The Hidden Key to the Illegal Immigration Door
I have scolded my Leftie friends who blame the "fatcat Republicans wanting cheap labor" for illegal immigration. Yet, the immigration inertia in Republican-controlled D.C. is painfully obvious. Maybe the Lefties are correct on this. I dived in.
I am not happy with what I unearthed.
The US government estimates that there are 10 million illegal immigrants in the US. (Here in Southern California, that is no secret). A recent investment bank report puts the figure closer to 18-20 million.
Wages in the U.S. are subject to income tax. Your employer effects "payroll deductions." If your employer fails to do so, the company (and even the owner) is personally liable for failure to withhold. This is the key to compliance with our income tax system.
A corollary law (26 USC 1441) plugs a loophole. It requires that certain "withholding agents" (like an employer, or a bank, or other entity that moves money) withhold 30%, or some smaller percentage (14%) from payments the agent makes, where the money is likely US-based income.
So if 10 Frenchmen (that is, non-U.S. taxpayers) come to the US and are paid $1 million each by Pepsico for their fine soccer match performances, Pepsico will withhold from each payment a 30% "backup withholding" amount. Each Frenchman may thereafter file a U.S. tax return, showing that under the French-US tax treaty, a different outcome is warranted. Perhaps the 10 Frenchman each get a refund of some or all of that 30% that was withheld. But if they do not bother to file, the U.S. keeps the money. (Just like the payroll withholding that your employer does, every 2 weeks.)
Great. So what?
We have 10 million to 20 million illegal aliens in the US. In theory, they earn money in the cash underground economy. The persons who pay them should withhold payroll taxes, but they don't.
In theory, those illegals travel back to Mexico and give the money to their Mexican families or the like. These folks shuttle back and forth across the border.
But a problem has arisen. In that past few years, clever financial services companies have decided that they can earn big fees from facilitating the "wiring" of monies by illegal aliens to Mexico or the like. In other words, the illegal alien no longer has to travel back to Mexico; instead, he can "Western Union" the money back to Mexico.
How much? $36 billion a year wired to Mexico, and climbing...
Now, there is no need to travel back to Mexico. Just wire the money, instead. Is it any wonder why the number of illegal aliens has swollen, to 10 million (or 20 million, depending upon whose numbers you believe)?
OK. But Western Union is a "withholding agent" under 26 USC 1441.* (See Footnote) As a withholding agent, Western Union is withholding taxes from all those wire transfers.....right?
Nope. (It took me hours to find out why.)
Bureaucrats in the Treasury Department issued regulations which are vague, but give Western Union and companies like it the plausible excuse to facilitate billion-dollar tax avoidance:
"Code of Federal Regulations Sec. 1.1441-4 -- Exemptions from withholding for certain effectively connected income and other amounts.
...(b) Withholding is not required under Sec. 1.1441-1 from salaries, wages, remuneration, or any other compensation for personal services of a nonresident alien individual if such compensation is effectively connected with the conduct of a trade or business within the United States and-- ....(iii) Such compensation is for services performed by a nonresident alien individual who is a resident of Canada or Mexico and who enters and leaves the United States at frequent intervals."
There it is, folks. There's the key. CFR 1.1441-4(b)(iii). No chicken-sh*t politician ever put that up for a vote. And I certainly don't remember voting on the issue of granting income tax immunity to illegal aliens from Mexico and Canada. I don't remember voting on creating a de facto $36 billion+ dollar annual subsidy -- a giant sucking sound? -- of cash moving out of the southern U.S. to Mexico. I don't remember any vote here in California, determining that 10 million workers would be exempt from both California and federal income tax, despite our annual $10 billion budget deficit caused largely by the skyrocketing schooling and medical costs for illegal aliens.
I visited a Western Union branch last week, at a Circle K convenience store. Alas, there was no procedure in place to ascertain whether the money sender was a Mexican who "enters and leaves the United States at frequent intervals." So how would the part-time Circle K clerk - aka, the Western Union agent - know that a backup withholding exemption applied?
This is it, folks. This little loophole is the reason for the immigration "inertia" in Washington. Billions are being made (i.e., via marketcap) off of these transfers. For example:
--Western Union (subsidiary of First Data Corp) - $30 billion market value.
--Total System Services Inc. - $5 billion market cap.
--Wachovia Corp. - with a - $80 billion market cap (happy quote: "We're the first major bank" to allow customers to "send money to friends and family throughout Latin American and Caribbean countries as well as Mexico.")
* -- Is Western Union a "Withholding Agent"? Absolutely. According the IRS Publication 515:
Withholding Agent. You are a withholding agent if you are a U.S. or foreign person that has control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding. ...You may be a withholding agent even if there is no requirement to withhold from a payment or even if another person has withheld the required amount from the payment.
Although several persons may be withholding agents for a single payment, the full tax is required to be withheld only once. Generally, the U.S. person who pays an amount subject to [Non-Resident Alien](NRA) withholding is the person responsible for withholding. However, other persons may be required to withhold. For example, a payment made by a flow-through entity or nonqualified intermediary that knows, or has reason to know, that the full amount of NRA withholding was not done by the person from which it receives a payment is required to do the appropriate withholding since it also falls within the definition of a withholding agent. ...
Liability for tax. As a withholding agent, you are personally liable for any tax required to be withheld. This liability is independent of the tax liability of the foreign person to whom the payment is made. If you fail to withhold and the foreign payee fails to satisfy its U.S. tax liability, then both you and the foreign person are liable for tax, as well as interest and any applicable penalties....