By Zach Carter on Huffpost Politics
WASHINGTON — During a Monday press conference addressing Standard & Poor’s downgrade of U.S. debt, President Barack Obama reaffirmed his commitment to raising taxes on the wealthy. But as he pushes to get the rich to pay more into federal coffers, Obama is also urging Congress to approve a trade agreement that would cement a key tax avoidance tactic deployed by some of the richest Americans.
“What we need to do now is combine those spending cuts with two additional steps: tax reform that will ask those who can afford it to pay their fair share and modest adjustments to health care programs like Medicare,” Obama said during the address, referring to steps the U.S. should take in addition the cuts agreed to to raise the federal debt ceiling.
Just two days before, during his Saturday radio address, Obama urged Congress approve three trade deals, including one with Panama that would permit Americans to easily stash assets in the Central American country, a notorious tax haven for the wealthy and American corporations.
“It’s time Congress finally passed a set of trade deals that would help displaced workers looking for new jobs,” Obama said, “and that would allow our businesses to sell more products in countries in Asia and South America — products stamped with three words: Made in America.”
But Panama’s entire annual economic output is around $26.7 billion a year, according to The World Bank — only about two-tenths of one percent of the U.S. economy — making the effect on jobs minuscule at best. Some economists expect other agreements with South Korea and Colombia to create net job losses in the U.S., as corporations ship American jobs overseas to take advantage of cheaper labor.
It may not have a large economy, but Panama does have some of the most stringent bank secrecy laws in the world, making it extremely easy and inexpensive for U.S. citizens to set up offshore corporations and bank accounts. Establishing the corporation and bank account costs less than $2,000, and any money that Americans stash in these entities is not taxed. Bank secrecy laws and extremely lax corporate registration standards make it very difficult for the Internal Revenue Service to track transactions transferring funds to these Panamanian destinations from the United States. Small surprise, then, that Panama is home to nearly 400,000 offshore corporations, more than any other nation except Hong Kong.
“A tax haven . . . has one of three characteristics: It has no income tax or a very low-rate income tax; it has bank secrecy laws; and it has a history of noncooperation with other countries on exchanging information about tax matters,” said Rebecca Wilkins, senior counsel with Citizens for Tax Justice, a nonpartisan nonprofit dedicated to improving U.S. tax policy. “Panama has all three of those. … They’re probably the worst.”
The trade agreement with Panama would effectively bar the U.S. from cracking down on this activity. The U.S. would not be allowed to treat Panamanian financial services transactions differently from transactions in nations that are not tax havens. It would also be unable to pursue some standard anti-money laundering techniques in Panama. Combating tax haven abuse in Panama would be a violation of the trade agreement, exposing the U.S. to fines from international authorities.
“It directly undermines Obama’s putative domestic agenda of job creation, cracking down on tax havens and collecting revenue from tax-dodging corporations,” said Lori Wallach, Director of Public Citizen’s Global Trade Watch. “The [free trade agreement] would forbid future use of existing policy tools to combat financial crime.”
The deal with Panama was first negotiated by President George W. Bush in 2007, but in April, Obama met with Panama President Ricardo Martinelli to announce the signing of a new information sharing agreement as part of the broader deal to help facilitate tax enforcement.
“Thanks to the leadership of President Martinelli, there have been a range of significant reforms in banking and taxation in Panama,” Obama said. “And we are confident now that a free trade agreement would be good for our country, would create jobs here in the United States.”
But the tax enforcement agreement amounts to little more than a gesture, relying on a decades out-of-date framework that is not very effective at recovering lost tax revenue. Thanks to the TIEA, American tax officials can now obtain tax information on U.S. citizens stashing money in Panama. That’s great — if they already know which citizens are using Panama-based schemes to dodge U.S. taxes. But, of course, the IRS doesn’t actually know who is doing this — if it did, it wouldn’t need to gather bank account information in the first place.
“The Tax [information] Exchange Agreement that we’ve executed with Panama is really weak,” said Wilkins. “There’s just a lot of reasons why it’s not going to be very effective.”
The U.S. has negotiated much more helpful TIEAs with other countries in the past. The IRS, for instance, is automatically notified whenever U.S. taxpayers deposit money in a Canadian bank, making it effectively impossible for a U.S. citizen to hide money in Canada.
Raising taxes on wealthy Americans, of course, will have little effect if those same citizens can simply hide funds from the IRS in Panama.
While the IRS is starved for information on U.S. individuals hiding money in Panama, it has the opposite problem among U.S. corporations. In 2008, the Government Accountability Office issued a report noting that 17 of the 100 largest American companies were operating a total of 42 subsidiaries in Panama, suggesting that these subsidiaries could be used to help firms skimp on their U.S. tax bills.
But while the IRS knows that firms are operating in Panama, it doesn’t have the resources to investigate or prove that the offshore activities of U.S. companies are devoid of economic substance other than tax-dodging. While 17 of the 100 largest corporations were operating Panamanian subsidiaries, a total of 83 were operating sub-companies in nations the GAO labeled as tax havens, with some corporations using dozens of different subsidiaries.
According to the Bureau of National Affairs’ Daily Tax Report, IRS official Samuel Maruca told an audience at a National Association for Business Economics conference that his agency didn’t have enough funding to chase cases of “transfer pricing” abuse — a technique in which U.S. corporations sell their own goods to foreign subsidiaries at bizarre prices in order to reduce their tax bills.
“To put it bluntly, we can’t afford to pursue every case — even cases that may have considerable merit,” the official said. “We have to be strategic about where we are willing to invest our resources.”
The U.S. Chamber of Commerce and the Business Roundtable, two lobbying groups pushing hard to approve the Panama deal, declined to comment for this article.