Why Aren’t We Waterboarding Billionaire Tax Cheats?

Imagine Superman not being able to use his x-ray vision in battle with the evil Lex Luthor.

Either the criminal mastermind had placed his laser weapons behind lead shields, or he had exposed the human-friendly alien to radiation from a special kryptonite rock.

Either way, the superhero wouldn’t get the job done because the villian exploited his nemesis’ weaknesses.

Similarly tied are the hands of the Internal Revenue Service at odds with super-wealthy Americans who evade paying taxes to the United States.

The super wealthy can currently keep their finances secret in offshore accounts and avoid taxes through the “offshore dividend tax loophole.”

Essentially, a shell company with an account at a foreign bank outside the United States could dodge taxes on its dividends by using a derivative transaction called a “total return swap.”

The swap entails investors selling stocks to Wall Street at the time of their dividend payments while the securities firms would pay the investors equal to the dividend plus stock gains via special contracts.

So the investors could claim that since they don’t earn dividends, they don’t need to pay the 30 percent tax; the Wall Street firms, though, might still pay 15 percent on the dividends plus claiming more deductions for the swap.

And the IRS could do nothing about it because the practice is legal.

But that could be changing, according to a bill filed in Congress last week. Well, sort of.

The Baucus/Rangel legislation would levy a 30-percent “withholding tax” on the income of U.S. assets held by foreign firms that fail to disclose their American account holders and their balances, deposits, and withdrawals.

However, it seems odd that the U.S. government would merely impose “a fee for maintaining bank secrecy,” as described by Philip West, a former international tax counsel at the U.S. Treasury.

In other words, think of Superman allowing Luthor (or even non-U.S. citizens owning U.S. investments) to blind him in exchange for a quick buck.

Said Reuven Avi-Yonah, a tax law professor at the University of Michigan: “This really becomes a fight between two countries over bank secrecy.”

Plus, the Baucus/Rangel bill stops short at hitting these tax cheats where it hurts — their island havens.

Even Rep. Lloyd Doggett’s proposal to make all companies with U.S.-based executives “American companies” for tax purposes falls yards short.

Why the federal government doesn’t waterboard, after kidnapping, all of these tax cheats worth multi-billion dollars and their accountants is beyond us.

However, the IRS’s new Global High Wealth Industry group gives us hope. If it does its job as IRS Commissioner Douglas Shulman says, then the richest Americans worth at least $10 million and up will feel at least a pinch.

Audits starting next month will target partnerships, offshore trusts, and other complex practices that dodge tax payments,

Shulman said, “Our goal is to better understand the entire economic picture of the enterprise controlled by the wealthy individual and to assess the tax compliance of that overall enterprise.”

Go get them!

— Nathan Diebenow