The Cheating Of America: How Tax Avoidance And Evasion by the Super Rich Are Costing the Country Billions--And What You Can Do About It

By Charles Lewis, Bill Allison, and the Center for Public Integrity (PublicIntegrity.org)

The Cheating Of America: How Tax Avoidance And Evasion by the Super Rich Are Costing the Country Billions—And What You Can Do About It by Charles Lewis, Bill Allison, et. al., is a well-researched overview of how some of America's wealthiest citizens and corporations avoid and evade taxation.

The Cheating Of America tells us that at least $195 billion a year in taxes isn't collected from the ultra-wealthy.

This means the amounts collected from honest affluent people, middle-class earners, and low-income people are invariably higher. If all the rich paid their taxes, it's estimated the average taxpayer wouldn't have to pay thousands of dollars per year in extra taxes to make up the tax shortfall.

While $1.5 billion in new wealth is created every day in the U.S., we learn the number of full-time workers living in poverty has increased from 459,000 in 1998 to over 2.8 million in 2001.

A few of the issues:

--American companies legally open non-U.S. corporations to hold non-U.S. profits. But, these companies often engage in illegal pricing schemes to inflate their foreign profits at the expense of U.S. profits, effectively transferring taxable income to the foreign corporation.

In the 1950's, corporate taxes comprised 27% of the tax revenue. By the 1990's, corporate taxes only made up about 10% of the federal tax revenue. That's about a 2/3 decrease in corporate taxes. Individual taxpayers must make up the difference.

--Nonprofit Organizations operating businesses. The book estimates that non-profits control $1.3 trillion in wealth. While many nonprofits are legitimate, many aren't.

The authors write: "…the precedent for using the cover of benefiting mankind to avoid taxes has a long, rich tradition. … Howard Hughes, for example, set up the Howard Hughes Medical Institute, which owned the stock of his aircraft manufacturing corporation. The nonprofit medical institute gave hardly any money to charity during his lifetime, unless one considers bankrolling the reclusive lifestyle of Hughes a charitable purpose."

Some of these nonprofits are lobbying organizations and industry promotional groups (For example, lobbying for deregulation and tax cuts).

--Corporate use of "phantom losses" from transactions that lack economic substance. The Cheating Of America does a good job of discussing the problems with international banking and how some companies create many entities to try to confuse the IRS. The secretive nature of some foreign country banks makes it nearly impossible for the IRS to obtain the records it needs to properly evaluate a business's tax situation. It's estimated that $10 billion a year in tax revenue is lost to this type of tax shelter.

For example, sometimes, some foreign bank will "loan" a wealthy individual money. That money is really taxable income in disguise. And, interest payments on the "loan" are sometimes reported as tax-deductible, if the "loan" is disguised as a mortgage or business loan.

--Wealthy individuals, renouncing American citizenship to avoid taxes, but continuing to spend hundreds of days per year in the United States. (In fairness to some of the tax ex-patriots, many also faced serious legal problems because they engaged in fraudulent activity. So, avoiding criminal prosecution or civil lawsuits could also be a motive for fleeing the U.S.)

So, what can the average American do about this? Not much. The Cheating Of America devotes a short five-page chapter to discussing what you can do. First, it points out you can't benefit from these tax-evasion schemes yourself, unless you have a lot of money.

Why can't the middle-class benefit from these methods? Because they were never designed to benefit the middle class. For example, the major source of income for most people is labor. If you work for somebody else, your wages are usually reported to the government. It's almost impossible to avoid paying taxes on money earned from work. The book does point out that many sole proprietors who deal in cash underreport their income, and the book recommends paying with a check to prevent these people from under reporting income. However, this doesn't affect most of the exceptionally wealthy.

What about depositing a small amount in a foreign bank? Your money might well disappear. These banks aren't regulated by U.S. law, and many are fronts for organized crime, terrorism, and other bad behavior.

Further, it's pointed out that the wealthiest individuals can afford the best attorneys in the world to defend them in tax court. They can tie the tax court up for 20 years with tens of thousands of documents. A few million in legal fees is chump change. And, they often purchase political influence. (A few million dollars contributed to the local community of a small country--and its officials--can do wonders for helping to avoid extradition.)

Trying to put pressure on politicians to enforce existing laws and enact laws that enforce tax fairness is one possibility. The authors say asking our politicians questions and demanding answers is a good start.

For example, some of the ideas the book suggests:

-- If companies are to take advantage of the American stock market to sell shares and become public companies, why shouldn't their tax returns be public information? This would help reduce the discrepancies between what is reported to investors and to the IRS. It should also cut down on corporate fraud and debacles like Enron.

--Why should people who renounce their citizenship for tax reasons be allowed back into the United States?

--Why are political forces discouraging audits of the affluent? What about requiring that all people over a certain income level be audited by the IRS?

--How about serious tax penalties for tax evasion over a certain dollar amount? The book says many times when people commit tax fraud, they settle in tax court for pennies on the dollar. How about making penalties based upon an individual or corporation's net worth, rather than the underreported tax amount? If a tax-fraud penalty of 10% were applied to the total worth of an individual, I suspect we'd see fewer people taking a calculated risk to evade taxes.

--Demand tougher international banking regulation. Several countries are known to be tax havens. How about economic sanctions against those countries?

Increasing the enforcement of tax laws would be incredibly difficult, because the politicians writing the laws are beholden to the most affluent people, some of whom definitely don't want to see tax enforcement reform. Political contributions speak.

After the terrorist attacks on September 11, the role of correspondent accounts became an issue (shell banks that could easily plug into the U.S. banking system to benefit from access to the U.S. market). A terrorist organization was able to fund and funnel money to terrorists operating in the U.S. this way. Despite some lobbying, a bill was passed that banned U.S. banks from doing business with shell banks. However, prior to 9/11, such legislation failed to pass.

Consider the Cayman-Island-operating Carlyle Group which managed $12.2 billion for select investors. The Cheating Of America tells us it boasts ties to several U.S. politicians. For example, James Baker III (Secretary of State under George Bush Senior) was managing director. George Bush Senior served as an Asia advisor. The company has many other ties to powerful politicians, Republican and Democrat. Thus, people active at the highest levels of the government are involved in offshore banking and investing. Or, at least, these foreign banking and investment firms find it desirable to employ high-ranking U.S. leaders and those with political connections. (Carlyle describes itself as a Washington, D.C.—based venture capital firm which invests in defense companies. In 2001, for example, Carlyle took the company United Defense public earning $1 billion for its investors. Apparently, United Defense was a struggling defense contracting firm until September 11 when the company's fortunes changed dramatically. Carlyle sold off all its shares by 2004 (Source: PublicIntegrity.org). One notable foreign investor in Carlyle—the Bin Laden family. The book tells us that Carlyle's website says the Carlyle Group "does not provide investment or other services to the general public.")

Overall, I highly recommend The Cheating Of America: How Tax Avoidance And Evasion by the Super Rich Are Costing the Country Billions--And What You Can Do About It to all people interested in learning about tax evasion by the rich