Growing opposition to Obama’s Tax Haven clampdown

| May 5, 2009 | 14 Replies
In Havens we Trust

In Havens we Trust

Opposition to President Obama’s plans to close the fiscal loophole of Tax Haven’s is under increasing pressure from business, lobbyists, and the media. You can be sure many Senators and Congressmen, worried about their campaign contributions in the run up to 2010, will be conveying this sense of alarm to the President.

Bloomberg ran with a story this morning, quoting some very influential Democrats:

Senate Finance Committee Chairman Max Baucus, a Montana Democrat, called for “further study” of Obama’s proposals within minutes of the president’s announcement yesterday. Representative Joseph Crowley, a Democrat on the tax-writing House Ways and Means Committee, said he’s wary because the tax changes would hurt Citigroup Inc., his New York district’s largest private-sector employer.

Natalie Ravitz, a spokeswoman for Senator Barbara Boxer, a California Democrat, said that any tax overhaul should not lead to “unintended consequences.”

Other Democrats, including House Ways and Means Committee Chairman Charles Rangel of New York, support the proposal. Some lawmakers, including Iowa Senator Charles Grassley, the ranking Republican on the Senate finance panel, are still weighing the plan.

This latest attack follows a lot of negative, primarily republican generated, commentary since last Monday, including the expected outrage from the Republican caucus and their media friends (particularly Fox). One of the most telling, however, was a seemingly innocent comment from CNBC’s Erin Burnett, during an interview on Morning Joe last week. She said:

Everyone likes to say American companies tax dodge, and no doubt they do, and the tax system could use massive reform, I don’t think anyone would debate that, but the average tax rate paid by American companies…as of last year, it was right up around 30-plus percent. They are supposed to pay 35%. The average in other countries is significantly lower. So that is something to think about when people talk about tax avoidance by major U.S. companies.

To Ms Burnett, and all of the other people who think that tax avoidance is perfectly acceptable, I’ll share another quote that I discovered while following this story – posted on a discussion thread

“My Lords, of recent years much ingenuity has been expended in certain quarters in attempting to devise methods of disposition of income by which those who were prepared to adopt them might enjoy the benefits of residence within this country while receiving the equivalent of such income without sharing in the appropriate burden of British taxation. Judicial dicta may be cited which may point out that, however elaborate and artificial such methods may be, those who adopt them are “entitled” to do so. There is, of course, no doubt they are within their legal rights, but that is no reason why their effort, or those of the professional gentlemen who assist them in the matter, should be regarded as a commendable exercise of ingenuity or as a discharge of the duties of good citizenship.”

Lord Simon, L.C., Latilla v Inland Revenue Commissioners (1943)

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Category: Current Events, Economy, Politics, Psychology Cognition

About the Author ()

I'm a technophile with an enduring interest in almost anything real or imagined. I suffer fools badly, and love trashy science fiction, plot-free action movies, playing guitar, and baking (especially scones. You haven't lived 'til you've eaten my scones. I've recently undertaken bread, and am now in danger of gaining in a matter of weeks the 60 pounds I've lost in the past 2 years). My wife & I are Scottish, living north of Atlanta, GA, with two children, one dog, and a growing collection of gadgets. I work for a living.

Comments (14)

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  1. Dan Klarmann says:

    I was a taxpayer since before the Tax Simplification Act of 1986, that was widely and loudly promoted as the end of tax loopholes and the beginning of less paper.

    Within a year it was known as the Tax Accountants' Early Retirement Act, because in practice it required more ordinary people to fill out more forms, while savvy corporate accountants simply and quickly located new loopholes. "Simplification" made the rule book thicker, guaranteeing more work for accountants while really gaining nothing for the treasury.

    Sweeping changes are no real problem to big operators; it's part of the game. However, plugging a known leak might force accountants to work so much harder that their employers end up paying more than the old loophole was saving them.

  2. Tony Coyle says:

    The naming of legislation often seems to be oxymoronic, doesn't it?

  3. Tony Coyle says:

    Dan – if it weren't for the simple fact that most individuals and organizations capable of doing so would simply find more ways to hide revenue, I'd be in favor of a very simple tax code (not flat – but progressive).

    I often wonder why we don't devise a 21st century tax policy, with allowances based on actual data, and rates then progressive based on earnings beyond allowances. I'm working on a post about this very thing.

  4. Dan Klarmann says:

    When Federal income tax was started, they called that allowance the "Personal Deduction" and set it around the median family income. By 1980, the personal deduction was still the same number of dollars, but the median family income was about 8 times that much.

    Currently the "Personal Deduction" is up to about 1/6 of the median family income, still well below the poverty level.

    Just reset this one number to the median income of the previous year, and I'd be happy even with a flat tax on earnings above that.

  5. Tony Coyle says:

    Dan – as would we all – but it would still leave a lot of doors open for those with money to buy accountants.

  6. Dan Klarmann says:

    History shows that penetrator know-how always outstrips defenses. This was as true in Lao Tzu's time as in modern missile defense labs. The idea fits war, peace, economics, and law. Name a subject, and this law can be applied.

    No law protecting fairness can be passed with less effort and expense than the subsequent circumvention will require. Bet on it.

  7. Tony Coyle says:

    I agree wholeheartedly. One challenge is that solutions (tax codes) are built based on audit and external control – correction and coercion. Embedded solutions are much more effective, especially those that impact people directly (if I don't fully participate, I could be 'holding the bag').

    Audit is always required – but it needn't be the only idea that ensures compliance. Ask an auditor – compliance works best when it isn't externally imposed, but simply part of the normal process. People always need some skin in the game.

  8. Erich Vieth says:

    If it's honorable to avoid taxes by hiding the money in an off-shore account, then:

    1) Proudly display to your fellow tax-payers what you are doing to avoid paying taxes (brag about it plainly and frankly in magazines and newspapers), and

    2) Use some of your massive political contributions to tell Congress to make your favorite off-shore techniques easily available to all of us non-wealthy individual taxpayers, not just to wealthy individuals and corporations.

  9. Karl says:

    Wouldn't it just be better if there were mandatory taxes to equivalent degrees paid to evry nation where profits made by a business are paid.

    Incentives for gettng around taxes exist because other developing nations do not have the ability to tax "fairly" as we Europeans and American do.

    To be fair, we should collect the taxes for them and return them to these developing nations.

  10. Tony Coyle says:

    Karl

    The issue with tax havens is NOT the tax regime in those countries – it is the fact that we are laboring under 80 year old international tax treaties that have two major (and wrong) underlying assumptions – that companies are mostly local, and people and companies are mostly honest.

    A recent opinion piece in the FT (How tax havens helped to create a crisis) states:

    To prevent double taxation, the treaties generally give governments the right to tax returns from an investment in the investor’s country of residence. Business profits, meanwhile, are taxable in the “source” country where the activity takes place.

    This is a laudable goal – no one wishes to tax people or companies twice for their efforts. However, the article goes on to say

    The relaxation and final abandonment of exchange controls in the 1970s led to the blossoming of “offshore” finance and a boom in tax havens. These depend on both outright tax evasion and the exploitation of grey areas by tax avoidance. Since large multinationals are as much financial as business entities, they have freedom to devise complex financial structures

    And our global financial crisis was born.

    The piece concludes that reform of international tax is required (I agree) and that Obama's proposals do not address the fundamental issues (I again agree), and that complete restructuring of international tax regulation and treaties are required (again, I agree).

  11. NIklaus Pfirsig says:

    Double taxation is a myth designed to empower corporations.

    A corporation is a legal entity that is supposed to be considered as a person under the law. Yet when a corporations pays taxes, the stockholders complain about being taxed twice. They're not. The income entity of the corporation is taxed and the income of the investors is taxed.

    If a small local business, for example, a lawn-mowing service is run by an individual, the owner pays income taxes. If he employs some helpers, they pay income taxes and he still pays income taxes. How fair would it be if the employees paid income taxes, but the owner of the business, the employer did not?

    Yet in the case of stocks, the investors refuse to separate the income of the legal person of the corporation from the income they earn as investors.

  12. Tony Coyle says:

    Niklaus

    I agree completely – the double taxation to which I refer (and which these treaties address) is about the same income being taxed in two separate jurisdictions – i.e If I work for a period in the UK – do I pay UK tax, or US tax? Paying taxes to both regimes would generally be seen as iniquitous.

    Corporations should pay taxes and their shareholders should see distributions based on profits after taxes. That distribution is then direct income for the shareholder, so should be taxed as income.

    I'm working up a post about taxes, which I expect will engender a lot of comment (it seems to be a popular topic!).

  13. Tim Hogan says:

    If we federally charter corporations to do business in the US, we can control them. The patchwork quilt of inconsistant and overly lax state regulation of corporations is absurd! Triply so that insurance companies are only licensed and regulated at the state level.

    I believe the worst decision in the history of the USSC was the Dartmouth College case which gave corporations recognition as "persons." After that, fascist corporatism was sure to do battle with the republic ever after.

  14. Tony Coyle says:

    Tim – I agree that corporations need to be regulated and 'incorporated' as federal entities, not state entities. That would resolve many current structural challenges.

    However I disagree about the 'corporate person' since it does provide us a common framework for dealing with such entities. It does however introduce some absurdities:

    Can a corporation commit murder for instance? Can it commit a crime? Is the corporation, or the individuals directing the corporation, responsible for the actions of the corporation? Who is responsible for the debts of a badly run, and fraudulent corporation? Who is responsible for a corporation engaged in criminal activity?

    Some of these have already been answered in case law (although without formal definitions, some precedents are not worth the paper they are written on, and may simply be awaiting an opportunity to be overturned!)

    Fiscally and judicially – I see benefit in recognizing a corporation as a person – but only insofar as it acts as proxy for its office-bearers. The corporation, if guilty of crimes, should be tried and punished as would a person – and the punishment should be exacted upon the office bearers directing such behaviors.

    Unfortunately, we seem to have missed that part of 'personhood' in setting that recognition.

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