Enron and other big companies have escaped taxes in recent years through financial maneuvers so complex that the Internal Revenue Service has been unable to understand them, the Senate Finance Committee will be told this morning by Congressional tax experts who spent nearly a year going over Enron's tax returns.
Enron, the Houston-based energy trading company, was one of the most politically connected businesses in the country, with ties to President Bush and many other federal officials. Its name became synonymous with corporate scandal when its stock price collapsed and it sought bankruptcy protection in December 2001. Enron's chief financial officer is awaiting trial on fraud and other charges.
The report's disclosures on corporate tax avoidance, and its details on executive compensation, "are eye-popping," said Senator Max Baucus, Democrat of Montana, the ranking minority member of the Senate Finance Committee and one of only two people who would speak publicly yesterday about its contents.
Molto misterioso! The scale of Enron's hypnotic powers boggles the mind:
"The report paints quite a shocking picture of Enron's tax gimmicks and structured transactions and executive compensation," Mr. Baucus said. "Bad as Enron is going to come out, the deeper concern is this is just not Enron alone. It involves lots of other companies and how they inundated the I.R.S., out-complexed the I.R.S. The I.R.S. just cannot handle the complexity of some of these transactions."
Enron created 881 offshore subsidiaries, 692 of them in the Cayman Islands, as part of its strategy to avoid taxes.
The committee chairman, Senator Charles E. Grassley, Republican of Iowa, called the report "an absolute barn-burner."
At a confirmation hearing for new Tax Court judges yesterday, Senator Grassley said the report "provides for the first time the complete story of Enron's efforts to manipulate its taxes and accounting."
"The report is very disturbing in its findings," he added. "From this report, I'm worried about the Tax Court blessing highly artful interpretations of the code."
Enron did not pay taxes in four of the five years before its collapse, according to the financial statements it sent to shareholders. The company has hinted in the past that it may have actually paid some tax during those four years because of the corporate alternative minimum tax. If Enron did pay some alternative tax in those four years, it would raise fresh questions about the reliability of reports to shareholders and whether the Securities and Exchange Commission is adequately policing rules on the disclosure of material information about corporate finances.
So far none of this is news, although it's worth repeating for a variety of reasons.
Tucked into the article was something a bit less unique to Enron and bit more shocking in its quantification:
Tax shelters are sold primarily to the very biggest companies because they can pay the largest fees to the accounting and law firms and investment houses that design them and sell them on the condition of confidentiality. The I.R.S. has stepped up efforts to find tax shelters, but the agency lacks the resources to address the problem fully, Charles O. Rossotti, the former I.R.S. commissioner, warned last fall in his final report to his oversight board.
Corporate profits reported to the I.R.S. in 1998 were $155 billion less than those reported to shareholders, according to Mihir A. Desai, a Harvard economist. His study and others suggest that tax shelters may be the primary reason for this difference, which is costing the government as much as $54 billion in taxes each year.
The 10,000 or so largest companies paid 20.3 percent of their 1999 profits in federal income taxes, while the next tier of companies paid at a 30.9 percent rate, according to an I.R.S. analysis of corporate tax returns for the year. The largest companies had 26 times the profits of the second tier of companies, which paid income taxes at a rate 50 percent higher than the largest companies, the I.R.S. data shows.
So much for double taxation of dividends. They apparently weren't even properly taxed the first time, if the cash was siphoned off to fund elaborate tax shelters.
The middle class of companies, like the middle class of citizens, is paying more than its share. The wealth redistribution schemes of this administration and the Republican Party are designed to tilt the playing field toward their contributor-masters, so that all wealth rolls uphill and concentrates in the fewest hands.
If we're losing $54 billion a year to shelters, what would it cost for the IRS to "address the problem"? $1 billion? $10 billion? Even if it cost an annual $25 billion to enforce IRS rules, We the People would be getting over 100% return on this investment — the closest thing we'll ever see to a Nasdaq bull market while a sticky-fingered Republican is president.