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One of the provisions of the $858 billion tax cut bill passed in the lame-duck session is another two-year extension for the "active financing" exception to the subpart F rules for taxation of the passive income of foreign controlled corporations. See Eggen, Active Financing Exemption to Cost Taxpayers $9 Billion, Washington Post, Dec. 23, 2010.
The beneficiaries of this provision are big banks with multinational operations and other big businesses who use the creation of their own financing subsidiary as a way to lower even further their already low US taxes. Remember that although the US statutory rate for corporations is somewhat higher than the norm at 35%, the effective tax rate is in fact lower than the norm, with US corporations among the lowest taxed of all the OECD nations. That means that the US is effectively a tax haven for corporations. Part of the reason that is so is that there are so many exceptions and special provisions worked into the corporate tax regime--exceptions like the "active financing" exception.
The active financing exception was supposedly eliminated some time ago. But lobbyists worked hard to get a transitional extension of the provision. And every year since then they've worked hard to get Congress to push through yet another extension and they've increased their efforts to get Congress to make the exception to Subpart F rules permanent.
This is similar to the way the research credit has worked. There is no question that research expenditures need to be taken into account one way or another in figuring a company's tax liability--new products depend on somebody doing the research. But there is a big question about HOW those costs should be taken into account. Under a conceptually rigorous tax system, research expenditures would likely be capitalized. But our system has long permitted a deduction. The credit for R&D is quite a different thing, and not at all justifiable economically and certainly not justifiable as a subsidy that will be worth the price by stimulating growth. INstead, it is a pet project of corporate lobbyists granted an extension each year by Congress that is essentially a pure giveaway--reducing dollar for dollar the corporate tax liability by the amount of money spent on whatever counts as R&D. The problem with that, of course, is that it generally is not growth-stimulating basic research (stuff that is more often done by university or government researchers than by corporate labs) but instead merely profit-enhancing fiddling with a product that allows the company to extend already overly long patent protection (and enjoy monopoly-like profits for even longer) or develop something that differs little from its predecessor product but can be labeled "new" for marketing purposes (and enhance monopoly-like profits for even longer).
Those proponents of lower corporate taxes--who have been lobbying Congress steadily on these issues for decades--have gotten Congress to pass a large number of corporate-friendly provisions with the purported purpose of stimulating economic growth that are really just subsidies for the biggest multinational corporations from Big Banks to Big Oil. So we have seen accelerated depreciation, and first-year partial expensing, and percentage depletion and "bonus" depreciation, and complete expensing--all much more generous than the true economic depreciation and all profferred as a way to stimulate growth.
There is not much empirical evidence to support that this kind of tax treatment results in growth. It correlates instead with increasingly steep increases in compensation levels for top managers (moving from 20-40 times the average worker to 200-400 times the average worker, with some CEOs being paid in a half a day what their average worker makes in a year) and with bigger payouts (either through stock buybacks or dividends) to wealthy shareholders (taxed now at extremely preferential rates compared to the rates of tax paid by ordinary workers on their income and, in the case of wealthy managers and shareholders, likely invested in offshore gambits rather than plowed back into the startup of new enterprises in the US).
The active financing exception fits right in with these others. It is a boon for companies like GE, that use their controlled foreign subsidiary to serve as a financing arm for foreign sales and thus avoid US taxation. But wait, you say. Doesn't that do just the opposite of what is claimed? Wouldn't that make foreign sales easier, cut tax revenues in the US, and do nothing but encourage GE to increase its foreign manufacturing and sales rather than increase its manufacturing in the US and exports from here? Of course. Moreover, by giving companies an exemption for this type of foriegn income AND by having done one almost tax-free repatriation program in 2004 that was supposed to increase domestic investment but instead went to share repurchases (good for wealthy shareholders) and often correlated with huge worker layoffs, the policy is likely to be more associated with domestic corporate decline than with domestic corporation expansion. When one considers in addition the fact that the Great Recession is a direct result of finance-friendly policies gone awry, leading to too much interconnectedness among financial institutions, too much speculation in derivatives like naked credit default swap, and too much of a casino mentality generally among financing entities, the idea of providing a $9 billion bonus to offsore financing bogles the mind.
This Congress (and regretably this President) are too corporate friendly to see the problem. Mark my words: corporatism and all that it implies in terms of increasing social inequality and growth of an influence-heavy, uncaring wealthy elite that can call the shots in its own favor is the single most important topic that every American should be considering in making decisions about how to vote, who to support, what kinds of institutions we should support and how to interpret what people (especially judges) say about justice, fairness and equal opportunity over the next five decades. We should all make a New Year's Resolution to write one letter to Congress every week dealing with some aspect of this issue. If we don't shift this ship of state to at least treat ordinary workers equal to the corporate oligarchs, the democracy we all take for granted will cease to exist. Anti-trust, unions, and democratically egalitarian tax policies are all needed in this effort that should break up the megalithic multinational corporations (especially the "too big to fail" banks), permit workers to form unions more easily rather than being harassed by their employers (a majority of American workers want to unionize but very few are in unions because of the way our national laws have shifted to favor employers' efforts to keep unions out so that the company managers and shareholders can harvest all of the productivity gains for themselves), and eliminate the many tax provisions that continue to redistribute income upwards to the elite (including most of the mortgage interest deduction, the charitable contribution deduction, expensing provisions, and of course the preferential rate for capital gains and the nontaxation of much of the income of the wealthy). Although not the biggest item, the international taxation provisions like the active financing exception that permit large corporations to defer taxation of their income need to be eliminated.