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Posts Tagged ‘taxes’

The U.S. Corporate Tax Code is Bananas

May 22nd, 2014

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A much-too-high corporate tax is causing companies to flee for Europe.

If any U.S. company seems ripe for moving to an island tax haven, it’s Chiquita. Based in Charlotte, the company’s sale of bananas, grown largely in Central America, accounts for two-thirds of its profits. But Chiquita isn’t bound for the tropics. It’s headed to Ireland, where the climate may be hostile to banana trees, but the cool 12.5 percent corporate tax rate feels just right.

Later this year, Chiquita will merge with Fyffes, an Irish fruit distributor half its size. Usually the larger company buys the smaller one, but not anymore. Entirely because of taxes, a newly formed Irish company will control the merged companies. Chiquita will remain listed in the U.S., but its headquarters will move to Dublin, unlocking access to the favorable Irish tax code.

Chiquita’s move, called corporate “inversion,” isn’t new. It’s an old strategy that U.S. companies have rediscovered. Everyone in Washington — Democrats and Republicans — should be concerned. Though completely legal, new inversions this decade will costs the Treasury nearly $2 billion a year, and they move high-paying corporate jobs overseas, albeit in limited numbers. Inversion happens because our bloated corporate tax code is bad public policy, severely handicapping U.S. businesses relative to their foreign competitors.

Inversion first became popular in the late 1990s when companies like Ingersoll-Rand and Fruit of the Loom reincorporated in Bermuda and the Cayman Islands. Then Washington started playing whack-a-mole, but not doing it very well. IRS rules targeting inversion didn’t work, so in 2004 Congress passed a law making moves to offshore havens more difficult.

The law now requires an American company looking to move its headquarters overseas to use a merger or acquisition with a foreign company at least one-fifth its size. This mostly took the Caymans out of the picture, because only shell companies locate there. But Europe is a more attractive corporate destination than it was 15 years ago. Countries like Ireland, the Netherlands and the UK noticed that in today’s globalized world, a competitive corporate tax code matters more than ever. So they lowered their corporate tax rates and eased taxation of foreign-earned income.

Meanwhile, the U.S. tax code sat rotting on the shelf. Our 35 percent statutory rate is highest among the world’s developed economies. While few companies pay an average rate that high, numerous tax preferences raise compliance costs and skew incentives.

One example is the “lockout effect.” Because some corporate profits are taxed only when returned to the U.S., many U.S.-based multinationals keep piles of cash on the books of their overseas subsidiaries. If it’s not coming home, that cash may be deployed to purchase a foreign company. When the selling company is big enough, the U.S. buyer can invert and avoid even more taxes.

If inversion were limited to bananas, maybe we wouldn’t care. But oil and gas companies, drug companies and others have exported their U.S. headquarters in recent years. Altogether, since 2012, at least 14 U.S. companies have completed or considered inversion deals. This month’s on-again, off-again takeover talk between Pfizer and AstraZeneca is one example. U.S. companies look to inversion not because CEOs wake up one day and feel the pull of the old country, but because they are seeking to maximize profit in the face of foreign competition. The pace is likely to accelerate, because as much as we may decry it, inversion currently makes financial sense.

In response, President Obama proposed in his 2015 budget that Congress raise the inversion foreign ownership threshold to 50 percent. This month, Senator Ron Wyden, D-Ore., and Sen. Carl Levin, D-Mich., are crafting legislation modeled after Obama’s proposal.

These efforts show Congress is taking inversion seriously. But let’s also realize that our uncompetitive code is the root of the problem. Only when Washington fully reforms the corporate tax code will the pressure for companies to leave the U.S. tax system subside.

First, the 35 percent corporate tax rate must come down, at least to President Obama’s proposal of 28 percent and preferably further. The cut can be financed in part by eliminating some outdated tax breaks, but savings elsewhere may also be necessary. Second, the lockout effect has to end. Some foreign-earned income, particularly passive income, should be taxed currently no matter where it’s earned. And income from real business activity abroad should be lured home with a tax rate competitive with those of other developed countries. Third, the tax code needs to be simplified.

A simpler, more competitive corporate code shouldn’t be confused for a giveaway to corporations or the wealthy. Research suggests that if Chiquita were to spend less preparing and paying corporate taxes, its shareholders and its workers share the benefit. Most importantly, so would the broader U.S. economy, which would attract and retain more business and more jobs. It’s bananas for the U.S. to sit back and do nothing as good American companies decamp for Europe

This piece was originally published in U.S. News & World Report

Economic Populism Is a Dead End for Democrats

December 3rd, 2013

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If you talk to leading progressives these days, you’ll be sure to hear this message: The Democratic Party should embrace the economic populism of New York Mayor-elect Bill de Blasio and Massachusetts Sen. Elizabeth Warren. Such economic populism, they argue, should be the guiding star for Democrats heading into 2016. Nothing would be more disastrous for Democrats.

While New Yorkers think of their city as the center of the universe, the last time its mayor won a race for governor or senator—let alone president—was 1869. For the past 144 years, what has happened in the Big Apple stayed in the Big Apple. Some liberals believe Sen. Warren would be the Democratic Party’s strongest presidential candidate in 2016. But what works in midnight-blue Massachusetts—a state that has had a Republican senator for a total of 152 weeks since 1979—hasn’t sold on a national level since 1960.

The political problems of liberal populism are bad enough. Worse are the actual policies proposed by left-wing populists. The movement relies on a potent “we can have it all” fantasy that goes something like this: If we force the wealthy to pay higher taxes (there are 300,000 tax filers who earn more than $1 million), close a few corporate tax loopholes, and break up some big banks then—presto!—we can pay for, and even expand, existing entitlements. Meanwhile, we can invest more deeply in K-12 education, infrastructure, health research, clean energy and more.

Social Security is exhibit A of this populist political and economic fantasy. A growing cascade of baby boomers will be retiring in the coming years, and the Social Security formula increases their initial benefits faster than inflation. The problem is that since 2010 Social Security payouts to seniors have exceeded payroll taxes collected from workers. This imbalance widens inexorably until it devours the entire Social Security Trust Fund in 2031, according to the Congressional Budget Office. At that point, benefits would have to be slashed by about 23%.

Undeterred by this undebatable solvency crisis, Sen. Warren wants to increase benefits to all seniors, including billionaires, and to pay for them by increasing taxes on working people and their employers. Her approach requires a $750 billion tax hike over the next 10 years that hits mostly Millennials and Gen Xers, plus another $750 billion tax on the businesses that employ them.

Even more reckless is the populists’ staunch refusal to address the coming Medicare crisis. In 2030, a typical couple reaching the eligibility age of 65 will have paid $180,000 in lifetime Medicare taxes but will get back $664,000 in benefits. Given that this disparity will be completely unaffordable, Sen. Warren and her acolytes are irresponsibly pushing off budget decisions that will guarantee huge benefit cuts and further tax hikes for Gen Xers and Millennials in a few decades.

As for the promise that unrestrained entitlements won’t harm kids and public investments like infrastructure, public schools and college financial aid, haven’t we seen this movie before? In the 1960s, the federal government spent $3 on such investments for every $1 on entitlements.

Today, the ratio is flipped. In 10 years, we will spend $5 on the three major entitlement programs (Social Security, Medicare and Medicaid) for every $1 on public investments. And that is without the new expansion of entitlement benefits that the Warren wing of the Democratic Party is proposing. Liberal populists do not even attempt to address this collision course between the Great Society safety net and the New Frontier investments.

On the same day that Bill de Blasio won in New York City, a referendum to raise taxes on high-income Coloradans to fund public education and universal pre-K failed in a landslide. This is the type of state that Democrats captured in 2008 to realign the national electoral map, and they did so through offering a vision of pragmatic progressive government, not fantasy-based blue-state populism. Before Democrats follow Sen. Warren and Mayor-elect de Blasio over the populist cliff, they should consider Colorado as the true 2013 Election Day harbinger of American liberalism.

This piece was originally published via The Wall Street Journal. 

Tax reform progressing in spite of fiscal gridlock

March 11th, 2013

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President Obama and his Republican dining companions showed last week that bipartisan schmoozing is back. Whether bipartisan deal-making will follow is anyone’s guess. But if it does, there are reasons to believe tax reform will be on the menu.

The most visible movement on tax reform is in the House of Representatives. Speaker John Boehner (R-OH) last week announced that the bill name “H.R. 1” would be reserved for tax reform. Traditionally, House speakers have given that title to bills that are among their top priorities. Consider some of the recent bills with that name: the stimulus package of 2009 and the Medicare prescription drug law of 2003.

The H.R. 1 designation signals the end of an internal Republican dispute over whether to proceed with tax reform. Majority Leader Eric Cantor (R-OH) previously advised the party to avoid the issue, because its progress could require votes on controversial topics like the mortgage and charitable deductions. But now, with Boehner’s blessing, House Ways and Means Committee Chairman Dave Camp (R-MI) has a green light to pursue his priority issue.

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Entitlement reform key to U.S. future

February 27th, 2013

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This piece was originally published in Politico.

As the sequester blame game hits fever pitch this week, Republicans’ stance on taxes is simply indefensible, falling hundreds of billions short of even their own prior positions. But as Democrats, we also share a large portion of responsibility for the coming cuts to domestic discretionary spending, as the party has decided in both action and rhetoric that meaningful fixes to the major entitlement programs of Medicare, Medicaid and Social Security are off-limits.

Think about it. Over the past three years, from debt ceiling deals to the supercommittee and the fiscal cliff, social insurance programs have escaped virtually unscathed while every other category of spending took some hit and revenue grew. And because of the sheer enormousness of the Big 3 entitlements, Democrats face a serious new crisis that is closer to home and will linger long past the sequester: There is now barely a farthing left in the budget for any new investments.

Over the past century, Democrats can boast two major economic legacies. The first is the safety net programs of the New Deal and the Great Society — successful programs that lifted the elderly and vulnerable out of poverty. The second is the New Frontier investment programs defined and expanded under President John F. Kennedy. These investments in science, space, defense, education, as well as highways, rails, ports and medical breakthroughs helped power the U.S. economy during the latter half of the 20th century.

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On gun control, taxes and other issues, Democrats must seize this moment

January 4th, 2013

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This piece was originally published in The Washington Post.

The collapse of John Boehner’s effort to get his party to rally behind a plan to raise taxes reveals the disarray and disagreement among Republicans. Democrats are urging them to forget about the hard-liners and go back to the negotiating table.

That’s good advice for Democrats as well.

If Democrats play their cards right, a combination of political and demographic forces, and dangerous precipitating events, could create a tipping-point moment, when they can advance their priorities not just on taxes, but also on guns, marriage for gays and lesbians, immigration, and even climate change.

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Post fiscal cliff: The fix is in

January 2nd, 2013

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We’ve been trying to deal with the national debt in this country for 30 years now. The fiscal cliff is just the latest failed gimmick. We’ve had more failed gimmicks than professional wrestling.

Failed? Yes, because the whole idea of the fiscal cliff was to force the federal government to put in place a long-term reduction of the national debt. And look what happened. Instead of reducing the national debt, the deal passed by Congress late Tuesday night will add $4 trillion to the deficit over the next 10 years, according to the nonpartisan Congressional Budget Office.

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