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Under the Biden administration, wealthy tax cheats can no longer count on getting the “audit lite” treatment.

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Economy / March 1, 2024

The IRS Finally Takes the Gloves Off

Under the Biden administration, wealthy tax cheats can no longer count on getting the “audit lite” treatment.

David Cay Johnston
Brown sign reading "Internal Revenue Service Building"
The Internal Revenue Service (IRS) headquarters in Washington, D.C. (J. David Ake / Getty Images)

The Internal Revenue Service last week announced a crackdown on writing off the personal use of corporate jets as a business expense. Taking improper tax deductions for private jet flights is the newest target of a reinvigorated IRS, which, under the Biden administration, has begun aggressively pursuing wealthy tax cheats.

On Leap Day, the IRS also announced plans to initiate 125,000 examinations “focused on high earners, including millionaires, who failed to file tax returns” on an estimated $100 billion of income, an average of $800,000 per case.

The IRS said it would also increase examinations of partnerships—another area where cheating has long been rampant—and in general will scrutinize more returns filed by people making more than $1 million per year, especially if they owe large tax debts, own multiple shell companies, or have overseas bank accounts.

These new audit policies clearly signal to business owners and executives that the Trump-era practice of looking the other way at high-level tax cheating is over. The IRS said that the rate at which the IRS audits poor, middle-class, and upper-middle-class Americans will not change.

This is welcome news for honest taxpayers, because when those with the highest incomes cheat, everyone else must pick up their burden in one of three ways: They pay more taxes, receive less government services, or bear the interest on increased government borrowing.

Danny Werfel, the Biden administration’s commissioner of Internal Revenue, said that the IRS is “concerned people are using business aircraft for personal use, and in turn, then taking the business deduction they may not be fully entitled to.”

While corporate jet abuse can involve tens of millions of dollars in improper write-downs and improper deductions for operating costs, that issue is primarily symbolic, a law enforcement tactic known as “general deterrence.” The aim is to catch the attention of big-name tax cheats so that they change their behavior lest they get caught and punished with fines or even prison time. Expect at least one high-profile civil prosecution over private jet tax deductions to drive home the point—followed by grumbling from pro-corporate politicians that enforcing the tax laws is oppressive.

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According to Werfel, the money lost to cheating by millionaires and billionaires totals about $150 billion each year. Collecting that would increase federal income tax revenue by more than 6 percent.

Many tax experts believe that the official estimate of high-end cheating is conservative. Indeed, Charles Rettig, the Beverly Hills tax avoidance lawyer who headed the IRS under Donald Trump, told Congress three years ago that, overall, “it would not be outlandish to believe that the actual tax gap could approach, and possibly exceed, $1 trillion per year.” This year, individual and corporate income tax revenue should total $3 trillion.

Tax cheating became almost risk-free for the wealthiest Americans during the Trump years. The 755 largest corporations also got a pass, their audit rate halved, IRS data shows. The amount of extra tax auditors found fell even more.

Consider tax returns filed by people reporting income of $10 million or more in 2016, the last year of the Obama presidency, and 2020, Trump’s last year as president. The number of these very-high-income households tax shot up 65 percent from 16,097 in 2016 to 26,517 under Trump. But the number of completed audits plummeted 92 percent to just 80. That’s just 0.03 percent.

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Counting both completed audits and those in process, as the IRS urges journalists to do, shows a nearly 70 percent decline in the audit rate, hardly any better.

The quality of these audits also fell, so much so that additional taxes recommended by IRS auditors fell 98 percent.

To put that in perspective, the highest-paid IRS auditors make less than $100 per hour but find more than $13,000 of taxes owed for each hour they work on these high-income tax returns, a new Government Accountability Office study found.

The tiny number of high-income tax returns that the IRS did audit largely received once-over-lightly examinations. These were not deep dives to untangle sophisticated accounting tricks or to uncover nonexistent shell companies used to fabricate tax deductions and hide income. Some IRS auditors call this, in a mocking reference to weak beer, “audit lite.”

The Americans audited most often are the working poor who take advantage of the earned income tax credit, the primary federal program to alleviate child poverty. Their audit rate is more than five times that of the general population, according to the Transactional Records Access Clearinghouse at Syracuse University, which gathers raw government data and makes sense of it for citizens.

The high audit rate for the working poor began under a 1994 deal between President Bill Clinton and Newt Gingrich, who became House speaker. Many Republican lawmakers favor these high audit rates, saying that the anti-poverty tax credit is rife with fraud. However, research by the IRS’s taxpayer advocate found that most issues involve math errors, estranged parents both claiming a child, and what the advocate says are unnecessarily complex rules.

(Congress created the taxpayer advocate position in 1996 at the urging of Republicans who complained that no one at the IRS spoke for taxpayers. Since then, Congress has largely ignored the annual recommendations of the advocate, currently Erin M. Collins.)

The Biden administration’s new policy targeting wealthy tax cheats won’t transform the federal tax system overnight. After many years of minuscule or nonexistent pay raises and relentless antagonism from Congress, the total number of auditors is down 43 percent since 2010.

Cheating among those who earn more than $1 million a year often involves sophisticated accounting tricks. Uncovering these devices requires tax auditors with advanced degrees in accounting and law who understand excessively complicated rules and can determine whether business subsidiaries are actual or fictitious.

“It’s going to take time to gear up…to audit high-income folks,” said Sue Long, a Syracuse University statistics professor who has studied IRS operations for decades.

The sharp decline in enforcing tax law began during the Clinton administration. It accelerated after Trump appointed Rettig, whose law practice represented tax avoiders and suspected tax cheats. I wrote in 2018 that “Trump’s pattern of putting foxes in charge of the henhouse continues” with his choice of Rettig to head the IRS. 

Under Rettig, the IRS withheld some routine statistical data from the public while insisting there was no attempt to hide evidence of lax law enforcement. But the data got out anyway because the IRS had to give it to Long under a federal court order she obtained in 1976.

Trump is among those high-income Americans whose tax cheating may now come under scrutiny. Letitia James, the New York State attorney general, just referred Trump to the IRS for investigation based on evidence that emerged during the civil fraud trial where he was ordered to pay more than $450 million in ill-gotten gains and interest.

Among other tricks, Trump is known to create fictitious businesses with fabricated deductions—which should be a risky strategy, but is one that IRS auditors have told me others have also used to escape taxes they owe.

The tax information released by House Democrats last year showed that Trump’s tax returns included five dozen businesses, known as Schedule C sole proprietorships.

These businesses showed little or no income over five years, yet Trump routinely took deductions for them. Some of these filings balanced revenue and deductions precisely, resulting in zero profit. Every tax accountant, lawyer, and professor I interviewed declared that it was so unlikely that revenue and expenses would be exactly equal that the filings should not be trusted.

That Trump persisted in claiming fictitious business expenses is particularly brazen because auditors caught him doing the same thing in 1984. Trump insisted he was entitled to take more than $600,000 in business expenses, despite having no revenue and no receipts. Eight years later, the city and the state of New York tried Trump for civil tax fraud. Like most tax proceedings, no reporter covered them at the time and the story remained unknown until my daughter Amy found records showing that Trump lost both cases—a story I broke in 2016.

At one of his fraud trials, Trump’s longtime tax lawyer and tax accountant Jack Mitnick testified that, though his signature was on the tax return, neither he nor his firm prepared that return or the filing for the imaginary business. The issue arose because the signature had been applied with a photocopier instead of Mitnick’s name appearing in ink, known as a wet signature.

Trump was lucky he wasn’t prosecuted for forgery and lying under oath.

Since two judges informed Trump in harsh language that what he did in 1984 was illegal, the IRS could build a strong case for criminal tax fraud because of those five dozen fictitious businesses. I’ve recommended that Alvin Bragg, the Manhattan district attorney, prosecute Trump for tax fraud, because proving he acted with criminal intent would be easy.

President Joe Biden’s Inflation Reduction Act financed the recent dramatic and long overdue shift to stricter tax law enforcement. That 2022 law provides nearly $80 billion in additional funding for the federal tax police spread over the next 10 years.

Support for more tax law enforcement has been growing even among those known for their anti-tax stances. Alex Muresianu, a senior policy analyst at the anti-tax Tax Foundation, recently wrote, “There is a compelling case for strengthening the enforcement of existing taxes, rather than creating new ones, as a way to raise revenue.” He noted that simplifying the tax code would also make enforcement more manageable and effective.



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https://www.thenation.com/article/society/irs-wealthy-tax-cheats/
How to Repeal the Tax Loophole That Allows Companies to Hide Their Profits in Offshore Accountshttps://www.thenation.com/article/archive/how-to-repeal-the-tax-loophole-that-allows-companies-to-hide-their-profits-in-offshore-accounts/David Cay Johnston,David Cay JohnstonAug 4, 2015

More than a third of a century after Ronald Reagan led America down a costly and unnecessary path into extreme income and wealth inequality, the opportunity to restore broad prosperity is rising before us. This is a moment not for despair, but resolve—and hard work.

Income inequality has become so outrageous that even Republicans vying for their party’s presidential nomination are talking about it, though not their party’s role in creating it or any workable solutions. On television the talking heads wring their hands, saying, “If only we could afford the costs of digging ourselves out of the economic hell most Americans have been shoved into.”

Actually, America has an immense pool of money that can be put to work closing the nation’s extreme inequality gap. Doing so will also improve our health, longevity, level of education, and knowledge.

Before getting to that, though, let’s take a quick look at the latest data.

In June, for the first time, the Internal Revenue Service released data on not just the top 1 percent, but also the top one-thousandth of 1 percent. The report excludes dependent children who file their own tax returns because they have a trust fund or work.

Even for those who know that the average income reported by nine out of 10 households has fallen back to the level it stood at in 1966, this is a shocking report.

My analysis shows that from 2003 through 2012, the bottom 90 percent of Americans saw their incomes decline by 6 percent, or about $200 a month.

Every penny of increased income went to the top 10 percent, but even there it was heavily skewed to the very few at the very top. Slightly more than half of all the increased income in the country went to the 1.36 million taxpayers who make up the top 1 percent. The most shocking detail: Just one in 1,000 of those top taxpayers collected 8 percent of all the increased income in the entire nation.

Think about that. America has 136 million primary taxpayer households. Over those ten years just 1,361 households raked in 8 percent of all the increased income in America.

Those one in 100,000 households averaged $161 million each in 2012. They paid 17.6 percent of their money in federal income taxes, about the same share as a single worker making just $80,000.

The awful truth is that the great industrial engine that once created rising prosperity for the vast majority has been converted into a mining operation. Instead of creating new wealth by making ever more useful widgets and services ever more efficiently, today’s economic titans mine the pockets of the many.

Public policy—laws passed by Congress, regulatory agency rules, and lax oversight of business—makes this mining economy possible.

We see this in the private-equity, high-speed trading, and hedge-fund operators who combine scads of borrowed money, favorable accounting rules, and offshore companies that block taxes to report huge profits. They rarely create new enterprises or improve existing ones. Instead they strip companies of their assets and froth the stock exchanges so they can collect profitable bubbles.

The biggest multinational corporations don’t even pay corporate income taxes. Rather they profit off them, something I exposed 13 years ago and that a three-volume study by the Congressional Joint Committee on Taxation later confirmed.

What makes this possible are a few seemingly innocuous words slipped into the 1986 Tax Reform Act that hardly anyone noticed at the time. Those words allow multinational corporations to evade the caps on how much cash and near-cash domestic companies can hold by simply moving their profits offshore.

Since 1909 Congress has limited cash hoarding because it damages the economy. Just as the economy would collapse if everyone cashed their paychecks and stuffed greenbacks in their mattresses, so too is economic growth damaged when corporations hoard cash instead of reinvesting.

But under the 1986 law American companies pay royalties, rents, and fees to their offshore subsidiaries, using accounting alchemy to convert profits into expenses. As long as those profits are held in so-called deferral accounts with an offshore mailing address, no taxes are due.

You would get the same deal if Congress let you take a deduction for every dollar in your right pocket that you moved to your left pocket and kept there.

The next part, though, is even more perverse: the multinationals buy the Treasury bonds that the federal government sells because it didn’t collect those corporate taxes right away. The government then pays these multinationals interest on their deferred taxes.

Do this for long enough and the magic of compound interest will result in more money than the value of the taxes owed, which are eroded by inflation. In effect Uncle Sam loans these companies their taxes at 0 percent interest and then pays them interest on the loan. If you could get a bank to do that for you when you buy a house, after three decades with no payments you would have enough money to pay the bank the deferred purchase price and enjoy three to four times the house’s price in cash.

Of course, no banker is dumb enough to give you that deal. But Congress gives it to multinationals like Apple and GE and to billionaires like Warren Buffett every day. So when their shareholder reports indicate that they paid a tiny percentage of their profits in taxes, they really made a profit and paid Uncle Sam a small fee on their profits from deferring payment.

Here’s the good news buried in that outrage: These huge corporate deferral accounts can be tapped to pay for investments that will move us away from extreme inequality, generate millions of new jobs, and create future wealth through basic research and improved infrastructure.

The 2004 American Jobs Creation Act gave multinationals an 85 percent discount on offshore profits brought home. When the proposal was being discussed, proponents said it would create 660,000 jobs. But as soon as the law took effect its biggest beneficiary, Pfizer, started firing 40,000 workers. Pfizer escaped about $10 billion in taxes. Like some other companies, Pfizer used the tax savings to buy back its own stock, which increased the value of stock options held by executives.

Instead of letting companies bring this offshore money home after paying little or no tax, as Congress did in 2004, those deferrals can be ended in a way that will stimulate the economy.

This is nothing new. Since the first corporate income tax was enacted in 1909, Congress has imposed a penalty tax on corporations that hoard cash. The current penalty for domestic firms found to be hoarding cash is 20 percent on top of the 35 percent corporate tax rate. Tens of thousands of small businesses have paid this in the past century, but no large publicly traded companies have done so.

The same penalty used to apply to profits held offshore, but three decades ago Congress gave multinationals a way to defer taxes by converting profits into royalties paid to corporate affiliates. Section 531 waives the excess earnings for “a passive foreign investment company.”

Repealing the exemption for profits moved offshore would force companies to close these deferral accounts and repatriate the funds. That action cannot, as corporate lobbyists tell Congress, damage investment for two reasons. First, new laws cannot affect past behavior, only future conduct. Second, Congress can let corporations avoid the penalty tax provided the repatriated profits are invested in new plants, equipment, and research. Even better, it could also waive the penalty on repatriated funds paid broadly as bonuses to nonexecutive employees. That would generate income and payroll taxes and infuse the economy with spending money, which in turn would generate more economic activity.

Congress can also tailor the rules to make sure the money is not wasted through stock buybacks—which buoy the holdings of senior executives, who get about two-thirds of their compensation from stock and stock options—or from dividends that will flow to a minority of Americans.

In 2012 American corporations worldwide held $14.6 trillion in cash and other liquid assets, IRS data show. That cushion was so plush that it equaled the entire output of the US economy from January through Thanksgiving that year. It also totaled more than four years of federal spending.

Take away the liquid assets held by banks and other financial institutions and the figure is still bloated: almost $6.7 trillion of idle cash. That’s more than $21,200 for every man, woman, and child in America. There is no possible economic or business argument for holding that much cash idle.

Apple alone holds about $202 billion in cash, about $633 per American—far more than it could possibly need for future investments in technology, design, and manufacturing (most of which it outsources). Most of this cash is profit, which can be taxed now. Doing so would generate immediate revenue and save taxpayers interest costs going forward.

What could the government do with all the cash that’s currently stuffed in corporate mattresses?

The tax dollars could be used to fix our infrastructure, which would make businesses more efficient, prevent tragic deaths, and create thousands of jobs.

We also could hire legions of young people for summer jobs in places like government offices and recreation centers. Keeping kids occupied would lessen the risk that they will get into trouble and would help them acquire useful work skills.

We could also hire more wage and hour inspectors, reducing wage theft—a problem not limited to marginal employers, as we have seen with Walmart and other large corporations. There were more such inspectors in 1940 than there are today.

We could finance much more basic research, the key to future prosperity. Instead of funding about 16 percent of the best medical research proposals—only the most cautious ones, naturally—we could fund two, or five, times as much.

We could increase grants to college students so they can stop working during the academic year and study more. The long-term benefits of such a policy should be obvious.

We need other reforms. We need to reinvigorate our unions so workers can collectively negotiate for better pay. We should consider having the Federal Reserve buy all mortgages and reissue them at lower interest rates to borrowers with no refinance fees by consumers.

What we should not do is fall into a malaise and act as if we are powerless to rebuild a productive economy that benefits the many, not just the few—especially the economic predators.

The whole idea of the United States is that we can—and will—solve any problem we have. We ended slavery, enacted child labor laws, granted women the right to vote, and made many other advances that have enhanced our freedom, happiness, and prosperity. Now that the corrosive effects of extreme inequality are clear to virtually everyone, we should seize the moment and get beyond the mistaken policies of Ronald Reagan and his supporters.

The needs are so great that the possibilities are endless. The key policy change is to pull the cash from the corporate mattresses and make sure it gets spent rebuilding the American economy.



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https://www.thenation.com/article/archive/how-to-repeal-the-tax-loophole-that-allows-companies-to-hide-their-profits-in-offshore-accounts/
By the Numbershttps://www.thenation.com/article/archive/numbers-0/David Cay Johnston,David Cay Johnston,David Cay JohnstonSep 2, 2009



Rising healthcare costs are killing wage increases. From 1980 to 2007 the average cash income for the vast majority of Americans (the bottom 90 percent) increased only $2,697, to $33,321. Healthcare spending per household rose more than three times as much, increasing $8,797, to $15,369, according to the Centers for Medicaid and Medicare Services. Household healthcare spending now equals almost half of the average income of the vast majority of Americans.


design by Lloyd Miller



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https://www.thenation.com/article/archive/numbers-0/
By the Numbershttps://www.thenation.com/article/archive/numbers/David Cay Johnston,David Cay Johnston,David Cay Johnston,David Cay JohnstonJul 17, 2009



Since 1940, Republicans have controlled the White House for thirty-six years; Democrats for thirty-three. Yet Bureau of Labor Statistics data show that almost two-thirds of new jobs were created during Democratic administrations. What about the years since Reagan was elected, promising prosperity through lower taxes, balanced budgets and less regulation? The Clinton years resulted in 21 million jobs, more than two decades of Reagan, Bush I and Bush II. One last detail: these numbers reflect only private-sector jobs; including the public sector would widen the gap in the Democrats’ favor.


design by Lloyd Miller



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https://www.thenation.com/article/archive/numbers/
Lettershttps://www.thenation.com/article/archive/letters-241/David Cay Johnston,David Cay Johnston,David Cay Johnston,David Cay Johnston,Our Readers,David Cay JohnstonJun 17, 2009

Invade the Caymans!

McMurray, Pa.

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Invade the Caymans!

McMurray, Pa.

I have a fundraising suggestion based on David Cay Johnston’s insightful “Lax Little Islands” [June 1]. Johnson’s idea that we should invade the Cayman Islands is a good one, and the timing is right. So I suggest that The Nation, with Johnston, embark on a project to print and sell banners that can be hung on homes throughout America proclaiming Invade the Caymans! This could create viral pressure on Congress to set aside its umbilical connections to Big Finance and Big Corporate and perhaps, for a change, do something for big citizen.

JOHN HEMINGTON


George Town, Grand Cayman, B.W.I.

There is so much misinformation in David Cay Johnston’s “Lax Little Islands,” it’s hard to know where to start. His most egregious claim is that the Caymans are a haven for criminals and others who want to escape taxes and launder money. This is patently false. Unlike Switzerland, Liechtenstein, Andorra and Monaco, the financial sector in the Caymans operates under full transparency to access monies for the benefit of the US economy. For the past twenty years, the Caymans have worked cooperatively on every international initiative from the United States, the IMF, the OECD and the FATF to create a robust, accountable, transparent and fair financial regulatory structure, frequently inspected by the IMF. More specifically to Johnston’s claim, in 1990 Cayman entered into a fully transparent, all-crimes Mutual Legal Assistance Treaty with the United States and, in 2001, a comprehensive US Tax Information Exchange Agreement.

The GAO report corroborates and is highly supportive of the Cayman position. We agree that those who break the law should be punished, so it is irresponsible to suggest that the Caymans are aiding and abetting such activity. The Justice Department will confirm that. Offshore centers enable US companies–which pay tax twice, in the States and where they earn profits–to compete internationally and reinvest their profits, expand their operations and create jobs. Last time I checked, this was a good thing.

ANTHONY TRAVERS
Cayman Islands Financial Services Association


Johnston Replies

Rochester, N.Y.

There is so much misinformation in Anthony Travers’s letter, it’s hard to know where to start. There is no double taxation, since Congress gives companies a dollar-for-dollar credit for taxes paid in foreign regions. Further, transfer pricing abuses let companies take profits in the Caymans while paying little or no tax to any government. The GAO report, read in context, hardly supports the claims made above; cooperation is conditioned on the US government having first identified a cheat or crook and then asking for assistance, at which point cooperation begins. By the most generous measure, the Caymans government budget devotes less than a penny on the dollar to financial crimes law enforcement, which the GAO report states the Caymans see as mostly a domestic American problem. Cheating the United States tax system is not a crime in the Caymans, which despite their denials profit by fostering evasion.

DAVID CAY JOHNSTON


How We Lost Universal Healthcare

Bethesda, Md.

An addendum to Nelson Lichtenstein’s “Time for Another Reuther Plan” [June 1]: in 1968 Walter Reuther announced the organization of the Committee for National Health Insurance and enlisted 100 leading Americans to join in working toward a single-payer health insurance system. He recruited me as executive director of the Committee of 100 for National Health Insurance (we had first met as members of President Kennedy’s Medicare Task Force). Not present among the 100 were any leaders of the auto industry.

Walter and his top VP, Leonard Woodcock, spent hours with General Motors officials, extolling the economic and social values of national health versus the burdensome Blue Cross and Major Medical premiums, which even then had become a competitive and wage drag on GM, its employees and retirees. Walter emerged from the meeting and said to me, “There’s something more important to them than their own self-interest.” He had made an offer that union leaders of lesser stature would not have dared to make: under a comprehensive national health plan he would ask no more in collective bargaining than the benefits provided under that plan. His urging that they join in working to enact such a plan was flatly rejected. If it had been accepted, GM–certainly followed by Ford and Chrysler, and by most US manufacturers–could have produced enactment of a national health plan, probably during the Nixon administration.

After denouncing the Reuther effort early in 1969, Nixon–persuaded by favorable media reports about Reuther’s plan–recanted that July, saw “a massive healthcare crisis” and vowed to act. Six months later Walter died in a plane crash. In 1973 Nixon, buffeted by Watergate, offered a health plan based on employer mandates.

MAX FINE


Dirty Harry Comes Clean

Vista, Calif.

Akiva Gottlieb seems to argue in “Last Man Standing” [June 1] that Clint Eastwood is Dirty Harry and Dirty Harry is Clint Eastwood. Both are right-wing martyrs until death do them part. I’m no Eastwood groupie, but I disagree wholeheartedly with this hypothesis, especially Gottlieb’s statement about Eastwood’s latest film. “Gran Torino,” he writes, “never entertains the idea that America is a country defined by its immigrants and not by John Wayne.” Baloney. True, Walt Kowalski (Eastwood) is a typical white retiree, suspicious and disdainful of his new Hmong neighbors. But through a series of conflicts he comes to realize that these Asian immigrants embody the values of hard work, sacrifice, community and family that his own children and grandchildren have abandoned. At one point he looks in a mirror and says, “I have more in common with these Chinks than with my own family.”

If this is Dirty Harry, then it is Dirty Harry matured, seasoned and redeemed. This is why my wife makes the film required viewing for college students in her intercultural communication class. And this is why I consider it one of Eastwood’s best performances, Oscar or no Oscar.

MARK R. DAY


New Haven, Conn.

Slavoj Zizek once said that the true measure of a nonracist encounter is to be able to insult one another and know the sentiment is not serious; PC aloofness hides its own bigotry. The humorless Akiva Gottlieb takes deep offense at Eastwood’s latest film on this elitist ground, reviving the 1970s labeling of Clint as a fascist. In praising The Wrestler‘s cynicism over Gran Torino‘s sincere effort at multiculturalism, Gottlieb reinforces the same holier-than-thou attitude that has censored discussion on race since the Reagan era. Eastwood’s values are conservative, but he doesn’t deserve to be treated like a fundamentalist.

GRANT WIEDENFELD



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https://www.thenation.com/article/archive/letters-241/Lax Little Islandshttps://www.thenation.com/article/archive/lax-little-islands/David Cay Johnston,David Cay Johnston,David Cay Johnston,David Cay Johnston,Our Readers,David Cay Johnston,David Cay JohnstonMay 13, 2009

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.

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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https://www.thenation.com/article/archive/lax-little-islands/
Why Don’t the Media Get the Bailout?https://www.thenation.com/article/archive/why-dont-media-get-bailout/David Cay Johnston,David Cay Johnston,David Cay Johnston,David Cay Johnston,Our Readers,David Cay Johnston,David Cay Johnston,David Cay JohnstonOct 8, 2008

Anyone who followed the mainstream media coverage of the financial turmoil could be forgiven for being baffled by recent developments. When the House failed to pass the $700 billion bailout bill on its first try, the subsequent drop in the Dow was chalked up to the stalled legislation. But then the market bounced back, only to tank further after the bill was passed and signed. We were told that authorizing the $700 billion was absolutely necessary to unfreeze the short-term credit markets, which allow the economy to function. But Treasury Secretary Henry Paulson has no plans to spend any bailout cash until after the elections.

Despite these obvious holes in the bailout story, reporters have almost unanimously accepted its premise. On TV it’s all crisis all the time, with images of the Great Depression and empty ATMs terrifying the many millions who don’t know much about finance or even the fine print in their mortgages. Steve Pearlstein, business columnist for the Washington Post, exemplified the journalism that offered uncritical regurgitation of officialspeak. In a blog entry titled “They Just Don’t Get It,” he characterized anyone who opposed the bailout as ignorant. Just why the bailout was the only solution he never explained.

Worst of all, two of our best-known journalists got so wrapped up in hype that they chose falsehood over fact. When the stock market sank on September 29, Katie Couric opened her CBS newscast saying it was “the biggest decline in stock prices ever,” and Brian Williams of NBC said it was “the worst single-day drop ever.” Nonsense. It was bad and it was big news, but it was only the third-worst in the past twenty-one years.

But now that events have cast new light on the bailout supporters’ dubious claims, perhaps reporters can tug on a few threads that merit attention. To begin with: just how much have Paulson’s policies benefited his former firm Goldman Sachs? Thanks to the New York Times‘s Gretchen Morgenson, we now know that when the Fed decided to bail out insurer AIG, there was one nongovernment official in the room–the current head of Goldman. Paulson’s old firm is on the hook for as much as $20 billion from AIG, half of the investment bank’s shareholder equity. And Paulson’s decision to let Lehman Brothers die meant one less competitor for Goldman, a fact few journalists noted. (Before the bailout, Goldman shares were in free fall. After? The shares soared back almost to where they had been.)

Even if you believe Paulson is acting with pure heart solely in the public interest, his actions scream scandal. Remember, under his original three-page plan, his power to spend $700 billion would have been unreviewable. Congress improved on that, but it still failed to require disclosure of those who would benefit from each asset purchased by the taxpayers. A party that had guaranteed payment of a package of mortgages, for example, could conceivably be relieved of its obligation by whoever is managing the Treasury’s massive pool of money–and the man with that charge will likely be former Goldmanite Neel Kashkari. By such subtleties can Treasury enrich Goldman’s owners without directly handing them a dime.

The battle of the first bailout may be over, but there’s plenty of time for the media to get this story right: by aggressively asking, “Who benefits?,” tracking how taxpayers’ money is being spent and asking about alternatives that may cost less and be more effective. Reporters could also write about a new study of forty-two banking crises that shows bailouts can make things worse. They might explore how the bailout will redistribute income–upward to the richest among us.



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