Corporate income tax avoidance in America

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A couple of weeks ago I wrote about the latest report from our government on corporate income taxes: About 2/3 of corporations pay no income tax. That report is somewhat misleading because certain corporations (like the one I own) don't pay income tax on earnings, but the owner personally reports that income and pays the taxes. Technically the corporation is not paying, but the owner is paying on its behalf.

I also argued at that time that corporations don't really pay taxes anyway. Consumers do. As taxes are raised, prices consumers pay for goods go up to cover them. So if we're looking to "stick it" to the corporations, we have to remember that we're the ones really paying for it. (And do we really need higher prices now?) My third argument against making corporations pay hefty income taxes is the effect it has on innovation and the creation and maintenance of a company. The more costs involved in doing business, the less attractive it is to start a company, and the more likely it is that the companies (and jobs) will go elsewhere.

One think tank suggests
that corporate income taxes will be the next big "scandal" in business. (And don't news watchers love scandals?) There are many legitimate loopholes in the tax code, and companies pay big bucks to consultants and tax experts who help find them. But then there's the fine line that can be crossed... over into the illegal world of tax evasion.

And that's what some say is the next big story. The Internal Revenue Service estimates that corporations illegally avoided $32 billion in taxes in 2001. That's pure guesswork on their part, but the figure seems alarming. And can you imagine the cost of all the tax return audits?

We've got an expensive, broken system. It's a complicated system that is largely unfair across the board (Did you know that half of American households pay no income tax?), is expensive to comply with, is even more expensive and difficult to enforce, and is no longer useful. The tax system in America is clearly not working and we need an alternative.

Why not scrap our income tax system in exchange for a system like the Fair Tax, which is far more equitable, much easier and less expensive to enforce, and more widely understood by the average taxpayer? The proposed system would wipe out income taxes and replace them with a national sales tax on retail purchases. Taxpayers would no longer be penalized by the government for earning money. They'd only be subject to taxes when they spend that money. Provisions are built into the system to ensure that poor people would not be unfairly burdened. And this system would be much easier to enforce than the current income tax system. It's something to think about...

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.
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