President Obama's plan to tax US companies' foreign profits

In his relentless pursuit to find funding for overtly expansive social programs, the President is now looking towards American businesses once again, "to pay their fair share."

I don't think many people would disagree that most of the American tax code needs to be overhauled. First on everyone's list resoundingly would be the federal income tax, a not so distant second would probably be corporate tax codes. Conversely what the Administration is setting out to accomplish is less about reform and more about revenue generation for government operations.

The President's proposal from the Wall Street Journal.

WSJ-The White House plan has three main elements affecting businesses. It would curb corporations' ability to park their overseas business earnings indefinitely outside the U.S. and avoid U.S. taxes, a practice known as deferral. The plan would change the legal treatment of many international subsidiaries that companies have used to shift earnings into low-tax offshore havens. And it would put new limits on corporations' ability to use offshore subsidiaries to generate unjustified foreign-tax credits.

However, according to some criticisms from the usual suspects, and one you may not expect, there are some problems with the President's proposal.

From The Tax Foundation,

"The Obama Administration is proposing to raise more than $100 billion from American multinational corporations by limiting in some way the ability of U.S. companies to defer tax on profits earned abroad. The premise behind the proposal is that by raising the taxes paid on the foreign profits of U.S. companies earned abroad, the companies will somehow have more incentive to locate their operations here in the United States.

"The proposal, however, is flawed and fails to recognize that in the increasingly global economy where capital flows freely across borders, the United States can no longer expect other countries to follow its policies. The proposal will penalize the foreign operations of U.S. companies operating abroad and make it more difficult for them to compete with foreign companies.

"The manufacturing of tractors or generating facilities in places like China and India will be less likely to be done by U.S. companies. Rather, these business opportunities will more likely be won by the foreign competitors of U.S. companies with the economic rewards—jobs and profits—going abroad rather than U.S. companies.

Surprisingly, Clinton's former Secretary of Labor, Robert Reich, agrees to a point.

Robert Reich's Blog-The White House says that some jobs go abroad because American companies are lured there by tax loopholes which, if closed, would bring the jobs home. True. But a crackdown on tax havens might also cost American jobs if companies decided that a higher tax burden here required them to cut payrolls in order to stay competitive or to simply leave the United States altogether.

Reich later draws some interesting conclusions as to why the Administration is attempting to go down this road. The first is for a bargaining chip to gain support for Universal Health Care from private businesses. A plausible analysis, however, I am not thoroughly convinced.

Obama knows he is entering waters in which his proposed social planning is going to eventually need funding from every working American in the form of tax payrolls. Regardless of what economic quintile they fall into. With the bill potentially coming due and congressional elections right around the corner some quick cash from a corporate shakedown might just be the answer. This scenario makes Reich's second reason a little more sound.

The second reason has to do with revenues. Originally the White House had planned to pay for universal health insurance by limiting tax deductions for wealthier Americans. But the Democratic leadership nixed that source. The rich Americans who take the deductions, and the groups benefiting from the wealthy's tax-deductible expenditures on them, had enough political leverage to make it a non-starter. That means the White House has to find other sources of money.

President Obama's constant theme of punishment as motivation might work well with liberal and progressive cronies, but this is the real world. Big business will find a way to get around this. Then there is the idea of foreign competition offering tax shelters and havens for US based companies to move operations solely to their regions. Leaving absolutely nothing for the American people, Obama, or his agendas.

Instead of using a punishment attitude it might behoove the President to try a new approach, like positive reinforcement by lowering the corporate tax rate by half or more. Providing a climate that is conducive and not hostile to business might just motivate them to return. It's called an incentive, the thing businesses thrive on. Unfortunately this not likely since Obama's mind set is more about big government than the free market.

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Ten Myths on Tax Policy.

In honor of the 15th being the official day that the "Tax man cometh and the tax man taketh away," here is a post from the Tax Foundation's Tax Policy Blog, "Ten Myths About Tax Policy."

Some myths you might agree with, some you might not.

10 Myths in Tax Policy

1. You aren't legally required to pay the federal income tax (for whatever reason, such as 16th Amendment was never ratified)

Researchers and activists sometimes make claims like this, but it should be treated as an academic argument and not advice for taxpayers. The federal income tax is here and it is collected; not paying it means fines, penalties, and often jail time. We at the Tax Foundation work for a tax system that is simple and transparent, and doesn't inhibit our economy with excessive burdens. But we're not there yet. If someone tries to convince you that there's no obligation to pay income taxes, it's too good to be true.

2. Cigarette smokers cost the government money and thereby should have to pay high taxes on cigarettes

Some have argued that since cigarette smoking leads to certain health costs that governments are in some cases responsible for (Medicaid and Medicare), that cigarette smokers should have to pay for this. Seems reasonable, right? What those same people won't tell you is that because smokers tend to have an earlier life expectancy than non-smokers, smokers actually save the government money relative to non-smokers, ceteris paribus. This is largely because the federal government has two huge programs that are age-based: Social Security and Medicare.

3. Taxing businesses allows us to lower taxes on people

It may sound nice to "shift" the tax burden from individual taxes like the personal income tax to businesses through say the corporate income tax. But all taxes are eventually paid by people, because after all, consumers, owners of the businesses and workers are people.

4. The FairTax would solve all the problems in federal tax policy

A debate over tax reform is one that we need to have, and that's helped by having various tax reform ideas with enthusiastic proponents. It is important to remember, however, that any tax reform plan will face political controversy and have short-term transition issues and these will have to be thought through carefully. The FairTax, for instance, would keep in place federal excise taxes and unconstitutionally tax government spending, suffer from evasion problems, and face the same political pressure that have made income and sales taxes full of deductions and exemptions. Like other consumption taxes, however, the FairTax has some economic advantages over income taxes. Regardless, whether we have a graduated income tax, flat tax, or national sales tax at the federal level, there are still many contentious and important tax issues at the state and local levels.

5. A carbon tax to fight climate change would definitely lower our standard of living

It is true that a carbon tax would likely lower GDP and income, as we measure it. However, if global warming is truly a problem that a carbon tax can help solve, such a Pigouvian tax would actually increase economic well-being, broadly defined. The problem is that environmental quality isn't counted in measures like GDP that we often associate with well-being.

6. Raising the top two income tax rates would not affect small businesses much

It is true that raising the top 2 income tax rates wouldn't affect a high number of small businesses. However, the small businesses that would be affected by such a tax hike make up such a significant amount of the small business income that raising the top 2 rates would indeed hit a large chunk of small business activity. (Now, personally, I don't really care much for this small business argument. In my view, the tax treatment of $1 of business income shouldn't depend upon the size of the business unit.)

7. The Bush tax cuts raised revenue

Many will often point to the fact that after the 2001 and 2003 tax cuts, federal tax revenues increased. The problem with this correlation proving causation argument is that we must answer the question, "what would have happened if the tax cuts had not passed?" Merely because two things occur at one time doesn't prove that X caused Y. In order to truly estimate what the impact was of the tax cuts on revenues, we must hold everything else constant. Most serious studies of the 2001 and 2003 tax cuts showed that the tax cuts cost the Treasury revenue compared to what would have otherwise happened. There was some dynamic effect, but it's not anywhere close to the case that the tax cuts paid for themselves.

8. Massachusetts is a high tax state (i.e. Taxachusetts)

Massachusetts used to have a high state and local tax burden. But ever since Prop. 2 1/2, Massachusetts's state and local tax burden has fallen rather dramatically. The state ranks in the middle of the pack when it comes to state and local taxes as a percentage of income.

9. Raising revenues via cigarettes, alcohol and other such taxes as well as lotteries is okay because those are voluntary taxes

Here's what this statement is actually saying: because a certain economic activity is voluntary, then the tax that is required as part of that economic activity is voluntary. By that same argument, your income tax is voluntary because you choose to work. The reality is that no tax is voluntary. It is just the economic activity that requires a tax be paid when it is conducted (such as consumption, labor, investment) is voluntary.

10. The rich don't pay taxes, or, the rich pay all the taxes.

There is a perception among some that the rich can easily evade taxes. Unfortunately for the rich, that is not the case. Significant amounts of money are paid to Treasury from those in top 1, 5, and 10 percent of the income spectrum, especially individual income taxes. On the other hand, the rich do not pay all the taxes. While the top 1 percent of tax returns pay around 40 percent of the individual income tax, every other federal tax (except estate) is significantly less progressive than the individual income tax.

Being an avid supporter of the Tobacco industry, Marb Lights being my poison of choice, I really like Myth #2. By dying earlier than most, I save you guys on having to dole out SSI and Medicaid bennies to me.

Just doing my civic and patriotic duty.

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California Dreamin' or Nightmarin'

Ever get the feeling you are about to get mugged? Have you ever come home to find your home has been ransacked by criminal thugs who have just turned your life upside down? Well, if you don't feel it now, when comes time to pay for the stimulus package, you might.

The state of California, according to the all seeing all knowing Wiki, boasts the eighth largest economy as far as GDP, eleventh as far as purchasing power parity, and is responsible for thirteen percent of the national GDP of the United States. Pretty impressive.

Now for the bad news, as reported by the LA Times, Cali is facing a projected $41 billion budget deficit by the middle of next year. Lawmakers and Governor Arnold "Arnie" Schwarzenegger are feverishly attempting to come to a compromise on how to settle their budgetary shortfalls. Their solutions; $14.4.billion in tax increases,$15.1 billion in program cuts, and $11.4 billion in borrowing.


Here is a more acute breakdown from the Tax Foundation,




Why look at Cali? Because, California, is the looking glass for future outcomes for the rest of the country, politically and economically. Looking at their solutions might just give some insight as to what to expect from our government and for the country over the next few years .

Now, when it comes time to pay up for the stimulus, what do you think our almost broke country is going to have to do? Raise taxes, cut spending, borrow, or spend more, much like California. Here is the cost per family and per person for just this stimulus, forget the original Bush stimulus ($168 billion), TARP I ($700 billion), Geithner's proposed TARP II ($1 trillion to $2 trillion), and the national debt, pre-stimulus rich environment (Sept.2007 est.-$9,007,653,372,262.48).

From WashingtonWatch.com



However, this is per American; every man, woman, and child, all 303,824,640 (July 2008 est.) of us. Though, this is not necessarily the people who are going to be paying it back, enter working Americans. The labor force estimates in the US, as of 2008, are at 155.2 billion (Using Ms. Pelosi's numbers.), roughly half of the population. That just about doubles the tax burden, generated by the stimulus, on working Americans who will be required to pay this garbage back. Or, $4,696.20 per American worker, using WashingtonWatch.com's numbers. Feel like you're getting mugged yet?


Important Sites:

ReadtheStimulus.com

Even though it is too late, NoStimulus.com

How your money is being spent, ProPublica.

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