George Bush has left his challenger, John Kerry, with a huge fiscal headache. Kerry, as president, would need to drastically reduce the inherited budget deficit, much as Bill Clinton did in the 1990s. But Kerry also champions social investment that the country needs and that voters want -- in health care, education, and energy independence. Seemingly, the budget deficits are now so immense that Kerry cannot do both things, even if he carries out his promise to repeal tax cuts on people making over $200,000.
But there is an ingenious way out of this fiscal trap. A Kerry administration should go after tax cheats, both individual and corporate, who now cost the U.S. Treasury something like $300 billion a year. Going after major tax cheats would be good politics as well as sound policy.
Corporate individual tax evaders are overwhelmingly wealthy. They are either overt criminal tax evaders or corporate money launderers who take advantage of gaps in reporting requirements to hide profits in tax havens. These abuses not only starve the Treasury of revenue owed under the existing tax code. They also breeds disrespect for law, and undermine tax compliance by the rest of us.
Why should you and I have to worry about cuts in services, the prospect of tax hikes on working families, or the fiscal deterioration of our economy because scofflaws cheat on their taxes? Why should we pay taxes when others don't?
Just before he left office in 2002, the departing IRS commissioner, Charles Rossotti testified to Congress on a new epidemic of tax shelters so complex that the IRS couldn't keep up. About one such shelter in 400 is audited. The cost just in domestic cheating: over $100 billion a year.
The mismatch was compounded by restrictions imposed on the IRS by the Republican Congress, hyping a few cases where Revenue agents overstepped their bounds to hamstring enforcement generally. The Bush administration then added insult to injury by shifting scarce auditing resources away from the wealthy to low income families who use the Earned Income Tax Credit.
A Kerry administration should restore tax enforcement on tax cheats so that it doesn't need to raise tax rates on law-abiding taxpayers. And there's a second front where the Bush administration is even more vulnerable to criticism.
In early 2001, one of Bush's first actions was to kill a joint effort by the US and its European allies to crack down on offshore tax havens. These are tiny countries in the Caribbean and elsewhere whose main economic products are a little tourism and a lot of money-laundering.
The joint US-European tax-haven initiative reflected two concerns. First, multi-national corporations were increasingly booking taxable profits in tax havens that collect no corporate income tax. These rogue mini-states have no tax treaties with the law-abiding countries, and these evasions were costing the US and Europe over $200 billion a year in revenue. Second, the growing concern about al-Qaeda required a crackdown on global money laundering.
The US-European plan would have tightened reporting requirements on banks and corporations, and thus dramatically reduced their ability to channel profits into tax havens. But the Bush administration put the tax-avoidance interests of its corporate allies ahead, not just of the solvency of the US treasury but of the war against money-laundering by terrorists.
So a Kerry administration should put the US-European initiative against tax havens back on track. And candidate Kerry ought to be explaining this sordid history to the American voters.
Tax havens also play a role in the serial cases of corporate bilking of investors. The Parmelat case, in which executives of the Italian food giant fraudulently diverted tens of billions of dollars, relied heavily on tax havens. After Parmelat, which is Europe's version of Enron, European tax and regulatory authorities are especially keen to crack down on tax havens, but can't do so without the active collaboration of the US.
By making this a major campaign theme, Kerry would also force the press to shine more of a spotlight on this tax scandal, which has gone largely unremarked upon. (Two notable exceptions are David Cay Johnston in the New York Times, and Sam Loewenberg in the American Prospect.
This column relies in part on their diligent reporting.)
Going after $300 billion in revenue from tax cheats would transform the fiscal assumptions of the campaign. Kerry could restore America to fiscal soundness, without giving up needed social investment. This tale also usefully reminds the voters of one more sordid aspect of an appalling incumbency.
Robert Kuttner is co-editor of the Prospect. This column originally appeared in The Boston Globe.
