On July 30, Rep. Jim McDermott (D-WA), along with six cosponsors, introduced the Taxpayer Responsibility, Accountability, and Consistency Act (H.R. 3408) which is aimed at stopping the misclassification of employees as independent contractors.

For each worker that a company "employs," it must withhold income and payroll taxes, pay benefits and unemployment insurance, and comply with labor laws. But companies do not have these expenses when they use "independent contractors" rather than "employees." Independent contractors are themselves responsible for paying the employer half of payroll taxes, as well as the employee half, and they generally don't receive other benefits like health insurance from companies that hire them.

As a result, some employers intentionally misclassify workers as "independent contractors" to avoid these costs.

It's unclear exactly how much misclassifying employees costs the U.S. Treasury. In theory, it would not matter to the Treasury whether payroll taxes are entirely paid by workers (as is the case for independent contractors) or half paid by employers (as is the case for employees) but the reality is that workers misclassified as independent contractors may be unable to shoulder the payroll taxes and are often unaware of this responsibility until the taxes are due. Or the income to independent contractors is simply not reported at all. 

A Government Accountability Office (GAO) report issued earlier this year found that only 8 percent of small businesses with assets under $10 million submitted 1099-MISC forms that are due whenever independent contractors are used. It seems pretty unlikely that only 8 percent of those companies are really hiring independent contractors. When income is not reported to the IRS by a third party, the income is correctly reported only 46 percent of the time.

Many employers use a loophole created by Sec. 530 of the Revenue Act of 1978 which is commonly referred to as "Sec. 530 relief." It allows employers to classify workers as independent contractors if they have historically done so, or if it is the industry practice. H.R. 3408 would repeal Sec. 530 and replace it with a new test which would be more difficult to meet. The old "Sec. 530 relief" would continue to be available for one year after the new bill is enacted.

On July 24, three organizations, Global Financial Integrity, the Tax Justice Network, and Citizens for Tax Justice, briefed Congressional Hill staff on proposals to crack down on offshore tax abuses. The speakers from the three organizations explained the types of offshore tax abuses that are costing Americans billions in tax revenue: tax evasion (which is illegal) by individuals and tax avoidance (which is not necessarily illegal) by corporations.

Speakers from Global Financial Integrity and the Tax Justice Network discussed developments related to offshore tax evasion and the ways in which some financial institutions facilitate it.

The strongest legislation proposed so far to crack down on offshore tax evasion is the tax haven bill introduced by Senator Carl Levin and Congressman Lloyd Doggett (S.506/H.R.1265). (See the letter that CTJ and several other organizations signed in support of this bill.) Congressman Doggett himself made a surprise appearance at the briefing and expressed his determination to keep pushing for action on the bill.

Speakers also explained that as the U.S. prods other governments to comply with our tax enforcement efforts, some respond that the U.S. itself is a tax haven for foreigners trying to escape paying taxes to their own governments. The problem is that certain U.S. states allow people to set up shell entities that can be used to hide income from whatever government they're supposed to be paying taxes to. The Incorporation Transparency and Law Enforcement Assistance Act, introduced by Senator Levin (S.569) would address this problem. (See a letter that Citizens for Tax Justice and other organizations signed in support of this legislation).

CTJ director Bob McIntyre discussed offshore tax avoidance by corporations. (See a summary of his remarks.)

Read CTJ's summary of pending legislation to address offshore tax evasion.

Read the complete materials from the briefing: Tax Evasion and Incorporation Transparency.

Did tax avoidance schemes contribute to the tragic subway crash in the nation's capitol on June 22? For us to know for sure, the District's transit agency should make public the details of leasing agreements it entered into purely to facilitate tax avoidance.

The Washington Metropolitan Area Transit Authority (WMATA or "Metro") has, like many other transit agencies, engaged in so-called sale-in, lease-out (SILO) deals with financial institutions that don't actually have any real substance and do not change anyone's behavior -- except perhaps that Metro was obligated to keep train cars in service longer than was advisable.

Here's how SILOs work. When a company buys assets like equipment, it takes depreciation deductions over a period of years to reduce its taxable income. Cities and transit agencies are not subject to federal income tax, so they can't use the deductions. A SILO basically allows transit agencies to sell the benefits of those deductions, which they cannot use anyway, to a private investor. A city or transit agency sells assets such as train cars to a private investor (usually a bank). The sale gives the city immediate cash for other investments. The bank, which now "owns" the train cars and can take depreciation deductions, "leases" the train cars back to the city. So the investor gets depreciation deductions on the equipment and deductions for interest, if it borrowed money to make the purchase. The city gets the cash it was paid for the train cars, which exceeds the lease payments it must make.

But notice that the deal has no economic substance whatsoever. The train cars obviously never are possessed by the bank, which is in no way involved in operating mass transit systems. Both the transit agency and the bank are in the exact same position as they were before the deal, except they've made some money by manipulating the tax code in a way that Congress obviously never intended, at a cost to U.S. taxpayers. In 2004 alone, SILO deals were estimated to cost the Treasury $4.4 billion.

Metro has $889.1 million of these deals in place. In a statement that the agency has recently backed away from, Metro told federal inspectors in 2006 that it could not retire its 1000 Series Rohr railcars (which are suspected of being a significant contributor to the deaths and injuries) because "tax-advantaged leases" required that the cars be kept in service "at least until the end of 2014. The National Transportation Safety Board had previously recommended that the 1000 series cars be retired or retrofitted, after its investigation of a 2004 crash.

Federal transit officials encouraged these deals as a way to provide much-needed funds to transit agencies. But the Treasury Department fought them and, beginning in 2004, denied depreciation deductions for SILO deals.

Sarah Lawsky, a law professor at George Washington University, posted one of the many SILO agreements the Metro has entered. This agreement is available to the public because of a court settlement, but the other agreements are not. What details are in the other agreements is unclear, but Metro has said that the agreements did not bar it from replacing the cars and were not a factor.

But there's only one way we can know for sure. Metro should make the rest of the agreements public.

A column by Kevin Hassett on Bloomberg.com this week suggested that if President Obama's international tax policy proposals are enacted, Microsoft will move out of the country.

Actually, quite the opposite is true. The President's proposals would reduce the perverse incentives in our tax code that currently reward companies for moving plants, profits, and people offshore. If they are enacted, Microsoft would have less, not more, reason to leave. The President's proposals would limit multinational companies' ability to reduce their U.S. tax by using deductions and tax credits attributable to their foreign income before the foreign income is taxed. The proposals would require matching of the income and deductions. (See the CTJ report explaining the President's international tax proposals.)

Hassett's assertions were based on Microsoft CEO Steve Ballmer's comments last week while in Washington, that "it makes U.S. jobs more expensive...we're better off taking lots of people and moving them out of the U.S." This strikes us as a lot of hot air designed to scare Americans and their lawmakers.

In support of his argument against changing the tax rules, Hassett also cites a study that shows for every 10 dollars U.S. companies invest offshore, their investment in the U.S. increases by about two dollars, and that foreign investment is therefore good for the U.S.

We might begin by pointing out that every ten dollars that U.S. companies invest in the U.S. result in at least, well, ten dollars of investment in the U.S. But this is largely beside the point. Many of the administration's proposals really address corporate tax avoidance practices that involve investments that only exist on paper anyway (think of Citigroup and its 90 subsidiaries in the Cayman Islands, which cannot possibly be conducting much real business). These are practices that serve only to reduce the U.S. taxes that corporations pay on the profits that are really generated in the U.S.

And as far as incentives to genuinely move real operations offshore, the current system of allowing tax deferral on foreign income encourages that. The President's proposals would begin to reduce that incentive (we wish they'd go farther).

Citizens for Tax Justice (CTJ) has joined forces with a broad coalition of organizations called Rebuild and Renew America Now (RRAN) to promote a simple message: Congress has a whole lot of options to raise revenue to pay for health care reform and other initiatives without unfairly impacting low- or middle-income people and without harming the economy.

These progressive revenue options include both the tax changes included in President Obama's fiscal year 2010 budget proposals as well as additional options formulated in a recent report by CTJ and endorsed by Health Care for America Now (HCAN) and the Service Employees International Union (SEIU). (See CTJ's report on the President's tax proposals and CTJ's report on additional revenue options to fund health care reform.)

RRAN is a coalition that engaged in education, communications and lobbying efforts in support of the President's budget and other progressive initiatives earlier this year and has mobilized advocates and activists all over the country. Many of the organizations involved are usually focused on particular public services or progressive reforms, but have realized that all public services and reforms are in danger if Congress can't bring itself to raise the revenue needed to pay for them.

RRAN has invited organizations (both national organizations and state organizations) to sign onto its two-page statement of principles for this new campaign for progressive revenue options. Signing does not commit an organization to do anything (although all are also encouraged to become active in RRAN's activities) but simply states support for efforts to pay for initiatives in progressive ways. Anyone who is authorized to sign on behalf of an organization can visit the website of the Coalition on Human Needs (CHN) or simply click here.

The statement lists three broad principles to guide Congress's efforts to find revenue:

1. Adequacy. The federal tax system should raise sufficient revenue over time to meet our shared priorities and invest in our common future.

2. Fairness. Tax preferences that overwhelmingly benefit the wealthy and corporations should be eliminated, and individuals and businesses should contribute their fair share of taxes, based on ability to pay.

3. Responsibility. We should not saddle future generations with unsustainable levels of debt.

The statement also lists examples of the kinds of tax policies RRAN supports:

• raising revenues from upper-income households;
• assessing a significant tax on large estates;
• reducing abuses among corporations and individuals who shelter income in offshore tax evasion or avoidance schemes;
• closing financial industry, oil and gas, and other inefficient corporate loopholes; and
• reducing tax preferences for unearned as opposed to earned income.

For more information in the coming days, visit RRAN's website: www.rebuildandrenew.org

Assistant U.S. Trade Representative Everett Eissenstat told the Senate Finance Committee yesterday that the administration has put the Panama Free Trade Agreement on hold while the administration develops a "new framework" for trade. Some Democratic members of Congress have been pressuring the administration and Speaker Pelosi to delay approval of the agreement until a Tax Information Exchange Agreement (TIEA) has been completed with Panama, a known tax haven. TIEAs enable two countries' governments to exchange information necessary to prosecute offshore tax evasion (although arguably many of the existing TIEAs are so weak as to be useless). Panama and the U.S. began negotiations on a TIEA back in 2002, but Panama has never finalized it. The administration and Congress should, at very least, refuse to reward countries that are uncooperative with U.S. tax enforcement efforts with enhanced trading relations.

The national advocacy group Public Citizen issued a report on April 29th explaining the issues. Lori Wallach, director of Public Citizen's Global Trade Watch division said, "Members of Congress wouldn't vote to let AIG not pay its taxes or to give Mexican drug lords a safe place to hide their proceeds from selling drugs to our kids, but that's in essence what the Panama FTA does." She argued that the trade agreement directly conflicts with the goals of regulating finance and closing tax havens. Thankfully, the Obama administration seems to be listening.

On May 11, the Treasury Department released its "Green Book" containing new details of the tax changes included in the President's fiscal year 2010 budget proposal. In addition to extending the Bush tax cuts for all but the richest Americans and making permanent many of the tax cuts in the recently enacted economic recovery act, the President would also make many changes that would raise revenue by closing loopholes, blocking tax avoidance schemes and making the tax code more progressive.

A new report from Citizens for Tax Justice examines and describes the significant revenue-raising provisions that are sure to be debated fiercely in the months to come.

Read the report.

On May 4, President Obama proposed several measures to address overseas tax avoidance and tax evasion. As explained in two new reports from Citizens for Tax Justice, these proposals are steps in the right direction but could be stronger.

For example, the President proposes to limit the rules allowing corporations to "defer" their U.S. taxes on foreign income, but he would largely exempt technology and pharmaceutical companies from even the weak limits he proposes, instead of simply repealing "deferral" altogether. He proposes sensible steps to reduce abuses of the foreign tax credit and the "check-the-box" rules that allow multinational corporations to cause their subsidiaries' income to "disappear." His proposals to crack down on the use of secret accounts in offshore tax havens are also positive steps but could be stronger.

Read the two new reports:

Obama's Proposals to Address Offshore Tax Abuses Are a Good Start, but More Is Needed

Myths and Facts about Offshore Tax Abuses

Senate Votes to Include Offshore Transfers to Avoid Tax in Money Laundering Criminal Statute

On Tuesday the Senate passed the Fraud Enforcement and Recovery Act of 2009 (S. 386). The bill makes several amendments to the International Money Laudering Statute, including one which places steep criminal penalties on transfers of money offshore for the purpose of evading federal income tax or committing tax fraud.

Violators of the criminal statute would face a fine of up to $500,000 or twice the value of the funds transferred (whichever is greater), or imprisonment for up to twenty years, or both. The Internal Revenue Code already provides for criminal penalties for tax evasion but the penalties are much lower (a maximum fine of $100,000 and imprisonment for up to five years).

The House has its own version of the money laundering legislation, the Fight Fraud Act of 2009 (H.R. 1748), which has been approved by the House Judiciary Committee. It does not contain the tax provision.