At the stroke of midnight, most U.S. residents will have filed their tax returns, marking the end of the annual ritual that allows us to share in the unfulfilling experience of interacting with our government’s bureaucracy. With the Byzantine tax forms sent and warmer months fast approaching, many would be content to not ponder tax policy. But reflecting on how the government collects its revenue and how it is spent provides insight into how the roles of government, businesses and individuals are changing. It also reveals several reasons for concern.
Increasingly, individuals are picking up more of the tax burden. Since 1973, corporate income taxes have risen 75 percent as fast as corporate profits, according to a report Monday in The New York Times. In contrast, individuals’ income taxes rose 21 percent faster than adjusted gross incomes during the same period. The result, according to the report, is that corporations keep 7 cents more of each dollar of profit after taxes while individuals keep 7 cents less of each dollar’s earnings after paying taxes.
The trend is due in large part to the growing ability of corporations to devise elaborate tax shelters – some perfectly legal – that allow them to avoid paying taxes. A strategy growing in popularity is the off-shore tax haven. Corporations establish their headquarters abroad, often in Caribbean nations such as Bermuda, and receive the legal protections of the U.S. government while avoiding taxes. Though perfectly legal, this is a discouraging and unethical trend, which ultimately undermines the system that allows businesses to prosper.
Meanwhile, tax crime is on the rise. The most egregious popular example is the Enron case. Through complex financial maneuvers that included altering the sets of information it gave to shareholders and the Internal Revenue Service, Enron ducked millions of dollars in taxes. By simply paying large fees, companies like Enron can enlist the help of powerful accounting and law firms and investment banks to design elaborate tax shelters that can stump the government’s most sophisticated investigators.
Investigations and prosecutions of tax crimes have fallen. Actual prosecutions for tax crimes fell by half, to about 500, according to a new study at Syracuse University. Just one decade ago, the IRS prosecuted more than 1,000 cases in a year. In defense, the IRS says it lacks sufficient resources to investigate and prosecute more crimes. As corporate scandals came to light last year, it is imperative the IRS receive the funding it needs to go after those who would cheat the system. If not, the IRS, the government and the taxpayer will continue to lose out. Each year, the IRS fails to collect $260 billion in revenue from corporations.
The Enron example reveals that institutions such as the IRS and the Securities and Exchange Commission cannot adequately enforce their respective rules pertaining to the disclosure of corporate finances. As the nation embraces a more business-minded model of government, it is important to be watchful of the businesses’ excesses. Corporate America is shirking its responsibilities when it comes to paying taxes, and the burden is increasingly falling on the individual taxpayer. But more distressing is government’s failure to address the problem through appropriate public policy. In the end, it’s we, the average taxpayers, who lose when the tax cheaters win.