Congressional Study Notes Ways to Collect Billions More in Taxes
By EDMUND L. ANDREWS
Published: January 28, 2005
ASHINGTON, Jan. 27 - The federal government could increase tax revenues by $311 billion over the next 10 years if it clamped down on hundreds of ways that individuals and corporations elude their obligations, according to a Congressional study issued on Thursday.
The report concludes that the nation's system for taxing overseas profits of American corporations is so flawed that the government would save $55 billion if it simply scrapped the system altogether.
The recommendation comes a few months after Congress passed a corporate tax bill that is expected to reduce taxes on overseas profits by nearly $40 billion over the next decade. The measure was promoted on the idea of reducing the "competitive disadvantage" that American companies said they suffered on the tax front.
The proposal on corporate taxes was one of hundreds aimed at closing what lawmakers call the "tax gap," the gap between taxes owed and taxes collected, in the report prepared by the Joint Committee on Taxation, the nonpartisan Congressional agency that estimates the cost of proposed tax laws.
The study was produced at the request of the Senate Finance Committee, which held hearings last year on a wide array of tax loopholes, abusive tax shelters and administrative lapses that cost the government tens of billions of dollars every year.
Many of the report's recommendations are likely to run into stiff opposition from powerful interest groups, and many would arouse widespread anger among ordinary citizens.
For example, the report said the government could raise $164 billion over 10 years by changing the laws that exempt from payroll taxes for Social Security and Medicare a variety of fringe benefits, including employer-paid health insurance and child care assistance.
The report also estimated that the government could raise $57 billion over the next decade by making it harder for self-employed people to avoid payroll taxes. And it said the government could raise $10.5 billion by expanding the federal tax on telephone service to cover data transfer over the Internet.
In principle, the United States has a tougher corporate tax system than many other countries have because it uses a "worldwide" approach that imposes taxes on profits of American companies regardless of where those profits are earned. European corporations are subjected to a "territorial" tax system that does not tax profits on foreign operations.
But in practice, the Joint Committee on Taxation said, American corporations almost permanently defer their taxes by keeping money outside the United States in low-tax countries like Ireland or India.
"By maintaining deferral indefinitely, a taxpayer can achieve a result that is economically equivalent to 100 percent exemption of income," the report said, referring to a company's foreign income.
The problem of taxing foreign corporate profits has been the subject of intense political battles for many years. During his campaign to unseat President Bush, Senator John Kerry of Massachusetts proposed giving American companies a one-time opportunity to bring their accumulated foreign profits back to the United States at a fraction of the normal corporate tax rate, which is 35 percent. In exchange, he proposed abolishing the practice of letting companies defer their United States taxes in the future.
The Republican-led Congress took a different tack. It gave corporations the one-time tax break on foreign profits, estimated by J. P. Morgan Chase to total about $418 billion, but it allowed companies to keep deferring taxes in the future.
Senator Charles E. Grassley, an Iowa Republican who is chairman of the Finance Committee, welcomed the recommendations but made it clear he did not support all of them.
"Today's report will get the Finance Committee's attention," Mr. Grassley said in a written statement. But he added, "While we won't embrace every recommendation, we'll give the report a close look."
