Monday, May 04, 2009
Obama and the corporate tax deferral for foreign source income
TaxProf has rounded up links related to the Obama administration's latest scheme to impose hundreds of billions of dollars in new corporate taxes by eliminating the deferral for foreign source income. There are any number of reasons why this proposal amounts to the triumph of bad policy in the name of political expediency -- the United States already imposes the highest corporate taxes in the developed world -- but among them is this: It is tantamount to a trade barrier against our heretofore sainted "traditional allies." You know, the Western Europeans toward whom the candidate Obama promised to be so much more solicitous than his predecessor. From the British Daily Mail: "Obama orders tax crackdown on U.S. firms with overseas operations in new blow for British jobs".
Taxing profits earned in foreign countries, which often impose higher non-income taxes, at American rates discriminates against American-domiciled corporations that do business abroad. If that is not a non-tariff trade barrier, what is? Does the Obama administration honestly think that our trading partners won't retaliate, or does it want a trade war to achieve some political or other collateral objective? What would the third explanation be?
18 Comments:
By 
John, at
Mon May 04, 11:45:00 PM:
I think it's all about political collateral and probably a sense of ideology for some of the behind-the-scenes folk in the Obama admin. They are hitting the public with this anti-corporate propaganda, whether it is tackling $100 million in bonuses and 'agency savings' out of hundreds of billions and trillions, or finding more ways to punish corporations, this time in a very serious way that may actually have a huge, negative effect on trade and especially domestic economy. Why would any corporation want to have any of its wealth in the United States?
By 
, at
Mon May 04, 11:57:00 PM:
Does the US have the highest NOMINAL or REAL tax rates in the world? In a tax system run rampant with deductions, nominal figures are worthless.
By Ray, at
Mon May 04, 11:57:00 PM:
He's a couple trillion in the hole and needs some way to make it up without touching his pork spending or reversing his income tax "cuts" on people who don't pay taxes.
By Escort81, at
Tue May 05, 12:11:00 AM:
We are scarily on the same wavelength, since I was about to post on this topic. Happily, I will join this thread.
My post was going to discuss the fact that many high-tech companies will be hit hard by the consequences of higher effective tax rates on foreign source income. The AP reports that "collectively, HP, IBM, Cisco, Microsoft and Google lowered their tax bills by a combined $7.4 billion in their last fiscal years by taking advantage of lower tax rates outside the United States."
What is particularly interesting is that large numbers of the employees at these firms gave $1,000 or greater contributions to candidate Barack Obama: 342 at Google, 150 at IBM, 39 at HP, 97 at Cisco and 276 at Microsoft, according to a quick search at opensecrets.org.
Clearly, there are very many highly intelligent people at these firms who are so exceedingly altruistic that they are willing to donate money to someone who is then going to tax the companies they work for to the tune of billions of dollars, the sucess of said companies being at least in part responsible for enabling these individuals to make such donations in the first place.
It strikes me that at least some of the people in the opensecrets search results may not be in a position to replicate their contributions to the Obama campaign in 2012 (even if they wanted to), either directly or indirectly as a a result of this new tax policy, should it become law.
I wonder what David Axelrod's plan might be for the 2012 campaign to have the kind of huge financial advantage it had last year? Is it to dramatically increase the number of sub-$100 donations made online by credit card without ID validation? Either that, or maybe the tech donors will come back for more, as if they are suffering from battered wife syndrome.
By D.E. Cloutier, at
Tue May 05, 12:12:00 AM:
From the U.S. Chamber of Commerce:
QUOTE:
The U.S. Chamber of Commerce Chief Economist Dr. Marty Regalia issued the following statement today in response to the administration’s announcement that it is seeking to reform international tax provisions:
“This issue is about jobs in America and the competitiveness of American companies. Deferral has been mischaracterized as a ‘tax break’ but is actually a vital mechanism providing relief for American businesses from double taxation.
“The United States is the only major industrialized country which double taxes the overseas earnings of our companies. Since other countries don’t subject their companies to double taxation, U.S. companies need deferral to stay competitive in the global marketplace.
“When you limit deferral, you limit the ability of U.S. companies to compete, you impede growth in the U.S. economy, and you cause the loss of jobs – both at the companies directly impacted and companies in their supply chains.
“Tax increases that hurt U.S. companies’ global competitiveness hurts U.S. workers here at home. A huge tax hike on U.S. employers is not the way to stimulate our economy. Congress should reject this approach.”
END QUOTE
Article link:
http://www.uschamber.com/press/releases/2009/may/090504_tax.htm
-----
From Voice of America:
QUOTE:
The plan is generating few cheers from corporate America. Some business groups complain that the proposed tax changes will impose new costs on U.S. firms and make them less competitive in the global marketplace.
Former Federal Reserve economist Alan Viard tells VOA that efforts to crack down on tax evasion and save American jobs are always politically popular. But he says the administration's proposal will prove impractical and counterproductive when applied to the business world.
"This notion that you do not want U.S. firms going overseas is really a mistake to begin with, because in many cases the operations abroad and the operations at home are actually complimentary to each other," Viard said. "When U.S. firms create jobs abroad, they are often expanding opportunities to create jobs in the United States, as well. It does not have to be a choice between the two."
END QUOTE
Article link:
http://www.voanews.com/english/2009-05-04-voa43.cfm
-----
Subhead at the Christian Science Monitor today:
"The plan to crack down on individuals who hide cash in foreign accounts has broad support. But eliminating tax havens for American companies could put them at a disadvantage internationally, experts say."
-----
Meanwhile, some of my executive friends in the Silicon Valley are very unhappy. They voted for Obama last November.
In addition, some Democrats in Congress are leery about the proposal.
There are always legal ways for clever international entrepreneurs to get around these kinds of things.
By JPMcT, at
Tue May 05, 12:30:00 AM:
This is nothing less than an attack on American business. The more I see this guy in action, I can only suspect two liklihoods:
1. He is disastrously incompetent.
2. It is the INTENTION of the current administration to bring about "change" by a scorched earth policy of systematic destruction of the current American business model, then using the resulting chaos to re-establish a new order.
I suspect the latter.
By Georg Felis, at
Tue May 05, 12:31:00 AM:
Ooohhh. This won't cause a stampede of companies out of the US, will it?
/sarc
By , at
Tue May 05, 01:12:00 AM:
I don't visualize the non-tariff trade barrier this would erect.
OTOH raising taxes collected from US companies must make them less competitive in world trade.
A corporations paying taxes doesn't care about where it earned money or where money is banked at the moment.
Instead, it cares about the amount of their tax bill. If the corporation must pay more they must keep less.
With this plan the US corporation will end up with less money after taxes. And is therefore weakened v. foreign competitors.
This plan has many parts. Some of which I can agree with.
Looking for US residents or citizens who hide income from foreign sources is one. I have no objection to that.
Hiding income is not business, it is a crime. Unless......
Unless you are to have a cabinet post. In which case you didn't hide it, you were just confused.
K
By , at
Tue May 05, 03:43:00 AM:
Why should Americans pay taxes for money earned abroad? The government did not provide them with any services for that portion of income tax. Its just theft to pay off parasites.
On a practical matter, this will simply encourage US companies to reincorporate themselves in tax friendly countries and shift their labor force overseas. They will sell in the US but in such a manner that the profits will be recorded overseas and not in the US. Once they are no longer US companies, the US Government will be powerless to tax them. It will result in billions upon billions in lost tax receipts to the feds and the states and not to mention US jobs. Only a democrat can be this stupid no ordinary person could be that foolish.
By TigerHawk, at
Tue May 05, 05:31:00 AM:
A couple of clarifying comments, but I hope the discussion continues. First, I have no problem going after the individual accounts in tax havens. Most of that activity is evasion, which is illegal, and Obama's proposed reforms in that area are about enforcing existing law, something that conservatives usually favor on principle.
Second, it is for that reason that his unification of the individual evasion subject and the corporate tax deferral issue in the same announcement is public relations sleight of hand and intellectually dishonest. Deferral is, as other readers have said, a completely lawful mechanism by which U.S. corporations, filing consolidated returns, avoid double taxation on foreign subsidiaries that they own. By combining them in the two announcements Obama is trying to imply that deferral is also a form of evasion, when it is not.
Third, removal of deferral is a trade barrier because it is in effect a tax on intercompany imports. A U.S. company owns a foreign subsidiary with an R&D operation and a manufacturing plant. That plant invents things, then makes those "widgets", then sells them in the United States through the parent. The profits from the eventual sale of those widgets gets spread between the American selling entity and the foreign manufacturing entity according to long-established rules around intercompany "transfer pricing." Generally, the majority of the profits are retained by the entity that owns the intellectual property. Therefore, if the foreign plant actually invented the widget (as opposed to acting as a contract manufacturer), it getes most of the profit. That profit is then taxed at the foreign rate. In Germany, to pick an example of a foreign jurisdiction with high taxes, the tax would be (as I recall) 29% of the foreign profits. The difference between those foreign profits and the U.S. rate (35%) would be "deferred" until the day that the German subsidiary actually repatriates those profits back to the U.S. Eliminating that deferral adds current tax to the entire transaction, so it is the same as a tariff on the widgets made by the American company in Germany. That is Obama's objective -- he wants to move jobs from there to here -- and I guarantee that is how the Germans will look at it.
By PAULA, at
Tue May 05, 08:27:00 AM:
I too am vascillating between our new President as an incompetent driven by ideology or a Svengali.
I pray it's the former but fear it's the latter.
Another day another brick removed from the foundation that is our Great Country.
By , at
Tue May 05, 09:24:00 AM:
From Link:
What follows below -- re bank stress tests -- I posted here last week, with a lead that waterboarding was being intentionally used as a distracting wedge issue -- it got no response.
The WSJ is today reporting that the number of banks with bad stress tests grades will be 10, not six ... "sources say". I expect that at least a few of these banks will need a TARP conversion along the lines suggested below. It's a subtle thing, but I see it as a key part of Obama's grand design. It's not unconnected to taxing the foreign income of US companies, and the expansive use of Bankruptcy Code Section 363 in the Chrysler situation ... this is the month to fuck American companies over ... in ways only a corporate lawyer could understand.
Obama is an evil agent of Alinsky, and a clever one. I'm not usually paranoid, but Obama-Axlerod have worried me greatly for awhile. As an example, Obama wants the budget to blow-up in a grand way in a few years -- it's by design. We'll be a very different country in five years, if Obama & Co have their way.
There is no effective political opposition to this, because the Republican party got corrupted, and has its collective head up its ass. Obama has beguiled the media -- every development is sugar coated with populist spin, and the press eats it up.
Much depends on whether the Republicans can get their act together. News items that Jeb Bush is floating his name, and that Rush is pushing Palin don't make me optimistic. As I've ranted here -- the Bush name is toxic to 65% of Americans -- I like Palin but she needs a long-term makeover to go broad -- she has no hope for this if Rush is her sponsor.
I see the readership here as a proxy for the Republican party -- which is why I've been ranting here -- for giggles and as a test. ... for me it's confirmed that it'll be too easy for Obama & Co to create wedge issues by resurrecting the sins of Bush-Cheney ... too many Republicans are hyped on "purity" ... the party is too dominated by Rush, his dittos heads and the religious right. The lack of effective opposition ... and stimulus spending ... will carry Obama through 2012.
Link, over and out
*****
Meanwhile, developments are slipping by under the radar. Connecting a few dots ....
A story in today's WSJ suggests that Rahm Emanuel is really running Treasury ... "White House Chief of Staff Rahm Emanuel has been so involved in the workings of the Treasury that "Rahm wants it" has become an unofficial mantra among some at the Treasury, according to government officials." Little Timmy still has no appointed deputies helping him in any Treasury slot that matters -- this now looks to not be an accident as it's all being run out of the White House ... Geithner is just their overworked flunky fall guy errand boy ... the things people put up with for a good job title.
Bloomberg News had a story that included a leak from "sources close to the situation" that six banks out of 19 would get bad grades on their stress tests. If true, it could become a holy shit headline. The further delay in announcing the results is troubling -- it can't be because they're still running numbers. If it's six banks, Citi and Bank of America are probably included -- but which are the others? Interestingly, these stress tests assume a more challenging economy than Obama does for his own budget.
Presumably -- at the banks with bad grades on their stress tests -- the US would convert its TARP debt into common equity. This would make the bank's reported capital ratios look better, but have no real economic effect -- it's just reclassifying money that's already there ... but the banks would wind up with the US as a big equity holder. Once in this roach motel, they may never get out.
With all that's going on, it's easy to forget that the US is still the direct owner of Fannie and Freddie -- and thus in de facto control of the entire US mortgage industry -- with no exit plan under discussion. The US-UAW will now be the biggest player in the US auto industry -- in direct competition with Ford and Toyota. The US will soon control our health care industry. Utilities are on the list -- to be co-opted with free cap-and-trade licenses. Big companies like GE are learning to play ball to get at Obama's money -- seen an Eco-imagination ad lately?
This is looking a lot like Peron's Argentina, without the gold braid. Michelle is even becoming "beloved of the people," like Evita. I can't wait for Congress to declare Michelle "Spiritual Leader of the Nation." It'll make a nice story in the PAW.
Link, over
By , at
Tue May 05, 01:00:00 PM:
Tempest in a teapot. Our allies and trading partners will take not action, since they won't need to do so.
American transnational companies will reincorporate in their masses, moving to Sweden, the UK, France, Germany and other well known tax havens. America will become first a second rate economic power, and finally an afterthought entirely. Obama in the meantime will collect a very short lived tax boost, followed by a substantial decline over time.
Of all the dumb stuff thesse clowns have done or proposed, this is by far the stupidist (though cap-and-trade is right up there).
By , at
Tue May 05, 01:17:00 PM:
The corporate tax rate is more than 35%, since most states have corporate taxes. According to the OECD, the combined U.S. rate is 39.25% for 2008. The German rate, calculated the same way, is 30.18%. Japan has the highest rate with 39.54%.
http://www.oecd.org/document/60/0,3343,en_2649_34897_1942460_1_1_1_1,00.html
By , at
Tue May 05, 03:10:00 PM:
One point you are missing is that the US is proposing to tax all income wherever generated, while those countries whom you mention tax only domestic sourced income (and don't many let their multinationals then repatriate profits without additional tax?!). Domestic tax rate aside, that's why US companies will move their HQ's to other countries. America's tax rates are a huge problem, but the proposal to tax foreign sourced income is also a problem, as in "straw that breaks the camels back" type of problem.
By , at
Tue May 05, 04:26:00 PM:
Paula: thanks for supplying the rather involved reasoning behind the trade-barrier contention.
You made it clear even if I regard the matter as much simpler - if you tax a US company more it is weakened v. foreign competitors.
The consequences will be more companies moving overseas.
Taken alone this move seems mad; if there are good arguments for it I have missed them. (Calling businesses evil isn't a good argument.)
But this is what I expected from O and the Democrats. I am not surprised.
K
By , at
Tue May 05, 04:58:00 PM:
Another point. Most European countries have a VAT of the order of 20-odd percent. For exported goods this VAT is refunded. As an American shopping in Harrod's you can get your VAT back for goods you're taking home. The line is long and the procedure is cumbersome, but it can be done. On the other hand corporate income taxes are not rebatable on exported goods. This is according to international trade agreements.
JLW III
By Elise, at
Tue May 05, 05:04:00 PM:
What would the third explanation be?Obama believes the world will arrange itself as he wants. I know there are people out there speculating that he has some type of narcissistic disorder or something but I think his belief is based partly on his conviction that he himself is Good with a very capital “G” and partly on past experience. Heaven knows he’s had millions of people telling him he’s practically the Second Coming and I imagine that his combination of intelligence (however facile); symbolism; and charm (although it’s lost on me) have generally meant much of the world *has* arranged itself as he wants.
Thus Obama believes corporations not paying lots and lots of taxes is Bad and he therefore is going to tax them. He assumes our allies will want to do whatever they can to help him and it never occurs to him that they may react badly to one of his policies.
There’s been a pattern of this: Closing Guantanamo is Good and the issue of what to do with the prisoners there will simply resolve itself. Trashing big financial institutions is Good and it never occurs to Obama that those same institutions may not thereafter be champing at the bit to go into business with the government in the PPIPs. Stress-testing the banks is Good and it never occurs to anyone that if banks “fail” there may be a crisis of confidence; surely if Obama says “All is well” everyone will believe him. Releasing the OLC memos is Good and Obama seemed to assume he could then just say, “And now we’re done with that” and everyone would say, “Good job, glad that’s over with.”
This is actually pretty funny when you consider that the term “reality-based community” comes from an account a reporter gave of his discussion with a Bush aide:
The aide said that guys like me were "in what we call the reality-based community," which he defined as people who "believe that solutions emerge from your judicious study of discernible reality." ... "That's not the way the world really works anymore," he continued. "We're an empire now, and when we act, we create our own reality. And while you're studying that reality—judiciously, as you will—we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors…and you, all of you, will be left to just study what we do."The hubris of an Administration that believed it could create the reality it wants is nothing compared to the hubris of a President who believes the rest of the world will create the reality he wants.
On the campaign fund-raising front perhaps more companies - and company employees - will donate than before not because they suffer from battered-wife syndrome but because they will come to understand that when the government does what it pleases with companies the best way to survive is to pay whatever it takes to get some influence.
As for the Republicans getting their act together, here’s a question: Why aren’t they (in some form or another) running ads - national, prime-time ads - about stuff like, say, the Chrysler deal? Surely they can find some poor, elderly, woman who taught Special Ed for years to ask Obama, “Why don’t you stand with me? I have my pitiful retirement savings invested at Oppenheimer and you wanted to take all of that away from me.” Or about this new corporate tax policy: “The last thing we need is for even more companies to leave the United States and take their jobs with them.” I haven’t seen Fred Thompson around lately; hire him to do the voice-overs. If the Republicans wait until September of 2010 to push back on this stuff in a way that voters actually see and hear, it will be too late.
