IT TAKES A politician to be truly out of touch with financial matters. Take, for instance, the Finance Committee chairman of the United States Senate, Charles Grassley, who said last week that the tax avoidance schemes of US corporations read like the plot of 'a conspiracy novel'. Mr Grassley was commenting on the findings of the latest report on how the bankrupt Enron had baffled the US Internal Revenue Service (IRS) with complex deals while booking profits of hundreds of millions of dollars. 'We are going to have the veil torn off tax shelters and the world of manipulation accounting,' he said. Well, in the first place, sir, you will have to do it under a different president than you have now. The present White House incumbent is more minded to reducing corporate tax burdens and, given his past close connections with Texas oil tycoons, the Enron example may not be one that particularly stirs his wrath. More than that, however, you misunderstand the role of corporate accountants. They work for the companies that employ them, not for the IRS, and it is their job to keep corporate tax payments as low as they possibly can. Company directors would actually be culpable of a breach of responsibility to their shareholders if they did not tell their accountants to do so and those who defied such directives could legitimately be sacked. This does not say they should break the law or that their directors should tell them to do so, but I note, Mr Grassley, that you referred to tax avoidance, not tax evasion schemes. Tax avoidance is entirely legal. No taxpayer is obligated to pay more tax than the minimum required by tax codes and every taxpayer is entitled to look for every loophole he or she can find. This is not tax evasion. It is also not necessarily a breach of the law when companies report US$154.4 billion more in profits to their shareholders than they do to the IRS, as a study by one Harvard economist says they have done. Profit in a profit-and-loss (P&L) account is not a hard and fast figure. It is intended to give shareholders a reasonable picture of how their company is performing, but it is subject to many different interpretations of how income should be recognised, which is why auditors stress the words 'fair view' when approving accounts. They do not say 'absolutely accurate'. They cannot. The P&L account is like a painting, not a photograph. It is the best that can be done with a P&L account. Thus, if a government stimulates certain forms of investment and grants high annual depreciation allowances that overstate how fast the useful lives of those investments are being shortened, a firm may legitimately want to give its shareholders a more accurate view. This produces higher stated profits in the shorter term. It does not necessarily do so in the longer term if the investment is fully depreciated in the tax books but still incurs depreciation in the P&L account that the firm reports to shareholders. It is entirely legitimate and has been practised ever since the first corporate profit tax was imposed, even in Iowa. Where have you been, Mr Grassley? And why should it be a count against Enron that it used 'some of the nation's finest' accountants, investment banks and law firms to devise its tax shelters? Of course, it did. Every taxpayer seeks to get the best tax avoidance advice possible and is fully entitled to do so. The difficulty, sir, is rather that US legislators like you have approved a tax code so complicated that legions of high-paid experts are required to understand all its ins and outs. I agree it is a shameful waste of so many top-notch brains that could be employed in something productive, but if you wish to find a culprit for this waste then look in a mirror. I think it highly doubtful, however that your fulminations against tax shelters and tax manipulation will solve the problem. If anything, they are likely to produce even more convolutions, given the way the US Senate is so highly susceptible to high-priced corporate lobby groups. The fact is that we hear all these stories of corporate misdoings now because US financial markets are in a downtrend after a multi-year bull market. This always reveals financial scandals that bull markets hide but does not mean there are more at the moment. If there is a turnaround, I rather expect that you will forget them and talk about farm policies again. If you wish to improve US federal revenues, why do you not protest more loudly against your president's corporate tax cuts? Oh, I see, you are a Republican party member, too. Well, well, we know the nature of Congress, even as far away as Hong Kong.
