Tag Archives: taxes

Taxes and Expiring Tax Breaks

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Time is running out for Congress to extend more than 50 tax breaks worth nearly $85 billion, including popular ones for college expenses and energy-efficient appliances.

There are other costs to these tax breaks:

The [House of Representative’s Joint Committee on Taxation has identified 79 expired or expiring federal tax provisions from 2013 to 2023.

And

…the so-called “breaks” result in less revenue for the Treasury Department and an increase to the deficit—like the projected $84.1 billion the Senate bill would add if passed in full.

However, to get onto one of my hobby horses, we wouldn’t need these tax breaks if we had a single, low flat rate. Moreover, as the above quotes illustrate, there’s a large cost to government social engineering and to government interference in a free market’s operation.

Taxes, though, aren’t for government-directed social engineering. All the social engineering government is allowed to do is named in the Constitution and the Declaration of Independence—the founding documents of our social compact. Actual social engineering is up to We the People, and no one else, no entity else.

And the kicker: with a low, flat rate, and with everyone with an income required to pay, there would be no loss of revenue to the government, breaks or not. Note, too, that this kicker ignores the question of whether such a tax reform should be revenue neutral. (Hint: it need not be, except perhaps initially for the political reason of getting the thing passed.)

Ireland, Luxembourg, UK, and EU Commitments

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In a letter to the Irish government published Tuesday, the European Commission, the 28-member bloc’s central antitrust authority, said it had reached the “preliminary view” that tax deals struck in Ireland in 1991 and 2007 in favor of Apple constituted state aid.

1991! No statute of limitations here. That’s a small matter, though. The larger matter is the degree of freedom that sovereign nations have to govern their internal affairs while remaining a part of the European Union.

The beef here, and it’s a similar one involving Fiat in Luxembourg, and Starbucks and others in other constituent nations of the EU (the details vary from case to case), is this. Ireland didn’t impose a high enough tax on Apple’s Irish-earned income to suit the Authorities of the EU. That letter, in the form of a “report,” complained:

The main question in the present case is whether the rulings confer a selective advantage upon Apple insofar as it results in a lowering of its tax liability in Ireland….

The EU long has objected to the low Irish tax rates, insisting that these are somehow unfair to the other member nations, nations that have much higher tax rates. And no, don’t expect those nations to lower their taxes to compete; Ireland must raise its taxes so as to be less competitive.

The EU complained further:

[There were] several inconsistencies in the application of the transfer pricing method chosen when determining profit allocation [and costs had been] reverse engineered so as to arrive at a taxable income.

Because it’s shameful for a company—or a nation—to work to protect the company’s (and so the company owners’) money. It’s not their money, after all, it belongs to the EU. To paraphrase a man from the other side of the Pond, they didn’t earn that. Somebody else made that happen.

As James Stewart, a tax expert at Trinity College Dublin, noted,

There’s no doubt that this is damaging to Ireland. There’s a deeply held belief that our low corporate tax regime is central to Ireland’s industrial policy. The commission letter gives notice that these types of tax rates are under scrutiny. It will be much more difficult for Ireland to give similar deals to other multinational companies.

But that doesn’t matter. Ireland didn’t earn that, either.

The UK needs to watch this situation in Ireland very carefully and to think long and hard about the value of an EU commitment and the cost of EU insistence on intruding into the domestic affairs of its member nations. The importance of the occurrence of the UK’s EU membership referendum has gained immeasurably from this EU behavior, and the outcome of that referendum now is even more important to the vitality of the UK.

Ireland, Luxembourg, and the others, also need to think very carefully about the value they’re gaining from EU membership, and the costs they’re bearing from that membership. What is the EU’s commitment to its members, if it reserves the right to intrude?

The European Commission’s allegations can be seen here.

Democrats and Inversions

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Inversions in this context, to oversimplify, are when American companies buy foreign companies and then relocate their headquarters to that foreign country in order to take advantage of that country’s lower tax rates. That this is part of an American company’s management fiduciary duty to the owners to minimize costs and maximize profits is unimportant to the denizens of the present administration and to too many “Republicans” as well.

President Barack Obama’s Treasury Secretary, Jack Lew, had some thoughts about the evils of inversions.

These transactions erode the US tax base, unfairly placing a larger burden on all other taxpayers, including small businesses and hardworking Americans[.]

Of course, Lew and Obama carefully ignore the fact that half of us Americans already pay little or no taxes, “unfairly placing a larger burden on all other taxpayers.”

They also ignore the fact that it isn’t their money in the first place; the money belongs to the companies’ owners.

They also ignore the fact that our “tax base” already is excessively progressive and that it has the highest business rates in the world.

Lew went on:

These first, targeted steps make substantial progress in constraining the creative techniques used to avoid US taxes, both in terms of meaningfully reducing the economic benefits of inversions after the fact, and when possible, stopping them altogether.

A better way to reduce the economic benefits of inversions would be to do the patriotic thing: lower, drastically, the tax rates on American businesses. Taxes, after all, are at the foundation of our Revolutionary War—not only the stereotypical taxation without representation, but also the point of that demand of representation: so we could keep tax rates from getting out of hand.

If our business tax rates were lowered sufficiently—Ireland, for instance, taxes businesses at 12.5%, compared to our 35% rate—a couple of things would occur. The first would be a cessation of inversions, and if our business taxes were lowered significantly below 12.5% (I’ve been advocating all along for an elimination of taxes on our businesses), foreign businesses would be attracted to the US, bringing with them the jobs they have.

The other thing that would occur involves the $2 trillion that American companies with foreign branches, affiliates, and so on are holding overseas in order to avoid our usurious tax rates. With those tax rates vastly reduced, that money would come home. $2 trillion is a lot of jobs and capital investment (which is more jobs in the nearby future) waiting to happen.

But tax rate reductions are anathema, if not inconceivable, to Democrats.  And to too many “Republicans.”

Another Look at Tax Inversion Mergers

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Burger King Worldwide Inc is in talks to buy Canadian coffee-and-doughnut chain Tim Hortons Inc, a deal that would be structured as a so-called tax inversion and move the hamburger seller’s base to Canada.

After all, Canada’s corporate tax rate is competitive even with Ireland’s 12.5% rate, at least from the lofty perspective of our own 35% top corporate rate: Canada’s rate is 15%. This inversion isn’t just the fiscally sound thing to do, it satisfies the company management’s fiduciary duty to control costs and maximize profits for the company’s owners.

BK isn’t alone in moving to Canada:

Valeant Pharmaceuticals International Inc, which had been based in California, combined with Canada’s Biovail Corp in 2010 and redomiciled in Canada. The company now has a tax rate less than 5%.

And there are others.

Naturally, the Progressives in Congress and the White House—and no few captured Republicans—are demanding a stop to the inversions. Not in any sensible way, though. Treasury, for instance, is looking at a range of “options to deter or prevent” inversions.

No, BK’s pursuit of an inversion deal only illustrates the distorting, anti-competitive nature of our current tax code, and Treasury’s “options” will only make the thing worse. The right answer is to lower US corporate tax rates to competitive levels. When it becomes more attractive to be in the United States, to invest in the United States, to have a chance actually to turn a profit in the United States, not only will the BKs, the Valeants, and the AbbVies and Covidiens, et al., stay, foreign companies will look to come to the United States, bringing their ideas, their money, and their jobs here.

Even Canada, right next door (the convenience…), is becoming host to these things. But (even) Canada has been improving its tax structure for some years, lowering its corporate tax rate since 2005 from over 22% (still lower than the US’ then) to just 15%. Indeed, here’s a hint:

Tim Hortons [originally a Canadian company until its acquisition by Wendy’s] initially kept its headquarters in Delaware after it was spun off by Wendy’s in 2006. The chain moved back to Canada in 2009, shortly after the Conservative government in Canada lowered the nation’s corporate tax rate.

Democrats and Tax…Inversions

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Walgreen Co looked hard at doing one of these—buying an overseas company and then reincorporating in that overseas jurisdiction to lower its US tax bill, a bill flowing from a world-leading 35% tax rate. Indeed, Barclay’s had estimated that Walgreen would save $797 million a year in taxes if it carried through. They were brow-beaten out of the move, though, by the Federal government.

Now, Senator Chuck Schumer (D, NY) and his Senate cronies are looking at getting in the way of inversions generally.

The proposal…would restrict the practice of earnings stripping, where US companies borrow money from overseas parents and deduct the interest expense on US taxes.

Other proposals look at blocking outright such inversions.

This is an area where the supposedly low-tax Republican Party isn’t helping. House Republicans don’t want a (short-term) measure to interfere with inversions, but for the wrong reason: it would make U.S. companies vulnerable to a foreign takeover.

This is the Republicans’ own error. They shouldn’t be cracking down on inversions at all; they should be looking to make them economically useless by lowering corporate tax rates, instead. If we had competitive or better business tax rates (Ireland’s, for instance, is 12.5%), foreign companies would be looking to come here with their jobs, their business, their innovation, instead of our companies looking to go there.

Of course Senate Democrats (and their House colleagues) aren’t moving to lower business tax rates as a means of reducing the rate of inversion, either, as tax reductions are inconceivable to Democrats.