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Posts Tagged ‘Corporate tax’

What’s the best measure of the tax burden on the U.S. economy?

Is it the amount of money that we’re forced to surrender to the knaves in Washington (i.e., the difference between our pre-tax income and post-tax consumption)?

Or is it the loss of economic output caused by high tax rates, distorting preferences, and pervasive double taxation (i.e., policies that reduce our pre-tax income)?

The answer is both.

But even that’s not sufficient. There’s another very big part of the tax burden, which is the complexity caused by a 75,000-page tax code that imposes very high compliance costs on taxpayers. In other words, the tax (as measured by time, resources, and energy) we pay for the ostensible privilege of paying taxes.

And this compliance tax is enormous according to new research from the Tax Foundation. The report starts with some very sobering numbers.

…In 1955, the Internal Revenue Code stood at 409,000 words. Since then, it has grown to a total of 2.4 million words: almost six times as long as it was in 1955 and almost twice as long as in 1985. However, the tax statutes passed by Congress are only the tip of the iceberg when it comes to tax complexity. There are roughly 7.7 million words of tax regulations, promulgated by the IRS over the last century, which clarify how the U.S. tax statutes work in practice. On top of that, there are almost 60,000 pages of tax-related case law, which are indispensable for accountants and tax lawyers trying to figure out how much their clients actually owe.

It then measures the burden of this convoluted system for taxpayers.

According to the latest estimates from the Office of Information and Regulatory Affairs, Americans will spend more than 8.9 billion hours complying with IRS tax filing requirements in 2016. This is equal to nearly 4.3 million full-time workers doing nothing but tax return paperwork. …in dollar terms, the 8.9 billion hours needed to comply with the tax code computes to $409 billion each year in lost productivity, or greater than the gross product of 36 states… The cost of complying with U.S. business income taxes accounts for 36 percent of the total cost of the entire tax code, at $147 billion. Complying with the individual income tax costs another $99 billion annually.

The report provides data for 50 provisions of the tax code. In the interest of brevity, here are the 10-most expensive features of the internal revenue code.

The overall $147 billion compliance cost for businesses is enormous, particularly when you consider that corporate tax revenue for Uncle Sam this year is estimated to be $329 billion. So companies have a double-whammy of enduring the developed world’s highest corporate tax rate, and they have to spend lots of money for the pleasure of that punitive system.

Another part that grabbed my attention is “Form 4562” dealing with depreciation. If you care about good policy and stronger growth, businesses shouldn’t even have to depreciate. Instead, we should have a policy of “expensing,” which is simply the common-sense approach of recognizing costs in the year they occur. So firms are paying a $23 billion-plus tax for the privilege of a policy that already punishes them for investing. Amazing.

And don’t forget the death tax, which also makes the top-10 list. The Tax Foundation points out that the compliance cost basically doubles the burden of that horrible and unfair levy.

The estate and gift tax, which will only collect approximately $20 billion in federal revenues this year, has a compliance cost of $19.6 billion.

What a mess.

So what’s the answer?

Simply stated, we should rip up the entire internal revenue code and replace it with a simple and fair flat tax.

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Imagine if you had the chance to play basketball against a superstar from the NBA like Stephen Curry.

No matter how hard you practiced beforehand, you surely would lose.

For most people, that would be fine. We would console ourselves with the knowledge that we tried our best and relish he fact that we even got the chance to be on the same court as a professional player.

But some people would want to cheat to make things “equal” and “fair.” So they would say that the NBA player should have to play blindfolded, or while wearing high-heeled shoes.

And perhaps they could impose enough restrictions on the NBA player that they could prevail in a contest.

But most of us wouldn’t feel good about “winning” that kind of battle. We would be ashamed that our “victory” only occurred because we curtailed the talents of our opponent.

Now let’s think about this unseemly tactic in the context of corporate taxation and international competitiveness.

The United States has the highest corporate tax rate in the industrialized world, combined with having the most onerous “worldwide” tax system among all developed nations.

This greatly undermines the ability of U.S.-domiciled companies to compete in world markets and it’s the main reason why so many companies feel the need to engage in inversions.

So how does the Obama Administration want to address these problems? What’s their plan to reform the system to that American-based firms can better compete with companies from other countries?

Unfortunately, there’s no desire to make the tax code more competitive. Instead, the Obama Administration wants to change the laws to make it less attractive to do business in other nations. Sort of the tax version of hobbling the NBA basketball player in the above example.

Here are some of the details from the Treasury Department’s legislative wish list.

The Administration proposes to supplement the existing subpart F regime with a per-country minimum tax on the foreign earnings of entities taxed as domestic C corporations (U.S. corporations) and their CFCs. …Under the proposal, the foreign earnings of a CFC or branch or from the performance of services would be subject to current U.S. taxation at a rate (not below zero) of 19 percent less 85 percent of the per-country foreign effective tax rate (the residual minimum tax rate). …The minimum tax would be imposed on current foreign earnings regardless of whether they are repatriated to the United States.

There’s a lot of jargon in those passages, and even more if you click on the underlying link.

So let’s augment by excerpting some of the remarks, at a recent Brookings Institution event, by the Treasury Department’s Deputy Assistant Secretary for International Tax Affairs. Robert Stack was pushing the President’s agenda, which would undermine American companies by making it difficult for them to benefit from good tax policy in other jurisdictions.

He actually argued, for instance, that business tax reform should be “more than a cry to join the race to the bottom.”

In other words, he doesn’t (or, to be more accurate, his boss doesn’t) want to fix what’s wrong with the American tax code.

So he doesn’t seem to care that other nations are achieving good results with lower corporate tax rates.

I do not buy into the notion that the U.S. must willy-nilly do what everyone else is doing.

And he also criticizes the policy of “deferral,” which is a provision of the tax code that enables American-based companies to delay the second layer of tax that the IRS imposes on income that is earned (and already subject to tax) in other jurisdictions.

I don’t think it’s open to debate that the ability of US multinationals to defer income has been a dramatic contributor to global tax instability.

He doesn’t really explain why it is destabilizing for companies to protect themselves against a second layer of tax that shouldn’t exist.

But he does acknowledge that there are big supply-side responses to high tax rates.

…large disparity in income tax rates…will inevitably drive behavior.

Too bad he doesn’t draw the obvious lesson about the benefits of low tax rates.

Anyhow, here’s what he says about the President’s tax scheme.

The President’s global minimum tax proposal…permits tax-free repatriation of amounts earned in countries taxed at rates above the global minimum rate. …the global minimum tax plan also takes the benefit out of shifting income into low and no-tax jurisdictions by requiring that the multinational pay to the US the difference between the tax haven rate and the U.S. rate.

The bottom line is that American companies would be taxed by the IRS for doing business in low-tax jurisdictions such as Ireland, Hong Kong, Switzerland, and Bermuda.

But if they do business in high-tax nations such as France, there’s no extra layer of tax.

The bottom line is that the U.S. tax code would be used to encourage bad policy in other countries.

Though Mr. Stack sees that as a feature rather than a bug, based on the preposterous assertion that other counties will grow faster if the burden of government spending is increased.

…the global minimum tax concept has an added benefit as well…protecting developing and low-income countries…so they can mobilize the necessary resources to grow their economies.

And he seems to think that support from the IMF is a good thing rather than (given that bureaucracy’s statist orientation) a sign of bad policy.

At a recent IMF symposium, the minimum tax was identified as something that could be of great help.

The bottom line is that the White House and the Treasury Department are fixated at hobbling competitors by encouraging higher tax rates around the world and making sure that American-based companies are penalized with an extra layer of tax if they do business in low-tax jurisdictions

For what it’s worth, the right approach, both ethically and economically, is for American policy makers to focus on fixing what’s wrong with the American tax system.

P.S. When I debunked Jeffrey Sachs on the “race to the bottom,” I showed that lower tax rates do not mean lower tax revenue.

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I’m a bleeding heart libertarian in that I get most upset about statist policies that make life harder for disadvantaged people so that folks with more money can get undeserved goodies.

  • For instance, I despise anti-school choice leftists because they value political support from teacher unions more than they value opportunity for poor kids.
  • And I get very agitated that about the Export-Import Bank, which is a form of corporate welfare that transfers money from the general population to the rich.

Another example is occupational licensing, which occurs when politicians require newcomers to jump through expensive and/or time-consuming hoops before getting “permission” to provide a good or service. These licensing rules create unjust profits for established businesses by hindering competition, and they are especially burdensome for poor people, all of which is explained in this superb video from the Institute for Justice.

But if there’s a sliver lining to that dark cloud, it’s this image that I will add to my collection of libertarian humor. To be fair, I don’t know if it counts as purely libertarian humor, but I saw it on Reddit‘s libertarian page and it definitely makes the right points.

If you like libertarian humor, both pro and con, click here, here, and here for other examples.

P.S. Let’s close by sharing some good news on a serious topic.

Unlike the short-sighted politicians in the United States, the crowd in Australia seems a bit more level-headed on the issue of competitive corporate taxation. Here are some excerpts from a story in the U.K.-based Guardian.

The Turnbull government has given big business exactly what it wants – a substantial tax cut. It has also extended the Abbott government’s small business tax package by giving small and medium businesses more tax cuts and incentives. …“Our corporate tax rate is high by international standards and well above the average for OECD countries and those in the Asian region,” the budget papers say. “This will make Australian companies more internationally competitive in a tough global market place.” The government plans to cut the corporate tax rate significantly, from 30% to 25%. …The cut will be phased in over 10 years… The treasurer, Scott Morrison, says treasury modelling suggests the measures will grow the economy by 1% over the long term. He says they will lead to higher living standards, via increased business investment and more jobs.

I certainly don’t think “significantly” is a word to describe a modest five-percentage-point reduction in the rate, but kudos to Aussie politicians for moving in the right direction. I also like the part about “treasury modelling,” which suggests that the Australians also have a sensible approach on the issue of static scoring vs. dynamic scoring.

So perhaps now you can understand why Australia is my choice if (when?) the welfare state collapses in the United States (though I’m still of the opinion that the Swiss are the world’s most sensible people).

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My opinion on taxing corporate income varies with my mood.

When I’m in a fiery-libertarian phase, I want to abolish taxes on corporate income for the simple reason that all income taxes should be eliminated. Heck, I would also eliminate October 3 from the calendar because that’s the awful day in 1913 that the income tax was signed into low.

But when I’m going through a pragmatic-libertarian phase, I grudgingly accept that my fantasies won’t be realized and focus on incremental reform. And that means I want a simple and fair system like the flat tax, which is based on the principle that all income should be taxed, but only one time and at one low rate.

And that means corporate income should be taxed.

That being said, while it may be appropriate to tax corporate income, that does not mean the U.S. corporate income tax is ideal.

That’s the bad news.

The good news is that all of these problems can be solved with a flat tax, which would rip of the current corporate income tax and replace it with a very simple, low-rate system that properly measures income (i.e., expensing and territorial taxation) and taxes it only one time (i.e., no double taxation).

By the way, corporate income can be taxed without a corporate income tax. Simply tax the income when it is distributed to shareholders (the people who own the company) instead of taxing it at the business level. The goal, of course, is to make sure it no longer gets taxed twice.

A good business tax system isn’t a fantasy. Jurisdictions such as Estonia and Hong Kong have business tax systems that are very close to the aforementioned ideal. And it goes without saying that jurisdictions such as Bermuda, Monaco, and the Cayman Islands. are even better since they fulfill my dream of no income tax whatsoever.

With this background on good business tax policy, let’s now look at some contentious issues and see how they should be addressed.

We’ll start with the kerfuffle over companies that don’t pay tax, a controversy that was triggered by a somewhat disingenuous report from the Government Accountability Office.

One of the takeaway headlines from the GAO report is the supposedly startling revelation that 70 percent of corporations paid no tax.

But Aparna Mathur of the American Enterprise Institute explained the real story, which is that they didn’t pay tax because they didn’t have profits.

In 2012, out of 1.6 million corporate tax returns, only 51% were returns that had positive “net incomes,” and only 32% were returns that had positive “incomes subject to tax.” …“income subject to tax” allows companies with positive “net incomes” to claim an additional deduction as a result of prior-year operating losses. These losses can be carried forward to offset taxable incomes in years when firms are making a profit or have positive net incomes; this is known as a net operating loss deduction (NOLD). For 2012, the data show that approximately 20% of companies with positive “net incomes” (or profits) claimed a net operating loss deduction resulting in a zero tax liability.

There’s a bit of jargon in that passage, but the main thing to understand is that companies get to use losses from one year to offset profits from another year, which means – for all intents and purposes – that the government’s definition of taxable income does a better job of measuring profits over a longer period of time.

Here are some more details.

…the data shows two things: first, the GAO claim that 70% of companies paid no income tax is largely because more than 50% of these companies had zero profits or net incomes, and therefore they had zero tax liability. Secondly, some of these currently “profitable” (positive net income) companies have experienced large losses in prior years. For these companies, the NOL deduction allowed them to reduce their tax liability to zero. …The intent of this provision is, for example, to avoid a company with 5 years of consecutive operating losses of $20 million each having to pay income tax in year 6 simply because it realizes income of $20 million in that year. The principle underlying NOLD is intended to allow companies to get out of the hole of accumulated losses before the government can start claiming…the company’s income.

Her conclusion is completely sensible and appropriate.

…the GAO clearly acknowledges that the reason 70% of companies are paying no taxes is because they are either not currently profitable or they are able to offset taxes because of prior-year losses.

The Tax Foundation also has weighed in on this issue.

…the Government Accountability Office (GAO) published a report on corporate income taxes, which found that 19.5 percent of “profitable large corporations” paid zero corporate income taxes in 2012. …Should you be…outraged…about the number of U.S. corporations that pay no corporate income tax? In fact, there is good reason to think that many of the corporations that the GAO identifies as “profitable” did not actually earn a profit. In such cases, it would have been a mistake to collect corporate income taxes from these companies.

Echoing the explanation from Ms. Mathur, the Tax Foundations makes the same point about current year profits being offset by prior years’ losses, but also add a few additional reasons why “profitable” companies aren’t paying tax.

…some of the corporations that were categorized as “profitable” by the GAO in 2012 did not actually earn positive profits in the United States. …To the extent that some of the “profitable” corporations in the GAO report earned only foreign profits, rather than domestic profits, it is entirely reasonable that these corporations should not be subject to any U.S. corporate tax burden.

Particularly since they already are paying lots of tax on their foreign-source income to foreign governments.

There’s also the issue of depreciation, which journalists always have a hard time understanding.

…when calculating a corporation’s economic profit, it is appropriate to treat the entire cost of an investment as a current year expense. …imagine a corporation with $1 million in operating profits and $2 million in investment costs. Depending on how much of the investment the corporation treats as a current-year expense, the corporation could be making a large profit, no profit, or negative profit.

The bottom line is that you have look closely at how government defines “profit” to correctly ascertain whether companies are somehow avoiding taxation.

And in most cases, you’ll discover that the firms that don’t pay tax are the ones that don’t actually have income, properly defined.

…some U.S. corporations with positive book income might have negative taxable income: not because of any tricks or loopholes, but simply because the tax code operates under different accounting rules. …there are real, legitimate reasons why a “profitable” corporation would not and should not be required to pay corporate income taxes in a given year.

Now let’s return to the issue of double taxation, which occurs when income is taxed at the business level and then a second time when distributed as dividends to shareholders.

The Tax Foundation nicely summarize the issues in a new study, including some much-deserved focus on how this creates a bias for debt.

…income that is earned by corporations and funded by equity (stocks) is subject to a double tax: once on the corporate level, when it is earned, and once on the shareholder level, when it is distributed as dividends. The double taxation of equity-financed corporate income leads to several major economic distortions. It encourages investors to shift their investments from corporate to non-corporate businesses, leading to a less efficient allocation of capital. Furthermore, it incentivizes corporations to fund their operations with debt, rather than equity, leading to excessive leverage.

The solution, needless to say, is something called “corporate integration,” which is simply a wonky way of saying that income should be taxed only one time.

Corporate integration refers to a set of proposals to standardize the taxation of business income across legal forms and methods of financing. The chief advantage of corporate integration is that it would end the double taxation of equity-financed corporate income… The principle of tax neutrality – that a tax system should neither encourage nor discourage specific economic decisions – is embraced by public policy scholars throughout the political spectrum. Corporate integration – taxing all business income at the same top rate, regardless of the legal form of the business or how the income was financed – would minimize the economic distortions created by the U.S. tax code and conform to the principle of neutrality.

Here’s a chart showing how neutrality is violated by double taxing income that is generated by equity. Once again, there’s a bit of jargon, but the main thing to understand is that companies deduct interest payments they make to bondholders, so there’s a tax at the household level but no tax at the business level. But they can’t deduct dividend payments, which effectively means the company is taxed on that money in addition to the household paying tax as well.

The Tax Foundation helpfully suggests how this inequity could be resolved. Allow companies to deduct dividend payments, just as they now deduct interest payments.

Perhaps the simplest way to integrate the corporate and individual tax codes would be to tax dividends received by individuals at ordinary income rates and allow corporations to deduct all of their dividends paid.

Incidentally, this would basically mean that there’s no longer a corporate income tax, though (as discussed above) all corporate income would still be taxed (at the household level).

Let’s close by looking at two pieces of legislation and applying the lessons we’ve learned.

Congressman Devin Nunes (R-CA) has legislation that would address many of the problems outlined above. Here’s how the Tax Foundation describes his plan.

Major elements of his plan are: Cutting the corporate income tax to 25 percent; Limiting the top tax rate on non-corporate business income to 25 percent; Allowing businesses to deduct investment costs when they occur (full expensing); Eliminating most business tax credits and many deductions; Moving to a territorial tax system like most developed nations; …Applying the same tax-rate limitation to individuals’ interest income as now applies to their capital gains and dividend income; and Eliminating the individual and corporate alternative minimum taxes (AMTs).

Wow, that’s fixing many of the problems outlined above.

But here’s the catch. To make the numbers add up, he gets rid of the bias for debt. But he does it by adding a second layer of taxation to interest income rather than abolishing the second layer of tax on dividend income.

The Nunes plan would not let nonfinancial businesses deduct interest payments, but would not tax them on interest receipts. It would generally not allow individuals to deduct interest payments, except that home mortgage interest would remain deductible, and it would apply the same tax-rate limitation to individuals’ interest income as to dividends (top rate of 20 percent). These changes would have a mixed effect on tax biases. On the one hand, they would lessen the tax distortion at the corporate level between debt and equity financing. Because debt is riskier than equity (debt payments are legally required regardless of business cash flow), corporate businesses would be better able to weather economic adversity if the tax system did not push them so strongly toward debt financing. On the other hand, the changes would mean that corporate returns financed through debt would be taxed at both the corporate and individual levels, as is now the case with corporate equity.

For what it’s worth, the Tax Foundation projects that Cong. Nunes’ plan would be very beneficial to growth and job creation, so the benefits of the good reforms are much larger than the harm associated with extending double taxation to interest payments.

That sounds right to me, particularly when you include the fact that companies will make sounder decisions once there’s no longer a bias for debt.

Last but not least, let’s review some recent legislation from Congressman Tom Emmer (R-MN).

Here’s what Americans for Tax Reform wrote about his proposal.

Currently, the U.S. corporate rate is the highest amongst the 34 country Organisation for Economic Development (OECD). At 39 percent, it far exceeds the OECD average rate of 25 percent, and is even further behind developed countries like Ireland, Canada, and the U.K. which have rates of 20 percent or less. The CREATE Jobs act would fix this by reducing the U.S. corporate rate to five points below the OECD average and creating a process by which the U.S. rate is regularly reviewed to ensure economic competitiveness. …bringing the rate below the OECD average would have strong and immediate effects. A 20 percent U.S. corporate rate could create more than 600,000 jobs, increase GDP by 3.3 percent, and increase wages by 2.8 percent over the long-term, according to the Tax Foundation.

P.S. Here’s a video from the Center for Freedom and Prosperity that describes some of the warts associated with the corporate income tax.

P.P.S. If you think my video is a bit amateurish, it’s because it was a first-time experiment and originally wasn’t going to be released. But once it was finished, we figured it was adequate. And I think it compares well to some corporate tax videos put together by other groups.

P.P.P.S. For those worried about corporate inversions, it’s worth noting that the types of reforms listed above would make companies far less likely to re-domicile in other jurisdictions.

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I wrote recently about the Pfizer-Allergan merger and made the case that it was a very sensible way to protect the interests of workers, consumers, and shareholders.

That’s the good news.

Why? Because companies should be allowed to engage in a do-it-yourself form of territorial taxation to minimize the damage caused by bad tax policy coming out of Washington.

The bad news is that the White House, with its characteristic disregard of the rule of law, promulgated a regulation that retroactively changed existing tax law and derailed the merger.

Now the White House has produced an infographic designed to bolster its case against inversions, which I have reprinted to the right.

You can click on this link to see the full-sized version, but I thought the best approach would be to provide a “corrected” version.

So if you look below, you’ll find my version, featuring the original White House document on the left and my editorial commentary on the right.

But if you don’t want to read the document and my corrections, all you need to know is that the Obama Administration makes several dodgy assumptions and engages in several sins of omission. Here are the two biggest problems.

  1. No acknowledgement that the U.S. corporate tax regime drives inversions because of high rates and worldwide taxation.
  2. A bizarre and anti-empirical assertion that money is spent more productively by governments compared to the private sector.

And here’s the entire “corrected” infographic.

The bottom line is there aren’t any “loopholes” being exploited by inverting companies.

Instead, there’s a very anti-growth American tax system that makes it very difficult for American-domiciled firms to compete in global markets.

The solution is a simple, low rate flat tax.

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I’m never surprised when politicians make absurd statements, but I’m still capable of being shocked when other people make outlandish assertions.

Like the leftist policy wonk who claimed that capitalism is actually coercion, even though free markets are based on voluntary exchange. Or the statist columnist who argued people aren’t free unless they’re entitled to other people’s money, even though that turns some people into unfree serfs.

Now I have another example of upside-down thinking. It deals with the “inversion” issue, which involves American-chartered companies choosing to redomicile overseas.

A column in the Huffington Post implies that Pfizer is some sort of economic traitor for making a sensible business decision to protect the interests of workers, consumers, and shareholders.

Pfizer…wants to turn its back on America by claiming to be an Irish company through an offshore merger, giving it access to Ireland’s low tax rates. The change would only be on paper. The company would still be run from the United States, enjoying all the benefits of being based in America—such as our taxpayer-supported roads, public colleges, and patent protections—without paying its part to support them.

There’s a remarkable level of inaccuracy in that short excerpt. Pfizer wouldn’t be claiming to be an Irish company. It would be an Irish company. And it would still pay tax to the IRS on all U.S.-source income. All that changes with an inversion is that the company no longer would have to pay tax to the IRS on non-U.S. income. Which is money the American government shouldn’t be taxing in the first place!

Here’s more from the article.

Pfizer could walk out on its existing U.S. tax bill of up to $35 billion if its Irish tax maneuver goes forward. That’s what it already owes the American people on about $150 billion in profits it has stashed offshore, much of it in tax havens.

Wrong again. The extra layer of tax on foreign-source income only applies if the money comes back to the United States. Pfizer won’t “walk out” on a tax liability. Everything the company is doing is fully compliant with tax laws and IRS rules.

Here’s another excerpt, which I think is wrong, but doesn’t involve misstatements.

When corporations dodge their taxes, the rest of us have to make up for what’s missing. We pay for it in higher taxes, underfunded public services, or more debt.

The “rest of us” aren’t losers when there’s an inversion. All the evidence shows that we benefit when tax competition puts pressure on governments.

By the way, the author wants Obama to arbitrarily and unilaterally rewrite the rules .

President Obama can stop Pfizer’s biggest cash grab: that estimated $35 billion in unpaid taxes it wants to pocket by changing its mailing address. There are already Treasury Department rules in place to prevent this kind of overseas tax dodge. As now written, however, they wouldn’t apply to Pfizer’s cleverly-crafted deal. The Obama Administration needs to correct those regulations so they cover all American companies trying to exploit the loophole Pfizer is using. It already has the authority to do it.

Needless to say, Pfizer can’t “grab” its own money. The only grabbing in this scenario would be by the IRS. Since I’m not an international tax lawyer, I have no idea if the Obama Administration could get away with an after-the-fact raid on Pfizer, but I will note that the above passage at least acknowledges that Pfizer is obeying the law.

Now let’s look at some analysis from someone who actually understands the issue. Mihir Desai is a Harvard professor and he recently explained the reforms that actually would stop inversions in a column for the Wall Street Journal.

Removing the incentive for American companies to move their headquarters abroad is a widely recognized goal. To do so, the U.S. will need to join the rest of the G-7 countries and tax business income only once, in the country where it was earned. …Currently, the U.S. taxes the world-wide income of its corporations at one of the highest rates in the world, but defers that tax until the profits are repatriated. The result is the worst of all worlds—a high federal statutory rate (35%) that encourages aggressive transfer pricing, a significant restriction on capital allocation that keeps cash offshore, very little revenue for the Treasury, and the loss of U.S. headquarters to countries with territorial tax systems.

In other words, America should join the rest of the world and adopt a territorial tax system. And Prof. Desai is right. If the U.S. government stopped the anti-competitive practice of “worldwide” taxation, inversions would disappear.

That’s a lesson other nations seem to be learning. There’s only a small handful of countries with worldwide tax systems and that group is getting smaller every year.

Japan in 2009 and the United Kingdom in 2010 shifted to a territorial tax regime and lowered their statutory corporate rates. The U.K. did so to stop companies from moving their headquarters abroad; Japan was primarily interested in encouraging its multinationals to reinvest foreign earnings at home.

Professor Desai closes with a broader point about how it’s good for the American economy with multinational firms earn market share abroad.

…it is mistaken to demonize the foreign operations of American multinationals as working contrary to the interests of American workers. Instead the evidence, including research by C. Fritz Foley, James R. Hines and myself, suggests that U.S. companies succeeding globally expand at home—contradicting the zero-sum intuition. Demonizing multinational firms plays to populist impulses today. But ensuring that the U.S. is a great home for global companies and a great place for them to invest is actually the best prescription for rising median wages.

Amen. You don’t get higher wages by seizing ever-larger amounts of money from employers.

This is why we should have a territorial tax system and a much lower corporate tax rate.

Which is what Wayne Winegarden of the Pacific Research Institute argues for in Forbes.

…why would a company consider such a restructuring? The answer: the uncompetitive U.S. corporate income tax code. Attempts to punish companies that are pursuing corporate inversions misdiagnose the problem and, in so doing, make a bad situation worse. The problem that needs to be solved is the uncompetitive and overly burdensome U.S. corporate income tax code. The U.S. corporate income tax code puts U.S. companies at an unsustainable competitive disadvantage compared to their global competitors. The corporate income tax code in the U.S. imposes the highest marginal tax rate among the industrialized countries (a combined federal and average state tax rate of 39.1 percent), is overly-complex, difficult to understand, full of special interest carve-outs, taxes the same income multiple times, and taxes U.S. companies based on their global income.

Mr. Winegarden also makes the key point that a company that inverts still pays tax to the IRS on income earned in America.

…a corporate inversion does not reduce the income taxes paid by U.S. companies on income earned in the U.S. Following a corporate inversion, the income taxes owed by the former U.S. company on its income earned in the U.S. are precisely the same. What is different, however, is that the income that a company earns outside of the U.S. is no longer taxable.

Let’s now return to the specific case of Pfizer.

Veronique de Rugy of the Mercatus Center explains in National Review why the entire inversion issue is a classic case of blame-the-victim by Washington.

Almost 50 companies have chosen to “invert” over the last ten years. More than in the previous 20 years. …there are very good reasons for companies to do this. …for American businesses operating overseas, costs have become increasingly prohibitive. …Europe now sports a corporate-tax rate below 24 percent, while the U.S. remains stubbornly high at 35 percent, or almost 40 percent when factoring in state taxes. …it’s the combination with America’s worldwide taxation system that leaves U.S.-based corporations so severely handicapped. Unlike almost every other nation, the U.S. taxes American companies no matter where their income is earned. …So if a U.S.-based firm does business in Ireland they don’t simply pay the low 12.5 percent rate that everyone else pays, but also the difference between that and the U.S. rate.

Veronique explains why Pfizer made the right choice when it recently merged with an Irish company.

That’s a sensible reason to do what Pfizer has done recently with its attempt to purchase the Irish-based Allergan and relocate its headquarters there. The move would allow them to compete on an even playing field with every other company not based in the U.S. Despite the impression given by critics, they’ll still pay the U.S. rate when doing business here.

And she takes aim at the politicians who refuse to take responsibility for bad policy and instead seek to blame the victims.

…politicians and their ideological sycophants in the media wish to cast the issue as a moral failure on the part of businesses instead of as the predictable response to a poorly constructed corporate-tax code. …Clinton wants to stop the companies from moving with an “exit tax.” Clinton isn’t the first to propose such a silly plan. Lawmakers and Treasury officials have made numerous attempts to stop businesses from leaving for greener pastures and each time they have failed. Instead, they should reform the tax code so that businesses don’t want to leave.

Let’s close with an observation about the Pfizer controversy.

Perhaps the company did make a “mistake” by failing to adequately grease the palms of politicians.

Consider the case of Johnson Controls, for instance, which is another company that also is in the process of redomiciling in a country with better tax law.

Brent Scher of the Washington Free Beacon reports that the company has been a big donor to the Clinton Foundation, which presumably means it won’t be targeted if she makes it to the White House.

Hillary Clinton has spent the past few months going after Johnson Controls for moving its headquarters overseas, but during a campaign event on Monday, her husband Bill Clinton said that it is one of his “favorite companies.” …He described Johnson Controls as “one of my favorite companies” and praised the work it had done in the clean energy sector during an event in North Carolina on Monday. …Johnson Controls has contributed more than $100,000 to the Clinton Foundation and also partnered with it on numerous projects over the past eight years and as recently as 2015. Some of the Clinton Foundation projects included multi-million commitments from Johnson Controls. Bill Clinton pointed out in his speech that his foundation has done business with Johnson Controls—something that Hillary Clinton is yet to mention.

For what it’s worth, the folks at Johnson Controls may have made a wise “investment” by funneling money into the Clinton machine, but they shouldn’t delude themselves into thinking that this necessarily protects them. If Hillary Clinton ever decides that it is in her interest to throw the company to the wolves, I strongly suspect she won’t hesitate.

Though it’s worth pointing out that Burger King didn’t get attacked very much by the White House when it inverted to Canada, perhaps because Warren Buffett, a major Obama ally, was involved with the deal.

But wouldn’t it be nice if we had a reasonable tax code so that companies didn’t have to worry about currying favor with the political class?

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What’s the difference between Bernie Sanders and Hillary Clinton?

I suspect that most people would cite differences in personal ethics, but I’m a policy wonk so I actually think the leading candidates for the Democratic presidential nomination are two peas in a pod.

The only real difference is that Sanders is more open about his statist beliefs and is more anxious to adopt bad policies as quickly as possible.

But since I don’t want to become Greece, I have a hard time being impressed by politicians who bicker about the best route and best speed to get to the wrong destination.

Consider, for example, their views on corporate taxation. And let’s look specifically at the issue of how to deal with corporate inversions.

First, some background. The Wall Street Journal opines about the logical argument – and fiduciary obligation – for companies to escape America’s awful corporate tax system.

A major U.S. company merges with a foreign firm in part to avoid America’s punishing corporate tax code, and the politicians who refuse to reform the code denounce the company for trying to stay competitive. …Sigh. …Let’s try to explain one more time why it makes perfect business—and moral—sense… The U.S. federal corporate income tax rate is 35%. The Irish rate is 12.5%. …A CEO obliged to act in the best interests of shareholders cannot ignore this competitive reality.

All this makes great sense, and I’ve made similar arguments.

But what do Sanders and Clinton think? Well, the editorial skewers the two leading Democratic candidates for their vacuous demagoguery.

…none of this business logic impresses Hillary Clinton or Bernie Sanders, who helped to write the U.S. tax code as Senators but are now competing as presidential candidates to see who can demagogue more ferociously against American employers.Neither one wants to reform the tax code to make U.S. tax rates more competitive with the rest of the world. Instead they want to raise the costs of doing business even further. Mrs. Clinton’s solution is to raise taxes on investors with higher capital-gains taxes, block inversion deals, and apply an “exit tax” to businesses that manage to escape. Mr. Sanders would go further and perform an immediate $620 billion cashectomy on U.S. companies. The Vermonter would tax the money U.S. firms have earned overseas, even though that income has already been taxed in foreign jurisdictions.

Call me crazy, but I don’t think the ideas being peddled by Clinton and Sanders will lead to more and better jobs in the United States.

Which is why, when given the chance to  write about this topic for Fortune, I suggested that it would be best to actually fix the tax code rather than blaming the victim.

Some U.S. politicians respond to these mergers with demagoguery about “economic treason,” but that’s silly. These corporate unions are basically the business version of a couple in a long-distance relationship that decides to live where the economic outlook is brighter after getting married. So instead of blaming the victims, the folks in Washington should do what’s right for the country by trying to deal with the warts that make America’s tax system so unappealing for multinational firms.

And what are those warts?

The same ones any sensible person would identify. First, America’s corporate tax rate is absurdly anti-competitive.

With a 35% levy from Washington, augmented by smaller state corporate taxes, the combined burden is more than 39%. In Europe, by contrast, the average corporate tax rate has now dropped below 24%. And the average corporate rate for Asia’s major economies is even lower.

Second, we have a peculiarly self-destructive practice of wanting to tax income earned in other countries.

…the IRS also imposes tax on income earned in other nations. Very few nations impose a system of “worldwide taxation,” mostly for the simple reason that the income already is subject to tax in the nations where it is earned.

So here’s the bottom line.

The combination of a high rate and worldwide taxation is like a one-two punch against the competitiveness of U.S.-domiciled firms, so it’s easy to understand why inversions are so attractive. They’re a very simple step to protect the interests of workers, consumers and shareholders. …Let’s hope politicians put aside class warfare and anti-business demagoguery and fix the tax system before it’s too late.

By the way, even a columnist for the New York Times agrees with me. He has a piece on the inversion issue that is not very favorable to companies, and it certainly reads like he’s in favor of governments having more money, but he can’t help but come to the right conclusion.

Ultimately, the only way inversions will stop is when the corporate tax code changes so it becomes more attractive for American companies to be American companies.

And I can’t resist closing with a great blurb from George Will’s most recent column.

Having already paid taxes on it where it was earned, the corporations sensibly resist having it taxed again by the United States’ corporate tax, the highest in the industrial world.

Amen.

Will succinctly brings together the two most important things to understand about this issue. First, the income earned by American companies in other nations already is subject to tax, and, second, companies understandably don’t want it taxed again by the world’s highest corporate tax rate.

P.S. I’ve made the serious point that Sanders isn’t really a socialist, at least based on his voting record and what he proposes today. Instead, he’s just a conventional statist with mainstream (among leftists) views about redistribution.

Yet because he calls himself a socialist, that leads to amusing moments when other Democrats are asked to identify how he’s different. I’ve already mocked Debbie Wasserman Schultz for her inability to answer that question.

Now let’s see Hillary Clinton dance and dodge. The parts worth watching are all in the first half of the video.

Too bad Chris Matthews didn’t actually press her to answer the question. Though I’m vaguely impressed that she actually knows there are such a thing as libertarians.

P.P.S. While Hillary is clueless, there’s another Clinton that actually has some semi-sensible views about corporate taxation.

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