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"Blurry Lines" Separate Legitimate and Illegitimate Tax Handling

6/12/2003 --

Corporations (like individual taxpayers) operate in a tax environment with "blurry lines between legitimate tax planning and illegitimate tax evasion," says Joel Slemrod of the University of Michigan Business School.

No matter how well tax laws are written or enforced, there always will be "gray areas" allowing companies to comply with the letter of the law while undermining the intent of the policy behind the words. Each corporation, Slemrod says, must decide how creative and aggressive to be in its tax handling--and then be prepared to take the consequences for its decisions.

Slemrod is the Paul W. McCracken Collegiate Professor of Business Economics and Public Policy and serves as director of the Office of Tax Policy Research, an interdisciplinary research center housed at the Business School. He has been a consultant to the U.S. Department of the Treasury, the World Bank, the Canadian Department of Finance and the finance ministries of other countries. In addition, he is a member of the Congressional Budget Office Panel of Economic Advisers and has testified before Congress on domestic and international taxation issues.

Corporate responsibility in tax matters, as well as accounting, has become a hotly debated issue in recent months. News headlines have reported striking corporate income tax-reduction schemes, such as re-incorporating in Bermuda and creating special tax shelters for executives. Other instances of non-compliance and "creative compliance" by companies seeking to minimize or evade income taxes altogether have been less publicized. Exactly how far this creative compliance is pushed, Slemrod says, depends upon a firmís aggressiveness in seeking out alternative interpretations and taking advantage of gaps or weak spots in the tax law.

He lays part of the blame at the feet of Congress for the current dilemma in which corporations collectively spend billions of dollars complying or creatively complying with a tax that has been contributing an ever-dwindling amount to federal coffers for decades. "It is a matter of the responsibility of Congress to enact sensible tax policy, and to enable the IRS to enforce the tax policy in place," Slemrod said.

In the long run, corporate tax dodgers hurt everyone. Citizens lose their trust (a key ingredient for economic prosperity) in government and in corporate executives, and may question their own tax obligations, he says. Corporations risk outraging the American public and prompting the swift passage of new, possibly harsh, tax legislation. And the government loses much-needed revenue and its stock of goodwill, or social capital.

The best solution, Slemrod says, is for the business community to engage creatively with the government in developing sensible tax laws that "address the legitimate interests of an important stakeholder of corporate America---the American taxpayer."

For more information, contact:
Bernie DeGroat
Phone: 734.936.1015 or 734.647.1847