Excellent program on a difficult subject. As a CPA who began my career coming from the excellent accounting program at Brigham Young University where ethics and honesty were a constant emphasis to KPMG, working for some of the professionals that are now under investigation, and subsequently moving to Coopers & Lybrand(now Price Waterhouse Coopers)I can only say that from my years of experience the true extent of the tax evasion problem is much, much greater than what you have shown.
KPMG is only one firm but there are many, many accounting, legal and investment firms forming and pushing these and other similar types of transactions. It is also not just the complex tax evasion programs but also the inherent complex misreporting of transactions such as with Enron, Worldcom, etc. that are driven by our current tax system.
The tax system is broken and needs to be replaced. Our economy employs a huge amount of productive time and money in order to find both legal and illegal means of avoiding the tax law. If we were to spend those billions of dollars and hours spent on the current tax system instead in pursuits to build better products, provide better services, solve internal problems and build this nation we would grow and prosper like never before. The financial incentives to be unethical are just too great for most of our current leaders.
H.R. 25 - The Fair Tax Act of 2003, a flat tax system or a tax system modeled after whichever nation has the most efficient system in place currently - it makes no difference as almost anything would be better than what we have now.
I see the corruption even in the small business of this great Nation. It's not just the big sharks. Go do some investigation in the small business and see how they rip their employees off to their benifit. Frontline is great to watch.
The real shame in all this is the sanctioned, and legislated criminal inforcement of a tax scenario in this country, which is so complex, and out of controll that it forces corporations, as well as individuals to go to such extreme means in order to try and hold on to the money that they earned.
Perhaps if we did not have such an unethical, sham, beaurocratic Government, which wastes billions of tax payer dollars every year, we would not have "unethical" taxpayers, or rather, taxpayers who mearly dance as creatively as possible with the twisted tax laws we are forced to adhere to.
The real answer to your program is to lower tax rates like President Bush has pushed. Ronald Reagan' s budget director stated in 1981 that a Flat Tax of 10% could easily fund the real needs of our country.
In addition, if corporate welfare and foreign aid was stopped, the Flat Tax rate would dwindle to what Nevada gets from gambling revenues (7.6%) and funds that states' government. No Corporate or Individual Income Taxes there!
Elm Grove, WI
I am in the business of helping individuals and businesses handle their money in a "tax efficient" manner. Many times people will do anything to avoid doing the tough work - spending less than they make and saving the difference. Their choice is to do something "on the edge"and just hope they get away with it.
What is disturbing is that, what used to be done by the "hard core" criminal, is becoming mainstream. As the report stated, the most trusted institutions are no longer to be trusted.
In my opinion the only way to rid a tax system of shelters or other fraudulent action is to make government dependent on that lost revenue. Otherwise government itself has no vested interest in making their revenue system more efficient because it is easier for them to simply raise the money from somewhere else.
This could be done by limiting or capping governments ability to tax.
A limited tax system would force government to address tax issues rather then having us hope they do so.
As the tax system is now government simply collects the lost funds from shelters by raising other taxes. If they could not do so then they would be forced to fix their collection and ineptness problem and not force the average Joe to pick up the bill.
I used to feel guilty about the pittance I receive from SS. No longer, after seeing this show. NO ONE I even knew would even consider such schemes acceptable, ethically. And now, when a senator or congressman tries to stand up and say "no," s/he is faced with 50 bought and paid for by lobbyists for the industry stonewalling all efforts at reform. "The rich get richer. The poor get the picture."
Now, caring for my elderly mother, barely getting by on our minimal income, I see all this hyperbole from economists that is just so much junk. Once, the notion of flat tax, 10%, no matter what one's income, was acceptable. Corporations are now considered "persons" in law. Therefore, they too would pay a fair 10%. How, however, the rich just can't get enough.
What a load of hogwash! All taxes are paid by individuals. If the corporations had to pay more taxes they would have to raise the price of the goods and services which leaves the individual to pay the cost. Higher prices would make them less competitive with foreign companies which would mean a lost of American jobs. The only real and fair tax would be a national consumption tax such as the one proposed by H.R. 25, the Fair Tax Act of 2003. Imagine if corporations didn't have to spend the massive cost they do on complying with complex tax laws. The money saved would be passed on to consumers in the form of lower prices. Eliminating the complexity of doing business in the U.S. would make the U.S. extremely attractive to foreign businesses to open offices and plants here in the U.S., creating more jobs for the American workers.
I think that most viewers of Frontline's program,"Tax Me If You Can," are going to come away with the idea that tax shelters are the principal method being used by our nation's largest
corporations---Exxon,General Electric,Intel,etc.---to avoid paying billions to the government. Also, that tax shelters are
the reason for a company having the 2 sets of financial books that the program mentioned.
In fact, it is the "goodwill amortization" created in acquisitions and "restructuring" done when factories or divisions shutdown that is overwhelmingly the cause of massive deductions. These deductions enable mega-corporations to report billions of dollars in operating profits to shareholders but only losses to the IRS.
A fantastic show that grapples with complex subjects. I'm not sure if the answers are as straightforward as they might seem, but one thing is clear - those with money can afford to not pay taxes that they otherwise should have to.
Clearly there should be some sort of Alternative Minimum Tax rate for corporations that report profits to their shareholders - but claim rebates on their tax forms. I also found it eerie that the lobbyist at the cross-border leasing conference could and would list off the names of the current leadership of the House of Representatives. Sounds like that lobbyist strongly believes they're all in his pocket.
Thanks and keep up the great work!
New York, NY
A great show, and let the public peer into the biggest debate in the tax world. The tax bar has been arguing over this for at least the past 10 years. They know the corporate income tax will become voluntary unless the government shuts down shelters. As one whos been involved in this, both with the government and in private practice, Id like to make a few points.
First, the income tax is here to stay. A national sales tax wont work. Europe has tried this with their Value-Added Tax (VAT), but they still find they need an income tax. A national sales tax wont raise the revenue we need unless it has a very high tax ratearound 40%. Some proponents say we could have a 23% national sales tax, but they use Enron-style accounting. First, they derive the 23% rate as follows: You buy something for $100 and pay $30 in sales tax. Anyone who took grade school arithmetic knows the tax rate is 30%; $100 purchase price times 30% tax rate = $30 tax. But the national sales tax proponents say that since you paid $130 on the $100 purchase, the sales tax rate is $30 tax divided by $130 total cost = 23%. This argument is nothing short of fraudulent. Moreover, wed have to apply the tax to everythinghomes, food, drugs, carsin short, every major purchase. Think what a 30% sales tax would do to housing affordability. And to exempt housing and similar big ticket items from a national sales tax would require raising the tax rate to 50%!
Second, some argue we should abolish the corporate income tax because corporations dont pay taxes, people do because corporations pass on the tax to consumers as part of the price they charge. Even assuming this universalism to be true, we must remember that every dollar of individual income and sales tax paid reduces the amount of goods and services the public can buy from business. Remember, consumers drive the US economy, not producers (as with exporting nations such as South Korea). This is why tax cuts aimed at consumers stimulate our economy more than tax cuts aimed at business. Paul ONeil, the life-long Republican Treasury Secretary (until recently) knew that full well. Go read Price of Loyalty and youll see why. And do corporations pass on 100% of their corporate income taxes to the public? Nope. Some corporations are less efficient than others and thus must eat part of their taxes. And what do corporations do with tax breaks? Stock buy backs to support CEO option grants so they wont have to reprice them and take the earnings hit.
Third, a flat tax would do little to reduce complexity. Anyone whos filled out returns knows most of the complexity hits you long before you go to the tax tables. And well have unnecessary complexity as long as Congress is involved. Well still have all kinds of exemptions, special rates, special credits, and so forth, regardless whether we have an income or sales tax.
Fourth, theres nothing wrong with having two sets of books. Financial accounting (GAAP) and the Internal Revenue Code (IRC) have different aims and concerns. And if we did move to a single set of books, whose would we use? If we use GAAP to measure tax liability, we have 2 choices: let the FASB dictate the tax code, or let Congress dictate GAAP. Anyone who knows Congress knows theres no way Congress would keep its hands off such a lucrative source of campaign contributions. Imagine how reliable financial statements would be if Congress determined GAAP. Wed have an Enron a week. Interestingly, there was a link between tax liability and financial statement income for 3 years. For tax years 1987-89, the corporate alternative minimum tax picked up part of the difference between income reported on the financial statements and income determined under the IRC. It was referred to as the Book Income Adjustment. Congress gave arranged to replace it with another system, the ACE adjustment, because it knew it could not make the fisc dependent on private rules.
Fifth, some argue government is bad and business is good, so starve government and feed business. My question to them: which private company will you use to go after Osama bin Laden? Government performs many essential functions private industry cannot or will not. This is a fact of economic life. As George Will said in a rare moment of lucidity, capitalism is a government program. Government has to exist, spend and tax. Arguing that shutting down corporate shelters cuts stock prices and hurts the economy is nonsense. Taking this argument to the next step, well let the Mafia off the hook because they spend their hard-earned gains and stimulate the economy.
Tax shelters come down to this: they penalize obeying the law and cost honest taxpayers a lot of money.
The sham of corporate taxes: Who is actually being dishonest?
All of this hoopla over unethical corporate tax shelters and irresponsible corporations simply misdirects our good citizens and journalists.
Corporations do not pay taxes, people do. This is not a contest between capitalism and socialism, or good and bad, or Wall Street and Main Street. It just is. The buck does not stop at a corporation, it just passed through. This is the nature of the beast. When a corporation is taxed, any one or all three of the following pass-throughs happen in some measure.
The corporation will raise the price of its goods or services by the amount of the tax and the cost of compliance, if competition allows. Dale Jorgensen, Ph.D., Harvard economist, estimates the federal income tax system requires tax-and-compliance premiums amounting to 20 to 30 percent of each products or services price. These premiums are hidden in the cost of every good or service bought in or exported by our country. Think about that as we try to sell American-made goods overseas.
With the complexity of our tax code, it should come as no surprise that the compliance costs are actually higher than the tax burden. The National Federation of Independent Business estimates that ratio at 3:1 for small business: three dollars of compliance cost for every dollar of tax paid. Even those corporations that legally (if artfully) zero their taxes still have those compliance costs to pass through. Most importantly, whom do these hidden premiums really hurt? Who can least afford the increased cost? Why the low-income/fixed-income citizens we set out to protect when we taxed corporations in the first place!
Often global competition (and WalMart) will not allow pricing to absorb the entire cost of taxes/compliance. What is the next corporate move? Reduce the cost of labor. Who loses their jobs to efficiency or foreign manufacturing? It is our low-income friends again, taking it on the chin and out of their wallets.
Now, assume prices are as up as they can be and labor costs are as down as they can be, and there are still taxes/compliance costs to pay. What do corporations do? Lower profits to their shareholders. For a mom-and-pop, that means a lesser lifestyle for Mom and Pop. That means later or no retirement. For Wall Street, that means union pension funds experience lackluster performance when invested in domestic corporations. This may not be a big concern for the low-income, working poor, but that certainly puts a double whammy on the working class. Fewer jobs and threatened pensions. And then there are the undue burdens our fixed-income retirees. Yet again, the very groups we set out to protect with corporate income taxation are those we punish most.
So, as we seek an honest solution to a fair distribution of the tax burden, we need to find the correct target to affect a successful solution. Discussions of tax shelters and corporate irresponsibility mislead us. Attacking the wrong solution misdirects the well intentioned.
Simply put, taxing corporations burdens the very citizens we seek to protect. Now, whose idea was corporate taxation? And who is writing these foolish laws anyway? Perhaps more importantly, who is lobbying these bills into law? Probably the same lobbyists who resist replacing the income tax with the FairTax a federal retail sales tax. This legislation (HR 25/S 1493) honestly protects poor and fixed-income Americans while ending the sham of corporate taxation.
Tom Wright, a 14-year veteran of the rebellion to replace the current tax system, is the volunteer executive director of FairTax.org. You can reach him at firstname.lastname@example.org or 1-800-FAIRTAX.
I would like to commend Frontline and its correspondent for this excellent program. The timing for this subject is perfect as the President has just presented his budget to Congress with a half trillion dollar deficit.
After watching your program, I am convinced that most of this deficit could be wiped out in short order if all those lease-in/lease-out and comparable tax-shelter schemes were eliminated by Congress. I for one am writing all of my Congressional representative asking them to do just that!
Thank you Frontline.
If our country would have followed President Reagan's idea of a 10% flat tax crafted like Illinois' 3% Flat Tax form, simplification would make all of the schemes extinct. If the Income Tax is a "voluntary compliance" as the IRS continually states, then it is no wonder that complicated, legal interpretations will continue.
We have a tax law system that is so convoluted, it invites abuses in tax evasion. The IRS, when it saw the writing on the wall, should have shifted tax auditing emphasis from the general public (who already picks up the balance of the tax burden by 15% thanks to corporate write-offs) to the corporations. Ideally, what we really need is a better and fairer tax system.
However, what is really unfortunate about this program is the blatant message transmitted: many corporations lack initiative in ethical and socially responsible conduct, and many corporations are punished with the monetary equivalent of a slap on the hand. Did their lawyers and accountants learn to get away with cheating at school?
If the majority of American citizens followed their example, this country would be morally corrupt and financially bankrupt.
San Jose, CA
I watched this program, with very great interest. I have also reviewed the video tape 2x, and I still have no idea at to what was actually done. You folks were strangely quiet on the specific details (not even posted on the Website). What were all of those box diagrams about ? What does where and why ?
FRONTLINE's editors respond:
Here on FRONTLINE's companion web site for our report, we do offer more explanation of LILOs - lease in/lease out arrangements which are extremely complex transactions. Go to our UNCOVERING THE SCHEMES" section of this site and click on the article "Money For Nothing From the USA." Near the end of this short article on these cross border deals,, there is a link to Senator Grassley's Senate Finance Committee's hearings in Oct. '03. Near the top of the page, you will find the statement of an "anonymous witness" who is a former leasing executive and explains how LILOs work.