Opening Off-Shore Tax Shelters Cheaper and Easier than Getting EITC?

Remember when we used to think that opening a shell company in another company to avoid paying taxes was a rich man’s game? Well, thanks to the investigative reporting by NPR’s Planet Money team, we now know that we, too, can have that investment opportunity open to us for the bargain basement price of $725 (and that includes the processing fee!). And, it’ll only take about a week and a half to set up.

This finding follows a recent report from the Tax Justice Network estimating that around $21 trillion in assets are being held in these accounts around the world at a cost of between $190 and $200 billion a year in lost tax revenue to their home countries. There are multiple ways of parsing these numbers, but one thing that’s striking from my perspective is how easy and cheap it is to construct a tool that circumvents tax systems compared to accessing benefits that have been legitimately earned through the tax system.

The Earned Income Tax Credit is the largest anti-poverty program for working families. In 2011, almost 27 million low-wage workers earned almost $60 billion through the program. These resources give families the money they need to replace a broken appliance, pay down debt, or get medical treatment they’d been putting off. By the time tax time rolls around, most families know where that money is going to go and need it to go there quickly. The tax code in general and the EITC in particular is confusing and makes benefits difficult to calculate. The current workbook for presenting information about what types of income are used to determine eligibility, what your benefit is based on marital status and number of kids, what types of relationships allow someone to claim a qualifying child, etc takes about 63 pages.

Predictably, the complexity of this process leads many EITC recipients to enlist the services of paid preparers. The cost of this service can be from an average of $190 to a high of $540. So, not quite cheaper than setting up “Tax-Free, Inc.” in Belize, but considering the assets held in off shore unreported accounts average about $100,000 for the top 100,000 account holders and the average EITC recipient received just over $2,000, those fees come at a much higher cost. 

It’s also important to note that the cost of setting up these off-shore structures help the owners build wealth by freeing any earnings from taxes, while the cost many low-income filers have to pay to access the EITC undermines the accumulation of wealth. Recently the New York Times ran a piece featuring the benefits and some of the limitations of the EITC. In it, Karen Spain, a mother of two, lamented that she didn’t have $500 just to “let it sit there and grow.” Instead, she used her refund to reactivate her car insurance, make car repairs, and make back utility payments. Significantly, we learn later that Ms. Spain had paid $550 to have her taxes prepared.

Tax time can be a huge opportunity to save for low-income families, but only if they have access to the accounts and incentives that allow them to save, as well as tax prep services, like VITA sites, that help them file for free. It shouldn’t take opening a shell company in Belize to find an easy way to save or paying a comparable cost to access the resources to do so.