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Kass: Addressing the Fiscal Cliff

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This column originally appeared on Real Money Pro at 8:15 a.m. EST on Feb. 13.

NEW YORK ( Real Money ) --

"If you know the position a person takes on taxes, you can tell their whole philosophy. The tax code embodies all the essence of life: greed, politics, power, goodness, charity."

-- Former IRS commissioner Sheldon Cohen

It is my contention that dealing with our debt and deficits (i.e., the fiscal cliff) is probably easier to resolve than most believe. As a matter of necessity, it must be accomplished by:

  • cutting spending;

  • reforming Social Security, Medicare and Medicaid;
  • accelerating the pace of domestic economic growth;
  • reducing government waste; and
  • raising taxes.
  • As a starting point, there is the U.S. tax code.

    There is so much waste and accumulated abuse of our tax code that savings are abundant if our politicians only looked under those rocks.

    As Ralph Nader has written, the U.S. tax code (all 7,500 pages of it) "is the victim of severe tampering and perforating by corporate lobbyists and tax attorneys and unattended to by inadequate IRS enforcement."

    One particular abuse that should have bipartisan approval and that seems impossible to defend lies inside an innocent-looking, green-trimmed, white, five-story building in the Cayman Islands: the Ugland House office on South Church Street .

    The unassuming but appropriately named Ugland House is currently the home of over 18,500 corporate entities that reside there for the express purpose of avoiding (though some might say evading) U.S. taxes. It houses hedge funds and other partnerships as well as some of the largest U.S. corporations extant -- all of which benefit appreciably from the avoidance of current federal income taxes by assuming a Grand Caymans address of incorporation.

    Considering that the Cayman Islands have a tax rate of 0.0% and the fact that some of the largest U.S. corporations received billions of dollars from the bailout, one would assume the government would recoup some of this corporate welfare in the form of taxes. Instead, some of these corporations have not paid any federal income taxes for years.

    In late 2011, Citizens for Tax Justice analyzed the tax payments of 280 of the Fortune 500's largest companies. Seventy-eight of the 280 companies paid zero or less in federal income taxes during at least one year from 2008 to 2010. Thirty corporations paid less than nothing in aggregate federal income taxes over the entire 2008-2010 period.

    How are America's largest corporations avoiding so many taxes? A practice called transfer pricing. This accounting practice lets companies buy and sell products and services with their own offshore subsidiaries and set prices themselves, according to David Evans in the Bloomberg article "The $150 Billion Shell Game" from 2004.

    This practice is just as relevant nine years later. Corporations abuse the accounting practice by shifting profits overseas to avoid U.S. taxes. Their prices are set artificially high for imports and low on exports. In the U.S., the corporations are allowed to claim the high expenses on the imports and the smaller profits on the exports in their IRS filings.