NCPA - National Center for Policy Analysis


September 17, 2008

With corporations routinely engaging in extensive tax planning and elaborate schemes to minimize their tax burdens, and using offshore tax sheltering, stock option write-offs and "synthetic leases" as accounting and business strategies to take maximum advantage of tax laws, corporate America's next big scandal could come from corporate income tax avoidance, says the RAND Institute.

Taking advantage of loopholes can be legitimate, and at times, encouraged -- for example, tax credits for the purchase of hybrid vehicles.  But the line is fuzzy between tax avoidance, which is legal, and tax evasion, which is not, says RAND:

  • The Internal Revenue Service (IRS) estimates that the difference between what corporate taxpayers voluntarily pay and what they are legally obligated to pay was $32 billion in 2001.
  • A study found that among a sample of 250 large U.S. corporations, the annual effective tax rate declined from 2001 to 2003 - a period when corporate profits rose substantially -- and dozens of major U.S. corporations paid no income taxes for at least one year during that interval.
  • Statistics show that the proportion of net corporate income actually paid in federal taxes declined substantially from 2001 to 2004, and only one percent of corporate returns are reviewed by the IRS.

Meanwhile, demographics shifts, such as the retirement of the baby-boom generation, could lead to a fiscal crisis and a requisite change in economic circumstance that would trigger the next wave of corporate scandals, adds RAND.  The Congressional Budget Office has estimated that Social Security and Medicare, which accounted for five percent of gross domestic product in 2004, will rise to 13 percent by 2025 and 19 percent by 2050.

The combination of a cash-strapped federal government and corporate tax avoidance strategies could create the conditions for a perfect storm, in which widespread tax avoidance practices abruptly become illegal and fraudulent, says RAND.

Source: Michael D. Greenberg and Robert T. Reville, "Corporate America's Next Big Scandal," RAND Review, Summer 2008.

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