The Cheating of America: How Tax Avoidance & Evasion by the Super Rich Are Costing the Country Billions, & What You Can Do About It
Charles Lewis, Bill Allison, & the Center for Public Integrity
HarperPerennial
Paperback
336 pages
April 2002

Today our stock markets are in free fall, formerly respected CEOs of famous corporations are "taking the fifth" before Congressional committees, and the smell of "cooked books" permeates Wall Street. In the timely The Cheating of America we learn that corporations and super rich individuals have also long been avoiding and evading taxes on their loot.

The tax collector has historically been the villain; the tax evader, the hero. In the 1776 classic The Wealth of Nations Adam Smith believed the tax evader is "in every respect, an excellent citizen...." This idea is being reexamined as thoughtful people come to realize that the balance of power between government and corporations has shifted.

Few Americans will be surprised by all this, in view of the recent revelations concerning Enron, Worldcom, and a growing list of others cheating their employees and stockholders, but the extensive investigation of IRS records begun in 1996 by the Center for Public Integrity, reveals that "cooking the books" is not new to corporate America and is more widespread than previously imagined. The results of their investigations read like tomorrow's headlines, with numerous and detailed case studies ranging from individuals like Leona Helmsley, to a parade of Fortune 500 corporations and banks. In 1998 IRS Commissioner Charles O. Rosotti, testified that tax avoidance and evasion cost each taxpayer $1,600 plus a year:

"...thousands of the most affluent individuals and corporations routinely avoid and evade paying billions of dollars in taxes each year. And the level of unabashed greed seems to be increasing. Everyone from the principals of the largest accounting, law, and brokerage firms to the sleaziest, fly-by-night Internet shysters are promoting offshore, cyberspace, and other avoidance schemes, and many of the most respected corporations and individuals are heeding their advice."

Charles Lewis, a former investigative reporter for ABC and CBS news, and producer for "60 Minutes," is founder and executive director of the Center for Public Integrity (www.publicintegrity.org), a nonprofit, nonpartisan research group concentrating on ethical and public service issues. Coauthor Bill Allison is a former researcher for the Philadelphia Inquirer. They were aided by a team of investigators who for two and one-half years combed IRS files and tax court records, interviewed government officials and traveled from Beverly Hills to Belize to find the individuals and corporations profiled in the book. Lewis and the Center have also published The Buying of the President, The Buying of Congress and The Buying of the President 2000.

Helmsley, whose sins seem paltry in comparison to today's offenders, was convicted in 1989 of 33 counts of tax evasion, sentenced to four years in prison, and fined $7.1 million. "Your conduct was a product of naked greed," U.S. District Judge John M. Miller told her.

The next examples of naked greed the authors cite are the "Benedict Arnold billionaires" who took foreign citizenship, relocating offshore to legally escape corporate taxes, leaving their unpaid tax burden to be made up by the rest of Americans.

Then there are the corporations. For example, after a huge government bailout 20 years earlier, Chrysler Corporation in 1998 bailed out of America, becoming a German company, joining a long line of American companies switching countries to avoid U.S. taxes.

Furthermore, the super wealthy, when caught illegally evading taxes, can settle with the IRS for pennies on the dollar, unlike less affluent citizens without political clout or large legal teams.

The unfairness persists in Medicare and Social Security taxes as well. Following the colorful and convoluted career of Roy M. Speer, founder of the Home Shopping Network, the authors note he paid just 1.2 percent of his income into the trust funds in 1989.

Movie industry moguls are right up there with oil producers (who could give lessons to Enron in fleecing shareholders) utilizing offshore trusts and tax shelters to generate millions, but end up with no profits through accounting illusions. The taxing policies of Ireland, Aruba, Belize and other countries have also become a powerful lure to prominent movie stars as well as underworld characters.

Joe Conforte, when owner of Nevada's (in)famous Mustang Ranch, led the trend followed by firms like Microsoft and Xerox, saving millions in Social Security taxes, health insurance and pensions by reclassifying the employees of his brothel as Independent Contractors, shifting the tax burden to them.

Many of these profiles are fascinating, especially those dealing with well-known companies and individuals. Some of the intricate and detailed manipulations read more like a legal treatise, but for those engrossed in the financial world who want to know about these scams and scammers (and that should include everyone who owns a share of stock or pays taxes), this book makes for fascinating reading. Movie fans, too, will learn why their favorite stars chose to settle in countries like Ireland.

The investigators found various ominous trends. In 1995, for example, more than 39,700 millionaires, representing 3 of every 10,000 taxpayers, claimed 38 cents of every dollar in deductions for investment interest expense. And so it goes, in every aspect of finance. As the corporate percentage of federal income taxes decrease, the tax burden upon non-millionaire, individual taxpayers increases.

Charities did not escape their scrutiny. In 1999 more than 1.5 million non-profits, including 350,000 religious organizations, controlled $l.3 trillion in assets, and engaged in many businesses.

Although the book's subtitle promises to tell you what you, the individual taxpayer, can do about all this greed and corruption, the answer, they confess, is little:

• You can refuse to pay cash for services ($29.3 billion in revenue is lost yearly that way).
• You can be leery of schemes that promise tax savings too good to be true, such as the ever-popular line: "The IRS doesn't want you to know about this."
• Stockholders can demand to receive copies of each corporation's 10K, the annual report filed with the Securities Exchange Commission (for what we now know it's worth).

"The rule of law is one of the greatest inheritances of civilization, the great bulwark against anarchy and barbarism. And the perils of having a financial Wild West, operating alongside the regulated, legitimate economy, are all too real. Osama bin Laden reportedly boasted that his followers had used to their advantage 'the cracks inside the Western financial system' .... It seems the world can no longer afford to neglect mending those cracks."

There is fodder here for several more Center books.