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Lax Little Islands | The Nation

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Lax Little Islands

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The Cayman Islands are well known to those seeking sun, sand and sea--and for their hospitality to US corporations seeking to escape taxes, launder money and use other discreet financial services. The islands' tax dodgers help multinational corporations move jobs offshore; they also give aid and comfort to terrorists, drug dealers and divorcing spouses trying to hide money. Honest taxpayers have to make up for the revenues lost through this offshore cheating in three ways: we pay more in taxes, we get fewer government services and we incur rising government debt. Interest on that debt, which doubled under the Bush administration, now equals all the individual income taxes paid from New Year's to around June 10. And that cost means less government investment in research, education and the infrastructure on which commerce depends. Untaxed money hiding in the Caymans and other tax havens means the rest of us pay a higher price for less civilization.

About the Author

David Cay Johnston
David Cay Johnston, who received a 2001 Pulitzer Prize for his coverage of the tax beat, is a columnist for Tax Notes...

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Rising healthcare costs are killing wage increases.

Since 1940, Democrats have had far greater success creating jobs than Republicans.

In short, the Caymans, and other tax havens, are parasites that weaken the United States and other developed nations.

President Obama proposed on May 4 to crack down on offshore tax cheating; that proposal does not go nearly far enough. Instead of settling for a dime on the dollar, as Obama's plan would do, let's get serious about offshore tax cheating, both legalized and criminal. Let's do what we did to halt the imagined threats of communists in Grenada, depose a drug-dealing president in Panama and find those imaginary weapons of mass destruction in Iraq. Let's invade the Caymans!

The islands, which belong to Britain, have no military and just 300 or so police. An invasion force composed of tax lawyers, forensic auditors and a handful of computer technicians could execute a hostile takeover without firing a shot.

The Caymans are not really a country; they are a law firm posing as one. More than 12,000 "companies" operate out of a single building known as Ugland House, home to the law firm Maples & Calder. As Obama put it, "Either this is the largest building in the world or the largest tax scam." Under Caymans law these companies are barred from doing any business in the Caymans except hiding assets and profits. That means shares of stock, bonds and cash may technically be owned in the Caymans--which claims to be the world's fifth-largest center of bank deposits--but are really housed in New York, Greenwich, Houston, San Francisco. There is $1.9 trillion in bank deposits in the Caymans--money actually invested in the United States and other countries but invisible to the IRS.

The Clinton administration enabled this through a rule known as "check the box," which helped companies funnel profits into untaxed havens. US tax rules, liberally expanded by the Bush administration, enabled frauds like Enron to create hundreds of paper companies in the Caymans and other tax havens like Liechtenstein, Turks and Caicos, and the Isle of Man. Enron, as I revealed in a New York Times story in January 2002, paid no taxes because it had created hundreds of paper companies in these places. A subsequent investigation by the Congressional Joint Committee on Taxation uncovered internal documents describing Enron's tax department as a "profit center." Dick Cheney's Halliburton subsidiary, KBR--the old Kellogg Brown & Root construction company--has at least 21,000 employees paid via Caymans subsidiaries to escape taxes. KBR hired executives through these paper companies, enabling them to evade Social Security and Medicare taxes on their salaries and bonuses, much of which the taxpayers provided through Pentagon contracts.

President Obama estimates that his proposals for ending tax haven abuses will raise $101 billion over a decade. The Senate Permanent Investigations subcommittee puts the annual tax loss at $100 billion; Treasury sets the figure at $123 billion. Collecting those lost billions could mean that Americans could pay no withholding tax from November 15 to December 31; it could pay for healthcare for about 20 million of the roughly 50 million Americans without health insurance.

Because we are civilized, we should make the Caymans invasion the last resort in an escalating series of steps designed to persuade the islands to stop undermining US national security. For starters, as I proposed in Tax Notes magazine, Congress should pass a law funding pursuit of every major tax cheat, just as we pursue every killer, rapist and drug dealer. Using offshore accounts to cheat the government out of $50,000 or more for two or more years should be made a felony per se. Then let's provide an escape hatch, which would spare prosecution of anyone who fesses up and fully pays taxes, penalties and interest. The same law should make public the name and details of every person or company that skips the opportunity to make things right.

Next, Congress should require that the Caymans and fellow tax resorts end their secrecy retroactively. To encourage cooperation it could ban US financial transactions and bar Americans from going there on vacation--measures we have imposed on Cuba for almost fifty years.

Congress is likely to do much less. The multinationals with tax havens have much more sway than John or Jane Q. Citizen. The reliably corporate-leaning journalists are openly expressing doubt that our senators and representatives will go after even a dime on the dollar from rich tax cheats to ease our burdens. Reform begins with your demanding it.

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