In a recent testimony before the U.S. Senate Committee on Budget, Daniel Bunn, President & CEO of Tax Foundation, shed light on the complex world of offshore tax evasion and avoidance. His insights provide a valuable perspective on the legal and ethical implications of these practices, and the challenges faced by policymakers in addressing them.
Bunn emphasized the need to distinguish between tax evasion, which is illegal, and tax avoidance, which involves the use of legal methods to limit tax liability. He argued that the Internal Revenue Service (IRS) should enforce existing tax rules to bring criminal tax evaders to justice. However, he acknowledged that tax avoidance is a more complex issue, as it implies that the rules, as designed, allow businesses or individuals to legally reduce their tax burdens.
According to Bunn, the tax gap, which is the difference between taxes legally owed and taxes collected, has remained roughly constant as a share of GDP. Even full compliance would not close the deficit. He also pointed out that our citizenship-based income tax code creates headaches for taxpayers for not much revenue.
He further discussed the challenges of enforcing citizenship-based taxation of individual income, which led lawmakers to adopt the Foreign Account Tax Compliance Act (FATCA) in 2010. This law imposes a heavy compliance burden for banks around the world and U.S. citizens with earnings and savings abroad. However, it has also led to an increase in renunciations of U.S. citizenship, revealing the perverse incentives of enforcing such a policy.
On the business side, Bunn highlighted the complexity that can arise in the context of a hybrid territorial tax system. He noted that the U.S. adopted a deduction for foreign dividends as a transition away from a fully worldwide tax system with deferral in 2017. This change, along with other policy shifts, has resulted in trillions of foreign earnings being repatriated, and tax inversions have stopped.
However, U.S. business taxpayers must navigate a web of anti-avoidance rules, each with their own complexities and challenges. These include the Subpart F regime, the tax on Global Intangible Low-Tax Income (GILTI), the Base Erosion and Anti-abuse Tax (BEAT), and the Corporate Alternative Minimum Tax (CAMT) adopted in 2022.
As a tax attorney, I believe that understanding these complexities is crucial for making informed financial decisions and fulfilling tax obligations responsibly. It’s also important to remember that while tax avoidance may be legal, it can still have significant ethical implications and social repercussions. Therefore, it’s essential to promote responsible financial citizenship and ensure that everyone pays their fair share.