Tax-Code Trauma: Experts Contend That Simplifying the U.S. Tax Code Would Do More to Cut Down on Corporate-Accounting Chicanery Than the Introduction of Still More Regulations and Criminal Penalties. (Cover Story)

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In the wake of the Enron and WorldCom accounting scandals, President George W. Bush and lawmakers are demanding transparency on balance sheets and financial statements. The Senate just passed a bill sponsored by Banking Committee Chairman Paul Sarbanes (D-Md.) loaded with new regulations and increased criminal penalties while increasing the power of trial lawyers to sue for real and alleged misconduct. Much of it is likely to survive the conference with the Republican House, and Bush is expected to sign whatever comes to his desk.

But some experts say no matter how many new regulations are passed, or how many penalties are imposed, accounting for corporate transactions will remain all but completely opaque because of the incredible complexity and burdensomeness of the U.S. tax code.

"Because the corporate income tax is so complicated, companies are forced to go to the Pricewaterhouses to help them set up complicated structures to minimize their taxes" says Chris Edwards, director of fiscal-policy studies at the libertarian Cato Institute and former senior economist at the congressional Joint Economic Committee. "The way companies structure themselves around the world with various tiers of subsidiaries of subsidiaries of subsidiaries and partnerships, and this sort of thing, is because the tax code drives them to do that to minimize their taxation, and that makes it very difficult for investors to figure out how a company is structured."

Right now, in the midst of an accounting hysteria that has been fanned into a business panic, the tax code is being talked about only on the left. Collectivists are pushing laws at every level to close the tax strategies or loopholes that Enron and other companies have used to reduce their tax burden. "The refusal of the Bush administration and House Republicans to deal with the tax-shelter issue is coming home to roost," exclaimed Rep. Lloyd Doggett (D-Texas) in a press release in January. "There are other `Enrons' out there making end runs around our tax code, ready to implode at the expense of taxpayers without fancy accounting firms" he intoned ominously.

Feeling the heat, top Republicans on the House Ways and Means Committee and the Senate Finance Committee have signed on to even more-complicated bills to stop U.S. companies from reincorporating in offshore jurisdictions to minimize their tax burdens--in effect complicating the complications that Congress created earlier.

Edwards and others say the loopholes are symptoms of a tax policy that not only undermines American competitiveness but creates confusion for shareholders. The U.S. corporate tax rate, raised in the Clinton administration's first year to 35 percent (40 percent if average state and local taxes are included) now is higher than the average 31 percent rate for European Union countries and is the fourth-highest among developed countries in the Organization for Economic Cooperation and Development, according to a recent survey by KPMG LLP. And the number of pages of federal tax rules--the tax laws, tax regulations and various IRS rulings--has risen from 400 pages in 1913 to 45,663 pages in 2001. "No one completely understands the tax code," Edwards says. "No one!"

To make corporate transactions more transparent, Edwards says the tax system should be overhauled to reduce corporate taxes and reform a tax code that sometimes taxes corporate income two or three times. "If you had a simple cash-flow tax and you simply taxed companies at some low rate, cash in minus cash out, you wouldn't be able to create financial shenanigans. It would be clear and obvious to everyone how much is owed" the Cato scholar says.

Right now, legitimate companies are fearful of what actions to take tax-wise, and this could be a factor in the market's decline, says John Barry, a chief economist at the free-market Tax Foundation. With European countries continuing to slash tax rates for their businesses, U. …