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Copyright (c) 1994 Board of Trustees of Southern Illinois University
Southern Illinois University Law Journal

COMMENT: U.S. TAXATION OF FOREIGN INCOME: THE USE OF TAX HAVENS IN A CHANGING TAX ENVIRONMENT

Spring, 1994

18 S. Ill. U. L. J. 617

Author

Kurt A. Wagner

Excerpt

I. INTRODUCTION

Hold on to your tax shelter. President Clinton's income tax plan, as adopted by Congress, virtually assures a rebirth of the tax shelter industry 1 and, by extension, a resurgence of the advantage of using the corporate business form to defer taxes.

There are two reasons for this prognosis. First, the new income tax regime creates a capital gains differential by increasing to 36% the top marginal tax rate for individuals 2 and establishing a 10% surcharge on income above $ 250,000. 3 Maximum capital gains tax is left at 28%. 4 Thus, there exists a powerful incentive to turn ordinary income into capital gains. Secondly, and more importantly in tax haven use, the new tax rates create an incentive to hold income in corporate form by retaining a corporate tax rate of 34% 5 until corporate income reaches $ 10 million at which point the tax rate will rise to 36%. 6 Therefore, at certain income levels above $ 250,000 the individual rate could be as high as 46%, while the corporate rate could be as low as 34%. 7

If history is any guide, individual taxpayers will react to increased taxes by looking for ways to avoid them. 8 One popular and sophisticated way to accomplish avoidance is placing money overseas in such a way as to put it legally beyond the reach of the Internal Revenue Service (Service). Indeed, this very strategy was employed in 1721 by the American Colonies when they shifted trade ...
 
 
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