of which are investment tax credits and accelerated deductions for depreciation.  While studies suggest that such credits have some potential for increasing employment, they have not proven to be effective in practice.  Reasons for ineffectiveness include the complexity of credits, the uncertainty of credits prior to tax filing time, the lack of awareness about the credit til tax filing time, and the fact that "product demand appears to be the primary determinant of hiring."  Firms may not invest even with investment tax credits, if they are already at excess capacity.  In fact, the report notes empirical evidence from recent studies that suggest that the induced spending is less than the cost of the tax subsidy.

Let's face it.  Businesses will always demand tax subsidies, because the managers and owners benefit when they pay less in taxes.  But tax subsidies may do little or nothing to stimulate the economy or provide jobs.  This CRS report suggests that tax subsidies don't act as a stimulus for hiring, but rather as just another windfall for businesses.  The report notes that to the extent an investment subsidy isn't used to stimulate investment it may well simply be used to pay down debt or pay out dividends to shareholders.

Programs that create jobs are the ones that directly create jobs--not the ones that just put more money in the hands of already wealthy CEOs and shareholders who will likely sock the money away in some investment overseas.  We need to be creating jobs programs like those in the New Deal era--real jobs that can make the country better by building infrastructure and make the lives of the people directly affected better.  And we need to be very selective about the infrastructure projects that we fund.  Providing additional subsidies to Big Oil and other extractive industries is a 19th century solution to a 21st century problem. 

Will Congress be able to do anything other than the bidding of the big corporate interests and their managers and owners--especially after the right-wing Court in Citizens United overturned multiple precedents to find that corporations can spend whatever they want to buy elections, in the guise of claiming that such ill-founded judge activism furthers free speech rights?  Will Congress be able to show any concern for ordinary Americans?  It seems increasingly doubtful, unless Americans become better informed and able to vote in large blocks to disempower the corporatist agenda.  We must remove politicians that simply put in place the policies that the big multinationals want.  Those policies almost always will serve the managerial/owner class and not ordinary Americans.

Obama's State of the Union Tax Proposals

President Obama delivered his first State of the Union speech tonight, assuring us that we could jump-start job creation through tax cuts for businesses and gain needed relief for families through tax cuts for middle-class households. 

What Obama offers is, as usual, a mixed bag--too much of the same old tax cuts favored by the right for decades , which have not been proven to do much to create new jobs, but some good programs that merit passage.

I've got strong doubts that an accelerated depreciation provision amounting to a 10% tax cut for businesses and costing $38 billion can be considered an effective jobs bill, even when it is generously offered to small businesses.  Similarly, more preferences for capital gains (exempting them from taxes when the money is invested in small businesses) goes the wrong way--without much assurance of real job creation.  

The proposal for a tax credit for new workers is more promising--although I'd prefer to see stimulus and not tax cuts, this credit is at least directly related to new employment, unlike the other provisions that simply reduce the tax costs for existing businesses without any guarantee of new jobs.   

Adjusting the way the federal government supports loans for college students is a long-needed reform.  The current program represents a subsidy for banks that has grown through the years to provide fees to banks even though universities do most of the same administration work that they did under the direct loan programs.  Banks have finangled the subsidy (as they have credit card fees, the TARP-related guarantees) into more money for themselves and less for students.  It's time to eliminate the giveaway and provide the money to students instead of to the banks.  Obama is pushing the right policy here.

Ending tax breaks for Big Oil, ending the carried interest preferential taxation of compensation for investment fund managers, and not extending the lower rates for the super-rich are all good ideas.   Obama finally made the needed argument that the solutions offered from the right--to extend tax cuts for the wealthiest Americans, deregulate, and maintain the status quo on health care--are just what we've been doing that led us to crisis and huge deficits.  We shouldn't repeat the failed experiment.

Similarly, Obama made his proposal for taxing financial institutions to pay for the costs of the federal guarantee that has been necessary to move them out of crisis through use of the TARP funding.  That's a reasonable plan, based on the degree of leverage other than ordinary deposits.

Spending Freeze? Unsustainable Defense Spending into the future?

President Obama has announced a "domestic" spending freeze for the FY 2011 budget.  The plans don't include cutting the military one red cent.

Now, anyone that knows anything about the budget knows that the military is the place that 1) we spend tons of money, 2) there is very little accountability and oversight, and 3) military contractors lobby heavily to ensure that both items 1 and 2 continue as is into the foreseeable future.  The wars begun by Bush II in his idiotic play at preemptive war, imperialism, colonialism and nationmaker all rolled into one have not only cost us the lives of many men and women but have cost us dearly in terms of national resources.   Military contractors--as caught by Michael Moore in Fahrenheit 911--are gleeful; the rest of us should be in mourning until our national lust for warmongering comes to an end.

Is it fair to say that we simply can't cut military spending because the budget includes only necessary items?  No way.  See OMB Watch, What Makes Defense Spending so Special (discussing Spencer Ackerman at the Washington Independent on Just in Time for the Discretionary Freeze, New Report Says Defense Spending is Unsustainable (Jan 26, 2010); and Matt Yglesias at Think Progress on The Defense Budget and Political Will (Jan. 26, 2010)). 

Ackerman discusses a study by Todd Harrison, Looking Ahead to the FY 2011 Defense Budget (Jan. 2010) that concludes, not surprisingly, that our defense spending is unsustainable--the "direct discoonect between the plans and programs DoD has put forward...and the resources available to support these programs in the long run."  Id. (Harrison report).  That's what Joe Stiglitz has been telling us for some time--in advising us that the costs of the wars in Iraq and Afghanistan are much more than the relatively straightforward war supplemental budgets of the Bush years might have led one to believe.  According to the Harrison report, we've been spending an average of MORE THAN ONE MILLION DOLLARS PER TROOP  per year in Afghanistan, with direct spending on each troop accounting for about $66,000 of that per year.  Yet Harrison notes that only 21% ($1.02 trillion) of the total discretionary budget authority of the Department of Defense from FY2000 to FY 2009 ($4.8 trillion) was for those wars.  We are, indeed, expanding militarily everywhere--including outer space.  ("The decade's fastest growing area of procurement has been space systems, which more than quadrupled from $1.0 billion to $4.6 billion."  Id.)  Yet the combination of the Bush tax cuts and the Great Recession (caused by the Republican deregulatory regime) has left us with the lowest federal revenues, as a percent of GDP, in more than 50 years.  See CBO, Monthly Budget Review (Oct. 7, 2009) (cited by Harrison).

One of the commenters on the Yglesias posts notes that there are relatively simple ways to cut military spending--get our bases out of countries like Germany where we have had them since WWII, combine the Army and Marines, the Navy and Air Force aviation departments so that planes are under the same command as the ground tropps they support, and then keep those remaining corps small.

Meanwhile, of course, Congress has still done very little to help ordinary Americans.  Mortgage loans still cannot be modified in bankruptcy, the single most important change that could be made to favor ordinary Americans and force banks to eat some of the swill they've served to the rest of us.  Similarly, credit card banks are still raking in huge and unreasonable fees and usurious rates from those they've hoodwinked into using their cards--especially the poorest and most vulnerable amonst us.  See Frontline, Secret History of the Credit Card; Frontline, The Card Game (Jan. 26, 2010).  The credit card bill that was passed had so many loopholes that the banks have already run trucks through them.  (I'm sure my readers have gotten those new "disclosures" that raise the rates and the fees and charge fees in new circumstances, all done to come under the wire before the new rules kick in in 2011.) 

So why is it that military contractors and huge banks seem to be protected by administration and congress, while ordinary Americans get shafted?  I can't help wondering if it isn't that we--or at least Congress and the Administration--remain profoundly influenced by the Teddy Roosevelt image of carrying a big stick.  Maybe it's time to grow up so that we can avoid the kind of huge tax increases that will be necessary to continue funding, even at a lower growth rate, our military empire.  If we restrain those expenses, we can use our tax revenues to provide health care for all and jobs programs that create a better living for everyone.

The Shelf Project--should we add Tax-Free Reorganization Limitations and Pass-Through Regime Simplication?

Calvin Johnson at Texas is the primary author for Tax Notes for the "Shelf Project" (inventory and links to articles available on SSRN).  The goal of the project is to outline reasonable changes to the Tax Code that could be undertaken and yield increased revenues without increasing rates, taking as a given Obama's pledge to retain the Bush tax cuts for those making $250,000 or less.  Suggestions so far include the following (not a full list):

• removing compensation for services from capital gains (012110)
• restoring the original (English)  concept of capital gains as the capital reserved for the male heir
• coordinating the withholding tax on deductible payments (Reuven Avi-Yonah)
• ensuring progressive mark-to-market taxation (David Miller)
• requiring a duty to amend returns to correct material mistakes
• limiting business/casualty losses to basis lost
• repealing stepup in basis at death
• ending specific identification of stock certificates (something I heartily support--it permits financial asset owners to cherrypick their recognition of gains or losses, purely for tax purposes--something that has no economic substance other than tax, and leads to the Treasury's wacky notion--in 2006 regulations and 2009 proposed regulations--that says that since the share is the basic unit of property, then taxpayers should be allowed to designate, in generally nonrecognition transactions, what property they receive for what shares, leading to the outrageous result that taxpayers who designate boot solely to one block of shares can recognize a loss in a reorganization!)
• imposing capital gain tax on like-kind exchanges

Now there are a number of other proposals that one might add to this list. 

A.  For example, I'd include restricting the availability of tax free reorgs.  Various possible means of restricting reorganizations could be considered. 

1. Perhaps  the most obvious is that public companies that can use their highly liquid publicly traded stocks to acquire other companies should never be eligible for nonrecognition reorganization transactions.  (This is one that Calvin mentioned as a possible forthcoming shelf project.)  The media consistently reports these deals, even when done with all stock as consideration, as purchases.  That's because everyone knows that shareholders can generally dispose of the stock received easily immediately after the deal and receive whatever percentage of the deal in cash that the shareholder desires, with deferral of recognition on the uncashed shares.  That deferral is not justifiable, particularly when the availability of the tax-free reorg provides a significant incentive for consolidation within industries.  Not permitting tax-free reorgs of public companies would be relatively easy to administer.  Companies and shareholders would complain mightily, but it is not clear that those complaints would merit much consideration.
2. Further, nonrecognition treatment should not be permitted to any transaction unless there is a minimum of 80% continuity of interest (counting plain vanilla preferred).  The notion that the shareholder's investment is being continued just through a more indirect corporate form is the fundamental rationale for nonrecognition, and that rationale is lost when a non-de minimis number of shareholders are cashing out. 
3. Moreover, one could also impose a valuation limitation on the availability of tax free reorganizations, even when the other limitations do not apply.  I'd argue that transactions between corporations either of which has assets worth more than $2 million gross fair market value should not be nonrecognition transactions. 

The idea here is that facilitating the consolidation of corporate enterprises does not serve the democratic interest--especially after the Supreme Court decision on Citizens United treating corporations equal to humans in terms of "free speech" rights (further complicated by the fact that the Court interprets spending money as exercising free speech).  Certainly, we could have avoided many of the "too big to fail" problems if we had not made mergers and acquisitions so easy in this country.   Neither workers nor communities win when corporations are so big that their executives have no connection to the community in which the corporation operates, the corporation has nothing other than profit-making as its motive and so does not care if its decisions destroy the community in which it operates, and the corporation is so large that its desires carry inordinate weight with the political powers that be (a problem that will be sorely exacerbated by the Supreme Court "free speech" decision).

B. Another "shelf project" worth considering is the elimination of the S corporation election or at least the reduction of pass-through regimes available to taxpayers (by eliminating either S corp or partnerships). 

As I noted in a prior posting, the GAO reported to the Senate Finance Committee last December that there is a high degree of noncompliance in the S corporation context.  See  GAO,"Actions Need to Address Noncompliance with S Corporation Tax Rules" (GAO-10-195, December 2009).  The report notes that a large majority of S corporations misreport at least one item (68%) and that misreporting almost always advantages the taxpayer rather than the government (80% of misreported items are taxpayer-favorable).  S Corporations tend to deduct ineligible expenses and shareholders of S corporations tend to miscalculate basis when taking losses.  S corporations also tend to pay inadequate wages (more than $26 billion too little in 2003-2004), which results in underpayment of payroll taxes (social security and medicare). 

There is considerable anecdotal evidence of the misreporting of partnership items. I have spoken with practitioners who contend that the rules are "honored in the breach"--i.e., that much partnership reporting is simply reported as the partners want it without much regard to whether the rules are satisfied or not.   The uncertainty about the interpretation of partnership rules and the treatment of service interests in partnerships are both worrisome.

It is not clear, at any rate, what rationale justifies the existence of both S corporations and Partnerships as pass-through tax regimes.  In my view, Congress should limit the electibility of the tax regime applicable to taxpayers, and then we should carefully monitor taxpayers' use of whatever pass-through regime we retain to prevent basis manipulation, inaccurate deductions, and inappropriate shifting of income or losses among the owners of the entity.  At the same time, Congress should eliminate the possibility that compensation payments are treated as capital gains or are understated (codifying an interpretation of the partnership rules to eliminate the carried interest scam, if partnerships are retained, or requiring adequate compensation and payroll tax payments in the S Corporation context, if S corps are retained). 

Shulman on complexity, uncertain tax positions

Doug Shulman, the Commissioner of Internal Revenue, spoke today at the New York Bar Association Tax Section's annual meeting.  See Prepared Remarks (Jan. 26, 2010).

Among other issues, he addressed the ever-present question of complexity and the hot topic of tax accrual workpapers and information about uncertain tax positions. 

1. Complexity

Shulman was not addressing tax law simplification--as the speech notes, "that's a speech for another day."  He was talking about the fact that the IRS now administers a great deal of the country's social policies--from purported economic stimulus and global competitiveness policy (e.g., lowering of US "manufacturers" tax rates through the section 199 deduction; lowering of US banks' tax rates on foreign income through the "active financing exception" to subpart F income; lowering of most businesses taxes through expensing and acceleration of deductions for equipment through bonus depreciation) to aide to low income families (e.g., earned income tax credit, etc.).  The IRS even administers our environmental policy (or lack thereof) in large part (see the numerous provisions for special treatment of natural resources extractive industries).

One worthy initiative Shulman discussed is the attempt to "better understand the entire complex economic picture of the enterprise controlled by the wealthy individual and to assess the tax compliance of that overall enterprise."  To do so, the IRS has created a group that will focus its expertise on high wealth individuals and the entities through which they control that wealth.  Similarly, the IRS has focussed on offshore tax evasion, developing expertise and coordinating the various efforts at disclosure, legislation, and cooperation with other governments.  The IRS Is also "looking for and finding points of leverage...where multiple people not paying taxes can be detected such as f]inancial institutions...[and] promoters of evasion schemes."  To further all of these objectives, the IRS Is working on a protocol for joint audits with treaty partners, an effort that should limit multinational corporations' opportunities for arbitrage.  Shulman says more specialized attention will also be given to transfer pricing issues.

2. Uncertain Tax Positions and Tax Accrual Workpapers:

Readers will recall from prior postings (here, here, and here) that the First Circuit Court of Appeals recently ruled in Textron that tax accrual workpapers are not protected by the work product privilege, since they are prepared for accounting purposes and not for litigation. 

Companies, of course, want to have their pie and eat it too.  They want to be able to claim that they are adequately reserving for potential losses in respect of their "uncertain" tax positions for accounting purposes, while preventing any disclosure about those determinations for tax purposes under a claim that the evaluations of their uncertain tax positions are prepared "in anticipation of litigation" under the civil procedure rule protecting work product from disclosure to the opposing party. 

I've argued that the work product claim for such documents is absurd on its face under the seminal Supreme Court case--those evaluations are required for accounting purposes and not for legal purposes so the documents are business documents and not protected legal documents.  Further, the mere fact that determinations about uncertain tax positions have to take into account the possibility of success if the position were ever litigated cannot be sufficient to turn those determinations into protected work product because EVERY tax position that is not certain must be evaluated for its likelihood of success on the merits to determine whether there is a requirement to disclose or sufficient authority to take the position on the return in the first place.  That mere evaluation does not mean that the evaluating document is prepared in anticipation of litigation or even that litigation is expected.  In most cases, in fact, it is not.

Under the Supreme Court Arthur Young case, it is also clear that accounting determinations are not protected documents.  The IRS could demand tax accrual workpapers in connection with every audit.  But the IRS has a policy of restraint, under which it will typically not request tax accrual workpapers.  If a company has engaged in a number of listed transactions (transactions that have been identified by the IRS as potentially abusive tax shelters), then the IRS will request a copy of all tax accrual workpapers. 

Shulman said that the IRS has also been "taking a hard look at transparency regarding business tax issues" because of the many changes in accounting for income taxes and tax risk.  He announced a "major step" in reporting requirements for uncertain tax positions, unveiling Ann. 2010-9 (available on BNA).  He noted that too much time is wasted in corporate audits "searching for issues rather than having a straightforward discussion with the taxpayer about the issues." In order to get more complete information earlier, the announcement provides for reporting uncertain tax positions at the time a return is filed by covered taxpayers (generally those with assets over $10 million who file FIN 48 about establishment of tax reserves OR, even if FIN 48 reporting isn't required, a position that the taxpayer expects to litigate or that the taxpayer knows the IRS has a general administrative practice of not examining).  Disclosure would describe each uncertain position and the maximum tax liability if the position is not sustained.   The statement would be required to reveal the Code sections implicated, the reasons for determining that the position is uncertain, whether the position involves a permanent exclusion or inclusion or timing benefit (or both), whether it involves a computation of basis, and whether it involves a determination of the value of property, among other matters.

Beale here:  This position is something I have argued for in the past (see my article on Before the Return).  One cannot argue that such additional disclosure is improper, since it is necessary to arrive at all of those determinations in order to file a tax return incorporating the position.  One cannot argue that such disclosure is burdensome, since public companies already prepare this information for their financial statements or, again, for filing their tax returns.  One cannot argue that this disclosure is unreasonable, since taxpayers who make returns are basing those returns on their assessments of success regarding those uncertain tax positions--all information that goes into the return should, I argue, be disclosable to the IRS, so having a brief description of an uncertain position and the dollar amount at stake is minimally intrusive and maximally helpful.

Shulman indicates that, as part of this proposal, the IRS will continue its policy of "restraint" in asking for tax accrual workpapers. 

Beale here:  I am doubtful whether this continuation of the policy of restraint is reasonable.  A company that has a large number of uncertain positions with high dollar figures should be required to share its tax accrual workpapers with the IRS.  Since these are business documents and not tax documents, there is no reason that the IRS should hamstring itself in applying a "policy of restraint" regarding acquisition of information that could be central to the IRS's ability to find noncompliance or its ability to understand the positions taken by the taxpayer.

ABA TAx Section Meeting in San Antonio

I'm off to San Antonio tonight for the ABA Tax Section Meeting.  I hope to post from there on the Standards Committee (which I co-chair), and possibly the partnership tax, corporate tax, and teaching tax panels.  I'll even get to spend an enjoyable dinner with my tax colleagues from around the country, as we gather per custom on Friday night at a local restaurant to demonstrate to all that tax nerds, too, can have fun.

More on Rudolf Elmer, Swiss Banker Turned Whistleblower

In How multinational, aide by Ernst & Young, tried to launder porfits & cheat on taxes through offshore Bermuda shell, by Lucy Komisar, at The Komisar Scoop (Jan. 20, 2010), provides a nice addition to the information on how the big, multinational financial and accounting firms have aided and abetted tax evasion.  It's a story provided by Rudolf Elmer, the Julius Baer Swiss banker who was fired in 2002 when he refused to continue the scams, and made off, apparently, with various incriminating documents about the bank and its assistance to various nations' citizens in their zeal to avoid paying their fair share of the tax burden.  

Elmer later worked for Noble Investments SA, Zurich, a hedge fund consultant, from June 2003 to Oct 2005.  He is providing information about this company, too--including the use of a shell company in Bermuda to cheat on Swiss taxes, according to documents that Komisar says she has exclusive access to.  For example, here's an excerpt from the posting from text of a document written by the tax director of the Noble group (based in Hong Kong) about its efforts to avoid Swiss tax.

In the disclosure to the Swiss tax authorities we have not advised that personnel working in Switzerland conclude NIL’s contracts for fees for products structure and portfolio performance; and NIL’s intermediary agreements. .. There is concern that if the Swiss tax authorities learn that Swiss personnel are concluding NIL contracts, that NIL will be deemed to have a permanent establishment in Switzerland or that NIL will even be treated as a Swiss resident company... NIL would be exposed to a Swiss tax on a portion or all of its profits.

The post says that the Noble people had the initial idea for the scam, and then went to a Swiss lawyer to structure the companies and used Ernst &Young  as its auditor, which "was also aware of the plan from the start."   Komisar details the kinds of facts that would likely lead the Swiss tax authorities to think the Bermuda company was a fake--no physical presence, no staff, not listed in the directory, Swiss-based board, Swiss-based sales work, representation as an active investment company even though Elmer claims it was not.

Hmmm.  As more of these activities come to light, perhaps these banks and auditors will finally get their comeupence?  Not unless things change in enforcement and in Congress, where financial institutions have held much too much sway for the last twenty years.

AMT and tax rates

I received an interesting email today--one of many that are now sent out seeking publicity for someone who has written about, or wants to advise on, certain tax positions.    This one starts out as follows:

"We are currently experiencing the lowest income tax rates in America's history."

Now, if you read much that is put out by many of the groups talking about tax these days, you won't find that statement there.  In fact, there is a considerable amount of material that talks about the US as a high-tax jurisdiction and claims that we can't be competitive unless we lower our corporate tax rates or that we will drive entrepreneurs out of the country if we don't lower our individual income tax rates or if we tax managers of private equity funds at the ordinary rate like everyone else who earns compensation for the services they provide. 

But of course the quoted statement is quite true.  We had much, much higher tax rates in the pre-Reagan era and we had significantly higher tax rates before Bush II's succession of tax cut bills.  And those eras were eras of the economic growth that supported improving standards of living for ordinary folks. 

Of course, the email didn't stop with that statement--it suggested that Americans should start planning, because taxes are likely to rise soon.  That statement may be true or not--it depends on Congress and on what steps are taken this year to deal with the sunset provisions put in by the Republicans when they passed the series of tax cuts under Bush.  The sunset gimmicks were used because it was obvious, back then, that making those large tax cuts permanent--including very preferential rates for capital gains and dividends and lots of business cuts--would be very costly.  How can a Congress responsibly extend those Bush cuts, given today's economic environment?

When the Bush cuts were passed, Congress also used another gimmick--it left the Alternative Minimum Tax (AMT) in place without changing its rates to correspond with the changes in the regular tax rates as had usually been done in the past.  The AMT kicks in for higher income individuals who have significant amounts of items that are treated as preferences under the AMT.  But without lowering the AMT rate at the same time that there was a substantial lowering of the regular tax rate, the AMT applies to many more people --for someone subject to regular tax at a marginal rate of 25%, the AMT tax rates of 26% and 28% on a broader tax base will likely result in AMT liability.  So the AMT would have essentially clawed back the Bush cuts, except that Congress has passed a "patch" increasing the AMT exemption level every year, to prevent that from happening.  (The AMT exemption applies instead of the standard deduction and personal exemptions.)

It is a very costly patch, and it is not (yet) in place for 2010.  So the AMT will hit more people than before this year if a patch isn't passed.  The CBO has put out a very readable study of the AMT and the expected increases in AMT taxpayers over the next few years, assuming that there is no patch and that the Bush tax cuts are allowed to expire as written.  (If the Bush tax cuts were extended, the cost of increasing the AMT exemption level for inflation would be even more expensive.) You can access the study here:  The Individual Alternative Minimum Tax, CBO (Jan. 15, 2010). 

Is the AMT bracket creep all bad? Certainly nobody likes paying more taxes. But the main income group that will be hit by the bracket creep, at least in the next few years, is taxpayers who have between $200,000 and $500,000 of adjusted gross income--a farily well-to-do group that benefited from the Bush tax cuts. 

One of the problems is that the preferences (the items that get added back into the AMT base) are not finely tuned.   I've argued that the AMT should treat the capital gains preferential rate as a preference, but Congress has shown no inclination of late to bite that bullet.

I've also argued that comprehensive reform of the AMT should protect ordinary folks--but not those richer folks in the $200,000 to $500,000 bracket-- from having to deal with this alternative tax system.  If you take the average income of around $50,000, then folks who earn up to double that shouldn't be subject to the AMT.  That could be done with a new exemption, indexed for inflation, of around $100,000 or $150,000 at most, maybe, but to do that will be costly.  It means biting the bullet by adding preferences to expand the AMT base even more (such as my suggestion re capital gains) and/or allowing the Bush cuts to expire. 

The CBO study provides some information on the costs of various suggested "fixes" to the AMT bracket creep problem.  Just continuing the "patch" through 2019 would cost $450 billion.  Amending the preferences to allow taxpayers the benefit of standard deductions, personal exemptions (which are indexed, unlike the current AMT exemption) and state and local tax deductions for AMT purposes would cost around $530 billion over the same period.  Repealing the AMT would cost $620 billion over that period and reopen some loopholes that the AMT helps to close.