The corporate tax evasion is happening because Congress allows it
As usual, corporate spokesmen and their allies are trying to fight back against the latest ITEP study that shows that many companies pay little or no federal income taxes. One way they can react is to declare that everything they do is perfectly legal. This is an attempt by the corporate world to change the subject. The whole point of the ITEP study is that Congress has made it possible for companies to avoid paying taxes, and that needs to change.
Anyone who reads ITEP’s corporate study will find detailed explanations of how Congress needs to change the law to ensure companies pay. Okay, we understand the study is a bit long. We have also provided a two-page summary for your convenience, and you will find that the recommendations on page two are all for Congress to change the very laws that businesses use to avoid taxes.
People who read our reports know very well that we are not pointing out companies breaking the law. If we believed that was the case, we would just be asking for better enforcement of existing laws. The fact is, the existing law, including the changes made by the Trump GOP tax law, is a mess that calls out for the types of reforms we are proposing.
What is legal
That being said, the question of what is legal or not is not entirely clear and dry. The techniques that prevent a person or company from paying taxes fall into several categories.
Obviously legal
Obviously, if a company uses the expense rule enacted under the Trump GOP Tax Act to deduct the full cost of equipment in the year of purchase, it is obviously legal to do so, even if the company cannot pay anything for several years.
Most corporate tax avoidance falls into this category. Even some practices that seem particularly shady, like accounting gimmicks used to make a profit in tax havens like Bermuda or the Cayman Islands, are generally practices that the courts have long allowed.
That’s another way of saying that if you’re looking for someone to be responsible for corporate tax evasion, your primary focus is on members of Congress.
A legal gray area
On the flip side, there are many instances of companies making claims on their tax returns that may be successfully challenged by the IRS. It is possible for the IRS to step in and block some of the tax breaks companies applied for for 2018, which means some companies will end up paying more for the year.
Of course, the current tax system often favors companies when they enter a legal gray area. For example, if a company sells the patent for an invention to its offshore subsidiary at an apparently artificially low price and then pays royalties to the offshore subsidiary at an apparently artificially high price, this leads to a shift of profits abroad. But how many times can the IRS prove that the company is doing something wrong?
If the patent is a new invention (which is common in the engineering or pharmaceutical world, for example), it may be difficult for the IRS to find a comparable transaction between other companies that would prove something to be this agreement is not true.
We recently discussed this issue with Ed Kleinbard, a law professor at the University of Southern California who previously chaired the Joint Committee on Taxation, which is the official revenue estimator for Congress. As Kleinbard explained:
“To say that companies are acting ‘legally’ when they are taking steps to reduce their tax burdens betrays a fundamental misunderstanding about how things work. Corporate tax law, particularly international tax law, is an area where there is ambiguity in the law, the relevant facts and the application of those facts to the law. Corporations thrive in this fog of uncertainty because they not only control the facts, but how those facts are presented to the IRS, and because they can afford armies of experts to frame the narratives and argue their cases. The results may be “legal”, but they are often far from what Congress expected. “
Obviously illegal
If you just stop reporting income to the IRS, that’s a crime. If you choose to hide earnings from the IRS by not reporting them or transferring them to a secret Cayman Islands or Bermuda account that you do not report to the IRS, it is a crime. Large public companies are typically unlikely to get involved in anything like this. A CEO is not going to risk jail, especially when there are so many legal ways for companies to avoid taxes. Corporate apologists often seem to pretend that ITEP is accusing companies of engaging in practices that are clearly illegal and even criminal, which is obviously a red herring.
Are companies or their leaders morally guilty?
The question some people seem to be asking is simply who is to blame? As explained earlier, there is a corporate tax evasion because Congress allows it. And it really doesn’t make any difference who is to blame because the question is how we set our tax laws.
But if business leaders want to pretend they don’t play a role in the clutter of tax law we are facing today, then that is simply dishonest. Members of Congress are responsible for the mess, but they get their bad ideas from corporate lobbyists.
We saw this during the debate that led to the passage of the Trump GOP tax bill. As a recent profile of FedEx’s role in the 2017 tax debate, published in the New York Times, revealed: Corporations made extravagant, rosy promises of job creation and the capital investment that would follow if Congress cut taxes as directed – Promises that have lasted until now. largely unfulfilled. Business leaders like Tim Cook and his acolytes pledged that corporate tax cuts would spur economic growth, which has not yet happened. In other words, companies don’t just follow the law – in many cases they wrote the law.