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Saturday, January 17, 2009

Redefining the "tax haven" 


It used to be that a "tax haven" was a jurisdiction with little or no tax and laws that prevented the long arm of the United States government from finding assets or income that had been stashed there. No more. Now Democrats are trying to redefine the meaning to include any jurisdiction with little or no tax, even if it is completely accessible to the Internal Revenue Service. Hence the ridiculous claim, unchallenged by the Associated Press, that "8 out of 10 corporations" (the A.P. means "large multinational corporations") have subsidiaries in "offshore tax havens." Indeed, the gullibility of the A.P. in swallowing Senator Levin's press release borders on the conspiratorial. The underlying GAO report explicitly states in its first paragraph that it did not determine whether the subsidiaries in these supposed "tax havens" supported substantive non-tax business operations.

Eighty-three of the 100 largest publicly traded U.S. corporations in terms of 2007 revenue reported having subsidiaries in jurisdictions listed as tax havens or financial privacy jurisdictions. Sixty-three of the 100 largest publicly traded U.S. federal contractors in terms of fiscal year 2007 federal contract obligations reported having subsidiaries in such jurisdictions. Since subsidiaries may be established in listed jurisdictions for a variety of nontax business reasons, the existence of a subsidiary in a jurisdiction listed as a tax haven or financial privacy jurisdiction does not signify that a corporation or federal contractor established that subsidiary for the purpose of reducing its tax burden. GAO did not attempt to determine if corporations or contractors with subsidiaries in such jurisdictions engaged in transactions with their subsidiaries to reduce their tax burden.

The A.P. did not write this until the 13th paragraph out of 15, below the "read more" jump in the online version of the story.

Call me a bonehead, but I would think it is in the interests of even the government of the United States for large American financial institutions to have operations and take deposits even in jurisdictions that attract a lot of money because of their low taxes.

The more fundamental point is that to Democrats, virtually every jurisdiction in the world is becoming a corporate tax haven compared to the United States. The federal and state corporate income tax rate in New Jersey, not the highest in the United States, is seven percentage points (or approximately 20%) higher than France, 11 percentage points (or around 35%) higher than Australia and the United Kingdom, and 29 percentage points (or around 250%) higher than in Ireland.

Folks, we are not going to rebuild our economy by vilifying public U.S. corporations that are operating businesses in "tax havens," even tiny little islands in the Caribbean. The relatively new accounting rules around corporate tax (known as "Fin 48" to the cognoscenti) wrap corporate taxes up in the same intensive audit review as other financial reporting. Sure, there will be the occasional case of fraud, but the top U.S. corporations (and even much smaller ones) now have vast internal audit staffs that blow the whistle on any attempt -- which now cannot come from the "top" -- actually to evade taxes. No, if you want to stimulate economic activity in the United States, massively reduce the corporate tax. At least make us competitive with, say, France, which any corporation would prefer to the United States as a location for its profits.

MORE: The WSJ is running an op-ed by Mark Levey arguing for an elimination of the corporate income tax. While that strikes me as politically impossible, it would be a very good idea. Get the lost revenue back by setting a flat tax rate for dividends, interest income, and capital gains, say 20%. That way, there would be no particular tax benefit (other than delay) in returning profits as dividends, incurring interest expense, or reinvesting them to drive share price.

Seperately, on reflection the original argument of this post needs some tweaking. It is not that the GAO, at Carl Levin's request, defined "tax havens" down. Rather, it is essentially implying guilt by association. Yes, there are obviously countries that are popular places to avoid taxes because of low rates and secrecy laws. That fact, however, does not mean that huge American public companies are in a position to benefit from the secrecy (whether or not they can attribute profits to their activities in such countries and thus benefit from the low rates). The reason is American companies cannot evade taxes by the same means as individuals is that public company accounting now requires the full disclosure of future taxes that are "more likely than not" required to be paid under U.S. law. In other words, the government is leveraging the securities laws and their onorous penalties to force public companies into conservative -- and lawful -- tax planning. A CEO or CFO of a big company would be insane to use a "tax haven" to evade corporate tax in the way that, say, a wealthy European would. The risks and potential liability vastly outweigh the potential benefits. That does not mean it would not happen in some extreme or crazy case, but it simply cannot be the problem that Carl Levin and the Associated Press suggest it is. Levin is trying to create headlines to demonize business, not because he actually expects to collect more corporate tax.

5 Comments:

By Anonymous meta-4, at Sat Jan 17, 09:09:00 AM:

And since when does Levin, or the A.P., or any democrat for that matter, care about these facts?

The next four years are 'open season' on wealth; wherever it is, they're going to confiscate it if they can.

But remember, it's for your own good.  

By Anonymous Edward Lunny, at Sat Jan 17, 09:55:00 AM:

How unoriginal of Sen Levin, untruthfully attack business for avoiding taxes, while ignoring the criminal tax fraud of the nominee for Treasury secretary, the criminal tax fraud of one rep Rangel and former rep Jefferson, and the bribery, err pay-for-play, of fellow Sen Dodd and rep Frank. Senator Levin is an unrepentant liar and, had he any morals or ethics, should be ashamed. I wait for him to call for Sen Dodd, Rep Frank, and nominee Geitner to offer their resignations forthwith. I will not be holding my breath, however.  

By Blogger smitty1e, at Sat Jan 17, 10:14:00 AM:

<sarcasm>
Just goes to show why we need a unified world government, to promote fairness, love, peace and hair grease for all.
</sarcasm>  

By Anonymous Anonymous, at Sat Jan 17, 10:56:00 AM:

This is another fraud. Corporations don't pay taxes, they collect taxes. Taxing corporations just make their products and services more expensive to the public. As corporate taxes are rolled into the cost of the product or service, the public doesn't know they are paying another tax to the government. This also allows the government to complain about "corporate greed" because the corporations charge more to pay the tax. It's a closed loop.  

By Anonymous Anonymous, at Sat Jan 17, 04:28:00 PM:

A flat tax, on capital income? The elimination of corporate taxes? Dream on. We live in a time where the Congress will try to take the federal tax burden from 18-19% of GDP to 25% or more. With that scenario in mind, it's impossible that any tax source will be relieved. Given how easy it is to collect tax from companies (particularly small companies with transparent operations), that will especially apply to businesses.  

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