As I See It: Misera Plebs Contribuens
March 31, 2008 Victor Rozek
Greetings, misera plebs contribuens! It’s what the Hungarian people started calling themselves after King Andreas II exempted the nobility from taxation–an immunity which, like one, long, baronial happy meal, lasted from the 13th to the 19th century. It means “miserable tax-paying people,” and if you’ve already prepared this year’s return, you probably feel like one.
One third and perhaps as many as one half of eligible tax filers either cheat on their returns or don’t file a return at all. And their numbers, like springtime pollen counts, are exploding. In 1985, there were 3.4 million nonfilers. Just two years later, that number jumped to 4.2 million. By 1991, 6.5 million were dissing the Internal Revenue Service and 74,000 of them had incomes greater than $100,000. There was even a multi-gillionaire who owned art galleries and penthouses in New York, a chateau in France, a residence in Switzerland, and a ranch in Kenya several times as large as Manhattan who never filed a return–a small oversight discovered during divorce proceedings. This disheartening information comes from Donald Bartlett and James Steele, a dying breed of investigative reporters who several years ago wrote a dispiriting (if you’re honest), or instructive (if you’re not), tome called The Great American Tax Dodge.
How may people escape paying taxes today? No one knows for certain because the IRS enforcement budget has been slashed by Congress, but conservative estimates place it at over 30 million. The amount it costs the treasury can be measured in the hundreds of billions of dollars each year, which those of us who do pay taxes are obliged to make up. And, if you’re looking dejectedly at the amount of taxes withheld on your pay stub, this next bit of information is not likely to cheer you.
One of the people not paying taxes may well be the programmer with the H-1B visa working right next to you.
As the IT community knows, during the 1990s, nearly 1 million bargain-priced foreign computer professionals were invited to displace American workers under a visa program that allowed them to stay for up to six years. Of course many, like sour milk, stayed beyond their expiration date, but that’s another issue. Apparently, a sizeable percentage of foreign workers are not officially employed by their American clients, but by the foreign consulting firm that recruited them. The recruiters sometimes pay their charges in cash or by check, or have their salaries deposited directly to a foreign bank, free of those annoying U.S. taxes. As Bartlett and Steele report, “What’s more, they often live in rent-free apartments with free meals, all courtesy of the consulting firm that hired them.” Still others are paid an “allowance” while working in the United States, free of income tax, social security, Medicare, state and local taxes.
Which is one reason foreign IT professionals can afford to work for less.
Then, of course, there are millions of undocumented foreigners who work for cash and never file returns, and workers who come from nations where governments are overtly corrupt and for whom tax avoidance is a way of life. The crowning irony, however, may be that many H-1B workers who pay no taxes receive health care coverage through the recruiting firm, while American workers who do pay taxes often cannot afford comparable insurance. To be fair, in some cases, those H-1B workers not clever enough to evade the taxman may actually pay higher taxes than a U.S. citizen because they are not entitled to certain deductions, such as that for the head of a household. But the system is fraught with other abuses.
According to Bartlett and Steele, recruiting companies sometimes pose as hiring companies in order to obtain visa approvals, then shop their recruits around to the highest bidder. Other recruiters use the H-1B program as a means to smuggle people into the country. A phony company petitions for employees ,then “terminates them on arrival, enabling an otherwise ineligible person to enter the United States.” And of those who come legally, many “fabricate the educational and professional papers needed for entry,” say the authors. At a bustling American consulate in India, officials estimated that nearly all H-1B petitioners “were misrepresenting their academic or professional credentials.”
Perhaps the IRS has been hiring some of those programmers with inflated credentials because, historically, the agency has had miserable luck installing information technology. As an indicator of how complex the tax code is, the authors report that the IRS operates some 50 mainframes running “19,000 separate software applications.” That, in addition to who-knows-how-many desktop and laptop units that run another 30,000 programs. If you’re looking for employment, and can support 62 million lines of code that must be changed every time some special interest group provides enough monetary incentive for Congress to alter the tax code in its favor, then the IRS will be glad to meet you.
The government agency’s past efforts at IT modernization have, in the blunt estimation of the authors, “all failed.” First came the “System of the Seventies” replaced by the “Tax Administration System,” supplanted by the “Equipment Replacement and Enhancement Program,” followed by the “Tax Systems Redesign,” which itself was trumped by the attempt at “Tax System Modernization.” After many billions of dollars, the agency still had computers that couldn’t communicate and software written in archaic languages understood only by a dozen guys long retired and living the tax-free life in Antigua.
But if information technology was not user friendly to the tax collectors, it was a godsend to the tax evaders. If there is such a thing as karmic irony, it can be found in the fact that information technology suddenly made it possible for the common man to take advantage of all the tax scams that were previously only available to the very rich.
The Internet, that great leveler, “has democratized offshore tax evasion and avoidance.” You, too, miserable tax-paying people, can, with a few key strokes, open a foreign bank account, establish a personal holding company, or create a trust on some distant palm-studded tax haven. One Internet site offers what it calls “The Ultimate Global Business Package” that for about $5,000 provides the aspiring tax evader with “a Belizean trust, major credit card (no identification required), a Panamanian international business corporation complete with directors and bearer shares, a Visa debit card, and a Costa Rican mail drop.”
Think of it as the Ken Lay kit.
Accounts can be established without the need for identification, or a mailing address, or bank references, or even an actual name for that matter. Security and anonymity are offered by companies that themselves are no more tangible than a post office box. Account activity is guaranteed to produce no paper trail, which means assets can be hidden not only from authorities, but creditors and angry ex-spouses as well.
If only someone had told Paul McCartney.
Electronic records have the advantage of being amendable or erasable, and computers can be operated remotely, masking the location of the user. The availability of encryption software further complicates enforcement. It’s the perfect storm of tax evasion, and according to the authors, the IRS has no idea how many people are hiding assets abroad or what their value is.
At one time, a great many Americans believed, as Oliver Wendell Holmes did, that taxes are the price we pay for living in a civilized society. No longer. In the words of the authors, “tax cheating has become so common, so widespread, running through all levels of society, from the very poor to the very rich, that the United States could not build enough prisons to hold everyone who’s doing it. Think Prohibition magnified many times over.”
To put things in context: What we have is an unknown but substantial number of people who either pad their deductions or pay no taxes at all; a national debt surpassing $9 trillion; a tax code full of custom-tailored tax breaks for corporations and the wealthy; a national infrastructure that is crumbling; and a tax collection agency that–at the direction of Congress–turns a blind eye to tax-avoiding shenanigans, especially among the wealthy.
Given the state of affairs, one would think that some combination of reform and enforcement are called for. But, as is increasingly the case, those who benefit most from civilization want to take the least responsibility for it. Remember Carly Fiorina? Former chairman and chief executive officer of Hewlett-Packard? By happenstance, she recently appeared in a Newsweek article called Ways We Can Fix This Giant Mess. The magazine queried seven economists and businesspeople for their solutions to the current economic downturn. Fiorina, who is now dabbling in politics, gave the politician’s favorite answer: She wants to lower the business tax rate by 10 percent.