ataxingmatter

Links worth reading

An Even Worse Financial System Than the One With Which We Began, Naked Capitalism, July 1, 2009.

Yves Smith has a disconcertingly dismal outlook on the reform on the financial system, , where he sets out Martin Wolf's concerns and "toughminded" proposals, as presented in the Financial Times.   Wolf notes that "the survivors [of the financial crisis] are an oligopoly of 'too-big-and-interconnected-to-fail' financial behemoths."   I agree that we need to understand that the political intransigence on enacting adequate reforms--including breaking up the "too big to fail" banks, enacting stringent controls of derivatives like credit default swaps, and forcing banks to rely on banking business rather than the exotic financial stuff they have engaged in that causes systemic risk-- amounts to acquiescence to the big financial institutions.  One of the commenters notes that part of the problem is accepting the corporatist dogma that we must retain a 'financialized globalist system', which leaves us unwilling to break up the "too big to fail casino banks". Another points out the consistent failure to recognize the importance of counterparty risk in evaluating whether derivatives like credit default swaps really make sense, even in the more vanilla versions.  Ultimately we need "Glass-Steagall on steroirds" but we aren't likely to get it from today's Congress.

Igor Barenboim, Loukas Karabarbounis, One Dollar, One Vote (SSRN Jun 1, 2009) and abstract displayed on Tax Prof, here.

My thesis in this blog, democratic egalitarianism, argues that a more egalitarian society is essential to the sustainability of democratic institutions, and that our economy has strong pressures that lead to redistribution of resources upwards towards the more affluent and not enough that balance with redistribution downwards towards the less affluent.  Tax can be a force for good, or bad, in that balancing act, so we should harness it to support rather than undermine democracy.  Accordingly, I argue, the estate tax should not only be retained but also strengthened, so that it helps prevent the accumulation of mega-fortunes that create dangerous plutocractic forces of power within the society.  Similarly, reforms to the AMT or the regular tax should build in more progressive structures rather than moving towards the flatter, national sales tax model pushed by the right, which favors capital over labor. 

In this context,this study by Barenboim and Karabarbounis provides some interesting insights.  These two authors have studied the relationsh8ip between inequality and redistribution in advanced OECD countries.   They conclude that countries with richer upper classes have less public spending for redistribution (used here, as it typically is, to refer to reallocation of resources in favor of lower classes) and vice versa.  "When the income of a group of citizens rises (relative mto mean income), aggregate redistributive policies tilt towards this group's most preferred public policy."  That sounds like another way of acknowledging that power comes to them that's got the green, and that power typically is used to get more of it.

Nina Olson, National Taxpayer Advocate Report to Congress: FY 2010 Objectives (June 30, 2009)

Ihave tended to view the NTA as overly partisan in support of taxpayers, even when the complaints of taxpayers to which she is responding are relatively weak.  But on some issues, the NTA has played an important role in calling attention to problems and pushing the IRS and Congress to take action.  One example, of course, is the use of private debt collectors, a practice that the NTA opposed from the beginning, with good reason.  An ongoing goal of the NTA is to make the offers-in-compromise program more accessible to taxpayers, and on the whole this works in the direction of greater compliance and more collection of tax revenues. 

I am strongly supportive of the NTA's advocacy of better regulation of "unenrolled tax preparers--the majority of tax return preparers today.  As the report notes, these preparers often prepare "inaccurate returns" and "even take[] positions that they know are not supportable", conduct which "usually results in understatements of tax." Report, at xiii.  the NTA proposes three steps for the IRS to take on this issue: (i) advocate for legislation to regulate tax return preparers; (ii) step up enforcement actions (earlier studies showed that penalties were rarely imposed and even more rarely collected); and (iii) require a preparer tax identification number on all returns, to permit identification of those who tend to submit inaccurate returns.

I think however, that the NTA also tends to adopt positions that are taxpayer favorable without justification in the underlying policies of the Code.  For example, the NTA may go somewhat too far in wanting the IRS to assess taxpayer's financial circumstances before pursuing the legal means available, sucn as liens, to collect on taxes.  Similarly, the NTA push to streamline the Offer in Compromise process may result in taxpayers thinking that they can easily compromise their actual tax liabilities by not paying, resulting in poorer compliance.  I'm not sure she has paid sufficient attention to the competing concerns in this area.

At any rate, the report is worth skimming for an understanding of the various issues and the role that the NTA plays in the tax system.

Robert Reich, What Can I Do?, Robert Reich's Blog, Jun 25, 2009.

To paraphrase (with admittedly some coloring of my thoughts--you can read  the Reich piece for his own words), Reich notes that we can't just expect the Obama administration to do the right thing, or Congress either, for that matter (I'd say,  we can almost expect them not to), unless we the people push them enough towards the hard decisions that need to be made. 

What are those issues, from my perspective, that we should be writing Obama, Baucus (in particular), Rangel about?:--creating a REAL public option on health care (not these finky little state-based "coop exchanges" or any of the half-baked schemes to look like a public option while ceding the field to the same old private insurance system that fails us by weeding out sick people and refusing to pay claims for people that it does ensure);--raising taxes on the rich in spite of the right-wing hullabaloo that taxes will cause GDP to go down instead of up;--ensuring that we tame the Wall Street greed that landed us in systemic risk by breaking up the "too big to fail" institutions before they fail again, etc.

While you are at it, you might want to look at his "Why the Critics of a Public Option for Health Care Are Wrong", Jun 23, 2009.  The AMA, Big Insurance and Big Pharma are against the public option, so odds are it has something they don't want to ever see come to light.  What?  An effective reform that would prohibit them from continuing to make rent profits and force them to undertake major reforms.  Got it?  They don't want a public option because they fear (know?) it will work.  What do we the people want? Health care that works.  Guess that makes it clear where Congress should go, doesn't it?

Divorced One Like Bush, Deja Vu Health Care Reform: Hillary Care is the Wrong Feeling, Angry Bear, Jun 29, 2009.

When we started talking (again) about genuine health care reform that would reduce costs and ensure universal care, many of us were optimistic that, this time around, Congress would recognize that the private system of health insurers/HMOs that make money by denying care (including by fooling their insureds about what care they are obligated to cover) is broken beyond repair.  Surely, we thought, the greedy insurers won't be successful in blocking the needed reforms yet again.  This time, we can finally move our system towards the ones in Canada and european countries that have achieved better health care at a cheaper price than ours. 

Now, it's not looking so good.  Business lobbyists have announced that they will step away from the table if we don't stop talking about a public option.  (Why don't we just say--step away and good riddance?)  The GOP talk machine is making the same old noises about how a real public option will destroy "choice" and lead to rationing care.  (Why don't the people understand that going bankrupt when you can't pay your medical bills is not a very valuable choice, or that health care is rationed today by what economic class the sick person is in?)

DOLB tells us we've seen all this before.  Not in the nineties, when Hillary was pilloried by the private health insurance lobbyists who used mcCarthy like tricks to scare ordinary taxpayers into thinking that single-payer public option would be disaster.  But back in 1971, when Nixon and Ehrlichman deided that supporting HMOs like Kaiser Permanente made a lot of sense, because he'd be "running this Permanent deal for profit" and could do it, too, because "[a]ll of the incentives are toward less medical care--because the less care they give them, the more money they make."  Read it, and weep.

Mark Thoma, The Purely Rational Economic Man is Indeed Close to Being a Social Moron (discussing and excerpting Daniel Little's "Polanyi on the market") Economist's View, July 2, 2009.

More debunking of the notion of economic rationality and markets as the organizational principles of human economic behavio and the corollary that it is "natural" for people to be motivated primarily by their own self interest.  A good read.

Roni Deutsch, How Offshore Tax Evasion Affects You, The Tax Lady Blog, Jun 29, 2009

Roni provides a good summary of the detrimental impact on ordinary taxpayers of a few  greedy taxpayers' offshore tax evasion antics.

A Must Read: CTJ's Proposals for Funding Health Care Reform

Citizens for Tax Justice (CTJ) favors the kind of revenue raisers that make sense to fund our country's decision to ensure that every American has decent health care.  Not a new tax on health insurance premiums, not a regressive national sales tax or VAT.  Not passing the burden to all the ordinary folks to pay for the continuation of the privatized health insurance that has resulted in the U.S. paying much more for less than our European counterparts. 

Nope. None of that.  Instead, after Main Street's bailing out of Wall Street from its binge of risky leverage (and hefty fees and bonuses), we should let Wall Street bail out Main Street.  Tax capital gains a little more (at 28%, the rate that currently applies to collectibles gains); apply the Medicare tax to all income, with a rate increase of about 1% for upper-income taxpayers; eliminate the many other tax subsidies for Wall Street millionaires--including those for stock options and intangible assets; and reduce the tax incentives for investing offshore, like worldwide interest allocation and deductions on deferred foreign income. 

Here's the report, with some good charts and numbers.

TARP Lifting? transparency, not secrecy, needed

As the federal bailout of financial institutions (and a few other industries) continues, there continues to be a dearth of information about the way trillions of dollars of federal funding is being used, especially through the Federal Reserve's emergency lending powers.  Big Banks are getting federal funds, foreclosing on homeowners, and raising fees every which way and back.  Credit card banks send out dozens of mailers to get people to take out new credit, while gouging their customers at every opportunity.  Congress still hasn't passed a law permitting modification of home mortgages in bankruptcy, the one most obvious solution to the housing crisis/credit crunch/Great Recession that would help ordinary people the most.  Congress also hasn't yet enacted the kinds of major regulatory reforms of the financial system (real and "shadow") that need to be enacted to prevent Big Banks from causing another global market disruption the next time that their greed gets out of hand.  

So I agree with Doggett (D-Texas), who said at the House Budget committee testimony of Fed Chair Bernanke today,

While the $700 billion financial bailout that congress approved last September has been the subject of public scrutiny and debate, the Federal Reserve is apparently committing three times as much public money through its emergency lending powers.  This use of expansive emergency powers relying on a vague statutory provision that hasn't been used in almost 70 years is not normal.  We need to shine a light of transparency on this process, and we must do it now because the confidence of the American taxpayer, our public debt, and our economy are at stake.  While independence and secrecy may be important to the Fed's normal operations, we need a canary in the coal mine."  Doggett Press Release

See more on this video clip of Doggett and Bernanke, available here.  In response to Doggett's questioning, Bernanke claims that the Fed is being transparent in terms of programs, collateral accepted and borrowers, but Doggett notes lack of specific information about use of funds.  Also see earlier discussions between Doggett and Bernanke on the beginnings of the TARP program, available here.

After my refreshing break, I am more convinced than ever that the following actions are required to get the financial system on track to prevent similar market disruptions in the future:

1) Bust up the Big Banks through reinvigorated anti-trust actions  against quasi-monopolies in areas of significant innovation and market reach (electronic communications--Microsoft; financial institutions--Citi, Goldman, etc.);

2) Bring all derivatives (credit default swaps, CDOs and synthetic CDOs, mortgage "grantor trust" securitizations, OTC and customized) under the control of a single, powerful regulator that has an incentive to regulate and an interest in accountability and transparency. To be effective, regulation must include all customized products entered into between any banks, shadow banks or insurers, which should be accounted for and revealed timely in an open framework as a step in discouraging the risky speculation that drives the market in the direction of the speculators;

3) Regulate the shadow banking system as banks with capital reserve requirements and leveraging restrictions while removing the preferential treatment of compensation that the hedge funds and equity funds have enjoyed . (How can it make sense to encourage the shadow banking system to buy the toxic assets off bank books, with a very tiny equity stake and the rest made up by Fed funds and guarantees, with the shadow banks getting the lion's share of the profit for the mouse's share of the equity?  Just break up and close the damned banks with too much garbage on their books, and sell the waste for whatever the market says it is worth.)

4) Make the TARP and Fed emergency lending programs fully transparent and publicly accountable, including imposing more restrictive guidelines for banks that get any federal funds: bank impositions of higher charges should be carefully scrutinized to prevent rent-taking subsidized by taxpayer monies and  bonuses (and compensation in general) should be designed to decrease risky behavior rather than incentivize it.

5) Pass a law to permit modification of mortgage loans in bankruptcy.  This is still the single most important step to allow ordinary Americans to get out from under the crushing burden of debt and resume ordinary lives.  If Congress has not got the guts to do this against the drivel rationales for not doing so sold to them by the Big Bank lobbyists, Congress should resign en masse.

6) And throughout all this mess (including the auto company bankruptcies), apply this rule: no bondholder is entitled to get more from the Federal government processes than the bondholder paid to purchase an asset.

I'm not the only one who sess the current regulation of banks, and proliferation of "too big to fail" banks, as a problem, of course.  For more on the banking problems at the heart of the financial crisis, see Arthur Wilmarth's article on SSRN, The Dark Side of Universal Banking: Financial conglomerates and the Origins of the Subprime Financial Crisis, 41 Conn. L. Rev. 963 (2009).  He says the following in his abstract:

Current regulatory policies—which rely on “market discipline” and LCFIs’ internal “risk models”—are plainly inadequate to control the proclivities in universal banks toward destructive conflicts of interest and excessive risk-taking. As shown by repeated government bailouts during the present crisis, universal banks receive enormous subsidies from their status as “too big to fail” (TBTF) institutions. Regulation of financial institutions and financial markets must be urgently reformed in order to eliminate (or greatly reduce) TBTF subsidies and establish effective control over LCFIs.

Yankee Stadium--"the house that taxpayers built"

David Sirota, on Salon.com, sometimes has the perfect word painting for today's over-the-top age of Reagan-inspired government corporatism, where our government has been captured by Wall Street and the big corporations.  Here's his description of the "destructive greed" behind the Yankee Stadium fiasco, whereby "a billionaire politician using the municipal office he bought [defends] charging $2,500 a ticket to a new Yankee Stadium he forced the public to finance."  As Sirota notes, the Yankees are "the wealthiest corporation in sports".  Sirota concludes--"In the new Gilded Age, socializing risk and privatizing profit has become the standard--as American as General Motors, Bank of America and, yes, the New York Yankees."  See Sirota, the House that Taxpayers Built, salon.com, May 23, 2009.

More Capital Gains Preference Proposals--Not what's needed.....

Mike Crapo and Tim Johnson have introduced a bill in the Senate (S. 1082) to defer taxation of capital gains dividends from mutual funds that are reinvested in the same fund. The idea, according to their news release, is to "keep retirement savings earning more money for a longer period of time" and to treat those invested in mutual funds the same as those investing in the stock market.  See Crapo website on GROWTH Act.

That's problematic for several reasons.  First, the changes should go the other way.  Instead of extending more preferential treatment to capital gains, Congress should eliminate the preference.  Second, the fact that these funds may be used for retirement doesn't justify the tax reduction.  Third, equating the trigger for taxation as the time that mutual fund shares themselves are sold is inappropriate and gives an inappropriate tax deferral.  Holding stock through mutual funds means that when the mutual fund sells shares, it is as though the holder of the mutual fund had sold shares.   The proposal gives a tax break to mutual fund ownership that parallels in part the tax treatment of individual retirement accounts, but those funds are established expresslyto encourage retirement savings, whereas mutual funds may be merely a way of diversifying. 

Congress still seems to think that cutting taxes is the answer to every economic issue.  Retirement savings not as good as they should be?  cut taxes on income flows from vehicles that are used for retirement.  Nobody buying as many cars?  Give a tax break on the purchase of any number of new vehicles.  Nobody investing as much as they should be in R&D?  give a tax credit instead of a deduction.  All these tax breaks are indirect ways of accomplishing policy that likely reward many a taxpayer for doing what the taxpayer would be doing without the tax break.  They cost the federal fisc, and they add complications to an already complex tax code.  They aren't very well targeted, and likely do as much public harm as public good in most cases.  Congress should stop these special tax breaks, and start thinking about how to collect more in taxes in ways that are fair and help create a sustainable democractic foundation.  The GROWTH Act proposed by Crapo-Johnson is not a good idea.

The Greenbook: Obama's International and Other Tax Proposals

The Treasury Department released the Obama Administration's General Explanations of the Administration's Fiscal Year 2010 Revenue Proposals (usually known as the "Greenbook)  on May 11. See Treasury Release, Administration proposes Tax Cuts for Middle Class Families and Small Businesses, Closing Corporate Tax Loopholes, May 11, 2009 (TG-125) and Greenbook.  The release continues to emphasize the problem that the current tax code's international provisions "give[] businesses that invest and create jobs overseas a competitive advantage over those who invest and create jobs at home."

The release starts with its additional tax cuts--the making pay work credit for families, and the three cuts for businesses and their owners that are, in my view, indefensible (expanding the NOL provision, providing a zero capital gains rate on small business stock; and making the R&D credit permanent). It then outlines the repeal of tax preferences for oil companies and overseas investment, including the check-the-box loophole closer, the deferral of deductions (primarily interest) to match repatriation of income, and various other loophole closers. 

Personally, I wish that Obama had never made the promise to continue the 2001-2003 tax cuts except for those making more than $250,000.  Fact is, we will need some tax increases all around to pay for  various public goods that government should provide--like universal health care.  People should start thinking of this tradeoff without always see red when anyone mentions tax increases.

It should be noted that this budget would finally enact some much-needed reforms in the treatment of Big Oil, removing a number of "tax expenditures" that have given undue subsidies to this industry (and made many an oilman rich because of the tax subsidies).  The Greenbook (pp58-70) details a series of proposed repeals, including the credit for enhanced oil recovery projects, the credit for production from marginal wells, the expensing of intangible drilling costs, the deduction for tertiary injectants, the passive loss exception for working interests in oil and gas properties, the percentage depletion allowance.  It's about time these subsidies for Big Oil were repealed, so let's hope Congress gets on board on this one.  The budget also proposes eliminating the alternative fuel mixture credit gambit that paper companies have been exploiting by mixing diesel with the "black liquor" left over from paper processing.

There are just a few of the rules included here that need to be enacted in respect of financial institutions and life insurance companies.  But the budget provides a start in the right direction.  For example, the budget proposes a requirement of income accruals on forward sales of corporate stock.  Under current law, corporations do not recognize gains or losses on forward sales, even though a current sale for a deferred payment would result in interest income.  The proposal would treat those two transactions consistently and require accrual on the forward sale.  Similarly, commodities dealers, delaers in securities, options dealers and commodities derivatives dealers get partial capital treatment on their dealer activities under section 1256 under current law.  The Obama proposal would take away that preference and require all such dealers to report ordinary income, just as other dealers in property must.  The Obama proposal would also broaden the scope of the control definition for the anti-abuse rule in section 249, moving from section 368(c) control (which requires direct control in a parent subsidiary relationship) to section 1563(a)(1) control, which takes into account indirect relationships.  The rules also would modify the determinations for dividends received deductions by life insurance companies, because the current methodology for prorating amounts between the company and the policyholders do not always accurately reflect a company's economic interest in the account. 

Other changes are noteworthy. Carried interests would be taxed as ordinary income and subject to self-employment tax.   Payments of punitive damages would no longer be deductible, and insurance payments to cover punitive damages paid would be includible.  A particularly noteworthy proposal is the repeal of the "last in-first out" (FIFO) and "lower of cost or market"  (LCM) methods of accounting for inventory.  As the Greenbook notes, the method amounts to a "one-way mark-to-market regime that understates taxable income".  Repeal is the right answer here.

On the individual side, the proposals require consistentcy of valuation for basis purposes and for estate tax purposes.  No longer would an heir be able to claim an exorbitantlly high valuation as its basis, when the estate avoided estate tax by claiming a highly discounted valuation.  Reporting requirements would ensure that recipients used the same value claimed by the estate as their basis.  At the same time, the proposal would add a new category of restrictions that should be disregarded in determining valuation for estate tax purposes, to eliminate (or lessen) the ability of planners to artificially lower the value of an estate to avoid estate tax.  Of course, these estate tax and basis measures make sense.  They would make a lot more sense if Congress was reasonable and permitted the estate tax to lapse back to its 2001 level, rather than continuing to exempt these ultra wealthy estates from almost all taxation.

As I noted in an earlier posting, the administration's international tax proposals also represent an appropriate turn in the right direction.  After years of allowing corporations to have too much say over corporate tax policy through influential lobbying, the government appears to be ready to embrace a change in direction that will ensure that corporations pay their fair share of the tax burden.  As Reuven Avi-Yonah notes in a brief essay on this issue posted on SSRN, there are sound reasons for ensuring that corporations pay tax once on their income, rather than permitting them to game the system so as to avoid both US tax and foreign tax. 

Corporate lobbyists' arguments that sounder taxation of corporations will "destroy" them because it will render them "uncompetitive" should not carry much weight.  For one thing, they've been making this argument for years, as the US tax system has gone through a variety of changes.  There doesnn't seem to be any empirical evidence that the changes in the US tax system have negatively impacted the US MNEs' ability to compete.  For another, many of the devices Obama's proposal addresses are ones used by domestic corporations to shift their US income offshore in order to avoid taxation on it in the US--so it has nothing to do with competition and everything to do with lowering taxes that should be paid in the US. (For example, moving an intangible created in the US to a Caymans Island mailbox for an amount that is much less than the expected future income stream from the property right, and then claiming that all of the income paid to the company to use the property right is foreign source income not subject to US taxation.)  Furthermore, this argument tends to be made any time anyone suggests that corporations bear any of the costs of their income-producing activities.  Corporations want to dump their pollution off on the public at large (socialization of costs) while enjoying the huge profits from that activity (privatization of gains).   Needless to say, they want to enjoy the benefits of being managed and headquartered in the US (socialization of costs through the support of the US military for their ships at sea, and similar activities around the globe) while reaping the benefits of various special "tax expenditures" cajoled from the tax writing committees even if adverse to the long-term interests of the U.S. (subsidies for companies that extract natural resources--privatization of benefits).

Citizens for Tax Justice has a brief release worth reading on "Myths and Facts about Offshore Tax Abuses" (May 8, 2009). 

The Greenbook clarifies how the check-the-box rule would work under the Administration's proposal.  A foreign corporation could "check-the-box" on an entity created in its own jurisdiction, and that entity could be recognized as a disregarded entity.  But a foreign corporation  could not check the box on an entity created in another jurisdiction--that entity would be treated as a corporation.  The proposal isn't clear on when US corporations would be permitted to check-tye-box on first-tier foreign entities.  It says that the proposal "generally" would be inapplicable "except in cases of U.S. tax avoidance." 

The budget also proposes to stiffen the way that section 482 polices the pricing of intangible property shifted to offshore jurisdictions.  It includes workforce, goodwill and going concern value in the items covered, and provides that the Commissioner may value the intangible properties on an aggregate basis if that produces a more reliable result.  Valuation must be at the "highest and best use". 

These proposals are, of course, related to other important issues at stake, especially health care reform.  For more information on the current status of those proposals, see Senate Finance Committee materials, including the following: Press Release (May 11, 2009),  Description of Policy Options (May 14, 2009); Senate Finance Committee, Financing Comprehensive Health Care Reform, Public Roundtable, May 12, 2009 (BNA link) (noting 235 billion of tax expenditures for health care).

Misunderstanding tax (take 2)

Brad Delong's "Grasping Reality with Both Hands" weblog Upward Mobility: Reality and Illusion, has a link to Ezra Klein's blog take on Russell Shorto's discussion of the Netherlands, in Going Dutch (NY Times Magazine, Apr. 29, 2009). 

You see, in the Netherlands, there is a fairly high (roughly 52% all in) tax rate.  But there are also quite a few things that make life better for all, from prenatal to child care, from education to health care that is as good as in the US and available to all at a very modest cost compared to the US.  Shorto sees all that, but suggests that the Dutch are nonetheless a bit bland for American taste--missing out on the juicy incentive to be the best that makes that individualistic streak correlate with upward mobility. 

Klein, however, is having none of that last bit.  You see, when there is a fairly good amount of opportunity for people to move out of the bottom economic class and up into a better life--health care, education, and such being well funded by those tax dollars--you don't have to be wealthy to get along. We Americans pride ourselves in having upward mobility, but we don't actually have as much as they've got.  Klein offers this false pride as the likely reason that Americans are so easily fooled by suggestions about what tax laws would be good for us.  We don't understand how bad things are, so we don't see the need for the laws we need to make them better.  Makes sense.

The President's International Tax Plans

President Obama's announcement of new programs--none taking effect until 2011--to end "illegal overseas tax evasion" and the Treasury Department press release on President Obama's international taxation proposals are generally welcome news.  See Zeleny & Knowlton, Obama Calls for New Curbs on Offshore Tax Havens, New York Times, May 5, 2009; Leveling the Playing field: Curbing Tax havens and Removing Tax Incentives for Shifting Jobs Overseas, Treasury (TG-119), May 4, 2009.

Overseas activities of U.S. multinationals clearly have been a significant taxsaver for those businesses.  The release notes that US multinationals paid tax at a rate of about 2.3% on their overseas earnings in 2004, and that the 100 largest U.S. corporations have 83 of their subsidiaries in tax haven countries, with nearly one-third of their foreign profits coming through Bermuda, the Netherlands and Ireland.  The administration is accordingly proposing changes in two areas--removing tax incentives for shifting jobs overseas and getting tough on overseas tax havens.  

And the corporate lobby is already underway.  "Bad stuff", says Kenneth Kies--tax lobbyist for some of the most powerful U.S. multinationals like General Electric and Microsoft.  It will "hurt U.S. companies' competition with their foreign rivals by increasing operating costs", say the various trade groups like the U.S. Chamber of Commerce and National Foreign Trade Council.  It will "cause a lot of pain", says Bush administration functionary Pamela Olson, because companies structured to get the tax avoidance permitted under current rules.  Donmoyer, Obama Seeks End of Corporate Tax Break to Raise $190 Billion, Bloomberg.com, May 4, 2009.  Marty Regalia at the U.S. Chamber of Commerce claims that the U.S. is the "only major industrialized country which double taxes the overseas earenings of our companies."  See Zeleny & Knowlton, NY Times, above.  Hogwash.  Taxes on foreign earnings are exceptionally low, as the Treasury release points out.  And taxes on all earnings end up at well below the statutory rate.  So there's no "double tax" on overseas earnings.  In fact, foreign tax credits --especially with check-the-box and the elimination of most of the different foreign tax credit "baskets"--permit U.S. multinationals to cross-credit and lower their taxes on U.S. income.  Regalia makes the tired old claim that taxation "limit[s] the ability of U.S. companies to compete."  That argument is a slide into the abyss of null taxation--companies will argue that US taxes keep them from competing (with whom is hardly ever specified) until taxes are zero. And even if it were a sound mode of arguing, it disregards the fact that US companies don't have to pay VAT in addition to income tax, as many of their competitors must do.

Folks, of course GE and Microsoft are going to object--they've been getting a nice little ride through these tax breaks that have permitted them to make more money going overseas than they would make at home running the same business.  There's no reason for Congress to keep tax breaks that encourage companies to offshore their business.  And of course companies aren't going to like the fact that their fancy multi-layered tax avoidance structures may not garner them the big tax savings that they enjoyed for the last decade and a half under check the box with deferral.  So what.  They've been arbitraging the system.  The rules were not good to start with, and it's time the extra benefit these companies had, under a corporatist philosophy that has treated their goals as quasi-sacred, came to an end.  Let them compete on a level playing field, rather than arbitraging the offshore rules to their managers' and owners' benefit.  The idea that paying the 35% corporate tax rate would make them uncompetitive with foreign rivals is also exaggerated.  These companies are paying almost no US tax on their foreign profits, and in many cases they are combining the US laws (check the box rules) with fungibility of money (interest expense) to avoid paying foreign taxes as well.

Remember, too, that those profits earned from moving assets offshore haven't benefitted U.S. workers.  As Krugman notes in today's op-ed, "falling wages are a symptom of a sick economy. And they're a symptom that can make the economy even sicker."  Krugman, Falling wage syndrome, NY Times, May 4, 2009.  The ordinary workers are the first to lose when things are bad, and the last to see any increases when things are good.  From 2000 to 2007, wages adjusted for inflation fell.  (Of course, the rich got richer, with the average top one percentile at more than a million back in 2006.) And jobs are getting slashed steadily, with new hires getting lower wages.  New hiring will be an employer's opportunity for paying lower wages.  See Annys Shin, U.S. Workers' Wages Stagnate As Firms Rush to Slash Costs, Washington Post, May 3, 2009. The recession is starting to look like a union-busting bonanza for big business, as hotels get unionized workers to accept wage cuts, and the federal government forces the UAW to huge concessions.  It looks like Congress won't have the guts to pass the Employee Free Choice Act, but will instead continue to permit employers to dictate how workers organize themselves to decide on whether to have a union.  (The media contributes to that--it still refers to the act as "ending" the choice of secret ballots, which is quite simply untrue.)  Meanwhile, with lots of US taxpayer funding, the banks have mostly continued outrageous compensation structures (bonuses already back up to 2007 levels), and they haven't even been required either to actually lend money out at reasonable rates or to modify mortgage loans in bankruptcy.  The Senate failed to end the banks' ability to game mortgage loans for their own benefit 52-47.  As Ariana Huffington, noted, in Why are bankers still being treated like royalty, May 2, 2009, (hat tip to Angry Bear, here), Senator Durbin has called bankers "the most powerful lobby on capital hill.  And they frankly own the place."  The banks haven't stopped lobbying for their welfare subsidy as middlemen on student loans, and for their welfare subsidy (called the "active financing exception") to the nondeferral of international business income.  For more on the problem of wages and unemployment, including as always some useful discussion in the comments section, see Mark Thomas, Paul Krugman: Falling Wage Syndrome, Economist's View, May 4, 2009.  

To remove inappropriate tax incentives for pushing assets overseas, the administration suggests reforming deferral rules, closing foreign tax credit loophooles and using savings to make the research and experimentation credit permanent.  I'm definitely in favor of the first two, but the last is just another giveaway. 

re Deferring most expense deductions.  As the release notes, "currently businesses that invest overseas can take immediate deductions on their tax returns for expenses supporting their overseas investments but nevertheless 'defer' paying U.S. taxes on the profits they make from those investments.  As a result. U.S. taxpayer dollars are used to provide a significant tax advantage to companies who invest overseas relative to those who invest and create jobs at home."   The Obama proposal would defer expense deductions (other than research costs) until matching profits are brought home--an better-than-nothing step, though the right answer would be ending overseas deferral altogether.  Interest expense is a particularly useful expense to multinationals currently in this regard, since companies can deduct interest paid to foreign subsidiaries in low-or-no tax countries to reduce the overall tax burden.  This would amount to about $60 billion over the next decade.

Research costs shouldn't be excluded from that proposal.  Research that is conducted overseas could almost certain be done at home, and there is no reason to continue to provide an incentive to companies to move research and development laboratories offshore.  the proposal asserts that there are "positive spillover impacts" in the U.S. economy, but  that argument is not convincing.  Those impacts do not require that the research be done in the foreign country; in fact, they are likely to be greater if the tax code provides an incentive for research to be conducted in this country.  This exception doesn't pass the smell test:  one suspects that it is due to assiduous lobbying by Big Pharm, Big Oil and similar industries.

re Foreign Tax Credit Loopholes. The press release points out that the foreign tax credit, which is intended to ensure that U.S. companies with overseas operations do not pay more on their worldwide income than they would pay if they paid only U.S. taxes, actually has been used--with manipulation of rules and aggressive planning strategies, to achieve a lower tax on their U.S. taxable income.  (One of the reasons for this, not mentioned directly in the release, was a gradual loosening of the foreign tax credit over the last decade, with the various "baskets" reduced to only two, thus allowing considerable cross-crediting that reduced U.S. multinationals' taxes.)  Again, this provides a competitive advantage to U.S. multinationals over U.S. domestic corporations in the same businesses.  The proposal would limit the foreign tax credit to the aggregate foreign taxes paid on aggregate foreign earnings, minus any foreign taxes paid on earnings that are not subject to current U.S. taxes.

re Research expenses.  This seems rather obviously to be an attempt to buy some credit with the tech and pharm companies that are among the biggest gainers from the deferral and tax credit gambits above and the biggest beneficiaries of the research credit.  Take with one hand, and give away (the research credit) with the other.  The research credit was originally enacted in 1981 and although it has faced its deathbed several times, business has been lobbying for making the " extension" permanent  for years, and it looks like they may finally get it.  I think Obama is wrong on this one, and Congress shouldn't go along.  The credit covers 20% of research expenses over a "base amount" determined using the percentage of expenses to gross receipts for 1983-1986, plus 20% of certain basic research payments plus 20% of certain energy research.  Making it permanent is justified in the release as necessary for stimulating investment, since taxpayers don't know how to factor the credit into decision.  That isn't a good enough justification for almost $75 billion of lost tax revenues over the next ten years.  End the credit now, and use those tax savings to help make health care reform take place.  That would be much better for job creation here at home.  Businesses can deduct research expenses just as they always have been able to do.  Their uncertainty is no different from every taxpayer's uncertainty about almost every single aspect of the tax law; in that sense, uncertainty should already be taken into account in market pricing, since tax laws change more frequently than any other area of the law.

The proposals for getting tough on tax havens are all good ideas.  They include eliminating loopholes for disappearing subsidiaries, cracking down on individual abuse, and increasing IRS enforcement.

re Eliminating disappearing subsidiary loophole. The administration is finally considering how to deal with the "check-the-box" nightmare created in the late 1990s under Clinton, where Treasury made it easier to disregard 100%-owned corporations by making the "check-the-box" election.  The " 'check-the-box' rules have permitted US firms to establish sister subsidiaries in a foreign country and in a tax haven, and shift income from the foreign operating business to the tax haven without reporting income to the US for taxation.  The proposal would not permit check-the-box elections to disregard certain foreign corporations, and claims that about $86.5 billion would be recouped over the next decade.

re Cracking down on tax haven abuse by individual taxpayers.  The "qualified intermediary" (QI) regime for financial institutions to report and withhold on a "know your customer" basis has been abused--the open solicitation of tax evaders by UBS, a QI for US tax purposes, is a perfect example.  "Good" financial institutions can still carry on business with "bad" ones without losing their QI status, by relying on the "bad" institution's assertion that there is no US person on a transaction,  and US taxpayers can escape withholding by simply claiming not to be a US person.  US taxpayers are required to file certain foreign reports, but if they do not do so, the rules make it hard for the US to compel the report or assert penalties (or, for that matter, get information from the banks in banking secrecy jurisdictions).  The proposal will assume that financial institutions that are not QIs are assisting tax evasion, unless established otherwise.  As a result, a high tax withholding amount would be required for US institutions making payments to such non-QIs, and US persons holding accounts at non-QIs will be presumed to be required to file a foreign bank report disclosing those assets.Treasury could require QIs to ensure that all commonly controlled affiliates are also QIs.  Penalties would be increased and the statute of limitation extended to 6 years.  QIs would be required to report on the same basis as domestic financial intermediaries.

re Increasing IRS international enforcement.  More resources means more IRS employees--800 of them--able to go after offshore tax evasion.

The tax cut road to monarchy? (and mainstream media's complicity)

Angry Bear's Bruce Webb writes about the corporatist agenda for tax reform, in Leona Helmsley Omnibus Tax Reform Act of 2009, Angry Bear, Apr. 27, 2009.  Here's my one-sentence recast:

The recipe for monarchy is one part of each of the following (mixed, according to the comments, with a splattering of tax-advantaged health savings accounts and similar goodies available to the wealthier denizens):

• repeal of the corporate income tax (with rhetoric about "double taxation" and fake concern for the little-guy consumers),
• repeal of the estate tax (with emotional appeals about the "death tax" and fake concern for those poor little businesses and family farms that [don't] get destroyed by having to pay the tax),
• institution of a capital gains preference for investments and dividends (with rhetoric about "double taxation" and fake worries that any tax at all might cause the super-rich to quit investment their wealth [and start hiding it under their mattresses?]), and
• enactment of a Flat Tax (with rhetoric about "efficiency" and fake concern that even the little guy should pay less).

But Webb probably leaves out a critical ingredient--or at least part of the "cooking" process that ensures the desired result--mass media's defense of the privileged class.  For a prime example, you can read the April 27 article in the Washington Post that purports to examine how the Obama tax plans (which provide for some rather insubstantial increases of taxes for those with incomes above $250,000--i.e, the  upper crusts of society).  Read Montgomery & Haynes, Small Businesses Brace for Tax Battle: Under Obama Plan, Some Entrepreneurs' Bills Would Soar, Washington Post, Apr. 27, 2009.  Note that the taxpayers picked to elicit our sympathy are a couple with more than $500,000 (half a million) in annual income--taxpayers that even the staff writers admit are "squarely [in] the ranks of the richest Americans".   We are supposed to think that it is inappropriate to burden these rich business owners, who currently make about $90,000 in deductible charitable contributions, with additional taxes of about $23,000.  (Wonder if any of those deductions are for those nice little percs available only to the rich, like having artsy places named after them or getting tickets to nice Northern Virginia area social events?) Another businessman making about half a million is reported as possibly having $60,000 added to his tax bill (the taxpayer's report of his accountant's estimate).  No analysis of what benefits those businesses get from governmental institutions.  But we are supposed to empathisize with these employers who would find the downscaling of income from additional taxes "really painful."  There's no mention of how much these employers pay their employees in order to reap those profits. 

And who else talks in this piece about the wisdom of such tax policies?--"Republicans and business groups" that think taxing the rich will "strike some of the nation's most productive businesses" that have "the greatest capacity for job creation".  That is, die hard anti-tax (for the rich) Republicans like Charles Grassley and business associations lobbying for zero corporate taxation,such as the U.S. Chamber of Commerce or National Foreign Trade Council.  The Post doesn't bother to ask--much less research-- the question whether entrepreneurial activity is really located among the rich rather than in very small businesses at the startup stage, or whether it is the small startups hiring and the larger firms "cost cutting" through layoffs.

Only at the end is there word from a business owner who admits he "wouldn't mind" an additional $35,000-$50,000 of taxes, because "we're fortunate to be successful".

More on UBS and Swiss Banking Secrecy: new info exchange just a figleaf?

The US government, as noted in earlier postings, is continuing to pursue the Swiss bank UBS to recover information on 52,000 US client accounts with about $14.8 billion in assets, by seeking enforcement of John Doe summonses.

UBS and the Swiss government each submitted briefs in the case, underway in the Southern District of Florida.  

UBS claims that the US is inappropriately tackling an issue of international diplomacy through the courtroom, since the bank must now decide "whether to obey U.S. law or Swiss law" because it would have to hand over "a massive quantity of confidential account information located exclusively in Switzerland."  Brannnigan, Swiss bank UBS fights IRS in Miami, Miamiherald.com, May 1, 2009.  This argument is worrisome, of course, for several reasons.  UBS signed a contractual agreement, called a "qualified intermediary agreement", establishing its obligations to report on U.S. clients' accounts.  Furthermore, UBS has admitted that it sent its agents into the U.S. illegally to solicit U.S. customers for its secret accounts business, which included hiding U.S. holders behind nominees.  The very reason that the accounts are "located exclusively in Switzerland" is because of the possibility of being inaccessible to the US government and hidden from tax collectors. UBS wants its crime of soliciting customers for secret Swiss accounts to justify their failure to provide information on US customers evading tax laws.

Meanwhile, the Swiss government, long an ally of the kind of banking secrecy that permits mafia lords and wealthy oligarchs to hide away their assets and retain power no matter what the laws of their own country set out as their obligations to their governments, stated in its amicus brief that these efforts to attain records "would violate its sovereignty and international law" and damage the negotiations for a new US-Swiss tax treaty that is intended to provide for better information exchange.  Brown, Switzerland asks U.S. court to halt UBS tax case, Reuters, Apr. 30, 2009.  But as the Miami Herald article notes, the Swiss government has volunteered the renegotiation of the treaty as a way to "head off the IRS."  Brannnigan, Swiss bank UBS fights IRS in Miami, Miamiherald.com, May 1, 2009.  The Swiss government says that the US should follow the treaty, with its "careful balance between the U.S. interest in receiving tax related information from Switzerland and the Swiss interest in preserving its long tradition of financial privacy."  "The court should refrain from issuing an order that would interfere with those negotiations and the more general intergovernmental relations between Switzerland and the United States."   Brown, Switzerland asks U.S. court to halt UBS tax case, Reuters, Apr. 30, 2009. 

Let's get real. The current provisions, and even the "improved" transparency that the Swiss are willing to provide, are still much too weak to do any good.  They amount to a fig leaf covering the intentional facilitation of the use of secret Swiss accounts by and for the benefit of US tax evaders. The problem is the degree of specificity generally required.  If the US government cannot get information through "John Doe" summonses that describe the types of accounts without naming the specific individuals holding the accounts, then information exchange is useless.  The whole point is that the US government generally doesn't have other information to identify the individuals who hold those accounts.  They're SECRET, remember?  It can't track the tax evasion being practiced by its own taxpayers if a foreign government is aiding and abetting that tax evasion through secret banking practices that permit its banking cabal (part of the global banking imperium) to rake in high profits as the bankers' (and Swiss government) gain from the US fisc's loss--i.e., for providing a tax shelter to US clients. 

I hope the Florida court is able to give short shrift to the Swiss government's whining.  The information sharing provisions under negotiation are likely to be mostly worthless anyway. What we need here, as in the case of needed reforms to mitigate the power of the domestic banking imperium, is a new order of transparency and information exchange among governments.  Let's require a full annual accounting (names, addresses and account number) by financial institutions to regarding new accounts established in foreign jurisdictions.  I can't see a justifiable rationale for cross-border banking secrecy as currently exercised.

Some background documents:

US Petition to Serve John Doe Summons, June 30, 2008;

Order Approving Service of IRS Summons, July 1, 2008;

DOJ, Federal Judge Approves IRS Summons for UBS Swiss Bank Account Records, July 1, 2008;

DOJ, United States Asks Court to Enforce Summons for UBS Swiss Bank Account Records, Feb. 19, 2009;

Opening Statement of Mark Branson Before the Permanent Subcommittee on Investigation, United States Senate, Mar. 4, 2009 (CFO of global wealth management for UBS Zurich indicating that he "believed that the John Doe Summons is inconsistent with those long standing treaties" "that specify the circumstances under which client names and account information located in Switzerland can be shared with U.S. authorities")