Don’t make Swiss cheese of U.S. tax law

The U.S. government must continue its efforts to crack Switzerland’s bank secrecy walls. Those barriers have helped perhaps hundreds of thousands of wealthy Americans shield at least some of their income from the Internal Revenue Service.

Last week in a deal negotiated between the U.S. and Swiss governments, the Zurich-based Swiss banking giant UBS AG agreed to turn over to the IRS the details of 4,450 accounts suspected of holding assets undeclared by American customers. The deal was a significant crack in Switzerland’s long-standing tradition of banking secrecy, though the U.S. didn’t get all it wanted.

UBS is estimated to have 52,000 accounts belonging to U.S. customers, but IRS Commissioner Doug Shulman said that the 4,450 accounts being relinquished to the agency were the ones most suspected of containing undeclared assets. The accounts held $18 billion in assets at one time, though many have since been closed, he said.

The UBS deal is just the first step. There are more than 300 private banks in Switzerland in addition to the major banks such as UBS and Credit Suisse Group AG.

The U.S. government must ensure that the agreement that is reached on the UBS accounts also applies to Credit Suisse of Zurich and to private banks.

It must then seek to extend its reach to other tax havens such as Hong Kong, Liechtenstein, Luxembourg and Panama, which also have banking secrecy laws.

There are many possible reasons an individual or family might wish to have a secret bank account in a country such as Switzerland.

Those who experienced the de-struction of World War II value the stability and neutrality of Switzerland and seek to protect their assets with secret accounts there. In other cases, family feuds may cause one party to wish to hide assets from another.

But tax evasion and/or tax fraud are no doubt the main reasons for establishing the secret accounts. Tax evasion was likely the motive for most of the U.S. taxpayers in creating such accounts at UBS.

U.S. citizens evading U.S. taxes by keeping money in a Swiss bank are protected by Swiss law. But tax fraud is something else, since an account holder whose deception has been active doesn’t receive legal protection.

Likewise, account holders suspected of money laundering receive no secrecy protection.

Both tax fraud and tax evasion are a drain on U.S. taxpayers.

As justification for tax evasion, some make the case that U.S. business taxes are too high. But if that is the case, the answer is to campaign for corporate-tax rates more in line with those of other countries.

Others argue that the U.S. income tax code is too complicated. Again, evasion isn’t the answer; campaigning for a simpler tax code is.

Wealthy Americans have less of an excuse for tax evasion than Europeans. U.S. personal-income-tax rates are low compared with those of most European countries.

All taxpayers should applaud the efforts of the IRS and the Department of Justice to gather information on possible tax evaders hiding in the Swiss banking system and to pursue them vigorously in the courts.

When some individuals, especially those with high income, appear to be getting away with not paying their full share of the tax burden, it weakens the will of others to comply voluntarily with the in-come tax laws — just ask Treasury Secretary Timothy Geithner.