Tag: TaxJusticeBlog

Puzzle this. Microsoft believes the U.S. government is trying too hard to prove that it’s avoiding federal income taxes. The latest legal salvo out of the company’s Redmond, Wash., headquarters alleges that the IRS improperly hired outside lawyers to help prosecute its tax avoidance case against the tech giant.

But the company’s newest annual financial report, released without fanfare late last Friday, inadvertently confirms that the IRS’s assertion that Microsoft is shifting its profits offshore for tax purposes is basically true.

Like other corporations, Microsoft is required to annually disclose its offshore “permanently reinvested earnings” — profits that it has declared, for tax purposes, to be foreign profits that the company has no intention of repatriating to the United States. Companies also disclose the amount of tax they would pay if these profits were officially repatriated to the U.S. If Microsoft wants to convince the IRS, or the American public, that it is innocent of the tax-dodging charges that have been leveled against it, these disclosures aren’t helping its cause.

Microsoft’s latest annual report discloses that the company now has a total of $108.3 billion in permanently reinvested offshore profits, an astonishing $15 billion jump over the $93 billion they reported at this time last year. But some things don’t change: the company says that its U.S. income tax on repatriation of these profits would be $34.5 billion, or a 31.9 percent tax rate.

Since the tax due on repatriation is 35 percent minus whatever tax has already been paid to foreign governments, this means that Microsoft has paid an effective income tax rate of just 3.1 percent on its $108.3 billion offshore hoard, the same tiny rate that it reported last year. This disclosure strongly indicates not only that Microsoft is offshoring its profits more aggressively than any other company except Apple, but also it is continuing to put these profits — at least on paper — in low- or no-tax countries. Of course, this is exactly what the IRS is accusing Microsoft of doing.

So here’s the inconsistency: In its annual financial reports, Microsoft dutifully admits that it is aggressively stashing its profits in offshore tax havens, even as it protests the vigor with which the IRS is trying to crack down on this tax-avoidance activity. Perhaps the company’s PR and accounting departments need to get on the same page.

Congressional leaders are using a discredited economic theory to help push through a costly package of tax cuts that mostly benefit large corporations.

Last week, the Joint Committee on Taxation (JCT) scored the Senate’s version of controversial tax extenders legislation using dynamic scoring, a method that purports to quantify the macroeconomic effects of tax changes based on widely discredited supply-side economic theories.

The tax extenders bill is the first to be subject to a House rule passed earlier this year requiring the JCT to project the cost of substantial tax legislation using both the conventional (static) method of scoring as well as dynamic scoring.  

The tax extenders are a package of various temporary tax breaks that Congress has to vote to renew every two years or so. The bulk of the cost of the package are attributable to a few tax breaks for corporations, such as “bonus depreciation,” the research tax credit and the “active finance” exception.  As we have pointed out before, tax extenders are mostly bad policy and an example of congressional hypocrisy, as the costly business tax breaks are deficit-financed while Congress insists that the costs of legislation benefitting low- and middle-income families be offset by spending cuts.

Using dynamic scoring allows lawmakers to grossly underestimate the true cost of the tax breaks. The JCT estimates that the corporate tax cuts in the extenders bill would lead to slightly higher economic growth in the short term, thereby reducing the projected cost of the bill by about 11 percent.

Of course such sleights of hand are nothing new. For more than a decade, Congress has vastly understated the cost of the extenders by enacting them for only short periods, even though everyone expects them to be reenacted continually. According to the Congressional Budget Office, making these tax breaks permanent would cost more than $700 billion over 10 years.

This year, Congress has added dynamic scoring to its skullduggery. The scoring method employs a primitive economic model that is based on the assumption that tax cuts for corporations and the wealthy almost always will be good for the economy.  In contrast, the model assumes programs and tax changes that help ordinary taxpayers will be economically harmful.

Historically, these supply-side assumptions have not passed muster. The theory got a full-blown test under President Ronald Reagan in 1981, and it failed miserably, as Reagan himself soon acknowledged.  Even the Treasury Department under President George W. Bush essentially refuted the idea that tax cuts necessarily lead to economic growth. 

Even with the assumption of short-term economic growth, JCT notes that the extenders bill will result in decreased economic growth in the long run, and thus reduce revenues, due to the larger federal debt and associated increases in private borrowing costs. While this long-run effect is anticipated to be “small,” JCT did not specify what it means by small, so the slowdown could very well reverse the alleged tiny growth increase projected within the 10-year budget window.

Congress, however, will probably ignore this caveat, and, conveniently, focus solely on the short-term economic boost that is mistakenly assumed to result from tax cuts for corporations and the wealthy, while neglecting the long-term economic harm.

The flaws of dynamic scoring come on top of the long-time problem with the conventional cost estimate, which vastly understates the true 10-year cost of the tax extenders.  The Senate extenders bill would extend the expired tax provisions retroactively to the beginning of this year and through the end of 2016. The two-year cost of these measures would be $170 billion. But the Joint Committee staff’s analysis makes the ahistorical assumption that the provisions will actually expire after 2016. Because the biggest item in the bill, “bonus depreciation,” trades lower revenues in early years for higher revenues later when that provision will allegedly expire, the 10-year cost estimate for the bill ends up being lower than the two-year cost, at only $97 billion.  Dynamic scoring then brings the official cost estimate down to $87 billion.

Corporate lobbyists and their congressional allies may be pleased with JCT’s questionable dynamic scoring estimate that makes the extenders bill appear slightly less costly. But they may be disappointed at how small the alleged positive economic effects are. The rest of us should be very worried, however, that the JCT staff seems to have bought into a diluted version of the long discredited supply-side economics theory.

Former New York Gov. and now presidential candidate George Pataki has made cutting taxes one of the central themes of his political career. In fact, Pataki has repeatedly said over the years that “I’ve never met a tax cut I didn’t like.” His tax cuts largely went to New York’s wealthiest taxpayers and deprived the state of critical revenue over his tenure as governor.

Tax Record as Governor of New York

From the outset, Pataki pushed a series of regressive tax cuts including dropping income tax rates 25 percent across the board, cutting the corporate tax rate, and expanding areas with low taxes called enterprise zones, special districts with lower tax rates. These were followed by a series of cuts to other taxes, including the beer tax to the bank tax. By his own estimate, Pataki claims to have cut 19 different taxes and “saved” New Yorkers $140 billion during his entire time as governor.

Pataki’s fervor triggered a destructive tax-cutting competition with the legislature in the late 1990s when the speculative boom on Wall Street temporarily fueled state tax revenues. It was in the midst of this fiscal recklessness that the governor and the legislature eliminated New York City’s commuter income tax over the objections of New York City’s then Mayor Rudolph Giuliani, and despite the fact that the average commuter enjoyed salaries twice as high as those of the average New York City resident.

While Pataki is happy to tout his tax cuts at the state level, he conveniently leaves out the fact that these cuts meant substantial reduction in aid to local governments and schools. This actually compelled local governments across the state to increase property taxes (which are significantly more regressive than the state-level income taxes) to make up the difference, with lower-income school districts bearing even more of the brunt.

The damage to the state’s public investments did not end there. The tax cuts meant devastating cuts to the Metropolitan Transit Authority’s capital spending. Just a few years after Pataki’s final term, lawmakers had to pass a massive financial rescue of the MTA system.

The consequences of his irresponsible tax cutting would have been even more devastating, but two things helped cushion the impact. First, in 2003 state lawmakers overrode a veto by Pataki and enacted income tax surcharges on taxpayers with incomes over $100,000 to help cover the substantial state budget gap caused by the early 2000s recession, corporate financial scandals and the aftermath of the 9/11 World Trade Center attacks. In addition, Pataki’s tax cuts were aided by the run-up in the stock market during his early years as governor, which provided a larger base of revenue.

It is also worth noting that Pataki sold his tax cut along classic supply-side lines, meaning that he argued that tax cuts would jumpstart the economy to such an extent that they would be well worth it. After all was said and done however, Pataki’s tax cuts are yet another example of how tax cut-driven economic growth strategies always fall flat.

Record as a National Figure and Candidate for President

During his time as governor and in the years since, Pataki has staked out several positions on federal tax policy issues.

Pataki has explicitly staked out a position against the creation of a national sales tax. The resolution that he endorsed makes a federalist case against the tax, pointing out that the sales tax base has historically been “reserved for and relied on by state and local governments.”

Despite his experience running up the debt in New York, Pataki attempted to stake out a position as a deficit and debt hawk in 2011 by starting an advocacy group called “No America Debt.” While his group was supposed to be anti-debt, the reality is that it was counter-productive to this effort in that it advocated against any form of revenue increases as part of an ultimate debt reduction agreement, a position rejected by most of the public.

In the early stages of his candidacy for president, Pataki has been vague about his vision for reforming the federal tax system, crucially leaving out whether he believes more revenue should be raised through tax reform. His announcement speech, for example, noted that the tax code should be replaced with one that is “simpler” and has “lower rates that are fair to us all.” While this says very little about what he would actually do in real terms, he did go a step further at an event in Iowa where he said that he would eliminate virtually all tax exemptions and credits with the exception of the mortgage interest deduction and child tax credit. The key question is whether Pataki would really advocate eliminating very popular tax breaks like the charitable deduction and how he would structure any sort of tax rate reductions. Without knowing this, it’s impossible to know whether he would seek a tax reform that would be revenue reducing and how it would impact the distribution of the tax code.

Nine-term congressman and current Ohio Gov. John Kasich has received  accolades for his perceived position as the “moderate” or “compassionate” candidate in the 2016 GOP presidential race. It’s true that he embraced a few policies benefiting low-income families, notably the expansion of Medicaid, but a handful of progressive policies do not a moderate make. The bulk of Kasich’s economic agenda as a governor and former congressman has been pursuing tax cuts for the wealthy and increasing taxes on low- and middle-income families.

Record as Governor of Ohio

As a gubernatorial candidate, Kasich took a radically regressive position on tax policy by calling for the phase out the Ohio’s personal income tax. As the Institute on Taxation and Economic Policy (ITEP) notes, income taxes are the only progressive portion of state revenue, so its elimination in Ohio would have made the state’s already regressive tax system even more so.

Early in his term, Kasich dialed down his ambitions, choosing instead to push for cutting the state’s income tax on capital gains. An ITEP analysis of a legislative proposal to cut the capital gains tax in Ohio found that three-quarters of the benefit would have gone just to the wealthiest one percent of taxpayers, who would have received an average cut of more than $6,500 a year. The governor had to back off his capital gains proposal due to constitutional concerns.

Ultimately, state lawmakers passed a budget that included regressive tax cuts, including a complete repeal of Ohio’s estate tax (at an annual cost of $286 million), a credit for investments in small businesses and a smattering of other provisions. The estate tax repeal was especially harmful since 80 percent of its revenue was distributed to local governments, meaning that its repeal forced local governments to cut critical services like education or raise substantially more regressive property taxes to compensate for the lost revenue.

In 2013, Kasich proposed a massive tax shift away from the progressive income tax toward a broader sales tax. After much wrangling in the state legislature, the tax cut package that emerged included a 10 percent across-the-board cut in income tax rates, a 50 percent deduction for pass-through business income up to $250,000, an increase in the state’s regressive sales tax from 5.5 to 5.75 percent and the introduction of a 5 percent, capped non-refundable earned income tax credit (EITC). Despite the inclusion of the EITC, the reality is that overall the tax-cut package resulted in a slight tax increase on the bottom 40 percent of taxpayers, even as the top one percent of taxpayers received an average annual tax break of $6,083.

Kasich worked in 2014 to increase the state’s EITC from 5 to 10 percent of the federal EITC. He has since used his support for the EITC to boost his bona fides as a compassionate conservative, but the credit  is nonrefundable and thus provides little or no help many of the state’s lowest income residents. Furthermore, boosting the state credit by 5 percent does not negate his tax giveaways to wealthier residents and businesses.

In 2015, Kasich continued his push toward shifting more of the share of taxes owed from the well-off to low- and middle-income families by calling for more cuts in state income tax rates and offsetting the lost revenue with an increase in regressive sales taxes. While Kasich’s initial proposal was even more regressive, the compromise proposal enacted into law will still result in an average annual tax break of $10,236 for those making over $388,000  and a slight tax increase for the bottom 20 percent of taxpayers. The compromise includes a 6.3 percent across-the-board income tax cut, a 35 cent increase in the cigarette tax and an increase in the income tax deduction on the first $250,000 of business income from 50 to 100 percent.

Kasich’s legacy in Ohio is a substantial tax shift from the wealthy taxpayers of his state toward low- and middle income families. At the same time, he has deprived the state of revenue to pay for critical investments in infrastructure, education and public safety.

Record as Congressman

During his nine terms in Congress, Kasich was an avid anti-tax conservative, who worked relentlessly to cut taxes for the rich. As early as his first term in Congress, Kasich co-sponsored a radically regressive piece of legislation that would replace the progressive federal income tax with a flat rate 10 percent tax. Because the federal income tax is one of the most progressive parts of the tax code, replacing it with a flat rate tax would result in a massive tax cut for wealthy taxpayers, while at the same time raising taxes for low- and middle-income families.

 Kasich also supported efforts to repeal the estate tax, and substantial cuts to the capital gains tax rate, both of which overwhelmingly benefitted the wealthy. Near the end of his term, Kasich proposed legislation that would have cut income tax rates by 10 percent, a move that would have provided very little benefit to lower-income taxpayers, while providing huge breaks to the wealthy.

Not only did Kasich seek to cut taxes for the rich, he also sought to impede the federal government’s ability to raise adequate revenue by supporting a radical constitutional amendment that would require a two-thirds majority for any tax increase. For proof of the potential harm of this policy, one does not have to look any further than the more than a dozen states that have seen their ability to raise adequate revenue significantly restricted by similar limitations.

In the mid-90s, Kasich got a lot of media attention for joining with Ralph Nader and others to campaign against tax loopholes and subsidies for the rich. As Citizens for Tax Justice (CTJ) pointed out at the time however, Kasich quickly “made a mockery” of his pledge to crack down on corporate subsidies by supporting $144 billion in new special-interest corporate subsidies.

In touting his record as the chairman of the House Budget Committee during his announcement speech, Kasich noted he led the congressional effort that created federal budget surpluses in the late 1990s. The reality is that the most significant policy drivers of budget surpluses were the passage of the Omnibus Budget Reconciliation Acts of 1990 and 1993, which included a series of tax increases and spending cuts, and both of which Kasich voted against. Kasich is trying to rewrite history by claiming that the Balanced Budget Act of 1997, which had little effect, led to  surpluses that began in 1998.

Record as a Presidential Candidate

As a presidential candidate, Kasich has yet to announce an official tax reform plan, instead saying so far that “flatter makers more sense” and that the corporate tax rate should be lower. There are reports however that he is talking seriously with flat tax advocate Steve Forbes about the idea of proposing an optional flat tax. Under such a plan, a taxpayer would have the choice to either pay a flat tax rate or pay under the current system. In 2012, CTJ estimated that an optional flat tax proposal, as proposed by Texas Gov. Rick Perry, would blow a $10.5 trillion hole in the budget and give that top 1 percent of taxpayers an average annual tax break of $272,730, a tax cut more than 270 times the size that middle-income taxpayers would receive.

Kasich has also used his status as a national figure to promote the passage of a balanced-budget amendment through a constitutional convention. To this end, Kasich created a non-profit called Balanced Budget Forever that is seeking to get 34 states to pass the necessary resolution to convene a constitution convention on a balanced budget amendment. While Kasich’s group has not specified the exact parameters they would like to see in such an amendment, a balanced budget amendment would be very harmful to the economy.

Kasich’s reputation as a moderate or compassionate governor is a ruse. He has pushed for right-wing anti-tax policies that would result in substantial cuts in taxes for the very wealthy and higher taxes on the very low-income families that he has said he wants to help.

Former Virginia Gov. Jim Gilmore became the seventeenth and likely final major candidate to announce his candidacy for the Republican nomination for president.

While running for governor in 1997, Gilmore made the implausible promise that he would repeal Virginia’s car tax, but once elected he was unable to deliver when the real cost of repeal became apparent.

As a national figure and presidential candidate, Gilmore has pushed an extremely regressive tax reform agenda, dubbed “The Growth Code,” that would provide massive tax cuts for the rich and likely blow a major hole in the federal budget.

Record as Governor

Gilmore ran and won the governorship of Virginia on the promise of repealing the state’s personal property tax on cars. Car taxes are sometimes perceived as progressive, but they are in fact regressive, capturing a greater share income from poorer Virginians compared to higher-income individuals.

In his first year in office, Gilmore secured legislation phasing out the car tax over five years by first reimbursing individuals and then local governments for an increasing percentage of the tax each year until it was 100 percent offset with the reimbursement. This legislation failed to provide a fiscally prudent way of making up for the substantial loss in revenue from the phase-out.

During his campaign, Gilmore estimated that a complete phase-out of the tax would cost $620 million annually, a claim that a Republican lawmaker who felt mislead by the estimate referred to as “utterly erroneous.” A more realistic estimate pegged the cost at $1.4 billion, more than twice the size of Gilmore’s estimate. To make up for the lost revenue, Gilmore pushed a whole slew of budget shenanigans, such as borrowing against a one-time legal settlement and requiring retailers to prepay sales tax. Despite his objections, more fiscally prudent lawmakers ultimately voted to freeze the reimbursement rate for the tax at 70 percent in 2002 and later to cap the reimbursement expenditure at $950 million each year from 2006 to the present.

Altogether, the phase-out of the car tax during his governorship blew a $2 billion hole in the state’s budget and continues to sap the state of $950 million in much-needed revenue each year. While Gilmore has touted his fiscal responsibility by claiming he left the state with a balanced budget, the reality is the budget was only “balanced” due to fiscal chicanery, and he left an estimated $4 billion structural deficit to his predecessor.

Record as a National Figure and Presidential Candidate

In 2008, Gilmore attempted to recreate the political success of his anti-tax campaign for governor in a run to represent Virgina in the U.S. Senate. Gilmore’s anti-tax Senate campaign floundered however, proving that voters will not automatically vote for any politician who rails against taxes.

Following his failed run for Senate, Gilmore became the President and CEO of the Free Congress Foundation. Gilmore developed a regressive tax reform package called the “The Growth Code.” The regressive provisions of the proposal include eliminating of taxes on capital gains and dividends, immediate expensing of capital equipment, lowering the top marginal tax rate to 25 percent and the implementation of a territorial tax system.

Although a report detailing the reform package claims it would be revenue-neutral, the outline of the proposal does not include a single reference to how it would make up for the trillions in lost revenue that the cuts it proposes would generate. Even assuming a Herculean amount of base broadening (which again the document does not mention), it is likely that the proposal would still create a massive hole in the federal budget. As the Director of Citizens for Tax Justice Bob McIntyre put it, Gilmore’s plan “clearly would be an enormous tax cut for the rich, a big tax increase for the poor, a bankruptcy plan for the federal government, and a disaster for the economy.”

The U.S. Senate’s Permanent Subcommittee on Investigations (PSI) ain’t what it used to be. That’s the obvious conclusion to draw from Thursday’s hearing on the “Impact of the U.S. Tax Code on the Market for Corporate Control and Jobs.”

Two years ago, the PSI, under the leadership of Sen. Carl Levin (D-MI), issued detailed investigative reports exposing the egregious tax avoidance practiced by Apple and Microsoft. But the committee’s new leaders are taking an entirely different tack. Committee chairman Rob Portman (R-OH), after listening sympathetically to corporate whining about the nation’s allegedly burdensome corporate tax system, lamented that “if there’s a villain in this story it’s the U.S. tax code.” This was in response to testimony from a number of corporate spokespeople who presented inaccurate pictures of how the tax code treats their companies.

A more critical audience (or a reader of CTJ’s recent memo to the PSI published in advance of yesterday’s hearing) might have drawn different conclusions from yesterday’s testimony. One invited witness, Boston Beer executive Jim Koch, complained that his company pays “a tax rate of about 38 percent” on its U.S. profits. A closer examination, however, shows that Koch’s estimate is hugely inflated.

To be sure, Boston Beer’s 2014 annual report does assert that its current and deferred federal and state income taxes were 38 percent of its U.S. income. But that figure is a fiction, for two reasons.

First, a large share of these so-called taxes were “deferred,” meaning that the company has not yet paid them, and may never do so. Second, Boston Beer benefitted handsomely from a tax break for executive stock options that, for arcane accounting reasons, is not reflected as a tax reduction in companies’ annual reports. Making these two adjustments shows that Boston Beer’s actual federal and state effective tax rate was only 15 percent.

This week’s PSI hearing confirms the analysis of Bloomberg reporters Jesse Drucker and Richard Rubin, who noted earlier this week that the new leadership of the PSI appears far more interested in investigating the U.S. government than in chasing down corporate tax dodgers. That’s a real shame.

Tax avoidance thrives on opacity, and the PSI’s previous in-depth investigations of convoluted international tax schemes brought to light important details of the tax dodges that real reform would bring to an end. The PSI’s new leadership would do well to follow the example set by Sen. Levin. But so far, it seems unlikely that they will do so.

After weeks of hinting about an “innovation box” tax proposal, U.S. Reps. Charles Boustany, Jr. (R-LA) and Richard Neal (D-MA) Wednesday released draft legislation that would provide a massive giveaway for high-tech and pharmaceutical companies as well as other industries that generate income from patents and copyrights. The details of the legislation raise the very serious concern that the “innovation box” could be the tax break minnow that swallows the corporate income tax whale.

The legislation would create a special low tax rate of 10.15 percent for income generated by intangible property such as patents, trademarks and copyrights. This is nearly a three-quarters discount on the 35 percent federal income tax rate.

The big question is how much such a low tax rate would cost. As we have argued, the patent box concept is ripe for exploitation and abuse, for two reasons. First, the legislative process, with immense lobbyists influence, will likely expand the definition of “income from intangible property” beyond recognition, and second, sophisticated corporate tax departments are certain to seek ways of undermining the system by reclassifying  as much of their income as possible to qualify for this tax break.

The federal tax code is littered with examples of a simple concept that morphed into an administrative nightmare once it went through the legislative process. The most salient example is the special lower corporate tax rate for manufacturing. When lawmakers floated this tax break in 2004, the ostensible goal was to lower U.S. manufacturers’ taxes. But when the dust settled, the final law expanded the concept of “manufacturing” to include roasting beans for coffee (an early example of the lobbying clout of Starbucks) and film and television production. When policymakers initially began discussing the manufacturing tax break, few would have imagined that the Walt Disney Company  would reap more than $200 million a year in tax breaks for “manufacturing” animated films.

In the 10 years that the “manufacturing deduction” has been in place, the business world has changed in ways that were unimaginable in 2004, and so has the tax break’s reach. Open Table Inc. now annually collects tax breaks for “manufacturing” reservations at your favorite local restaurant.

 It is reasonable to conclude that the legislative sausage making process will similarly contort the definition of “intangible property”. Even those who think a properly-defined “innovation box” is a good idea may shudder at the product that emerges from Congress.

The second concern with the proposed “innovation box” tax break is how corporations might seek to game the system once such a box is in place. It would be very difficult to disprove the claim that a dollar of corporate profit is generated by the research and development that yields patents and copyrights. Corporate profit is the function of many economic forces, of which corporate R&D expenses are only one. When big pharmaceutical corporations claim that huge chunks of their U.S. profits are generated by their investments in intangibles such as trademarks, evaluating these claims will require a huge enforcement effort by the Internal Revenue Service—a vital branch of government that already is finding its enforcement abilities hampered by funding shortfalls.

This second problem—namely, the endless inventiveness of corporations in finding ways of gaming the system to reduce their taxes—may be the reason Congress’s official bean counters at the Joint Committee on Taxation have been unable to produce a revenue estimate on the cost of patent box legislation.

A third huge problem would be the mismatch between the 35 cents on the dollar that deductions for the costs of producing patents, etc. would provide to companies and the 10 cents on the dollar that the profits from such property would be taxed. In effect, the government would pay for 35 percent of the costs, but get back only 10 percent of the profits in taxes. That’s a negative tax rate.

Few would argue directly that the biggest corporate tax dodgers should get a special prize for their tax-avoidance efforts—yet the innovation box would provide huge windfalls for companies such as Apple and Microsoft that appear to have saved billions by artificially shifting their intangible property into low-rate tax havens. The focus of corporate tax reform should be, first and foremost, to make sure that corporate scofflaws are held to account and made to pay their fair share. An “innovation box” would instead offer a brand new tax break for these companies.

At a time when federal corporate income tax collections are near historic lows as a share of the U.S. economy, the unanswered questions about the direction and enforceability of the proposed “innovation box” tax giveaway should, alone, be enough to stop this idea in its tracks.

In film, it’s called “deus ex machina” or god from the machine. When heroes find themselves painted into a hopeless corner from which seemingly nothing can save them, an implausible plot twist saves the day. In the original Superman movie, for example, Christopher Reeve’s Man of Steel sees Lois Lane killed by a devastating West Coast earthquake and suddenly remembers that he has the capacity to turn back time by flying around the earth so fast that it temporarily starts spinning backward.

Equally unexpected, and substantially less lame, is the latest development in the endless saga of tax avoidance by hedge fund and private equity managers. The Internal Revenue Service proposed new rules last Wednesday that will make it harder for money managers to disguise their ordinary income as capital gains. That’s right. After years of congressional inaction on hedge fund tax avoidance, the IRS, like Superman, has suddenly remembered that it has had the power to solve this problem all along.

To be clear, the new IRS rules can only solve a small part of the problem. Hedge fund and other investment partnership managers are often paid under an arrangement known as “two and twenty”. Managers receive a 2 percent fee for assets under their management, and later get 20 percent of any profits.

The managers of these partnerships have come up with strategies for avoiding taxes on both the 2 and the 20. On the 20 they get the tax break we know as “carried interest,” through which hedge fund managers brazenly classify their share of the partnership’s profits as capital gains income, despite the fact that the money they’re investing doesn’t even belong to them. The top tax rate on capital gains is lower than the top tax rate on ordinary income, which is why these wealthy fund managers seek to classify as much of their income as possible as capital gains.

What the IRS dealt with last week is the 2, the management fees, which private equity firms have also found a way to convert into capital gains. The scheme here is certainly less gripping than Lex Luthor attempting to destroy California, but it is just as obviously wrong that private equity managers take their management fees, clearly a payment for service that should be taxed as regular income, and pool them into a fund that generates income they can describe as capital gains. This results in huge tax savings. This crafty accounting has fooled no one, and—finally–the IRS is calling these alleged capital gains what they are: “disguised payment for services.”

This isn’t the end of the story, however. Affected parties can submit comments to the IRS during the next several months on suggested modifications to the new IRS rules. Expect those who benefit from these tax loopholes to submit comments arguing why the IRS shouldn’t tighten its rules. Yet it seems highly unlikely that hedge funds and private equity firms will be able to use this tax dodge with impunity going forward.

This leaves the interesting question of whether the IRS can also deal with the much larger problem of carried interest, or the 20 percent of profits that money managers earn if and when an investment becomes profitable. While the profits are indeed capital gains for the actual investors, the money managers (who don’t have to invest a single cent of their own money in the venture) get a share of the profits because of how the deal is structured, thus their share of profits is income in the same way that the money that individuals pay to financial advisors is income.

President Obama, CTJ and other groups have called for legislation to close this loophole, but Congress has repeatedly failed to act. Last year, however, the respected tax professor Vic Fleischer argued in the New York Times that the Obama Administration could close the door on the carried interest loophole through administrative action, just as the IRS has proposed to do with the 2 percent management fees.

It would be more pleasing if Superman could save the world in a plausible way, just as it might be better to see the carried interest loophole closed through legislation. But the current ruling party in Congress is utterly uninterested in doing so. So it would be more expeditious if the IRS has another epiphany and recognizes that it has the power to solve the entire problem on its own. 

Congress is considering further gutting the Internal Revenue Service’s enforcement capacities even as a new report from the Taxpayer Advocate shows that previous rounds of budget cuts have put the IRS dangerously close to being unable to perform basic enforcement and compliance functions.

Lawmakers have cut the IRS’s budget in each of the past five years all while giving the IRS increased oversight responsibility under the Affordable Care Act and Foreign Account Tax Compliance Act (FATCA). Further, the IRS processed 1.5 million more filings this year than last. This is a practice that hurts law-abiding taxpayers and rewards tax evaders.

The IRS budget is down 17 percent from 2010, adjusted for inflation, with another $838 million in cuts scheduled for 2016. These cuts are forcing the IRS to reduce services that help citizens pay their taxes according to the Taxpayer Advocate. During the 2015 tax season, IRS customer service representatives answered 37 percent of phone calls and callers waited an average of 23 minutes to speak with a representative.

Furthermore, the IRS automatically hung-up on 8.8 million callers–a 1500 percent increase since 2014–due to an overwhelmed phone system. The Taxpayer Advocate argues that these dismal levels of customer service will result in fewer people voluntarily paying their taxes.  Currently 98 percent of taxes are paid voluntarily and on time. Any drop in voluntary compliance will lead to greater enforcement costs and less revenue.

Although the IRS is choosing to focus more of its limited resources on making sure citizens pay their taxes, enforcement is still weak and getting worse. The number of employees dedicated to enforcement has dropped by 20 percent since 2010. John Koskinen, the Commissioner of the IRS, stated in January that reduced funding will result in $2 billion of lost revenue this year. This means that the $838 million in ‘savings’ from cutting the IRS budget will really result in $2 billion in losses for the entire federal government. Indeed, losses could be even greater because each additional dollar spent on enforcement yields six dollars of revenue and every dollar spent on “audits, liens and seizing property from tax cheats” yields ten dollars of revenue. In 2011, the commissioner of the IRS even testified to Congress that every dollar spent on enforcement, modernization, and management saves the government $200.

Currently there is a proposal attached to the highway funding bill that requires the IRS to outsource some tax enforcement to private debt collectors. This policy was practiced from 2006 to 2009 and lost money. Critics are also concerned about an increase in scammers who claim to represent the IRS, an alarming trend that has been growing in recent years. Clearly, the government would have to compensate private collectors, but it would be far more cost-effective to fully fund IRS enforcement.

Right now there is no end in sight for the fiscally irresponsible budget cuts to the IRS. Even with the $75 million increase in funding for taxpayer services, Congress is proposing to cut the 2016 budget by more than double the 2015 cuts and spending $2.8 billion less than what President Obama requested. Critics of the IRS argue that reducing the IRS budget will result in more efficient use of funds and more accountability to the American people. The main issue with this argument is that the IRS has already employed many cost saving techniques such as encouraging electronic filing and referring taxpayers to the IRS website rather than speaking with a representative. As noted by the Taxpayer Advocate report, the cuts have already begun to impact taxpayer filing services, fraud prevention, FATCA enforcement, and digital security.

The IRS needs more funds, not fewer, to properly serve taxpayers, maintain high levels of voluntary compliance, and enforce the laws Congress has passed.  

For fans of creative tax dodging, the release of the Nike Corporation’s annual report is always an enlightening occasion. As we noted two years ago, the company quietly acknowledges having stashed billions of dollars in low-tax offshore destinations, and has inadvertently given some signals about how it might be achieving this.

The company’s 2013 annual report disclosed the existence of a dozen subsidiaries based in Bermuda, almost all of which were named after specific brands of Nike shoe. A sensible inference is that these subsidiaries may exist solely to house the company’s intellectual property—patents, trademarks, logos and slogans, for example—associated with each of these brands.

In 2014 the company apparently got wise to the optics and abruptly stopped disclosing the existence of half of these subsidiaries, reducing to six the number of Nike shell companies allegedly doing “business” in Bermuda.

This shouldn’t be surprising. As has already been documented, technology companies like Microsoft and Google have stopped disclosing the existence of almost all of their offshore subsidiaries, and we now know that Wal-Mart never disclosed its offshore subsidiaries to begin with. This behavior is made possible by lax reporting requirements and abysmal enforcement by the Securities and Exchange Commission, which is tasked with ensuring that corporations submit transparent financial reports to their shareholders.

In 2015, the company’s latest annual financial report lists only three Bermuda subsidiaries. Does all this mean that the company has renounced its use of the “Nike Force,” “Nike Pegasus” and “Nike Waffle” subsidiaries it formerly disclosed? It’s possible—but don’t count on it. After all, the company added a breathtaking $1.7 billion to its stash of offshore cash in the past year and quietly discloses that it has paid a tax rate that is likely less than 5 percent on these profits. Tax rates that low are pretty hard to find outside the Caribbean.