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Wednesday, July 14, 2004

Psst...Want to Rent a Bridge?

Did you know that much of Europe's infrastructure -- bridges, dams, subways, sewer systems [101k pdf]-- has been leased to American corporations? So says a former leasing executive who testified anonymously before Congress last year.

What do American companies do with their European bridges? They lease them back to the European owners, usually a city or other government entity. The transactions are a wash: often, no rental payments change hands. But The American company gets a big tax deduction for depreciation. In exchange, the European city receives an up front payment.

Pretty shocking, huh? But when the NY Times reported last year on the German city of Frankfurt's plans to enter the tax shelter business, they played it for laughs, in an article titled "Latest German Fad: Leasing Out the Subway." Not until the 16th paragraph, more than halfway through the article, does the Times mention that the Americans won't actually be operating the subway, and that the motivation for the transaction is to take advantage of a tax loophole.

Tax shelters like the rent-a-bridge scheme came back in a big way in the 1990s, along with Enron and other accounting scandals. The Clinton administration tried to rein them in, but the Republican Congress refused. Instead they passed the "Taxpayer's Bill of Rights," which shifted IRS staff from compliance to customer service and laid out a number of new fireable offenses. Tax collectors worried that they could be fired for mistakes. As a result, by 2001, the IRS was auditing less than half the number of corporate returns it had in 1997, and enforcement actions dropped even more drastically.

The corporate tax bill currently before Congress plugs some of these loopholes. But without systematic changes in the law and a genuine will to crack down, new tax shelter schemes will soon be invented. Indeed, the rent-a-bridge loophole described above has already been plugged, and quickly replaced by new variants on the same scheme. Somehow, I don't think that George Bush and the Republicans, having presided over the tax shelter boom, plan to make a very serious effort.

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