Business for Shared Prosperity

The U.S. tops the list -- but it's more complicated than that

By Jonathan Berr
InvestorPlace.com, Dec 23, 2011

From Washington, D.C., and Brasilia to Moscow and Madrid, the taxman is on a mission to squeeze more revenue from people, many of whom are struggling to make ends meet amid the worst economic slowdown since the Great Depression. He has his work cut out for him. That’s because tax evasion in all its many forms is so pervasive around the world.

How big a problem is tax evasion? Take a look at the table below from Tax Justice Network, a London-based watchdog that fights against tax havens. When combined with information from other academic, governmental and media sources, the full scope of tax evasion’s impact starts to become clear. And the results are surprising in a few ways.

Top 10 Countries Losing to Tax Evasion: [US, Brazil, Italy, Russia, Germany, France, Japan, China, UK, Spain. See original article for table.] ...

Though politicians may disagree, the relationship between high tax rates and tax evasion isn’t so clear-cut. As David Cay Johnston of Reuters recently noted, “The United States has lower tax rates than eight of the nine other top 10 tax evasion countries [on Tax Justice Network’s list]. Rampant evasion in America raises doubts about the notion that high tax rates fuel evasion.” Indeed, countries with some of the lowest tax rates are among the most economically troubled, such as Ireland.

“Tax evasion is endemic and has actually worsened in most countries despite lower top-end tax rates and very generous allowances,” says John Christensen, director of Tax Justice Network International Secretariat, in an email. “In many cases, the situation has deteriorated because the use of sophisticated offshore structures using secrecy jurisdictions has become very much more widespread in recent decades, and politicians have taken the easier route of switching to indirect taxes [such as sales taxes and customs duties], which are broadly regressive and therefore impact more heavily on ordinary people, rather than tackling endemic evasion by rich individuals and powerful companies.”
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According to data from the IRS’s Criminal Investigations division, the number of cases recommended for prosecution has risen 33% between the 2009 and 2011 fiscal years. However, “The IRS is moving toward a more lax enforcement regime in some ways,” says Scott Klinger of the watchdog group Businesses for Shared Prosperity. He’s talking about cuts to the IRS budget that place it a disadvantage against large multinationals such as General Electric (NYSE:GE), which has 1,000 employees in its tax department employing sophisticated tax-minimizing strategies.
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New Thinking at the IRS

Meanwhile, big multinationals are pushing for a U.S. corporate tax holiday that they say will enable them to bring $1 trillion in profits that are being held overseas. Sen. Carl Levin (D-Mich.) rejects this argument, saying most of the money companies say is trapped is actually in U.S. banks. Still, tax haven abuse costs the U.S. $100 billion in revenue annually, according to the watchdog group Businesses for a Shared Prosperity, which is seeing more corporations use tax havens.

The IRS has had some success in encouraging individual taxpayers to come clean about their overseas assets. It’s also changing its strategy with corporations facing the same issue, according to Commissioner Douglas Shulman. “When we engage multinational business taxpayers, we need to think about strategy differently, depending on whether we’re looking at an outbound situation — a U.S.-based company with operations abroad — or an inbound situation — a foreign-based company with U.S. operations,” he said in a recent speech. “That may sound obvious to many, but the point is to recognize the obvious drivers of tax behavior and to then ensure we strategically align our resources and train our people, consistent with basic behavioral patterns.”

Vowing to crack down on tax evaders is a worthy goal and makes for great political rhetoric. Unfortunately, it’s far easier said than done.

Jonathan Berr does not own shares of the stocks mentioned here.

Copyright InvestorPlace 2011

http://www.investorplace.com/2011/12/10-worst-countries-for-tax-evasion/