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My 2007-08 Tax Reform Wish List

My colleague, Prof. Linda Beale, asked various academic tax specialists for their suggestions for reform of the tax system for 2007-08. My wish list is posted on her blog, A Taxing Matter. It is also attached here.

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Transparency in financial transactions

StatOil, Report: Sustainable Development (2005). Statoil, the Norwegian oil company, has made an important contribution to the global effort for greater transparency of payments from the oil industry to governments, by publishing a breakdown of its tax payments to each country around the world. Here is page 28 of the report, showing the country by country breakdown for FY 2004. The following is an excerpt from the report, making the case for transparency. The full report is available at:
http://www.statoil.com/

"The extractive industries transparency initiative (EITI) is directed at achieving greater openness about cash transfers between companies and host countries. Its aim is to encourage reporting in accordance with agreed standards so that income flows are made transparent in a way which prevents corruption and promotes an equitable distribution of revenues. We gave our support to this initiative at the EITI’s first meeting in London during June 2003.

"While the EITI model does not have global support, work through its network has prompted certain countries to express their willingness to apply the EITI standards. Of these nations, Azerbaijan is the first in which we pursue exploration and production activities. The country’s authorities, four national and 17 foreign oil companies – including us – and several interest organisations signed a letter of intent in November 2004. Agreement prevails between the oil companies and the Azerbaijan government that each company will report its financial transactions to an independent third party, which will analyse the data and publish an overall auditor’s statement. Together with BP and ExxonMobil, we made an active contribution ahead of signing the letter of intent. More information on EITI work in Azerbaijan can be found at www.oilfund.az/."

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Social Security Proposals (Reform and Deform)

Bush’s Double-Barreled Attack on Social Security, By Robert S. McIntyre. T H E T A X O N O M I S T, The American Prospect, March 2005.

George W. Bush’s Social Security proposals have come under heavy and deserved attack over the past few months. But a few key points should be made clearer.
First, repeat after me: cutting Social Security benefits does not mean “saving” Social Security. It means cutting Social Security. We can debate whether that’s advisable, but we shouldn’t let anyone misname it.
Second, Social Security’s most daunting problem isn’t its small projected funding shortfall. The real crisis is that the rest of the government stole the trust fund, spent it, and because of Bush’s tax cuts won’t be able to pay it back. Or pretty soon, do much of anything else either.

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Real International Tax Reform

  • U.S. Firms Keep Billions Overseas: Kerry's Plan Spotlights Huge Untaxed Earnings, Washington Post, April 2, 2004, by Jonathan Weisman. "The Kerry campaign said U.S.-based multinational corporations are deferring [] $12 billion in [taxes on] foreign earnings each year, a figure that may be low, corporate tax experts say. Corporate tax revenue in 2003 fell for the third straight year, to its lowest in a decade. As a percentage of the economy, business taxes last year reached the second-lowest level since the Great Depression. Few doubt that tax avoidance has been a reason for meager corporate tax collections, and the deferral of taxes on foreign earnings may be one of the biggest factors."
    • “This is a big deal,” agreed Robert S. McIntyre of Citizens for Tax Justice, who has inveighed against foreign tax deferral for years. As a company, he said, “you may go to India or China or Ireland for the wage differentials — there’s nothing we can do about that. But we don’t have to pay you to go there.”

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Corporate Tax Shelters

  • Irish Subsidiary Lets Microsoft Slash Taxes in U.S. and Europe, Wall Street Journal, Nov. 7, 2005, by Glenn Simpson. Archive.
    • DUBLIN -- A law firm's office on a quiet downtown street here houses an obscure subsidiary of Microsoft Corp. that helps the computer giant shave at least $500 million from its annual tax bill.

    The four-year-old subsidiary, Round Island One Ltd., has a thin roster of employees but controls more than $16 billion in Microsoft assets. Virtually unknown in Ireland, on paper it has quickly become one of the country's biggest companies, with gross profits of nearly $9 billion in 2004.

    Ireland's citizens may not have heard of Round Island One, but they benefit greatly from its presence. Last year the unit handed the government of this small country of four million citizens more than $300 million in taxes.

    The citizens of other nations where Microsoft sells its products are less fortunate. Round Island One provides a structure for Microsoft to radically reduce its corporate taxes in much of Europe, and similarly shields billions of dollars from U.S. taxation.

    Giant U.S. companies whose products are heavily based on their innovations, such as technology and pharmaceutical firms, increasingly are setting up units in Ireland that route intellectual property and its financial fruits to the low-tax haven -- at the expense of the U.S. Treasury.

    Much of Round Island's income is licensing fees from copyrighted software code that originates in the U.S. Some of the rights to these lucrative assets end up in Ireland via complex accounting rules on intellectual property that the Treasury is now seeking to overhaul. The Internal Revenue Service said it is also looking closely at how companies account for such transactions. [Emphasis added]

  • TAX CHEATS & THEIR ENABLERS. By Robert S. McIntyre, Citizens for Tax Justice Economic Policy Institute Tax Enforcement Forum, April 12, 2005. "Lots of unscrupulous big corporations and wealthy people are working hard to hide their profits and income from the tax collector. . . . The culprits are many. The greedy tax dodgers, of course. Their unscrupulous tax advisers, including America’s most prestigious accounting firms, biggest banks and many law firms—who make billions of dollars facilitating evasion and avoidance. But most of all, the blame lies with demagogic lawmakers in Washington, who have turned a blind eye to tax evasion, and have refused to give the Internal Revenue Service—the tax police—the resources to stop the abuses."
  • The $150 Billion Shell Game, by David Evans, Bloomberg Markets, August 2004. "On a January afternoon in George Town, the capital of the Cayman Islands, the sun beats down on three cruise ships anchored at Hog Sty Bay. Along the waterfront on Church Street stands a green-trimmed, white, five-story office building called Ugland House. From the outside, there’s no way to see it’s the official address of 12,748 companies. Ugland and other office buildings in George Town are home to subsidiaries of more than 150 U.S. corporations, including Coca-Cola Co., Intel Corp. and 10 more of the 30 companies in the Dow Jones Industrial Average."
  • Businesses crack the code, San Francisco Business Times (April 9, 2004) by DANIEL S. LEVINE AND THOMAS PISAREK. Here’s something to ponder while you wait at the post office to send off your taxes next week: The Bay Area’s largest corporations will save about $6.8 billion for 2003, thanks to tax breaks, tax shelters and the vagaries of accounting and tax rules.
    In fact, 14 of the region’s largest companies — each of which posted multimillion-dollar profits — will pay nothing in taxes this year or even get money back from the government for taxes paid in the past, according to a San Francisco Business Times study of 50 of the largest Bay Area companies.
  • Skeptical Hearing for Audit Firm (November 19, 2003), By David Cay Johnston. "KPMG and others often charged multimillion-dollar fees for shelters but risked penalties of no more than $10,000 if the Internal Revenue Service uncovered them and determined they were illegal. Senator Norm Coleman, the Minnesota Republican who is chairman of the panel, the Senate ermanent Subcommittee on Investigations, said that 'ethical standards of the legal and accounting profession have been pushed, prodded, bent and, in some cases, broken, for enormous monetary gain.'
    "KPMG collected $124 million in fees from 1997 through 2001 for shelters that cost the government at least $1.4 billion in lost revenue, a report by the subcommittee’s minority staff members estimated."
    "Professor [Calvin] Johnson [University of Texas] called for Congress to break up the accounting firms into separate businesses, one to audit companies and another to sell other services and products. 'This selling of sleazy tax shelters is utterly irreconcilable with their cop function' as auditors, he said." Archive.
    For copies of the testimony presented at the Senate Hearing and a video of the proceedings, click here.
  • Wide Range of Tax Shelters Draws Senate Inquiry (October 22, 2003), By David Cay Johnston. Major companies have leased parts of the subway systems in Washington, Boston and Chicago, to be joined soon by water mains in New York City, in deals intended to cut the companies' tax bills and to get around rules prohibiting abusive tax shelters, said a witness at a Senate Finance Committee hearing on Tuesday. Big American corporations are also receiving tax breaks for leasing public assets in Canada and much of Europe in similarly circumspect deals, said the witness, a leasing industry executive who testified behind a screen to conceal his identity. Archive.
  • MORE CORPORATE TAX SHELTERS ON THE WAY? (Oct. 14, 2003). Pending in Congress this fall, with President Bush's backing, are bills to provide the third major corporate tax reduction in the past two years. A new CTJ analysis looks at the impact of the new corporate tax shelters that would be introduced under these bills. The analysis is available on CTJ's website.
  • "Tax avoidance became a competitive sport, with even blue-chip companies aggressively benchmarking their effective tax rates against those of rivals. According to a recent Harvard University study, U.S. companies avoided paying tax on nearly $300 billion in income in 1998" Business Week, March 31, 2003.
  • "American companies have been rapidly shifting some of their most valuable assets to tax havens, where they pay little or no tax on profits, government data show." New York Times, Key Company Assets Moving Offshore, Nov. 22, 2002.
  • "Bush waxes nostalgic for robber-baron-era tax policies," By Robert S. McIntyre (Taxonomist column on Republican post-election plans).
  • "Inching Away From Income Tax: ‘Value-Added’ Levy Would Turn System Upside Down," Washington Post story by J. Weisman (Oct. 31, 2002). Treasury tax-policy experts are hatching plan to shift the U.S. tax system away from taxing income toward regressive taxes on consumption.
  • David Wessel, "It's Time to Pull the Plug On Corporate-Tax Games," Wall Street Journal, Sept. 23, 2002. Argues that corporate scams are hurting American and need to be stopped.
  • Colgate-Palmolive scam, designed by tax-shelter peddler Merrill Lynch and defended by Fred Goldberg (former IRS Commish and Asst Sec. for Tax Policy), criticized on front page of Wall Street Journal, "IRS Battles Colgate Over Deal That It Calls a 'Subterfuge,'" May 3, 1996 (quoting M. McIntyre). IRS vindicated in ACM Partnership v. Comm'r, TC Memo 1997-115, aff'd in relevant part 157 F.3d 231 (3rd Cir. 1998), cert. den., 119 S. Ct. 1251 (1999).

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Offshore (Bermuda) Tax Shelters, Corporate Inversions

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Bush Achieves Partial Repeal of Tax on Dividend Income

  • CTJ, May 30, 2003. MOST TAXPAYERS GET LITTLE HELP FROM LATEST BUSH TAX PLAN. A May 30 state-by-state analysis finds that despite misleading presidential rhetoric that taxpayers will get $1,000, almost half of all American taxpayers will get less than $100 this year and next from President Bush’s just-passed tax plan. The analysis is available on CTJ's website.

  • CTJ, May 29, 2003. BUSH TAX PLAN'S CHILD CREDIT BOOST LEAVES BEHIND ONE IN FOUR OF AMERICA'S CHILDREN. A May 29th state-by-state study reveals that the highly-touted temporary increase in the per-child tax credit to $1,000 for 2003 and 2004 will provide no benefit to one out of four families with children under 17, because they do not earn enough to qualify for the aid. The analysis is available on CTJ's website.

  • Final Tax Plan Tilts Even More Toward Richest (REVISED), Citizens for Tax Justice, Friday, May 23, 2003. A revised analysis of the tax cut plan approved by House and Senate negotiators last night shows that the plan offers the wealthiest one percent of Americans a $103,899 tax reduction over the next four years. The analysis is available on CTJ's website.

  • For a summary of the House-Senate Conference bill, as approved May 22, 2003, click here.

  • Warren Buffett attacks Bush plan for dividend tax relief for the rich. See Dividend Voodoo, Washington Post, May 20, 2003: "The annual Forbes 400 lists prove that — with occasional blips — the rich do indeed get richer. Nonetheless, the Senate voted last week to supply major aid to the rich in their pursuit of even greater wealth.
    "The Senate decided that the dividends an individual receives should be 50 percent free of tax in 2003, 100 percent tax-free in 2004 through 2006 and then again fully taxable in 2007. The mental flexibility the Senate demonstrated in crafting these zigzags is breathtaking. What it has put in motion, though, is clear: If enacted, these changes would further tilt the tax scales toward the rich." Archive.

  • Senate Bill Permits Tax-Free Dividends Paid Out of Untaxed Corporate Profits. See Wall Street Journal, May 20, 2003. "WASHINGTON -- When the Senate voted to eliminate the tax on dividends, it quietly dropped a White House proposal to require companies to pay taxes on their profits before paying tax-free dividends to shareholders." Archive.
  • SENATE ACTION MAKES BAD TAX CUT PLAN MUCH WORSE
    A May 16 CTJ analysis finds that the tax cut plan approved by the Senate on May 15 offers the best-off one percent of Americans a $69,000 tax reduction over the next four years-- two-thirds more than the bill reported by the Senate Finance Committee on May 8.

    The analysis is available on CTJ's website.

  • From Citizens for Tax Justice:
    President Bush’s new, $674 billion tax cut plan would boost the size of his 2001 tax cuts by more than half over this decade, sending our country even deeper in debt and endangering important public programs, while doing little to stimulate the economy. A computer analysis
    of the effects of Bush’s new tax cut proposals shows (click here for full report):
    • Despite some tax changes slightly lowering taxes on average families in the short run, three-fifths of Bush’s proposed tax reductions for this year would go to the best-off 10 percent of all taxpayers.
    • The typical taxpayer would get a tax cut of $289 this year.
    • In contrast, taxpayers in the top one percent of the income scale, whose average income exceeds $1 million, would get tax cuts this year of more than $30,000 each.
    • By the end of the decade, more than half of the President’s proposed new tax
      reductions would go to the top one percent.
  • An article in Tax Notes by Gale and Orszag finds fault with the Bush plan for new tax cuts, including an exemption for dividends, on the following grounds: (1) it would add at least $925 billion to the deficit; (2) it is steeply regressive --- after 10 years, the cut for the top 1% will be almost double what they now pay in federal taxes; (3) it would have a negligible effect on economic activity in 2003 and the long-term benefits, if any, would be offset by the bad effects of the increased federal deficit; and (4) it would not contribute to corporate tax reform and would undercut the possibility of real reform.
  • According to Leonard E. Burman, a senior fellow at the nonpartisan Urban Institute, "many economists and commentators have been unenthusiastic about the President's proposal. They argue that this is just another tax cut for the rich and that it could actually damage the economy in the long run by adding $370 billion over the next decade to burgeoning budget deficits." These "many economists and commentators" are correct. For a link to Burman's revenue-neutral proposal for dividend relief coupled with full taxation of capital gains, click here.
  • Treasury "Bluebook" (01/21/2003) offers some details on the operation of the proposed dividend-relief plan. Link here.
  • From SLATE: readme --- Opinions about politics and policy, Michael Kinsley, "Dubya's Dividend Delight" (January 16, 2003). "Making dividends tax-free is supposed to correct the tax code's tilt in favor of retained earnings, but there's a large capital gains tax break for companies that retain their earnings, in case this new arrangement tilts things too far toward paying out profits as dividends. The plan starts by excluding dividends from a stockholder's taxable income, then adds rules limiting the exclusion when the corporation itself has taken too many deductions and exclusions, then excludes certain kinds of exclusions from this exception to the main exclusion. And so on."
  • From SLATE: Mea Culpa, Mea Microsoft culpa (Jan. 17, 2003): "Regardless of what Washington decides about Bush's tax plan, shareholders of Intel, Microsoft, Dell, and other cash-rich technology companies shouldn't sit by their mailboxes waiting for fat dividend envelopes."
  • The Brookings/Urban Institute's Tax Policy Center's preliminary distributional estimates of the effects of the President's tax package and the Democrats' tax package in 2003 are online. The estimates indicate that most of the benefits of dividend relief go to the rich.
  • "Democrats Who Backed Tax Cut in ‘01 Balk Now," New York Times, Jan. 8, 2003
  • "Bush’s Plan Taxes Certain Dividends, Fine Print Reveals," New York Times, Jan. 9, 2003 (Plan for dividend relief includes some limitations for companies that do not pay Federal income taxes).
  • "This Week, President Bush announces a legislative package that will encourage consumer spending that will (1) continue to boost the economic recovery, (2) promote investment by individuals and businesses that will lead to economic growth and job creation and (3) deliver critical help to unemployed citizens." For links to the Administration's documents spinning its proposal as fair and efficient, click here.
  • "Bush’s Bold, and Risky, Economic Plan," New York Times, Jan. 8, 2003 (discussing right-wing praise and criticisms from Democrats and tax and economic specialists).
  • "States Fear Double Whammy From Tax Plan," New York Times, Jan. 8, 2003 (discussing States' loss in revenue from dividend exemption and the undercutting of state tax-exempt bonds).
  • "Bush Proposes Big Round of Tax Cuts to Bolster Economy," New York Times, Jan. 7, 2003 (Tax cuts, mostly for rich, but some stuff thrown in to affect distribution charts).
  • Oldie but Goodie. In 1977, I published in Tax Notes an essay on corporate integration that anticipated most of the major issues now being discussed in the context of the Bush administration's flawed proposal for partial integration. In the essay, I attempted to capture the style and wit of Blaise Pascal's famous Pensees. The essay is available here. The essay was revised in 2003 to reflect current developments. For the revised version, click here.

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International Tax Deform

  • Firms Accused of Using Shelters Lobby U.S. to Repatriate Funds, Wall Street Journal, May 19, 2003. By Glenn R. Simpson and Rob Wells. "WASHINGTON — A dozen companies lobbying Congress for a huge one-time tax break on their foreign income have previously been cited by the Internal Revenue Service for improperly sheltering funds overseas.
    "The firms include pharmaceuticals company Wyeth, which is fighting an IRS demand of more than $200 million for allegedly using an improper foreign tax shelter. Others are software makers Oracle Corp., BMC Software Inc. and Xilinx Inc., which are fighting the agency in court.
    "'It is really pernicious,' said Michael McIntyre, a professor of tax law at Wayne State University in Detroit. 'You don't raise revenue by encouraging companies to avoid the 35% rate and pay 5%.'" Archive.

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Avoidance of State Corporate Taxes

  • Vermont facilitates tax avoidance by hosting capitive insurance companies, Boston Globe, Dec. 12, 2003.
  • Montana took affirmative action to curtail tax sheltering this year. On April 26, 2003, Governor Martz (R-MT) signed into law, HB 721 that modifies Montana's water's edge election statute to include corporations incorporated in 35 tax haven nations (the nations identified as such by OECD). The bill also requires expanded reporting to the Department of Revenue with respect to such corporations. You can find this legislation here.
  • "Massachusetts Suffers Setback In Curtailing Tax Avoidance," Wall Street Journal story by Andrew Caffrey (Nov. 1, 2002). Highest court allows Sherwin-Williams to avoid taxes by stashing trademark assets in affiliates organized in low-tax states and then paying royalties for the trademarks and deducting the expense.
  • Wisconsin is considering the introduction of a single-factor sales apportionment formula (bad idea). See A.D. Lank, "MMAC [Metropolitan Milwaukee Association of Commerce] has another way to cut the tax rate," quoting M. McIntyre article in State Tax Notes. Lank calls instead for combined reporting (good idea). Milwaukee Journal Sentinel, Oct. 9, 2002.
  • Use of holding companies to avoid state taxes. Glenn Simpson, "A Tax Maneuver In Delaware Puts Squeeze on States," WSJ, Aug. 9, 2002.
  • Industry Bill approved by House Judiciary Subcommittee on Commercial and Administrative Law on July 16, 2002, would open loopholes and encourage Bermuda-style exodus from State taxation.
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Offshore Banking Fraud

  • Switzerland’s banking secrecy rules are costing the world’s poorest countries billions in lost revenue every year, according to a new campaign. See Bank Rules Slammed for Costs to Developing World, swissinfo, May 18, 2003. Archive.
    • See Swiss push for EU tax concessions, swissinfo, March 6, 2003. Switzerland is pushing for concessions as part of a withholding tax deal with the European Union. EU finance ministers are to discuss the Swiss demands on Friday, with Italy and Spain expected to lead resistance.
  • Offshore banks are being used to evade billions of dollars in taxes by U.S. and other tax cheats with the assistance of U.S. banks and the knowing compliance of U.S. political leaders. See 'After Dirty Air, Dirty Money' by LUCY KOMISAR, The Nation, June 18, 2001.
  • Oldie but Goodie. Mike McIntyre, "Offshore Banking and Gresham’s Law," adapted from 2 Tax Notes Int’l 819-821 (Aug. 1990).

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Soak the Poor

  • From SLATE: The Journal re-enters the tax-the-poor fray, Chatterbox, January 20, 2003 (WSJ claims that it doesn't really want to tax the poor more, but, in fact, it actually does. ("Now Bush's budget director says the tax cut will keep the federal budget in deficit for the next decade. This expectation, in turn, has required Bush's White House chief economics adviser (and tax-the-poor advocate) R. Glenn Hubbard to argue that deficits don't harm the economy, a position that, Berkeley economist Brad DeLong discovered, contradicts what Hubbard wrote in his textbook Money, the Financial System and the Economy.)
  • From SLATE: "Meme Watch: Bushies Take the Bait, The tax-the-poor movement picks up steam," Chatterbox: Dec. 17, 2002.
  • CTJ, Monday, December 16, 2002: WHITE HOUSE REVEALS NATION'S BIGGEST PROBLEM: RICH NOT RICH ENOUGH. According to White House sources quoted in today's Washington Post, the Bush administration is trying to lay the groundwork for a massive shift in federal taxes away from the wealthiest and onto the vast majority of American families. As the article reports, top Bush policymakers have recently complained about what they falsely assert is an "increasing reliance on taxing higher income households," and have threatened that "the tax burden will have to begin extending backward down the income ladder."

    A December 16 CTJ analysis shows that under current law, the overall federal tax system is only modestly progressive--and that when the already enacted Bush tax cuts take full effect in 2010, the wealthiest one percent of taxpayers will pay a smaller share of federal taxes than they currently do. The analysis also shows the impact of converting the personal income tax to a strictly flat-rate tax. The analysis is available in PDF format on CTJ's website at www.ctj.org/pdf/flat1202.pdf.

  • Washington Post, Dec. 16, 2002: New Tax Plan May Bring Shift In Burden Poor Could Pay A Bigger Share, by Jonathan Weisman.

    MJM Comment: Wall Street Journal, fearful that the poor will unduly influence tax policy, wants to tax the poor to show them what it's like.

  • Wall Street Journal Story: The Non-Taxpaying Class, Nov. 20, 2002. "[A]s fewer and fewer people are responsible for paying more and more of all taxes, the constituency for tax cutting, much less for tax reform, is eroding. Workers who pay little or no taxes can hardly be expected to care about tax relief for everybody else. They are also that much more detached from recognizing the costs of government."
  • From SLATE. "Conservatives have a new idea: Raise taxes!" Why the Wall Street Journal wants cleaning ladies to fork more over to Uncle Sam, By Timothy Noah, November 25, 2002.
  • From SLATE. "Conservatives for Higher Taxes, Part 2," Three more reasons why higher taxes on the poor are [sic] an idiotic idea, Timothy Noah, November 26, 2002.
  • Payroll Tax Tilts Burden Onto Poor, Middle Class, Letter to Editor, Prof. Deborah A. Geier, Wall Street Journal, November 27, 2002.
  • From SLATE: Meese joins WSJ in calling for high taxes on the poor, Introducing the Meme Watch: A periodic series tracking thought-viruses of interest. By Timothy Noah, November 27, 2002.

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McIntyre Testimony, Ways and Means

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Bank Withholding on Foreign Tax Cheats

IRC § 871(i)(3)(C) exempts nonresident aliens from tax on interest earned on U.S. tax on bank deposits. The point is to help U.S. banks by encouraging foreigners to use U.S. banks rather than foreign banks. It is an open secret that most of the individuals taking advantage of the provision (the deposits are estimated to exceed $1 trillion) are tax cheats who are evading tax in their home country. In early 2001, the Clinton Treasury Department issued proposed regulations that would require U.S. banks to disclose the names of the foreigners holding deposits, citing U.S. treaty obligations. The tax fraud lobby rose as one to oppose the move, and the Bush Treasury has now issued new proposed regulations that gut the prior Treasury initiative. For an article opposing the revision, see Bob McIntyre, Taxonomist, "The Tax Cheaters Lobby: How the banking industry and the right foment tax evasion," American Prospect (forthcoming Oct. 2002).

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Corrupt Accounting Practices

  • WorldCom Case Encounters Snag Over KPMG LLP
    WSJ, March 18, 2004. A request by 14 state governments to disqualify KPMG LLP as WorldCom Inc.'s independent auditor arose as the latest obstacle in the telecommunications company's effort to emerge from bankruptcy-court protection.
    The request, led by Massachusetts Commissioner of Revenue Alan LeBovidge, came yesterday in a court filing with the U.S. Bankruptcy Court for the Southern District of New York. Pointing to a tax shelter that KPMG sold to WorldCom during the 1990s, which the states describe as a "sham," the states contend that the accounting firm isn't sufficiently disinterested to act as WorldCom's external auditor or tax adviser.
  • Accounting Firms Face Backlash Over the Tax Shelters They Sold, WSJ, Feb. 8, 2003. Excerpt: [The taxpayer] says he didn't quite understand the plan -- and wasn't allowed to take the marketing materials with him to study later. But he says he signed on, relying on the firm's reputation and the advice of his auditor and accountant who also worked for Ernst. Mr. Camferdam and his associates paid about $7 million in fees for a strategy that put their taxes at close to zero.
    Now the move is beginning to look costly, both for them and for Ernst. The IRS is auditing the Ernst tax strategy, meaning that the four clients potentially face back taxes, penalties and interest of more than $20 million. They have sued Ernst in federal court in New York, alleging that the firm exploited its position as a trusted adviser, fraudulently luring them into "an illegitimate tax sham." Ernst has declined to discuss specifics of the suit, which it is fighting it court, but terms it "frivolous" and "without merit."
    The dispute is just one part of a new wave of scandal hitting the accounting business. Ernst, along with nearly every other major accounting firm, is under attack for tax advice given to individuals, many of them highfliers now being pressed by the IRS to pay significant sums to cover taxes they avoided at the firms' advice. Clients are suing accountants in a sour aftermath to the profession's push in the 1990s for new markets that paid better than auditing work.
  • Wealthy Suing Accountants Over Rejected Tax Shelters, February 7, 2003, NYTimes story (David Cay Johnston) "The threat that one tax shelter will be demolished in an audit has already meant that the top two executives at Sprint could owe more than $100 million in taxes. William T. Esrey, the departing Sprint chief executive, and Ronald T. LeMay, the company president, bought shelters that Ernst & Young said would let them take stock option profits immediately, but delay taxes for 30 years. Mr. Esrey disclosed Wednesday that he was being audited and could lose his entire fortune. Mr. Esrey said he was depending on Ernst & Young to defend him if the I.R.S. disallowed his arrangement; Ernst & Young said it stood by its tax advice."
  • Effort to Dilute New S.E.C. Rules, NYTimes, January 21, 2003 ("The staff of the Securities and Exchange Commission plans to recommend that the agency soften proposed rules that would impose new obligations on lawyers and accountants, government officials said today. After an onslaught of lobbying, the commission will complete work this week on regulatory proposals that were required under a law passed by Congress nearly six months ago to address a spate of corporate scandals.")
  • SEC Proposed Regulations. As directed under the Sarbanes-Oxley Act of 2002, the SEC is proposing rules that, inter alia, place limits on the ability of an accounting firm to audit a company if the company has puchased a tax avoidance (or evasion) product from it.
    • For a link to the SEC site with its proposal, click here.
    • For a copy of the SEC proposal in pdf format, click here. (542 kb) For just the tax-relevant excerpts, click here. (197 kb)
    • For a copy of the Sarbanes-Oxley Act in pdf format, click here. (209 kb)
    • Tax Profs Letter #1. For a letter to the SEC drafted by Professors Calvin Johnson, Linda Beale and Elena Marty-Nelson (and signed by 27 tax professors) that argues for auditor integrity and endorces rules that would prevent accountants from providing tax services to their audit clients in some important cases, click here.
    • Tax Profs Letter #2. For a letter to the SEC drafted by Professor Linda Beale, University of Illinois College of Law, (and joined by MJM and several other tax professors) supporting the SEC's efforts at preventing accounting firms from continuing to providing tax services to clients when they have a conflict of interest, click here.
  • Citigroup's violation of Glass-Steagall Act (1933) by buying Traveler's Insurance led it to pressure Congress to pass the woefully defective Gramm-Leach-Bliley, replacing G-S (The "Gramm" in G-L-B is the guy who played coverup, with his wife, for Enron.) See SLATE, Nov. 20, 2002: "How Citigroup’s CEO rewrote the rules so he could live richly," by Chris Suellentrop.
  • "The resignation of Harvey L. Pitt from the Securities and Exchange Commission will set back by months the efforts of the agency to clean up Wall Street." New York Times story by Stephen Labaton (Nov. 7, 2002). Not that there would have been a cleanup under Mr. Pitt.
  • It's not just about Auther Anderson. "FDIC Sues Ernst & Young, Citing Role in Bank Failure," Wall Street Journal story, Nov. 1, 2002.
  • "SEC Chief Is Subject Of Probe: Pitt Failed To Disclose Past Of Board Nominee," Washington Post story, Nov. 1, 2002. Pitt knew that nominee Webster was tainted by accounting scandal and failed to disclose that information to accounting watchdog board in order to facilitate Webster appointment as head of that board.
  • Stephen Labaton, "Bush Seeks to Cut Back on Raise for S.E.C.’s Corporate Cleanup" NYTimes (Oct. 19, 2002). The Bush Administration, after being forced by bad publicity to support the bipartisan (mostly Democrat) bill to curtail accounting abuses by the MNCs, now wants to slash most of the new budget authorized for the SEC to police the big companies and the accounting firms.
  • Bernard Wolfman, Harvard Law School, argues that the giant accounting firms should not be allowed to do tax consulting for the companies they audit, even with explicit approval of the company's audit committee, and should not be alllowed to do tax consulting for the clients of their major accounting competitors, who all sell the same dubious tax shelters. U.S. Law Week, "Accountants — Audit Standards: ‘Sarbanes-Oxley’ Needs Fixing," Aug. 13, 2002.
  • Bipartisan critics claim Justice Department is trying to gut new law designed to deal with accounting firm abuses. Story in Washington Post, Aug. 7, 2002.

From WSJ, Feb. 7. 2003

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Economic Policy

  • CBO, Effective Federal Tax Rates, 1997 to 2000 (August 2003). An update of a study of effective tax rates, 1977 to 1997. Study of Income Distribution shows that the tax burden on average taxpayers has been stable from 1977 to 2000 but has dropped sharply on the rich, due primarily to the decline in the corporate income tax.
  • In Tax-Cut Con, NYTimes, Sept. 14, 2003, Paul Krugman argues that the Bush tax cuts for the rich threaten the financial viability of the Deal Deal and Great Society programs (Social Security, Medicare, Medicaid) within two decades. And he shows that this result is intended by many of those promoting the cuts. He argues that the Bush administration has been deceptive about the distributional effects and economic effects of the tax cuts and that the supply-side ratioale sometimes given for them is laughed at by most economics. Archive.
  • The Global Competitiveness Report for 2002/03 of the World Economic forum (Davos ) ranks the United States number one, notwithstanding the claims of some politicians that tax giveaways to U.S.-based multinationals are needed to make the U.S. competitive in the world. Finland is number two, and high-tax Sweden is number five.
  • Economic Inequality Grew in 90's Boom, Fed Reports, NYTimes, January 23, 2003 ("Economic inequality increased markedly as the boom of the 1990's fizzled, even as incomes increased at almost every level, according to a detailed new survey by the Federal Reserve released today.") For Federal Reserve study, click here.
  • The Maestro Is a Hack: How Alan Greenspan has become a Bush puppet, By Daniel Gross, SLATE, November 21, 2002. Argues that Greenspan's support for huge federal deficits, contrary to his prior positions, is a sellout by a political hack to the Bush administration.
  • "The Roaring Nineties," by Joseph Stiglitz, Atlantic Monthly, October, 2002. This essay, by the winner of the 2001 Nobel prize in economics, gets a lot of things right about globalization, IMF, developing countries, crony capitalism, and US economic policy under Clinton, Bush I & II, and Reagan, with emphasis on the good and bad aspects of the Clinton years.

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Transfer Pricing

  • "Corporate Taxes: A taxing battle." The Economist, Jan. 31. 2004, p. 71-72. "Almost every big corporate scandal of recent years, from Enron to Parmalat, has involved tax-dodging in one form or another. In the latest revelation on January 26th, Dick Thornburgh, the man appointed to look at the collapse of WorldCom, released a report claiming that, as well as the slew of other crooked dealings of which the bankrupted telecoms company is guilty, it also bilked the Internal Revenue Service (IRS) of hundreds of millions of dollars in taxes through a tax shelter cooked up by KPMG, its auditor."
  • "Phony Prices May Hide Import-Export Profits From IRS," Nov. 1, 2002, Washington Post story by J. Weisman. Profs. Pak and Zdanowicz release their latest analysis of overpriced U.S. imports and underpriced exports, estimating that corporations manipulated international trades last year to shave $53.1 billion from their tax bills.
  • Wall Street Journal story (June 11, 2002). GlaxoSmithKline PLC and the Internal Revenue Service are battling over allegations that the British pharmaceuticals giant improperly avoided a significant portion of U.S. taxes due on billions of dollars in drug sales.

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Tax Fraud

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