TAX CHEAT, INC.
THE FINANCIAL PAGE / The New Yorker
Issue of 2002-04-22 and 2002-04-29
Mark Vicini was a local boy made good. In the early nineteen-nineties, this Monmouth County, New Jersey, entrepreneur built a computer company, Micro Rental & Sales, into a thriving business. He became a millionaire. He put a disabled relative through college. He gave to charities. But he did not give to the Internal Revenue Service. As Micro Rental boomed, Vicini funnelled a good portion of his profits into an account at an offshore bank in the Cayman Islands—nine million dollars between 1991 and 1994, six million of which he hid from the I.R.S.
Unfortunately, of all the shady banks in all the Caymans, Vicini had to walk into John Mathewson's. In 1996, Mathewson, the chairman of Guardian Bank & Trust, was arrested for money laundering, and, to avoid a prison term, he turned over the records of all his bank's depositors, including Vicini. Within months, Vicini had pleaded guilty to tax evasion and was given a prison sentence, along with a bill for back taxes of three million dollars.
The tropics are full of Vicinis. In the past decade, there has been a boom in innovative ways to outwit the I.R.S.; sophisticated tax-evasion tactics aren't just for career criminals anymore. Fifteen years ago, no one except the odd international man of mystery had credit or debit cards from offshore banks. Today, two million Americans do. Promoters push "layered trusts," "offshore asset-protection trusts," and "constitutional pure trusts." If you spend a few minutes on the Internet trolling for tax scams, you'll come away convinced that everyone is cheating Uncle Sam but you.
The problem with such schemes, for your average taxpayer, is that they're illegal. If you want to avoid taxes with impunity, hide millions in offshore banks, and contentedly snub the tax authorities of your home country, you need to be something more than an ordinary citizen. You need to be a corporation. You need to be, say, Ingersoll-Rand.
Ingersoll-Rand, the venerable machinery manufacturer, has been an American company since its founding, a century ago. It made the jackhammers that made Mt. Rushmore. It has major contracts with the federal government. (It's currently trying to sell the feds new airport screening machines.) Yet, when it comes to paying taxes, Ingersoll-Rand is not an American company. It's Bermudan. Last December, Ingersoll reincorporated itself in Bermuda, where there are no corporate income taxes. The company has no operations on the island—just a small office, with no employees, that's little more than a mail drop. But this is enough to save the company forty million dollars a year.
Ingersoll-Rand is not alone. Among the many U.S. firms that, since 1994, have decided to reincorporate in Bermuda are the giant conglomerate Tyco, the electrical-parts manufacturer Cooper Industries, and the hardware maker Stanley Works. They're no different, really, from Mark Vicini: they're using paper transactions to shift income abroad in order to avoid taxes.
If Ingersoll actually wants to leave the United States and set up shop in Bermuda, so be it. Lovely golf courses, and all that. For that matter, if Toyota wanted to move to Michigan it would be more than welcome. But Ingersoll-Rand doesn't want to leave. Its executive offices are in Woodcliff Lake, New Jersey. Its C.E.O. and all its top officers live here in the States. It wants the benefits of U.S. citizenship; it just doesn't want to pay for them.
Someone who spends a hundred and eighty-three days a year in the United States is an American, as far as the tax man is concerned. So why should corporations, which, after all, are deemed "persons" in legal terms, enjoy the benefits of drop-box citizenship while human beings, who are also persons, sweat over their 1040s? It's not that complicated. If, say, the people who run a company live and work in northern New Jersey, let's agree that the company is American. Until Herbert Henkel, Ingersoll-Rand's C.E.O., moves his family, his desk, and his executive corps to Bermuda the firm's tax address there is just a joke.
And the joke's on us, because Ingersoll is simply doing what the law allows. So maybe there ought to be another law. Senator Charles Grassley, a solid Republican and an avid tax-cutter, introduced legislation last week that would discourage reincorporations like Ingersoll's, but the bill is sure to run into stiff opposition from House Republicans, who, cajoled by industry lobbyists, tend to equate the closing of any tax loophole with a tax hike. "We want to get at those cases where there's no legitimate business purpose behind the move, where companies have nothing more offshore than a piece of paper and a filing cabinet," Grassley says. Watch to see which way your congressman jumps.
The billions of dollars in tax revenue lost to corporate tax shelters is bad enough. But the real problem with the proliferation of shelters is that they sour the average American on one of the obligations of citizenship. "The more people think that the tax system is operating unfairly and arbitrarily, giving some special breaks, the more they'll look for a way not to pay taxes," Michael Graetz, a Yale law professor, says. The system depends on people's being what the political scientist Margaret Levi calls "contingent coöperators." Most Americans pay their taxes willingly—if grudgingly—even though in purely economic terms it's rational not to, given that the chances of getting audited are so slim. But people are willing to pay only as long as they think that everyone else is paying, too, and as long as they believe that tax dodgers will get their due. Big-name corporate tax scamps, like Ingersoll-Rand, are helping to corrode the very system that makes America work. They might as well take a jackhammer to Mt. Rushmore.
— James Surowiecki |
