Tue Jan 8, 2013, 02:41 AM
HiPointDem (20,729 posts)
Deferred profits: how tax law subsidizes non-payment of taxes & offshoring
(FYI: The writer is approaching this from the POV of reducing overall tax rates & paying for it by closing loopholes.)
I recently stumbled upon a position paper from Citizens for Tax Justice which identifies numerous tax expenditures that could be tapped to pay for a rate reduction. The big-ticket item on their list is something that nobody is talking about: the deferral of foreign corporate income. The CTJ scores the elimination of deferral at $583 billion over 10 years....If lawmakers are serious about taking an axe to tax expenditures, one wonders how long deferral can escape their attention.
Viewed most plainly, deferral is the ability to earn income in the current year but not pay the related tax until a subsequent year... Corporations can often delay the U.S. tax hit on foreign profits until those earnings are repatriated from overseas affiliates. This benefit is not available for domestic earnings which are taxed currently — that is, on an accrual basis. Earn a profit in Detroit and it's taxable now. Earn a profit in Dubai and it's taxable when (or if) the firm brings the money back into the country. Keep those profits offshore indefinitely and you may never pay U.S. tax on them. Thus the stories one hears about vast corporate treasuries being parked offshore in places like the Cayman Islands. That's deferral at work.
Deferral is perfectly legal, and has been for a long time. Back in 1962 Congress saw fit to enact a set of anti-deferral rules. The idea was to permit deferral for active income while restricting deferral for passive income. Fifty years on, those rules don't have much teeth. Multinational firms can side-step our anti-deferral laws with relative ease. Tax attorneys joke that "a tax deferred is a tax avoided."
And no discussion of deferral is complete without mentioning the economic incentives it creates. Deferral results in capital invested abroad enjoying higher after-tax returns than capital deployed domestically, other things being equal. In effect, deferral subsidizes foreign investment relative to domestic investment. (Opinions differ on whether deferral also subsidizes foreign employment relative to domestic employment.)
Eliminating deferral gets Congress well over half a trillion dollars. That's real money. Second, I suspect the general public doesn't really care about deferral — certainly not to the same extent they care about the deduction for mortgage interest or the exclusion for health insurance. Most Americans are unaware that deferral even exists, which by implication means they wouldn't be dismayed by its repeal. Third, the business sector will cling to deferral like a mama grizzly bear clings to her cubs. And with good reason. Eliminating deferral would effectively kill transfer pricing as we know it today. That would translate to a major increase in effective tax rates for businesses with foreign operations, although the statutory tax rate (35%) would never change. There's no chance Corporate America allows that to happen without one heck of a fight.
The challenge ahead for the business lobby in 2013 is to keep deferral off the negotiating table when a wide range of political voices are telling us that everything must be on the table for the sake of keeping down rates. Nobody in Congress is mentioning deferral just yet, but you can be darn sure they're thinking about it.
Didn't come up in the recent negotiations, apparently. But a back-door way to repatriate some of those profits at low rates stayed operative, rather than disappearing, as it would have if the Bush tax cuts had just sunsetted as a whole.
Trillions are parked overseas in tax havens.
4 replies, 415 views
Deferred profits: how tax law subsidizes non-payment of taxes & offshoring (Original post)
Response to HiPointDem (Original post)
Tue Jan 8, 2013, 10:14 AM
ProgressiveProfessor (22,144 posts)
1. I don't blame the players, I blame the game
Publicly traded corporations have a fiduciary duty to make as much as they can for the shareholders. They should be taking advantage of legal tax avoidance.
The solution is not whine about them behaving legally as many media writers have done, its to change the laws.
Currently the US tax code is a farking mess. Every loophole was someones pet rock, and the dabbling in social engineering via the tax code has made worse. There is a lot of money spent in the private sector just to avoid taxes. They actually know the tax code better than the government and certainly better than Congress. A clean streamlined code would address all of this.
I am not advocating for the stupid Forbes plan or any kind of flat tax, but a streamlined progressive one. It can be done if the pols get serious.
Response to HiPointDem (Reply #2)
Tue Jan 8, 2013, 10:36 AM
ProgressiveProfessor (22,144 posts)
3. They have been in the past and can be again
I don't think Obama has the political will to force a change, but it would be the best thing he could do for the country