Corporations

The Oppressive Logic of Obama's Plan to Chase Down Foreign Earnings

It won't bring back the money but will drive America down the road to serfdom

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ViaMoi / Foter / CC BY-NC-ND

F.A. Hayek, a Vienna-born economist who taught at the University of Chicago in the 1950s, won the 1974 Nobel Prize for explaining how monetary policy contributes to business cycle booms and busts. But his more penetrating insights were actually in a slim, populist 1944 pamphlet called The Road to Serfdom, in which he argued that government interference in the economy inevitably raises the specter of tyranny in our politics.

Hayek's thesis was that when the government tries to achieve broader collectivist-socialist goals by interfering with private economic transactions, it puts the country on a road to serfdom. Individuals naturally resent the intrusions, and look for way to circumvent them, subverting the government's grand plans. But the government doesn't accept failure and back off. It redoubles its efforts and cracks down in evermore draconian ways. Individuals try to circumvent those new government intrusions. And so on.

That's the logic playing out in the left's frenetic efforts to make American companies pay their "fair share" in taxes. Witness President Obama's latest budget plans to go after the foreign earnings of alleged corporate tax scofflaws. (These plans stand little chance in the GOP-controlled Congress.")

American corporations face a tax double whammy. They confront combined federal and local corporate tax rates of about 40 percent (68 percent if you include capital gains taxes), the highest in the free world, largely because OECD countries have been slashing their own rates for the last two decades while America twiddles its thumbs. And to add insult to injury, U.S. companies are taxed on their worldwide income, not just their domestic earnings, as is the case in 27 of the 34 OECD countries that have what's called a territorial tax system.

So, as per Hayek, human nature being what it is, American companies have responded by looking for ways to escape Uncle Sam's clutches. And because U.S. tax law doesn't require companies to pay taxes on their foreign earnings until they bring them home, these companies keep their money stashed abroad. This has locked about a trillion dollars of wealth in low-tax foreign jurisdictions, depriving the American economy of capital investments, jobs, and tax revenues.

The best way to encourage them to repatriate this money would be to simply slash America's corporate tax rates to globally competitive levels. What would those be? America offers advantages—a relatively union-free environment and a high return on investments—compared to other countries, so its tax rate doesn't have to be rock bottom. But somewhere close to Europe's 20 percent average corporate tax rate or Canada's 15 percent rate would be a good start.

That, of course, is not the approach the Obama budget is taking.

It proposes to cut corporate tax rates to a mere 28 percent (25 percent for manufacturing companies) while raising capital gains from 20 percent to a whopping 28.7 percent.

Obama surely knows that these rates aren't low enough to induce companies to bring back the moola, so his budget is tightening the noose on them in other ways.

He wants to eliminate the "deferral loophole" that allows companies to stash cash abroad, and impose a 14 percent surcharge on their existing foreign holdings to fund America's noble public works projects, a draconian form of retroactive taxation that is no doubt making Hayek flip in his grave. Obama is also proposing a 19 percent tax on future foreign holdings of these companies. These can be repatriated without any further taxes—except for one caveat. Currently, companies are allowed to credit taxes paid to foreign governments against what they owe Uncle Sam. Under the Obama plan, as best as one can tell, the 19 percent tax would be calculated on their total foreign income without the benefit of any credits. The administration hopes that if companies have to pay a tax on foreign income regardless of where they park it, they will bring it back home.

That wishful thinking will backfire. The 19 percent mandatory tax will discourage companies from headquartering in America in the first place, producing more loss of revenue in the long run. And among existing companies, it will accelerate the trend of inversion that produced so much bellyaching among Democrats last year. That involves American companies merging with companies in lower-tax countries to get domiciled there.

The Obama administration won't take this lying down, of course. No doubt the president would redouble efforts to make it even more difficult for U.S. companies to shed their tax liability by inverting, something the administration already started doing last year. For example, it limited tax breaks only to American companies that merge with foreign companies larger than themselves, a much more difficult proposition than buying smaller ones.

But to really see how far the administration could go to bring recalcitrant companies to heel, consider how it has treated American expatriates settled abroad. In order to snag a handful of mega-millionaires with unreported income stashed abroad, it passed something called FATCA (the Foreign Account Tax Compliance Act) four years ago. This act requires Americans with more than $10,000 in foreign accounts to file disclosure forms or risk $100,000 in fines and jail time. Worse, it demands that foreign financial institutions report the accounts of their American customers, much as domestic banks are required to do.

Rather than face the red tape, many foreign banks have simply shut their doors to American customers, leaving about 8 million expats living abroad few options besides their mattresses to store their cash.

Predictably, expats scrambled to renounce their U.S. citizenship after this rule went into effect, offending the administration further. It hiked the citizenship renunciation fee on these deserters by 422 percent. And it tried to pass the ExPatriot Act to impose additional exit taxes, but failed.

Mercifully, in America's system of checks and balances, a functional opposition can halt some of the worst tendencies of the redistributionist left (and vice versa). But left to its own devices, it would fulfill Hayek's prophecy.

This column originally appeared in The Week

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  1. (These plans stand little chance in the GOP-controlled Congress.”)

    Staunch defiance followed by whimpering acquiescence.

  2. The Obama administration won’t take this lying down, of course.

    Isn’t there an extra dollar or two we can squeeze out of smokers? They’re low-class and stupid anyway, they probably won’t even notice.

    /His Nibs

  3. It won’t bring back the money but will drive America down the road to serfdom

    things like this are said and written as though gold has been discovered. No shit that something Obama wants to do would be seen as negative by sane people. This is not new. Obama is who he always has been, no matter how much the cosmotarians wanted to believe otherwise. Again, things like this are not incompetence, they are malevolence.

    1. Obama, Schumer, and friends are taking it to new lows, though. I haven’t seen their level of hatred for, you know, being productive and making money, in my lifetime.

      1. I know. It’s like the economic miracle that is the U.S. is something they heard about on a cartoon once.

  4. Capital controls. That’s what this is, and the first of many.

    Capital controls are a feature of banana republics. And are universally associated with accelerating economic decline.

    1. Exactly right, RC.

    2. When people in power don’t understand the difference between money and wealth, they destroy wealth in their search for money to steal. That makes everyone poorer.

    3. Ding! Ding!

      We have a winner!

  5. What American companies with foreign earnings?

    1. We….might deal with some of them….

      Who is asking?

      *looks nervously left and right*

  6. So the article on that NPR ombudsman who wants to outlaw ‘hate speech’ has gotten kind of buried.

    However, I needed to share his opinions on insulting the pope.

    “If we keep jokes about the pope off-limits, we create a silencing effect that is far more damaging than the jokes themselves. We threaten to become like the intolerant extremists now most notoriously bedeviling the Muslim world, though other religions suffer from strains of fanaticism as well.”

    ^^ Huh. I feel like this could equally apply to pictures of Mohammad. Weird that Schumacher-Matos’ opinions on sacrilege seem to vary based on which religion is getting insulted.

    1. I find it funny that Graham is bitching because he’s not nice to the Pope while Matos is a hypocrite. Shitheads all the way down.

  7. OT: I’m trying to make a point of not posting ThinkProgress articles here (may as well just link Socialist Worker, amirite?) but this piece about the Daily Show and the comments may amuse

    http://thinkprogress.org/cultu…..aily-show/

    Like his rival in launching careers, Lorne Michaels, he suffered from many of the same comedic biases early on. For a long time, many of the careers he launched were of white men. In 2010, Irin Carmon wrote for Jezebel that the Daily Show had a “woman problem” ? Olivia Munn was, at the time, the first new female correspondent on the show in seven years. (Samantha Bee, who has been a Daily Show staple on the show since 2003, is married to another correspondent on the show, Jason Jones.)

    And a well liked comment:

    Pretty disappointed in this article for all the reasons people have commented. Stewart is one of the few “entertainment” hosts to promote careers, address political and racist issues important to everyone, and to do it all with consistent class and humor. Attacking the fact that he didn’t have a prescribed ratio of diversity on his show is petty and attempts to undermine all the good the show did while under his direction. Minorities and women want to THANK people like John Stewart. Not attack them. We’ve got plenty of opponents to diversity and equality that deserve our scrutiny more than him.

    1. So essentially, its okay if someone on our team does the thing we don’t like. Standards are only for people that disagree with the poster.

      1. Principals trump principles.

    2. Standards. Who needs them?

    3. Funny thing about that is they ignore all the production crew who outnumber the few on-screen talent they have. Didn’t they point out in the Olivia Munn-Jezebel incident that they have a lot of female crew?

  8. There’s already been, In 2014, a record number of citizens who have renounced citizenship because of FATCA, more than double renounced than in any other year on record.

    They may as well just get it the hell over with and build a wall. It will get support from both the Dems and GOP. GOP will say it’s to keep the illegals out, Dems will say it’s to keep fat cat one percenters who don’t want to pay their fair share, in. The sheeple voters on both teams will support it overwhelmingly and we will officially be the USSA, complete with our own version of the Berlin Wall.

    The only question is, what do we name the wall?

    1. The Freedom Wall, of course. After all, freedom means asking permission and obeying orders.

      1. But you must construct the appropriate backronym:

        FREEDOM Wall

        Folks’ Right to Entry and Exit Democratically Ordered by Mandate

      2. Great. I really can envision the lowlifes in congress actually voting to name it that.

  9. Shouldn’t that be “Foreign-Earnings”?

  10. “FATCA”. Shit. No doubt the sorry-ass progs think that’s really, really clever.

  11. Individuals naturally resent the intrusions, and look for way to circumvent them, subverting the government’s grand plans.

    But that will end once we create The New Soviet Man, comrades!

  12. This desire to capture un-repatriated funds will cause the same situation as did FDR’s quest to tax un-distributed profits:
    A Capital Strike – which benefits no one, and hurts all.
    In the 30’s, it was the cause of the Depression-within-the-Depression, prolonging the Great Depression 2 painful years or more.

  13. My wife’s parents, both Canadian citizens were living in LA when my wife was born. Her Dad was getting his PhD. They moved back to Canada shortly after. My wife was registered as a Canadian born abroad. When she was 21 she was supposed to choose whether she wanted Canadian or US citizenship, which she had because of her birthright. There was no formal way of choosing but she was told by the US consulate that taking out a Canadian passport, or voting in Canada indicated her choice. She never thought about it much after that. She is Canadian.

    However, a few years back they changed the rules and she became a US citizen. She was informed when crossing the border she was a citizen and they don’t consider her a Canadian. Well…guess what? Because of FATCA she has to produce five years of bank records, if we sell our house up here she has to pay taxes on it in the US and she is liable to estate taxes in California when she dies. It is a mess. Surprisingly, there are a number of people in her situation. There used to be a lot more cross border moving around, back in the fifties. I’m a Canadian and I lived in the US for 6 years as a kid. FATCA is a typical giant net that scoops up all sorts that were never on the radar before that.

    1. Very few Americans know about FATCA and when I tell them about it, they can’t believe that their govt would treat citizens like this. Chuck Schumer and Carl Levin literally believe that any US citizen living abroad must be trying to dodge US taxes, even though US personal taxes are often lower than in other countries. The rules for reporting foreign income are horrendously complex, and the fines for failure to comply are bankrupting. NO other country (except Eritrea and N Korea) has citizenship-based taxation as opposed to residency based. US citizens abroad have no representation in congress to complain to either. Often there is no choice but to renounce citizenship, and it creates millions of former US citizens who harbor profound ill will to their home country instead of being ambassadors for the benefits of US citizenship.Totally unnecessary and unbelievably cruel.

  14. Obammor doesn’t know or care that he’s taking us down that Road to Serfdom, as Socialism is great with him.

  15. my best friend’s ex-wife makes $65 an hour on the computer . She has been without a job for seven months but last month her check was $13740 just working on the computer for a few hours. try this…………..

    ????? http://www.netpay20.com

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