IRS 'Reforms' Are No Taxpayer Bargain

By Robert S. McIntyre

With much fanfare, the U.S. Senate recently passed its Internal Revenue Service overhaul bill. After discussions with the House, a version of the legislation will undoubtably become law soon. The Senate vote was 97-0, with no one willing to go on record against the cynical Republican IRS bashing that produced the bill. Even President Clinton, whose Treasury Department remains deeply concerned about several of the bill's provisions, has become a cheerleader.

For the vast majority of Americans, however, the IRS bill is no boon. In fact, the biggest winners are likely to be large corporations, not the ordinary taxpayers whose alleged problems with the IRS were highlighted in the largely bogus horror stories presented at highly-publicized Senate hearings.

Take, for instance, the new private-sector IRS oversight board that the bill creates. Most of its members are supposed to have qualifications such as "expertise in the . . . management of large service organizations"--in others words, executives of big companies. Now maybe they'll put aside their corporate self-interest when they meet to set IRS policy, but the potential conflicts of interest are obvious.

Lawmakers backed off from their original scary idea to give the new corporate-dominated board the authority to hire and fire the IRS Commissioner. But the board will still have significant authority over the IRS budget. It could decide, for instance, that the IRS is devoting too much energy to cracking down on corporate tax cheats and should shift its attention to individuals. Or it might push to move tax-enforcement resources away from multinational corporations and toward smaller companies.

Then there's a truly obnoxious item stuck into the bill at the last minute to preserve a huge loophole for multinational corporations. Earlier this year, the Treasury Department discovered that a regulation it issued in 1996 was being abused by U.S.-based multinational companies to wipe out taxes on their overseas profits. The companies want to be allowed to use paper transactions to tell, say, Germany that their German profits were earned in a foreign tax haven, while simultaneously telling the U.S. government that the tax-haven profits--which normally are subject to U.S. tax--don't exist.

Concerned about the harmful impact on American jobs of new tax incentives to invest abroad, Treasury quickly amended its ambiguous earlier regulation to close the inadvertent loophole.

But a fierce lobbying campaign by the multinationals persuaded the Senate to block Treasury from correcting its mistake. If the multinationals' outrageous new tax avoidance scheme isn't stopped, tens of billions of dollars a year in corporate taxes will be in serious danger. Even worse, the giant sucking sound we'll hear will be American jobs and investment rushing out of the country in search of tax-free profits.

So-called "innocent spouses" are slated to get a break if they mistakenly sign fraudulent tax returns. But this relief won't go merely to inattentive wives whose husbands evade taxes and secretly send the money to the Cayman Islands. As passed by the Senate, many "innocent" wives won't be liable even if the tax-evasion dollars end up in the wives' own bank accounts. No one would think it sensible to allow a wife to keep money that her husband robbed from a bank and gave to her. But the Senate apparently thinks a different rule should apply if the money is stolen from other U.S. taxpayers.

To pay for the estimated $18 billion cost of these kinds of "taxpayer protections" over ten years, the Senate bill relies largely on a big new upper-income tax cut! It will go to certain wealthy investors who want to transfer funds from their tax-sheltered retirement accounts into new, even more tax-favored "Roth IRAs." Of course, such transfers actually lose considerable revenue over the long term--otherwise nobody would make them. But in the short run, investors who move funds will have to pay additional taxes. The Senate bill spends that short-term revenue gain while ignoring the much larger long-term loss.

So, the bottom line on the IRS "reform" bill is that it benefits big corporations and adds to our long-term budget problems. So why are we supposed to be grateful to our Senators for passing it?

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