Tax Policy Official Is Cracking the Whip

Pam Olson readily acknowledges that the government is partly responsible for the games -- sometimes legal, sometimes not -- that people play with their taxes. But Olson, the Bush administration’s top tax policymaker, wants the games to stop.

“The parents have arrived at the party,” Olson told a group of tax lawyers in Los Angeles last week, referring to the agency’s crackdown on tax cheating. “We have a lot of cleaning up to do, but the effort is underway.”

Olson, who was named the Treasury Department’s assistant secretary for tax policy in September, said she’s concentrating on three major initiatives this year. They involve disparate topics -- international tax rules, domestic tax rules and tax cheats -- but all are aimed at improving the fractious relationship between taxpayer and tax collector. If Olson succeeds, she believes, the tax code will become a little clearer and enforcement a bit tougher, ensuring that more taxpayers would play fair and pay their share.

The crackdown on tax cheating, particularly through the use of offshore banks and trusts, has been made more difficult by the IRS’ own actions -- or inaction, Olson acknowledged.

About five years ago, the agency began requiring registration of certain “listed transactions.” These are tax arrangements that the IRS believes are abusive, but the final determination of whether a particular deal passes muster is up to the courts.

Abusive tax shelters proliferated during this period because the IRS talked tough but didn’t follow through, Olson said. The agency had its reasons, ranging from congressional criticism to budget cuts that reduced IRS staff by about one-third over a decade.

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Presuming Approval

But there also was some neglect. Tax shelter promoters filed statements with the IRS about clearly abusive deals, she said, but no one bothered to look at the documents for years.

“What happens when promoters register transactions and get no response?” Olson asked. “Same thing that happens when children act up and no one tells them to quit it. They do it again.”

Indeed, promoters used the agency as a selling point, Olson said. They told their clients that because the statement was filed and the IRS didn’t object, the deals were OK.

“We can argue about whether promoters should have known the difference between approval and neglect,” she said. “But many did not understand that, or chose to believe otherwise,” and the tax industry’s standards “deteriorated without adult supervision.”

Enforcement remains a challenge because the IRS staff is thin. The agency has started hiring again, but new hires are barely keeping pace with the people lost through attrition, other agency officials said last week. The solution: IRS examiners have been reassigned from tracking “accounting nits” to hunting down tax cheats, Olson said.

Meanwhile, Olson is also pressing for legislation. She’d like Congress to create a uniform definition of an abusive tax shelter, a move that would make enforcement easier. And she wants to change some domestic and international tax rules that she believes are so capricious that they encourage companies to play games with their balance sheets to gain tax advantages.

Consider the double tax on dividends. Stock dividends paid to shareholders are taxed twice, once as profit earned by the company and then as personal income when shareholders receive a portion of the profit in the form of dividend payments. That can allow tax to eat up 60 cents of each dollar earned.

That tax burden has created a bias toward debt because interest payments are tax deductible. It also encourages corporations to retain earnings or repurchase their own stock, rather than pay profits out as dividends, she said. And it tempts companies to engage in an array of complicated transactions that have little economic purpose other than the avoidance of tax, she added.

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Not in Line With Reality

The same holds true for some international tax rules that may have made sense when they were written in the mid-1980s, but now simply hamper the free flow of commerce and put U.S. companies at a competitive disadvantage, Olson said. Like teenagers, she added, the nation’s international tax rules are “messy, inconsistent and display little regard for the real world.”

Olson’s primary goal on the domestic tax front is to attain passage of President Bush’s proposal to eliminate the personal income tax on dividend payments. She also is calling for a host of changes in international tax rules.

All but the enforcement actions require congressional support. Many Democratic leaders in Congress already have voiced strong opposition to Bush’s dividend proposal, as well as other tax-related initiatives, which could hinder Olson’s efforts. But she said she would do whatever she could.

“One thing I have become convinced of since joining Treasury is the importance of acting even without a legislative mandate,” she said. “We don’t always need laws to tell us the difference between right and wrong or to tell us what we ought to do. We’ll be considering what action we can take to support the voluntary adoption of best practices.”