Facebook® co-founder Eduardo Saverin is facing mounting public scorn for renouncing his US citizenship, presumably to save some tax money (which he says is not the case). There are even two US Senators after him! He left in September but the pile-on is happening this week because of Facebook’s Initial Public Offering (IPO) of its stock: Saverin’s share will be worth somewhere in the neighborhood of $4 billion.

Saving Capital Gains Taxes
If Eduardo Saverin were a US citizen and sold his stock, most of that income would be subject to special low rate capital gains taxes of 15 percent (or 20 percent in future years if the new rate goes into effect January 1 as scheduled). By renouncing his citizenship, Saverin avoids paying those current and future capital gains taxes (and he would never have to pay the full income tax rate that Facebook employees exercising their stock options will be paying), but he does have to pay an "exit tax" (see below). Saverin now lives in Singapore, which doesn’t have a capital gains tax. 

Lowering the “Exit Tax”
When wealthy Americans give up their citizenship, they must pay an “exit tax” which treats all of their assets as if they’d been sold for fair market value (the actual tax payment can be deferred until the assets are sold). The fair market value of publicly-traded stock is what it traded for that day; privately-held stock must be appraised.

A spokesman for Saverin said that he renounced his citizenship last September, well ahead of this week’s Facebook IPO. Therefore, the stock’s valuation for “exit tax” purposes was likely substantially below its expected $38 IPO value, allowing Saverin to reduce his exit tax cost.

Not Tax, But Financial Decision
According to a spokesman, Saverin is expatriating for financial, not tax reasons. He doesn’t mind paying tax, he says, he just dislikes the complicated rules. He claims that the US rules, like the recently enacted Foreign Account Tax Compliance Act ( FATCA), are preventing him from making some foreign investments he’d like to make.

Why It Feels Like Treason
Saverin emigrated to the US with his family at age 13 when his name turned up on a list of potential kidnap victims in his native Brazil where criminal gangs target the children of wealthy citizens and hold them for ransom. In the US, not only was Saverin safe from such violence, but he benefited enormously from government investment in education, the court system, and the Internet. Would he be a billionaire today if his family had relocated somewhere else?

Farhad Manjoo, a fellow immigrant, wrote a brilliant post (one of many, including this one) on the IT blog PandoDaily about what Eduardo Saverin owes America (nearly everything) including, quite possibly, his life. Taxes are the least of it.

It’s no longer news to most Americans that big, profitable corporations from Apple to General Electric are finding creative ways to zero out their income taxes.  Two widely cited recent reports on federal and state taxes from CTJ and ITEP identified dozens of companies that have achieved this dubious goal.

But the big news out of Illinois this week is that at least in the Land of Lincoln, lawmakers are taking positive steps towards doing something about rampant corporate tax avoidance. A bill introduced Wednesday by Senate President John Cullerton would require publicly traded companies to make available some basic information about the amount of state income taxes they pay, and specify which tax breaks reduced their taxes. The bill would also require companies to disclose their profits generated in Illinois, making it easy for lawmakers and the public to know whether these companies are really paying tax at the legal rate.

While the bill was approved by a Senate committee and sent to the Senate floor on Wednesday, its prospects for passage this year remain murky. And identifying the beneficiaries of unwarranted tax breaks is obviously only a first step towards repealing those tax breaks. But this legislation, along with a similar bill championed by the California Tax Reform Association in the Golden State, likely represents the beginning of a shift toward more transparency in corporate taxation—and that can only lead to improvements in the fairness of our overall corporate tax system.

Right now virtually every state (there are a few signs of hope) fails to disclose even the most basic information about corporate tax breaks. The Center on Budget and Policy Priorities’ Michael Mazerov has the dirt on how your state can move in the right direction, as does the encyclopedic Good Jobs First.

Photo from Senator Cullerton's legislative website.

Remember the Tea Party? Well, freshman Kentucky Senator Rand Paul is living up to his reputation as the darling of the Taxed Enough Already movement that shook the 2010 elections. 

Rand Paul, son of Libertarian firebrand and GOP presidential candidate Ron Paul, is currently blocking the Senate’s ratification of an amendment to the US-Swiss tax treaty, apparently worried about the right of tax evaders to financial privacy. He says the language is too “sweeping” and might jeopardize US constitutional protections against unreasonable search and seizure. But as one former Treasury Department official said, Paul's move “smacks of protecting financial secrecy for those who may have committed criminal tax fraud in the US.”

The US and Swiss governments renegotiated their bilateral tax treaty as part of the 2009 settlement of the UBS case. That case charged the Swiss mega-bank UBS with facilitating tax evasion by US customers. Under the settlement agreement, UBS paid $780 million in criminal penalties and agreed to provide the IRS with names of 4,450 US account holders.

Before it could supply those names, however, UBS needed to be shielded from Swiss penalties for violating that country’s legendary bank-secrecy laws. The renegotiation of the US-Swiss tax treaty addressed that problem by providing, as most other recent tax treaties do, that a nation’s bank-secrecy laws cannot be a barrier to exchange of tax information.

Many tax haven countries were hiding behind their bank secrecy laws to deflect requests for account holder information, and the IRS and Justice Department have been investigating 11 Swiss financial institutions on criminal charges of facilitating tax evasion.

The Senate must ratify the treaty changes – which is normally a routine procedure.

By blocking the ratification, Senator Paul is holding up the exchange of information in the UBS case (and others) and hampering IRS efforts to crack down on tax evasion by Americans.

Tax evasion by individual taxpayers is estimated to deprive the US Treasury of as much as $70 billion per year (corporate offshore tax avoidance is estimated to cost the Treasury an additional $90 billion per year).

Given Senator Paul’s obvious concern about the deficit, he might have a hard time explaining to honest American taxpayers how he justifies protecting tax evaders with Swiss bank accounts as the deficit grows ever larger.

Photo of Rand Paul via Gage Skidmore Creative Commons Attribution License 2.0

This week brought news of a few more states tackling the challenge of taxing purchases made over the Internet in the same way as purchases made in “brick and mortar” stores.  Nevada and Tennessee got agreements from Amazon.com, the mother of all online retailers, to start doing its part to collect those taxes, and it looks like Massachusetts isn’t far behind.

• In Nevada, Amazon.com will begin collecting sales taxes in 2014 under a new agreement announced on Monday.  The company already has major warehouses and distribution centers in the state.  Amazon’s agreement with Nevada is similar to deals struck in California, Indiana, South Carolina, Tennessee, and Virginia.
• As in Nevada, Amazon’s deal to begin collecting sales taxes in Tennessee won’t take effect until 2014, but a lesser known part of that agreement has already taken effect.  Amazon is mailing notices to all its Tennessee customers from throughout the past year letting them know that they may owe sales tax on the items they bought from the company, even though Amazon didn’t collect those taxes for them.  Similar annual notices will be sent by February 1st in both 2013 and 2014.
• The Massachusetts Main Street Fairness Coalition is continuing its calls for the state to require that Amazon collect sales taxes, and The Boston Globe just chimed in to support the idea as well.  As the Globe explains, the company’s new offices in Massachusetts should be enough to bring the company within reach of the state’s sales tax collection laws.

Of course, these efforts are only partial solutions at best.  Amazon.com may be the world’s biggest online retailer, but they’re hardly the only one.  Nevertheless, until the federal government acts to allow all states to enforce their sales tax laws on all purchases, these piecemeal victories are the best news we can hope for.

The latest monthly statement by the Treasury Department contains a startling revelation: the amount that Treasury expects to collect in corporate taxes in 2012 has been slashed by more than 28 percent, from $333 down to $237 billion.

With such a dramatic revision, one might expect that lagging corporate profits or a sudden economic disruption is to blame. In reality however, corporate tax revenue continues to limp in spite of the fact that corporate profits have rebounded to record highs.

If corporate profits are not behind this $96 billion drop in expected corporate tax revenue, then what is?

The Wall Street Journal’s David Reilly suspects that there are two critical drivers: the offshoring of more profits through overseas entities by multi-national corporations; and the continuation of extravagant corporate tax breaks for accelerated depreciation of assets like equipment. Last month, the Congressional Budget Office (CBO) came to the same basic conclusion, explaining that corporate tax breaks and loopholes played an important role in driving the corporate tax rate to a 40 year low in 2011.

In order to prevent the continued decline of the corporate tax, Congress and the President should enact revenue-positive corporate tax reform, rather than their current revenue-neutral approach. Right now, political leaders of all stripes are proposing merely to eliminate some tax breaks but continue or even expand others and possibly reduce the statutory rate. With the federal deficit growing every day, asking profitable U.S. companies to pay something closer to the statutory tax rate is a reasonable (not to mention popular) approach.

Chart from is from the Wall Street article " U.S. Tax Haul Trails Profit Surge"

Unless Congress acts, federal gas and diesel taxes will fall by about 80 percent on September 30.  If this is allowed to happen, spending on our nation’s already inadequate roads and transit systems will likely plummet, and Congress will face massive pressure to make up the difference through deficit spending or rerouting spending from other vital priorities.

Clearly, these outcomes are not ideal.  That’s why extending the gas tax – albeit at low rates – has always been a routine and bipartisan undertaking.  Today, however, the visceral opposition to taxes by many in Congress has led some observers to believe that the debate will be more hostile than usual, and that there is a real possibility – though small – that the gas tax will actually be allowed to expire.  Simply put, there is less and less that is “routine” in our nation’s capital anymore.

In a surprising and fortunate twist to this story, Grover Norquist stated flatly recently that a gas tax extension would not violate the no-tax pledge that 277 members of Congress have signed.  This should have already been obvious to anybody who’s taken the time to read Norquist’s 57-word pledge (it clearly applies only to income taxes), but his admission was nonetheless helpful in making that fact known.

Perhaps more surprising, though, was a confession by one of Norquist's employees that allowing the gas tax to fall so quickly would be too disruptive.  You know the situation is serious when even Norquist's group is cautioning against tax cuts.

Less encouraging was Norquist’s recent promise to push for a system in which states could opt-out of the federal Highway Trust Fund, and instead finance their roadways entirely with tax revenues generated inside their borders.  If allowed to happen, this would mark a major retreat from the federal government’s long-running role in helping to maintain our nation’s Interstate highways.

It should go without saying that the Interstate highway system is of immense importance to interstate commerce, and that there is an obvious federal role to be played in ensuring the smooth functioning of that system.  For example, the federal government has always seen to it that large, sparsely populated states are able maintain their expansive highway networks for the good of the national economy.

With this in mind, it should come as little surprise that the organization representing state transportation departments (AASHTO) believes that the federal government's involvement must continue.  As AASHTO representative Jack Basso recently remarked to Stateline, “The real question is can you maintain a national system, given the diversity and the breadth of geography in the country and the population situation, without some kind of national program? I think the answer is ‘No.’”

Unfortunately, while there appears to be a growing consensus that the gas tax should be extended, there's still a possibility that it will be "taken hostage" -- just like the debt ceiling and most of the Bush tax cuts were within the last year.  If that happens, it's very likely that the outcome of the current transportation debate will be much more skewed toward Norquist's priorities than would otherwise be the case.

Photo via Gage Skidmore Creative Commons Attribution License 2.0

Congress, the Internal Revenue Service, and the Department of Justice continue the attack against tax dodging, including schemes using offshore tax havens.

Congress

In Congress, Senator Carl Levin (D-MI) has introduced the Stop Tax Haven Abuse Act, which would strengthen the disclosure rules for foreign accounts and impose harsh penalties on taxpayers and tax shelter promoters who facilitate tax evasion.

Also in Congress, Sen. Charles Grassley (R-IA) has offered an amendment that would crack down on the use of offshore tax havens by charities. In a hearing last year, Senators learned that the Boys and Girls Club of America was holding more than $50 million in offshore investments in order to avoid paying the tax that is usually imposed when charities engage in business activities that are not related to their mission.

Justice Department and IRS

Meanwhile, Zurich-based Credit Suise confirmed that the U.S. Department of Justice was investigating its role in helping U.S. clients evade their tax obligation. The bank is the target of a criminal investigation prompted in part by information supplied to the Internal Revenue Service in its offshore account voluntary disclosure program.

Today, a Manhattan federal court unsealed an indictment charging a Swiss financial adviser with helping U.S. customers hide $184 million in assets from the IRS. The Swiss banking giant UBS is one of the banks where the adviser helped his clients hide their accounts.

In Virginia, a federal judge permanently barred HedgeLender LLC from promoting a tax shelter scheme called the HedgeLoan transaction. The Justice Department's Tax Division challenged the deals where clients purportedly pledged their appreciated stock for a "loan" to realize the cash without paying capital gains taxes.

In other tax dodging news, a U.S. Magistrate handed down a 28-month sentence to Rapper Ja Rule for failing to pay $1.1 million in taxes on the more than $3 million he earned in 2004-2006.

Small Business Owners

Some small business owners are also taking aim at tax dodging and tax havens. A recent op-ed from Business for Shared Prosperity argues that the opportunities that large corporations have for tax avoidance puts small businesses at an unfair disadvantage. It also points out that some of the most egregious corporate tax dodgers are those benefiting the most from public services and public investments that the rest of us pay for.

Photo via Mzrr1970 Creative Commons Attribution License 2.0

Despite the fact that the move would actually increase the deficit by an estimated $3.4 billion, House Republicans voted to slash the IRS’s budget by $600 million.

Unlike most types of public spending, increased funding of the IRS actually reduces the deficit. In some cases a dollar of additional IRS funding can generate $10 of revenue. Because of this, the non-partisan National Taxpayer Advocate noted in her recent report to Congress that the IRS should be viewed as not part of the deficit problem, but rather “as part of the solution.”

Taking this perspective, the Obama Administration proposed earlier this year to increase the IRS’s budget from $12.1 billion to $13.3 billion, in a move that was expected to actually reduce the deficit.

A $1.1 billion increase in funding would help the IRS reduce the “tax gap,” the difference between the amount of taxes owed and the amount of taxes actually paid on time. The tax gap is estimated to be between $400 to $500 billion each year.

One recent article points out that “the biggest losers” in the failure to stop tax evasion “are America's wage earners and salaried workers, who pay an estimated 99 percent of their taxes on time because their taxes are automatically withheld from their pay and reported by a third party, their employers.” These working people — the vast majority of Americans — must pay even more in taxes when others evade theirs.

Other than tax evaders, it’s unclear who the decrease in funding is supposed to benefit. It’s certainly not law-abiding businesses or individuals, who according to a report by the law and lobbying firm K&L Gates would actually face higher compliance costs if the cut in funding is enacted.

CTJ’s director, Bob McIntyre, addressed IRS enforcement a few years ago before the Senate Budget Committee. Just returning the IRS to the staffing levels of a decade ago, he said, would require a 50 percent increase in the IRS enforcement budget. Taking this a step further, McIntyre noted that, given the increase in tax sheltering in recent years, it may be necessary to double the resources for tax enforcement in order to keep up with tax evasion.

If lawmakers are serious about reducing the deficit, then reforming and dramatically increasing (rather than decreasing) funding for the IRS is one place to start.


Photo via alykat Creative Commons Attribution License 2.0

Federal benefits for the long-term unemployed have been expired for over a week and the Senate still has not approved a bill (H.R. 4213) that would extend these and other vital measures. The bill also includes badly needed Medicaid funding for states and other provisions that would stimulate the economy. (See CTJ's recent reports on this legislation).

Call your Senators and urge them to vote for H.R. 4213.

Use this toll-free number provided by AFSCME to make your call: 888-340-6521

Part of the consternation among some Senators is that the spending provisions in the bill would add (modestly) to the deficit. Economists have explained that short-term deficit-financed spending measures can be used to effectively boost consumer demand, and thus job creation, during a recession, without adding to the long-term budget crisis.

Many of the Senators who have supported tax cuts that created long-term deficits (the kind of deficits that actually do lead away from fiscal sustainability) now oppose this bill out of their concern about "fiscal responsibility." Other Senators are more genuine in their concern about deficits but have wildly misplaced fears about a bill that has little, if anything, to do with our long-term budget situation.

A number of Senators are still concerned about the tax provisions in the bill. It includes an assortment of small tax cuts (mostly for business), which are often called the "tax extenders" by members of Congress and their staffs. While these tax breaks probably accomplish very little, the good news is that their cost would be offset with provisions that close unfair tax loopholes.

It's the Senators' devotion to maintaining these loopholes that is another factor slowing down progress on this bill.

Battle Continues Over "Carried Interest" Loophole for Investment Fund Managers

The most controversial tax provision would clamp down on the "carried interest" loophole, which allows investment fund managers to treat their earned income as capital gains and thus benefit from a much lower income tax rate. Over the past few weeks, some honest investment fund managers have spoken up to tell Congress that their loophole really is unjustified, and it was also reported that two Republican Senators favor closing the loophole.

The draft of the bill proposed by Senate Majority Leader Reid already watered down this reform a great deal (compared to the version that passed the House) by allowing the lower capital gains rate to continue to apply to a larger portion of carried interest. As a new report from the Center on Budget and Policy Priorities explains, the last thing Congress should do is weaken this provision any further.

Senators Defend the "John Edwards" Loophole

Another controversial reform would close the "John Edwards" loophole for "S corporations." Payroll taxes apply to wage income, but not other types of income. So, some people want to disguise their wage income as non-wage investment income to avoid payroll taxes. People who own S corporations have to determine (and tell the IRS) how much of their income is wage income and how much of it is other income, and of course there is a huge incentive to underestimate the amount that is wage income.

John Edwards famously played this trick by saying that his name was an asset and this asset, rather than his work, was generating most of the income of his S corporation.

Some Senators have expressed concern about the effect this reform would have on small businesses. But none have explained coherently why we should allow this type of scheme to continue.

Yesterday a federal bankruptcy judge approved Sam Zell's Tribune Co. sale of the Chicago Cubs and Wrigley Field to the Ricketts family, of TD Ameritrade, for $845 million. Everyone, including the bankruptcy judge, is calling it a "sale" except Sam Zell and his tax advisors. They're calling it a "leveraged partnership transaction," wherein Zell will retain a 5% interest and avoid paying the tax on the sale. Reporter Allan Sloan called Zell out on the tax dodge in Tuesday's Washington Post.

The Zell structuring of the Cubs sale is just another example of why we need the "economic substance" doctrine in the tax code. The economic substance doctrine has been developed over the years by the courts to disallow losses or deductions that have no economic substance apart from their tax benefits. In other words, if the only reason someone would do a deal a certain way is to avoid taxes, then the court ignores it and looks at the real underlying transaction. Clearly, a court looking at the Zell deal would find that it was, in substance, a sale of the Cubs to the Ricketts family. And Zell would owe millions of dollars of tax on the deal.

Unfortunately, different courts have developed different interpretations of the rule and courts do not apply the doctrine uniformly. That's why there have been repeated calls for strengthening the doctrine's basis in statute, including in President Obama's budget proposal. Tax avoidance transactions rely upon the interaction of highly technical provisions of the Internal Revenue Code to produce a tax result not contemplated by Congress. In developing the tax laws, Congress cannot possibly foresee all the ways the rules might be abused.

But tax lawyers figure it out for their wealthy clients -- at fees upwards of $500 per hour. If the economic substance doctrine is codified, taxpayers would be required to show that a transaction had a substantial non-tax purpose and had real economic consequences apart from the federal tax benefits. It would give the IRS a way to fight any tax avoidance scheme, whether or not the law specifically addressed it.

The American Society of CPAs recently wrote a letter to the Assistant Treasury Secretary for Tax Policy, Michael Mundaca, arguing against the rule's enactment (subscription required). To be fair, the letter raised a few good points that should be considered in crafting the final legislation. The letter is nonetheless a study in how self-interest can cloud one's perception. The big accounting firms might have a little more trouble selling their tax shelter deals if an economic substance rule is enacted into law. The IRS would be able to quickly challenge the next abusive tax shelters that tax professionals are surely already dreaming up.

The House of Representatives approved a bill on "tax day" that would end the IRS's use of private debt collection agencies to locate unpaid taxes. The Taxpayer Assistance and Simplification Act of 2008 ( H.R. 5719) would ban the federal government from entering into new contracts with the private collectors and the extension of the existing contracts with two companies. (A third company, a scandal-plagued firm based in Texas, was dropped from the program for reasons the IRS would not make public). Similar legislation was passed by the House last year but the Senate did not act.

The IRS's private debt collection program pays contractors a commission of 21 to 24 cents for every dollar of tax debt that they recover, while it's estimated that IRS employees can do the job for about 3 cents for every dollar collected. The private contractors are paid on a commission basis unlike IRS employees, so there is a concern among many that they have an incentive to be overly aggressive and less respectful of taxpayers' privacy rights.

In the Senate, Byron Dorgan (D-ND) has introduced legislation ( S. 335), with 23 cosponsors, that would end the private debt collection program. However, the Senate Finance Committee chaired by Max Baucus (D-MT) has not yet acted, and the committee's ranking Republican, Charles Grassley (R-IA) has been particularly vocal about allowing the private debt collection companies, one of which is based in his state, to continue the work for IRS.

The Congressional Budget Office and the Joint Committee on Taxation have estimated that ending the private debt collection program will cost over half a billion dollars over a decade (since that's the net revenue the private companies would collect if allowed to continue). Of course IRS employees could collect much more for the same level of funding, but the budget "scoring" process does not treat funding for the IRS in a manner that accounts for the vast return on every dollar spent on tax collection.

As a result, the House had to come up with provisions that would raise revenue to offset the costs of the bill. One would require that people using money from a health savings account (HSA) provide more evidence that the money was used for a medical expense. HSAs, introduced as part of the Medicare prescription drug law in 2003, are accounts to which individuals can make tax-deductible contributions and which are connected with a high-deductible health insurance plan (plans with deductibles of at least $1,050 for an individual or $2,100 for a family). One fear health care advocates have about HSAs is that they will, over time, encourage healthier and wealthier people to leave the traditional health insurance market, which will make health insurance even less affordable for those at-risk workers and families who really need it. A fear tax fairness advocates have is that HSAs are just a way for better off people to shelter money from taxes. The deduction is worth the most to well-off families who will likely have health insurance with or without a tax incentive.

Another revenue-raising provision in the bill would close a tax loophole that is used by Kellogg Brown & Root (KBR), which until last year was a subsidiary of Halliburton. As we explained a month ago, KBR used the loophole to avoid hundreds of millions of dollars in federal Social Security and Medicare taxes by pretending its Iraq-based employees are working for a Cayman-Islands based "shell company."

Both of these are provisions that would be worthy even if Congress was not trying to raise revenue and they make the overall bill even more praiseworthy. Predictably, the President has threatened again to veto any legislation that ends the private debt collection program, in line with a pattern of positions that choose the private sector over the public sector even in situations in which the latter is able to operate far more efficiently.

Often lost in the debate over whether taxes should be increased or decreased is the fact that we can raise some revenue by doing a better job of enforcing current tax laws. A report issued earlier this month by OMB Watch explains that a lack of funding for tax enforcement by the IRS is costing us money and contributing to the "tax gap," the difference between the amount of taxes owed and the amount actually paid each year. The IRS has estimated that in 2001, $345 billion in taxes due was not collected on time, and around $290 billion of that was never collected. This means that taxpayers who comply with the law are in effect subsidizing those who do not.

The report, Bridging the Gap: The Case for Increasing the IRS Budget explains that IRS staff have been cut back since 1995 and that cuts have been especially severe among the staff who perform audits. Partly as a result of this, the number of audits is down, particularly for those with incomes over $100,000 and for large corporations -- the very types of audits that usually uncover the most in unpaid taxes. The amount of time spent on each audit has decreased and the audits are less often uncovering unpaid taxes, even though the tax gap remains a major problem.

Meanwhile, the report explains, Congress has instructed the IRS to crack down on EITC recipients (even though incorrect EITC payments account for only 3 percent or less of the tax gap) and has funded a private debt collection program that doesn't collect nearly as much money as IRS staff can collect at a given funding level.

The report argues that this situation can be turned around by increased funding for IRS enforcement, improved quality of audits, eliminating private debt collection and focusing more on assisting low-income taxpayers so that they can avoid errors in the extremely complicated EITC application process. Congress should pay serious attention. Increasing the IRS budget is one of the few opportunities lawmakers have to immediately raise revenues by spending money.

The House of Representatives voted Wednesday to ban the IRS from using private debt collectors to help collect delinquent taxes after its current contracts with collection agencies expire in March 2008. The IRS's private debt collection program pays contractors a commission of 21 to 24 cents for every dollar of tax debt that they recover, while it's estimated that IRS employees can do the job for about 3 cents for every dollar collected. The private contractors are paid on a commission basis unlike IRS employees, so there is a concern among many that they have an incentive to be overly aggressive and less respectful of taxpayers' privacy rights.

The Senate Finance Committee has not taken up the private debt collection issue although there is a bill ( S. 335) sponsored by Senator Byron Dorgan (D-ND) to end the program. Meanwhile, the White House has threatened to veto the House bill ( H.R. 3056) if enacted because it will cost the federal government revenues "that are otherwise not likely to be collected by the IRS."

This argument is ridiculous. The ten-year projected cost of the measure is just over $1 billion and that cost is offset in the bill with revenue-raising provisions. But the more fundamental point is that this measure should not be scored as costing anything at all. When Congress cuts back the tax enforcement staff at IRS, this reduction is not counted as a "cost" even though IRS personnel actually collect a lot more in taxes than do the private debt collectors. The private debt collection program seems driven by the ideology that the private sector always works better, even when the facts clearly state otherwise.

Top White House Economic Adviser Involved in Patenting Strategies to Avoid Taxes

Tax Notes, a trade journal for tax experts (sorry subscription required), reports that Edward Lazear, chairman of the President's Council of Economic Advisers, is named on a patent application for a product to help companies avoid taxes. The application was filed 10 months after Lazear began working at the White House.

The White House says that, essentially, Lazear's work on the product ended before he came to the White House. Whatever the case may be, it certainly highlights questions over whether tax strategies should be patentable at all. A patent reform bill in the House of Representatives includes provisions that ban patents on tax strategies. Senators Max Baucus (D-MT) and Charles Grassley (R-IA), chairman and ranking member of the Finance Committee, plan to craft a bill that would ban tax patents as well. A bill introduced by Senators Carl Levin (D-MI), Barack Obama (D-IL) and Norm Coleman (R-MN) in February to target offshore tax avoidance also bans tax patents.

As Levin pointed out when he introduced his bill, patent law exists to encourage innovation. There is no lack of innovation when it comes to avoiding taxes and there is certainly no public policy reason to encourage it.

The House Ways and Means Committee approved a bill ( H.R. 3056) on Wednesday that would end the IRS's use of private debt collectors after its current contracts with collection agencies expire in March 2008. The IRS's private debt collection program pays contractors a commission of 21 to 24 cents for every dollar of tax debt that they recover, while it's estimated that IRS employees can do the job for about 3 cents for every dollar collected. The private contractors are paid on a commission unlike IRS employees, so there is a concern among many that they have an incentive to be overly aggressive and less respectful of taxpayers' privacy rights, a concern echoed by Nina Olson, the National Taxpayer Advocate.

Unfortunately, earlier efforts to kill the program in an appropriation bill failed on procedural grounds. Part of problem stems from a peculiar wrinkle in the pay-as-you-go (PAYGO) rules that were revived earlier this year by Congress. Ending the private debt collection program counts as a "cost" to the federal government under these rules, since the private agencies are expected to collect over a billion dollars over the next decade if the program is allowed to continue. As a result, the Ways and Means bill just approved includes over a billion dollars of revenue-raising provisions to offset the "cost." The biggest offset would collect $764 million over ten years by making it harder for people to get out of paying their federal taxes by renouncing their U.S. citizenship.

But it's absurd that killing the private debt collection program should have to be paid for. Cutting funds for traditional tax collection by the IRS is not counted as a "cost" under budget rules that Congress has to offset with revenue-raising provisions. And traditional tax collectors at the IRS bring in a whole lot more money than these private contractors ever will. The legislative recommendations made by the National Taxpayer Advocate in January start out by noting that on a budget of just over $10 billion the IRS manages to collect over two trillion dollars, a return-on-investment of about 210 to one.

In the Senate, a bill ( S. 335) sponsored by Byron Dorgan (D-ND) would end the private debt collection program, but it's not clear when this bill will be considered.