Obama’s proposed budget cuts should be viewed with one recalling the $2.5 Trillion Bush Tax cut cost that the Institute on Taxation and Economic Policy Tax Model produced (9/2009) when it reflected both the tax cuts and AMT changes passed so as to not undo the cut for the rich. A bit more than the “1 trillion” Obama has used in speeches. Indeed Obama likes to use “1 trillion” for the “tax cuts for the rich if continued”, and not refer to the $4 trillion that is deficit increase caused by interfering with the automatic return of the Clinton tax rates.
I have hammered the non-enforcement (post Clinton) of IRS Code Section 482 where deferred taxes for corporations are determined and have said that the only solution is to repeal deferral, given the G.W.Bush/Obama refusal to tighten those rules. Obama did however in his first budget try to limit the worst abuses of deferral and was shot down by “Blue dog” Democrats working with the GOP. Obama’s 2nd budget then included a scaled back version of these proposals, with Obama dropping the prohibition on the nonsense of “check-the-box” rules that allow U.S. corporations to route profits through different countries and present conflicting information to different governments in order to avoid paying taxes to any government. This year Obama is down to just one tiny abuse being ended – U.S. corporations using “intangible” property to shift their profits into tax havens, as the actual proposal fails to raise revenue as it retains all those loopholes.
Given the small amount in taxes raised from US corporations despite our nominal 35% tax rate being at the high end amongst industrial nations, the goal should be raising revenue – but that does not seem to be Obama’s goal – he wants to be “revenue-neutral.” – What is point getting GE to pay more (from the current zero percent paid) just to give the money to Walmart (from the current 30% paid)?
The “deferral” of U.S. taxes on offshore profits approach is an incentive for U.S. corporations to shift operations and jobs to a lower tax country and to use illogical but approved by the US Tax Court accounting to make their U.S. profits appear to be “foreign” profits generated in offshore tax havens.
Now Obama’s “intangible” loophole does exist. U.S. multinational corporations do use intangible assets to make their U.S. income appear to be “foreign” income. For example, a U.S. corporation might transfer a patent for some product it produces to its subsidiary in another country that does not tax the income generated from this sort of asset (like the Cayman Islands), selling the asset for a artificially low price to the subsidiary, and then paying artificially high fees to its subsidiary for the use of that same patent, decreasing US income as it increase Island income. And Obama’s budget talk says he wants “realistic intangible pricing” – but he asks for a law when all he need do is issue a regulation under IRS Code Section 482 (as in the actions that Clinton took via regulations 1993/94). Likewise the banning of “excess” profits generated from the intangible asset by an offshore subsidiary in a low-tax country from deferral can also be done by regulation.
So why ask for a law ?? – Well, it is in order to give the money back as funding for new tax breaks, extending the temporary “stimulus” rule allowing companies to immediately deduct (“expense”) all investments in plants and equipment rather than deduction the cost pro-rata over the income producing life of the asset, rewarding companies that make an investment in communities hit by major job losses, cutting taxes on clean energy projects, and give a tax subsidy for “research.”
Anyone see these new tax breaks producing more investment, or producing new jobs? Businesses make investments and hire people when they see a profit from doing so. Would it not be more efficient to have the government collect the extra tax and then have the government make the investment and hire people? All those Bush tax breaks to companies produced the worst hiring, the worst new job creation, in decades.
Obama seems to propose a minimum tax on overseas profits, but does not say how deferral and ending tax breaks for outsourcing fit into this. It appears to be a first step in selling the GOP’s repeal of any deferred tax liability. Why does the President want these companies to pay a “minimum tax” when we could instead just require them to pay the full U.S. corporate tax that they are now avoiding through deferral?
Perhaps the most alarming possibility is that such a minimum tax could be a cover for moving in quite the opposite direction. A “minimum tax” on offshore income could describe the plan released in October by Republican House Ways and Means chairman Dave Camp to exempt almost all offshore profits of U.S. corporations from U.S. taxes by dropping the US system of worldwide incomes less credits for taxes paid on that income in other countries – going to the system imposed by the rich and corporate on almost all other counties known as the “territorial” tax system where you tell the local country there is no tax because you made the money elsewhere – indeed you tell each country that story, changing the numbers, and pay near zero taxes – paying perhaps a tax like Congressman Camp’s proposal for a little 1.25% tax on offshore profits? Is this the minimum that Obama is selling? Obama’s Simpson/Bowles came out in favor of a “territorial tax” and Obama endorsed that wonderful “deficit reduction plan.”