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Posts Tagged ‘Worldwide Taxation’

Last September, I wrote that America’s business tax system is a nightmare that simultaneously undermines the competitiveness of American companies while also causing lots of irritation in other nations.

Both of those bad things happen because politicians in Washington think the IRS should be able to tax income that is earned (and already subject to tax) in other countries. This approach, known as “worldwide taxation,” is contrary to good tax policy.

Indeed, all good tax reform plans, such as the flat tax, are based on “territorial taxation,” which is the common-sense principle that governments should only tax activity inside national borders.

Given the self-inflicted wound of worldwide taxation, particularly when combined with the world’s highest corporate tax rate, it’s easy to understand why some companies engage in “inversions” and become foreign-domiciled firms. Simply stated, that’s their best option if they care about the best interests of their workers, customers, and shareholders.

Well, the same problem exists for households. And it exists for the same reason. The United States also imposes “worldwide taxation” on individual taxpayers. But it’s even worse, because there are specific laws, such as the infamous Foreign Account Tax Compliance Act, that impose absurdly high costs on Americans with cross-border economic activity, particularly those who live and work in other nations.

And just as our senselessly punitive corporate tax system drives corporations to re-domicile, the same is true for the personal tax code. As CNN reports, record numbers of Americans are officially giving up their citizenship.

The number of Americans choosing to give up their passports hit a record 3,415 last year, up 14% from 2013, and 15 times more than in 2008, when only 231 people renounced their citizenship. Experts say the recent surge is coming from expats who no longer want to deal with complicated tax paperwork, a burden that has only gotten worse in recent years. Unlike most countries, the U.S. taxes all citizens on income, no matter where it is earned or where they live. The mountain of paperwork can be so complicated that expats are often forced to fork over high fees to hire an accountant… “More and more are considering renouncing,” said Vincenzo Villamena of Online Taxman, an accountant who specializes in expat taxes. “There are a lot of uncertainties about FATCA…I don’t think we’ve seen the full effect that FATCA can have on people’s lives.” As both expats and financial institutions rush to understand the new law, some banks have chosen to kick out their Americans clients rather than comply. If a bank mistakenly fails to report accounts held by Americans outside the U.S. — even checking and savings accounts — they can face steep penalties.

Here’s a chart from the CNN article.

As you can see, there was a pause in 2012, perhaps because people were waiting to see what happened in the election.

But ever since, the number of people escaping U.S. citizenship has jumped dramatically.

To better understand how bad tax law is hurting people with U.S. passports, let’s look at the plight of Americans in Canada, as reported by the Vancouver Sun.

…many Ameri-Canadians are feeling rising anger, fear and even hatred toward their powerful country of origin. …The U.S. is the only major country to tax based on citizenship, not residency. …open displays of American pride in Canada are becoming even less likely as Ameri-Canadians seek shelter from the long reach of FATCA. …In addition, the flow of Americans leaving the U.S. for Canada more than doubled in the decade up until 2011, according to Statistics Canada. …Now — with FATCA causing investigators to scour the globe to hunt down more than seven million broadly defined “U.S. persons” it claims should be paying taxes to Uncle Sam — even more people in Canada with U.S. connections are finding another reason to bury their American identities.

Now let’s be even more focused and look at the impact on a single Englishman who happens to be the Mayor of London.

Johnson was characteristically forthright, describing FATCA as “outrageous”, and a “terrible doctrine of taxation.” Born in New York and having never given up his US citizenship, the London mayor cannot escape the clutches of FATCA, which requires that foreign financial institutions report the financial information of Americans. Those affected include many so-called “accidental Americans” like Johnson… What has seemingly brought FATCA to the front of Boris’s mind is the sale of his UK home, on which he is liable to pay tax in America. …What it does do – because of its host of serious, unintended, adverse consequences – is brand Americans, and accidental Americans choosing to live or work overseas, as financial pariahs. …Similarly, American businesses working in international markets are now often branded with a leprosy-like status. Clearly, this can only be detrimental to the country’s global competitiveness, and could, in turn, hit American jobs and the long-term growth of the economy. Questions should be asked about the imperialist characteristics of FATCA. Governments and foreign financial institutions have been coerced into complying with its expensive, burdensome, privacy-infringing, sovereignty-violating regulations by the US – or they have to face heavy penalties and the prospect of being effectively frozen out of US markets. And all this to “recover” an estimated $1bn (£637m) per year, which is enough, according to reports, to run the federal government for less than two hours.

As you can see, FATCA is a major problem.

And not just for specific taxpayers. The law is also bad for economic growth since it throws sand in the gears of global commerce.

Here are some excerpts from another news report, which includes some of my thoughts on the FATCA issue.

Critics say the FATCA has gone too far, is too draconian and is imposing an undue hardship on Americans living overseas. So says Dan Mitchell of the Cato Institute, a libertarian think tank in Washington. He says the law is “causing lots of headaches and heartaches around the world, not only for foreign financial institutions but also for overseas Americans, who are now being treated as Pyrrhus because financial institutions view them as too costly to service.” The U.S. is one of the few countries that tax its citizen on the basis of nationality, not residency. And faced with a larger tax bill, thousands of Americans living overseas would rather give up their passports then pay a new tax to Uncle Sam. The Taxpayer Advocate’s Office of the IRS has reported that the FATCA “has the potential to be burdensome, overly broad and detrimental to taxpayer rights.” Mitchell says, “An American living and working in some other country is required to not only pay tax to that country where they live but also file a tax return to the U.S. No other civilized country does that.”

By the way, I didn’t say that the law was causing overseas Americans to be treated as “Pyrrhus.” I said they were being viewed as “pariahs.” But that’s the risk you take when doing oral interviews.

Returning to matters of substance, you’ll also be happy to know that FATCA is making people more vulnerable to identity theft. It’s gotten so bad that even the IRS was forced to issue an official warning.

The Internal Revenue Service today issued a fraud alert for international financial institutions complying with the Foreign Account Tax Compliance Act (FATCA). Scam artists posing as the IRS have fraudulently solicited financial institutions seeking account holder identity and financial account information. …These fraudulent solicitations are known as “phishing” scams. These types of scams are typically carried out through the use of unsolicited emails and/or websites that pose as legitimate contacts in order to deceptively obtain personal or financial information. Financial institutions or their representatives that suspect they are the subject of a “phishing” scam should report the matter to the Treasury Inspector General for Tax Administration (TIGTA) at 800-366-4484, or through TIGTA’s secure website. Any suspicious emails that contain attachments or links in the message should not be opened.

Gee, nice of them to be so concerned about potential victims.

Though perhaps it would be better if we didn’t have intrusive laws in the first place.

The law is even so destructive that the Associated Press reported that it might be used as a weapon against the Russians!

As the United States attempts to punish Russia for its actions in Ukraine, the Treasury Department is deploying an economic weapon that could prove more costly than sanctions: the Internal Revenue Service. This summer, the U.S. plans to start using a new law that will make it more expensive for Russian banks to do business in America. “It’s a huge deal,” says Mark E. Matthews, a former IRS deputy commissioner. “It would throw enormous uncertainty into the Russian banking community.” …beginning in July, U.S. banks will be required to start withholding a 30 percent tax on certain payments to financial institutions in other countries — unless those foreign banks have agreements in place… But after Russia annexed Crimea and was seen as stoking separatist movements in eastern Ukraine, the Treasury Department quietly suspended negotiations in March. With the July 1 deadline approaching, Russian banks are now concerned that the price of investing in the United States is about to go up. …For Russia, the penalties could be more damaging to its economy than U.S. sanctions, said Brian L. Zimbler, managing partner of the Moscow office of Morgan Lewis, an international law firm. …The 2010 law is known as FATCA.

So what’s the bottom line?

As you can see, America’s worldwide tax system is bad policy, and it’s a nightmare for millions of innocent people thanks to ill-considered laws such as FATCA.

What’s really remarkable – in a bad way – is the complete lack of proportionality.

Back during the 2008 campaign, Obama claimed that laws like FATCA would generate $100 billion per year. From the perspective of tax collectors, that amount of money may have justified an onerous law.

But when the dust settled, the revenue estimators predicted that FATCA would bring in less than $1 billion per year.

In other words, the amount of money the IRS will collect is dwarfed by the damage to the overall economy and the harm to millions of taxpayers. Not to mention all the negative feelings against America that have been generated by this absurd law.

Yet very few politicians are willing to fight FATCA because they’re afraid that their opponents will engage in demagoguery and accuse them of being in favor of tax evasion. Senator Rand Paul is an admirable exception.

P.S. Since this has been such a depressing discussion, here is some good IRS humor to lighten the mood.

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The President today released his budget for fiscal year 2016, a document that also shows what will happen to taxes, spending, and red ink over the next 10 years if the White House’s budget is adopted.

Here are the four things that deserve critical attention.

1. Obama proposes to have spending grow by an average of about 5.4 percent per year over the next five years and more than 5 percent annually over the next 10 years, well more than twice as fast as projected inflation.

Though it oftentimes doesn’t get sufficient attention, the change in government spending is the most important number (or set of numbers) in any budget. If the burden of spending is rising, regardless of whether that increase is financed by taxes or borrowing, more resources will be diverted from the economy’s productive sector.

In President Obama’s budget, he wants government spending in FY 2016 to be $3,999.5 billion, an astounding increase of 9.4 percent over the Congressional Budget Office’s estimate of $3,656 billion of spending in the current fiscal year (the President is proposing additional spending for FY 2015, so the annual increase between 2015-2016 in his budget is “only” 6.4 percent).

Even more troubling, he wants government spending to climb by more than twice as fast as inflation in future years. And most worrisome of all, he wants government to grow faster than the private sector, which means that the burden of government spending will climb as a share of GDP, both over the next five years and the next 10 years.

The challenge for the GOP: In part because spending rose so much in 2009, but also in part because Congress waged important fiscal battles over debt limits, shutdowns, and sequestration, there was a de facto spending freeze between 2009 and 2014. Unfortunately, spending is climbing by at least twice the rate of inflation in 2015, and Obama wants additional big increases in the future. It will be very revealing to see whether Republican control of both the House and Senate means policy moves back in the direction of spending restraint.

2. The President wants to renege on the 2011 debt limit agreement by busting the spending caps.

With great fanfare in 2011, the White House and Congress agreed to boost the debt limit, but only because both parties agreed on some modest caps to control the growth rate of discretionary spending.

But these spending caps don’t allow outlays to rise as fast as the President would prefer, so he is explicitly seeking to eviscerate the caps and allow bigger increases. These spending hikes would enable for defense spending and more domestic spending.

The challenge for the GOP: The spending caps and sequestration represent President Obama’s most stinging defeat on fiscal policy, so it’s hardly a surprise that he wants to gut any restraint on his ability to spend. This presumably should be a slam-dunk victory for Republicans since they can simply refuse to change the law. But there are some GOPers who want more defense spending, and even some who want more domestic spending. Indeed, the pro-spending caucus in the Republican Party was one of the reasons why the spending caps were already weakened two years ago.

3. The White House’s new budget wants a new tax on American companies competing in world markets.

The good news is that the President no longer is proposing to get rid of “deferral,” a policy from past budgets that would have resulted in a 35 percent tax on profits earned by American multinationals in other nations (and already subject to tax by the governments of those other nations). The bad news is that he instead wants to tax all previously accumulated foreign-source income at 14 percent and then tax all future foreign-source income at 19 percent.

To make matters worse, he wants to use this new pot of money to finance expanded federal involvement and interference in transportation and infrastructure.

The challenge for the GOP: Some Republicans favor more transportation spending from Washington and some companies may be tempted to acquiesce to some sort of deal, particularly if it only applies to accumulations of prior-year foreign-source income. Advocates of good policy in Congress should not enable a bigger federal role in transportation. Indeed, the only good policy is to phase out federal involvement and eliminate the federal gas tax.

4. President Obama wants class-warfare based increases in the death tax and the capital gains tax.

In addition to many other tax hikes in his budget, the President wants to boost the capital gains tax rate to 28 percent and he also wants to expand the impact of the death tax by eliminating a policy that acknowledges the actual value of assets when they are received by children and other heirs.

Since there shouldn’t be any double taxation of income that is saved and invested, both the death tax and capital gains tax should be abolished. Needless to say, increasing either tax would have a negative impact on the American economy.

The challenge for the GOP: Hopefully this policy will be deemed “dead on arrival.” Republicans presumably should be united in their opposition to class-warfare tax increases.

P.S. This Steve Breen cartoon is a pretty apt summary of the Obama budget (and one that will be added to my bloated government collection).

Particularly when augmented by this Jerry Holbert gem.

P.P.S. Here’s the fiscal policy we should emulate.

P.P.P.S. Here’s the fiscal policy mistake we should avoid.

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Most of us will never be directly impacted by the international provisions of the internal revenue code.

That’s bad news because it presumably means we don’t have a lot of money, but it’s good news because IRS policies regarding “foreign-source income” are a poisonous combination of complexity, harshness, and bullying (this image from the International Tax Blog helps to illustrate that only taxpayers with lots of money can afford the lawyers and accountants needed to navigate this awful part of the internal revenue code).

But the bullying and the burdens aren’t being imposed solely on Americans. The internal revenue code is uniquely unilateral and imperialistic, so we simultaneously hurt U.S. taxpayers and cause discord with other jurisdictions.

Here are some very wise words from a Washington Post column by Professor Andrés Martinez of Arizona State University.

Much of his article focuses on the inversion issue, but I’ve already covered that topic many times. What caught my attention instead is that he does a great job of highlighting the underlying philosophical and design flaws of our tax code. And what he writes on that topic is very much worth sharing.

The Obama administration is not living up to its promise to move the country away from an arrogant, unilateral approach to the world. And it has not embraced a more consensus-driven, multipolar vision that reflects the fact that America is not the sole player in the global sandbox. No, I am not talking here about national security or counter-terrorism policy, but rather the telling issue of how governments think about money — specifically the money they are entitled to, as established by their tax policies. …ours is a country with an outdated tax code — one that reflects the worst go-it-alone, imperialistic, America-first impulses. …the…problem is old-fashioned Yankee imperialism.

What is he talking about? What is this fiscal imperialism?

It’s worldwide taxation, a policy that is grossly inconsistent with good tax policy (for instance, worldwide taxation is abolished under both the flat tax and national sales tax).

He elaborates.

The United States persists in imposing its “worldwide taxation” system, as opposed to the “territorial” model embraced by most of the rest of the world. Under a “territorial” tax system, the sovereign with jurisdiction over the economic activity is entitled to tax it.  If you profit from doing business in France, you owe the French treasury taxes, regardless of whether you are a French, American or Japanese multinational.  Even the United States, conveniently, subscribes to this logical approach when it comes to foreign companies doing business here: Foreign companies pay Washington corporate taxes on the income made by their U.S. operations. But under our worldwide tax system, Uncle Sam also taxes your income as an American citizen (or Apple’s or Coca-Cola’s) anywhere in the world. …Imagine you are a California-based widget manufacturer competing around the world against a Dutch widget manufacturer. You both do very well and compete aggressively in Latin America, and pay taxes on your income there. Trouble is, your Dutch competitor can reinvest those profits back in its home country without paying additional taxes, but you can’t.

Amen.

Indeed, if you watch this video, you’ll see that I also show how the territorial system of the Netherlands is far superior and more pro-competitive than America’s worldwide regime.

And if you like images, this graphic explains how American companies are put at a competitive disadvantage.

Professor Martinez points to the obvious solution.

Instead of attacking companies struggling to compete in the global marketplace, the Obama administration should work with Republicans to move to a territorial tax system.

But, needless to say, the White House wants to move policy in the wrong direction.

Looking specifically at the topic of inversions, the Wall Street Journal eviscerates the Obama Administration’s unilateral effort to penalize American companies that compete overseas.

Here are some of the highlights.

…the Obama Treasury this week rolled out a plan to discourage investment in America. …the practical impact will be to make it harder to make money overseas and then bring it back here. …if the changes work as intended, they will make it more difficult and expensive for companies to reinvest foreign earnings in the U.S. Tell us again how this helps American workers.

The WSJ makes three very powerful points.

First, companies that invert still pay tax on profits earned in America.

…the point is not to ensure that U.S. business profits will continue to be taxed. Such profits will be taxed under any of the inversion deals that have received so much recent attention. The White House goal is to ensure that the U.S. government can tax theforeign profits of U.S. companies, even though this money has already been taxed by the countries in which it was earned, and even though those countries generally don’t tax their own companies on profits earned in the U.S.

Second, there is no dearth of corporate tax revenue.

Mr. Lew may be famously ignorant on matters of finance, but now there’s reason to question his command of basic math. Corporate income tax revenues have roughly doubled since the recession. Such receipts surged in fiscal year 2013 to $274 billion, up from $138 billion in 2009. Even the White House budget office is expecting corporate income tax revenues for fiscal 2014 to rise above $332 billion and to hit $502 billion by 2016.

Third, it’s either laughable or unseemly that companies are being lectured about “fairness” and “patriotism” by a cronyist like Treasury Secretary Lew.

It must be fun for corporate executives to get a moral lecture from a guy who took home an $800,000 salary from a nonprofit university and then pocketed a severance payment when he quit to work on Wall Street, even though school policy says only terminated employees are eligible for severance.

Heck, it’s not just that Lew got sweetheart treatment from an educational institution that gets subsidies from Washington.

The WSJ also should have mentioned that he was an “unpatriotic” tax avoider when he worked on Wall Street.

But I guess rules are only for the little people, not the political elite.

P.S. Amazingly, I actually found a very good joke about worldwide taxation. Maybe not as funny as these IRS jokes, but still reasonably amusing.

P.P.S. Shifting from tax competitiveness to tax principles, I’ve been criticized for being a squish by Laurence Vance of the Mises Institute. He wrote:

Mitchell supports the flat tax is “other than a family-based allowance, it gets rid of all loopholes, deductions, credits, exemptions, exclusions, and preferences, meaning economic activity is taxed equally.” But because “a national sales tax (such as the Fair Tax) is like a flat tax but with a different collection point,” and “the two plans are different sides of the same coin” with no “loopholes,” even though he is “mostly known for being an advocate of the flat tax,” Mitchell has “no objection to speaking in favor of a national sales tax, testifying in favor of a national sales tax, or debating in favor of a national sales tax.” But as I have said before, the flat tax is not flat and the Fair Tax is not fair. …proponents of a free society should work towardexpanding tax deductions, tax credits, tax breaks, tax exemptions, tax exclusions, tax incentives, tax loopholes, tax preferences, tax avoidance schemes, and tax shelters and applying them to as many Americans as possible. These things are not subsidies that have to be “paid for.” They should only be eliminated because the income tax itself has been eliminated. …the goal should be no taxes whatsoever.

In my defense, I largely agree. As I’ve noted here, here, here, and here, I ultimately want to limit the federal government to the powers granted in Article I, Section 8 of the Constitution, in which case we wouldn’t need any broad-based tax.

Though I confess I’ve never argued in favor of “no taxes whatsoever” since I’m not an anarcho-capitalist. So maybe I am a squish. Moreover, Mr. Vance isn’t the first person to accuse me of being insufficiently hardcore.

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I’ve complained over and over again that America’s tax code is a nightmare that undermines competitiveness and retards growth.

Our aggregate fiscal burden may not be as high as it is for many of our foreign competitors, but high tax rates and poor design mean the system is very punitive on a per-dollar-raised basis.

For more information, the Tax Foundation has put together an excellent report measuring international tax competitiveness.

Here’s the methodology.

The Tax Foundation’s International Tax Competitiveness Index (ITCI) measures the degree to which the 34 OECD countries’ tax systems promote competitiveness through low tax burdens on business investment and neutrality through a well-structured tax code. …No longer can a country tax business investment and activity at a high rate without adversely affecting its economic performance. In recent years, many countries have recognized this fact and have moved to reform their tax codes to be more competitive. However, others have failed to do so and are falling behind the global movement. …The competitiveness of a tax code is determined by several factors. The structure and rate of corporate taxes, property taxes, income taxes, cost recovery of business investment, and whether a country has a territorial system are some of the factors that determine whether a country’s tax code is competitive.

And here’s how the United States ranks.

The United States provides a good example of an uncompetitive tax code. …the United States now has the highest corporate income tax rate in the industrialized world. …The United States places 32nd out of the 34 OECD countries on the ITCI. There are three main drivers behind the U.S.’s low score. First, it has the highest corporate income tax rate in the OECD at 39.1 percent. Second, it is one of the only countries in the OECD that does not have a territorial tax system, which would exempt foreign profits earned by domestic corporations from domestic taxation. Finally, the United States loses points for having a relatively high, progressive individual income tax (combined top rate of 46.3 percent) that taxes both dividends and capital gains, albeit at a reduced rate.

Here are the rankings, including scores for the various components.

You have to scroll to the bottom to find the United States. It’s embarrassing that we’re below even Spain and Italy, though I guess it’s good that we managed to edge out Portugal and France.

Looking at the component data, all I can say is that we should be very thankful that politicians haven’t yet figured out how to impose a value-added tax.

I’m also wondering whether it’s better to be ranked 32 out of 34 nations or ranked 94 out of 100 nations?

But rather than focus too much on America’s bad score, let’s look at what some nations are doing right.

Estonia – I’m not surprised that this Baltic nations scores well. Any country that rejects Paul Krugman must be doing something right.

New Zealand – The Kiwis can maintain a decent tax system because they control government spending and limit government coercion.

Switzerland – Fiscal decentralization and sensible citizens are key factors in restraining bad tax policy in Switzerland.

Sweden – The individual income tax is onerous, but Sweden’s penchant for pro-market reform has helped generate good scores in other categories.

Australia – I’m worried the Aussies are drifting in the wrong direction, but any nations that abolishes its death tax deserves a high score.

To close, here’s some of what the editors at the Wall Street Journal opined this morning.

…the inaugural ranking puts the U.S. at 32nd out of 34 industrialized countries in the Organization for Economic Co-operation and Development (OECD). With the developed world’s highest corporate tax rate at over 39% including state levies, plus a rare demand that money earned overseas should be taxed as if it were earned domestically, the U.S. is almost in a class by itself. It ranks just behind Spain and Italy, of all economic humiliations. America did beat Portugal and France, which is currently run by an avowed socialist. …the U.S. would do even worse if it were measured against the world’s roughly 190 countries. The accounting firm KPMG maintains a corporate tax table that includes more than 130 countries and only one has a higher overall corporate tax rate than the U.S. The United Arab Emirates’ 55% rate is an exception, however, because it usually applies only to foreign oil companies.

The WSJ adds a very important point about the liberalizing impact of tax competition.

Liberals argue that U.S. tax rates don’t need to come down because they are already well below the level when Ronald Reagan came into office. But unlike the U.S., the world hasn’t stood still. Reagan’s tax-cutting example ignited a worldwide revolution that has seen waves of corporate tax-rate reductions. The U.S. last reduced the top marginal corporate income tax rate in 1986. But the Tax Foundation reports that other countries have reduced “the OECD average corporate tax rate from 47.5 percent in the early 1980s to around 25 percent today.”

This final excerpt should help explain why I spend a lot of time defending and promoting tax competition.

As bad as the tax system is now, just imagine how bad it would be if politicians didn’t have to worry about jobs and investment escaping.

P.S. If there was a way of measuring tax policies for foreign investors, I suspect the United States would jump a few spots in the rankings.

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One of the worst things about working in Washington is that it’s so easy to get frustrated about the fact-free nature of political debates.

For instance, there’s now a big controversy about companies “re-domiciling” or “inverting” from the United States to lower-tax nations such as Ireland and Switzerland.

This should not be controversial. Unless, of course, you think businesses shouldn’t be allowed to move from California to Texas. Or from New York to Tennessee.

And even if you somehow think taxpayers don’t have the right to legally protect themselves from punitive taxation, there are two very stark facts that should guide the political debate.

First, the United States has the world’s highest corporate tax rate, which undermines job creation and competitiveness in America, regardless of whether there are inversions.

Second, the United States has the most punitive “worldwide” tax system, meaning the IRS gets to tax American-domiciled companies on income that is earned (and already subject to tax) in other nations.

This is why, as I explain in this video, that the politicians who are protesting against inversions are putting demagoguery above jobs.

One of the most important aspects of this debate, though, doesn’t involve the intricacies of corporate taxation. Instead, it’s a broader public finance point about whether it’s good public policy to disadvantage shareholders, workers, and consumers in order to give politicians more money to spend.

In my mind, that’s a no-brainer.

P.S. Kudos to Rand Paul for being one of the few politicians who is willing to publicly defend companies that engage in legal tax planning.

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Last August, I shared a list of companies that “re-domiciled” in other nations so they could escape America’s punitive “worldwide” tax system.

This past April, I augmented that list with some commentary about whether Walgreen’s might become a Swiss-based company.

And in May, I pontificated about Pfizer’s effort to re-domicile in the United Kingdom.

Well, to paraphrase what Ronald Reagan said to Jimmy Carter in the 1980 presidential debate, here we go again.

Here’s the opening few sentences from a report in the Wall Street Journal.

Medtronic Inc.’s agreement on Sunday to buy rival medical-device maker Covidien COV PLC for $42.9 billion is the latest in a wave of recent moves designed—at least in part—to sidestep U.S. corporate taxes. Covidien’s U.S. headquarters are in Mansfield, Mass., where many of its executives are based. But officially it is domiciled in Ireland, which is known for having a relatively low tax rate: The main corporate rate in Ireland is 12.5%. In the U.S., home to Medtronic, the 35% tax rate is among the world’s highest. Such so-called “tax inversion” deals have become increasingly popular, especially among health-care companies, many of which have ample cash abroad that would be taxed should they bring it back to the U.S.

It’s not just Medtronic. Here are some passages from a story by Tax Analysts.

Teva Pharmaceuticals Inc. agreed to buy U.S. pharmaceutical company Labrys Biologics Inc. Teva, an Israeli-headquartered company, had an effective tax rate of 4 percent in 2013. In yet another pharma deal, Swiss company Roche has agreed to acquire U.S. company Genia Technologies Inc. Corporations are also taking other steps to shift valuable assets and businesses out of the U.S. On Tuesday the U.K. company Vodafone announced plans to move its center for product innovation and development from Silicon Valley to the U.K. The move likely means that revenue from intangibles developed in the future by the research and development center would be taxable primarily in the U.K., and not the U.S.

So how should we interpret these moves?

From a logical and ethical perspective, we should applaud companies for protecting shareholders, workers and consumers. If a government is imposing destructive tax laws (and the United States arguably has the world’s worst corporate tax system), then firms have a moral obligation to minimize the damage.

Writing in the Wall Street Journal, an accounting professor from MIT has some wise words on the issue.

Even worse, legislators have responded with proposals that seek to prevent companies from escaping the U.S. tax system. The U.S. corporate statutory tax rate is one of the highest in the world at 35%. In addition, the U.S. has a world-wide tax system under which profits earned abroad face U.S. taxation when brought back to America. The other G-7 countries, however, all have some form of a territorial tax system that imposes little or no tax on repatriated earnings. To compete with foreign-based companies that have lower tax burdens, U.S. corporations have developed do-it-yourself territorial tax strategies. …Some firms have taken the next logical step to stay competitive with foreign-based companies: reincorporating as foreign companies through cross-border mergers.

Unsurprisingly, some politicians are responding with punitive policies. Instead of fixing the flaws in the internal revenue code, they want various forms of financial protectionism in order the stop companies from inversions.

Professor Hanlon is unimpressed.

Threatening corporations with stricter rules and retroactive tax punishments will not attract business and investment to the U.S. The responses by the federal government and U.S. corporations are creating what in managerial accounting we call a death spiral. The government is trying to generate revenue through high corporate taxes, but corporations cannot compete when they have such high tax costs. …The real solution is a tax system that attracts businesses to our shores, and keeps them here. …The U.K. may be a good example: In 2010, after realizing that too many companies were leaving for the greener tax pastures of Ireland, the government’s economic and finance ministry wrote in a report that it wanted to “send out the signal loud and clear, Britain is open for business.” The country made substantive tax-policy changes such as reducing the corporate tax rate and implementing a territorial tax system. Congress and President Obama should make tax reform a priority.

Here’s some info, by the way, about the United Kingdom’s smart moves on corporate taxation.

For more information on territorial taxation, here’s a video I narrated for the Center for Freedom and Prosperity.

And here’s my futile effort to educate the New York Times on the issue.

And if you want some info on the importance of lower corporate taxation, here’s another CF&P video.

P.S. Last February, I shared a hilarious video spoof about some action figures called the “Kronies.” These fake toys symbolize the sleazy insiders that have made DC a racket for well-connected insiders.

Well, the Kronies are back with a new video about the Export Import Bank, which exists to subsidize companies that give lots of contributions to politicians.

I’ve written before about the Export-Import Bank being a perfect (in a bad way) example of corruption in Washington, but if you want to know the details about this crony institution, Veronique de Rugy of the Mercatus Center is a walking encyclopedia on the topic.

By the way, the recently defeated House Majority Leader has been a big supporter of Ex-Im Bank subsidies, and it’s very revealing that Boeing’s share price fell after his defeat. Investors obviously think those handouts are very valuable, and they’re worried that the gravy train may come to an end with Cantor on his way out the door.

Addendum: Some readers have already asked whether it would have been better to say that America’s corporate tax is “sadistic” rather than “masochistic.”

From the perspective of companies (and their shareholders, workers, and consumers), the answer is yes.

But I chose “masochistic” because politicians presumably want to extract the maximum amount of revenue from companies, yet that’s not happening because they’ve set the rate so high and made the system so unfriendly. In other words, they’re hurting themselves. I guess they hate the Laffer Curve even more than they like having more money with which to buy votes.

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