Some years back, there was a winter mountaineering disaster in New Hampshire. The post mortem (literally) summary of why this happened was nicely encapsulated in the phrase, “A plan of breathtaking stupidity.”
I was reminded of that today as details continue to emerge of what seems to almost be an overt Obama-Geithner plan to drive as many corporations as possible from the U.S. and to other jurisdictions.
Given that we’re the ONLY jurisdiction on the planet that double-taxes out-of-country foreign earnings (if repatriated – and that seems to be the “loophole” that they want to close), this is almost a death wish.
Now, instead of just the “off-shoring” of jobs, it will make perfect economic sense to offshore entire companies elsewhere.
This is a stimulus plan for Bermuda and Grand Cayman….
What am I ranting about? More below the fold….
This seemingly incomprehensible report has been circulating for days, but today things got more into the open – in the sense that this isn’t a mistake, but intent:
Geithner: Obama to fight international tax dodgers
WASHINGTON (AP) – President Barack Obama’s Treasury secretary says the administration will unveil a series of rules and measures in the coming months to limit the ability of international companies to avoid U.S. taxes.
Treasury Secretary Timothy Geithner told the House Ways and Means Committee on Tuesday that Obama will propose legislation to limit U.S. companies’ ability to shelter foreign earnings from taxation in the U.S. He also said the administration will try to limit wealthy Americans’ ability to use tax havens to avoid taxation.
He did not immediately provide details.
What’s going on here? Well, to grasp that, we have to dive a bit into some aspects of tax policies across various jurisdictions.
One item that seemed to finally be getting some traction last fall was the growing (for awhile) recognition that our tax system was becoming dangerously uncompetitive.
The U.S. corporate tax rate has been sitting at 35% for decades; in the meantime, while others have been reducing their rates, we’ve done nothing. As a consequence, the U.S. has one of the highest corporate tax rates in the world – and this isn’t good for economic growth.
Well, the situation is even worse than just that. The U.S. is the only country in the world that taxes (at full strength) profits earned outside the country and which have already been taxed in those jurisdictions. The only way to not have this extra tax imposed is to literally not bring the money home to the U.S. – but to let it stay overseas and be invested there.
Confused? Let’s work an example of this. Suppose you are CEO of XYZ Widgets, Inc., an international widget supplier based in the U.S. You have a competitor, ABC Widgets Oy, based in Finland. Both of you sell widgets in the U.S., earn profits, and pay U.S. corporate tax on those profits. Both of you sell widgets in Finland, earn profits, and pay Finnish corporate tax on those profits. So far, so good. However, here things diverge. ABC Widgets Oy can take its remaining after-tax profits from the U.S. and bring them back to home base in Finland to invest in things like increasing widget production – and not face another hit of Finnish corporate tax on that money. In contrast, if you (XYZ Widgets, Inc.) want to repatriate your after-tax profits from Finland back to the U.S. – to invest in things like increasing YOUR production of widgets…. well, you have to pay the full (and also too-high) U.S. corporate tax of 35% on those already-taxed-in-Finland profits. You’d probably choose to leave that money outside the U.S. – and, oh, use if for something like investing in increasing your widget production by building a new plant in someplace like Romania.
In the above, replace “Finland” with the name of any other country in the world, and the story is the same. The U.S. is the only country that has this “double-taxation” rule.
As CEO of XYZ Widgets, Inc., you have to report to your board and your investors. Are you surprised that you decide, as noted above, to build your new widget-making plant somewhere other than inside the U.S.? See how the “off-shoring” of jobs just makes basic business sense?
Well, when people try to impose an ideology on reality, real trouble starts. What appears to be in plan now is to change the law so that U.S.-based corporations have to pay that second (35%) payment on their already-taxed overseas profits – even if the money is not repatriated to the U.S.
That will change things – and we’ll put you back in the seat as CEO of XYZ Widgets, Inc. The basic economics of the extant silly tax scheme made it much more favorable to use your international profits outside the country – to create capacity and jobs there. Now, you are going to get hit with that double-taxation (including that way-too-high U.S. rate), even if you leave the money overseas.
The short translation is – under this new scheme, being a U.S.-based corporation is a pure cost for no benefit for the business. What will you, your board, and your investors likely do to respond?
Simple – and welcome to Phase II of off-shoring. Rather than just moving capacity and jobs off-shore, now it makes great business sense to off-shore the entire enterprise – by becoming a corporation in some favorable non-U.S. jurisdiction. Any business you do in the U.S. will still be taxed at the U.S. corporate income rate, but you will now avoid the silly double-taxation that this new plan imposes.
You really have to wonder what is going on inside some heads. Are these people so marinated in pure ideology that they can’t even ponder the unintended consequences of these silly actions? If someone was trying to impose a plan designed to explicitly drive corporations (of all sizes) to leave the country, they couldn’t have done much better than this nutty scheme.
Two last quibbles of note – in which I must object violently to the derogatory characterization of those (like you, dear CEO of XYZ Widgets, Inc.) who make sensible business decisions as “tax dodgers.” First, that’s gutter-demonization that has no place in civilized discourse. Second, it’s patently wrong; right now, those who leave overseas after-tax profits overseas (and don’t pay U.S. corporate tax on that money) are completely within the law in doing so. If the ideologues don’t like this arrangement, they can try to disastrously change it – but preemptively implying criminality where none exists is beyond the pale.
BTW, there is a Phase III of off-shoring. But we don’t need to stir that pot for the time being….