Tax Avoidance Weakens the US Economy

In an interview with Fox Sunday news recently Governor Romney was quoted as saying. “First of all, there was no reduction, not one dollar of reduction in taxes, by virtue of having an account in Switzerland or a Cayman Islands investment. Those — the dollars of taxes remained exactly the same. There was no tax savings at all. And the conduct of the trustee in making investments was entirely
consistent with U.S. law and all the taxes paid were those legally owed and there was no tax savings by virtue of those entities.”

There is currently no way of telling whether Mr. Romney is lying or telling the truth, but it is well known that rich people,including drug lords, illegal international arms dealers and terrorists, use the 1934 Swiss law protecting security of information about banking transactions to hide their financial actvities from the rest of the world. While the Swiss law provides exceptions for serious criminal cases, the U.S. government has been putting pressure on Switzerland to release information regarding use of their banks for U.S. tax evasion with no success.

The Cayman Islands is a tax-free haven where there are no tax laws at all and that's why rich people put their money there. And if they establish an International Business Corporation in the Caymans, otherwise known as a blocker corporation, there is no record tying their name to the account holding their assets. Based on leaked internal documents described in a recent Washington Post article, we know for sure that Romney’s former private-equity firm, Bain Capital, used a blocker corporation to invest in a Japanese electronics company. We also know that Romney invested in Bain funds benefiting at least indirectly from blockers.

Edward Kleinbard an international tax law professor at the USC's Gould School of Law who has written articles questioning Romney’s tax dealings, expressed serious doubts that Romney did not use blockers to reduce the current tax burdens on himself or his IRA. Kleinbard added that Romney has “demonstrated a consistent interest in availing himself of every possible tax minimization strategy and it is greatly improbable that he chose to leave money on the table by not using offshore blocker corporations and the like when doing so could save some tax dollars.”

Other tax experts have drawn similar conclusions. Michael Graetz, a tax-law professor at Columbia University and a former assistant to the Treasury secretary during the George H.W. Bush administration, wrote in an opinion piece for the New York Times that said “we don’t need any more tax returns to know that Mr. Romney is an Olympic-level athlete at the tax avoidance game. Rich people don’t sent their money to Bermuda or the Cayman Islands for the weather.” Graetz went on to say that Romney should release more details about his finances, including at least three more years of income-tax returns and documents showing how he valued his transfers to his IRA.

Whether or not Governor Romney using blocker corporations to hide additional incomes from the U.S. Treasury, the widespread use of these vehicles by rich Americans and money laundering of U.S. profits by big corporations who electronically transfer these funds to faux offices in Europe on the way to investment banks in Bermuda and the Caymans is weakening the ability of our government to help solve problems of deteriorating infrastructure,
unrenewable energy dependence, uncompetitive education and overly
expensive healthcare.

Republicans are fond of pointing out that Greek economic problems are a result of their socialist government and bloated entitlement programs. What they fail to mention is that the Greek citizens are known as the ultimate tax scofflaws in Europe and this is one reason that they are deteriorating into a 3rd world country.

Mitt Romney has been quoted as proudly stating “I do not pay a penny more in taxes than that required by U.S. law.” The danger to our democratic system of this attitude of rich Americans is best described by Nobel laureate in economics, Joseph E. Stiglitz. In a column for the UK Guardian, Stiglitz said “If  politicians and those around them do not pay their fair share of taxes, how can we expect that anyone else will? Those at the top of the income distribution who pay 15% of their reported income (money accruing in tax shelters in the Cayman Islands and other tax havens may not be reported to U.S. authorities) clearly are not paying their fair share. Democracies rely on a spirit of trust and co-operation in paying taxes. If every individual devoted as much energy and resources as the rich do to avoiding their fair share of taxes, the tax system either would collapse, or would have
to be replaced by a far more intrusive and coercive scheme. Both alternatives are unacceptable.”

More broadly, Stiglitz points a finger at a more fundamental feature of the U.S. individual tax system that widens economic inequality while weakening the growth of our economy. He says “A system that taxes speculation at a lower rate than hard work distorts the economy. Indeed, much of the money that accrues to those at the top is what economists call rents, which arise not from increasing the size of the economic pie, but from grabbing a larger slice of the existing pie.” He concludes “Romney may not be a tax evader; only a thorough investigation by the U.S. Internal Revenue Service could reach that conclusion. But, given that the top U.S. marginal income-tax rate is 35%, he certainly is a tax avoider on a grand scale.”

For the complete text of Stiglitz remarks see Mitt Romney's Tax Avoidance Weakens Bonds of American Society, UK Guardian, 3 September, 2012.