Friday, August 1, 2014

The growing trend of inversions – American corporations acquiring smaller overseas corporations to legally avoid paying corporate income tax in the United States – has sparked editorials, blog posts, and letters to the editor. Nearly all of them are clamoring for “closing loopholes” and discouraging inversions.


You really can't blame the companies. The board of directors of these companies defecting overseas have a duty to act in the best interest of the shareholders, not Uncle Sam. That included deciding which country to headquarter in.


If Congress passes bills that closes loopholes and discourages inversions, companies will still find new ways around it. It's just like keeping a dog inside the fence. It will find a hole and go free. The owner will fix the hole, and the dog will find another hole. Eventually, all the holes will be fixed. Then, the dog will dig its own hole (I had a dog that did that).


How about encouraging American companies to stay? Out of all the editorials, blog posts, and letters to the editor that I found were in response to the inversion trend, I found one that suggested do that – making the U.S. a tax haven. In Could the U.S. Become a Tax Haven?, Jordan Weissman wrote that the corporate income tax originated in the early 20th century, an era before American. companies went global. As American companies did expand globally, they discovered tax haven countries such as Ireland and the Cayman Islands. Since then, the U.S. has been battling to tax overseas profits. “Instead of fighting tax havens, America could consider joining them,” Weissman wrote in the last sentence of his commentary.


If the United States becomes a tax haven, not only will American companies find it advantageous to stay, they'll find it advantageous to expand in the U.S. instead of elsewhere, and bring overseas operations to the U.S., creating jobs in the U.S. along the way.


A bill has been introduced in both the house and senate that can transform the United States into a tax haven. The FairTax bill (H.R. 25 and S.B.122) proposes a national sales tax on new goods and services to replace the current personal and corporate income tax. As part of the FairTax, all households would get a prebate (a rebate paid in advance) every month for sales tax paid for purchases up to the poverty level for that size of household. The FairTax bill also calls for the repeal of the16th Amendment, the constitutional amendment that authorized the federal income tax.



The FairTax compels everyone (citizens, tourists, undocumented persons, and even criminals) in the United States to pay taxes without requiring them to fill out forms. The businesses would collect the tax and submit it to the government. 

Saturday, July 26, 2014

President Obama Addresses Corporate Tax Inversion in Weekly Address


In President Obama's Weekly Address for July 26, 2014, President Obama addressed the trend of corporate tax inversion. Describing it as corporations renouncing their U.S. citizenship, countries are incorporating in other countries even though most of their operations are still in the United States to avoid paying corporate income taxes in the United States. The problem this presents to the U.S. economy is that profits will be stashed overseas and not in the United States. Profits will remain there to avoid paying taxes, resulting in the U.S. to miss out on economic development and job creation.

Obama said that the way to “level the playing field” is to lower the corporate tax rate, close “wasteful” loopholes, and simplify the tax code. Lowering the corporate tax rate is a step in the right direction. The problem with closing the “loophole” is companies that are willing to relocate overseas will find ways around the loophole including moving more of their operations and jobs overseas if that is what it takes. It'll just chase more companies and jobs overseas. Simplifying the tax code requires a lot of untangling.

What we need to do is create a tax environment that encourages potential defecting corporations to stay.  The most effective way to do that is to pass the FairTax proposal.  The FairTax proposal (H.R. 25) repeals income taxes not only for corporations but also individuals and replace the revenue with a consumption tax. With corporate income taxes no more, global companies would be able to freely move their overseas profits to the U.S. tax free, thus injecting money into the U.S. economy without borrowing from China. The more money borrowed in the U.S., the more money spent in the U.S., the more jobs created in the U.S.

For more information about the FairTax, visit the official FairTax website at http://www.fairtax.org.

Foreign Law Firms Touting Tax Inversion Services to American Companies


Two blog posts ago, I reported that corporations are defecting to countries with lower corporate tax rates than the U.S. and hoarding assets overseas to avoid paying taxes to Uncle Sam through acquisitions of companies in those countries. Among those tax haven countries are Ireland, Great Britain, and the Netherlands. The trend has risen so much that that law firms in those countries are now promoting their services to American corporations to perform the legal work to make the inversions happen.

When these inversions happen, profits are hoarded in these tax haven countries. These profits are then reinvested in these countries and not in the United States. Should these companies divert any profits to the U.S., the companies face corporate income tax consequences. Therefore, these companies are keeping the profits out of the U.S. As a result, jobs are being created elsewhere and not in the U.S.

The FairTax does not tax income, which means no tax on repatriated profits. If we have the FairTax, U.S. companies wouldn't have to look overseas for tax havens. In fact, the U.S. would become a tax haven for foreign companies. As a tax haven, foreign companies would find it advantageous to move investments and operations to the U.S., thus creating jobs. Since that's not happening, the U.S. is losing out on potential economic expansion.

Thursday, June 19, 2014

The Latest Trend - U.S. Companies Acquiring Overseas Companies and Relocating Overseas


The latest trend in Corporate America to avoid paying taxes to Uncle Sam is to acquire or merge with a company headquartered in corporate-tax friendly countries, allowing them to and relocate the U.S. headquarters overseas to that country. In a sense, U.S. corporations are acquiring tax havens.

The latest to do this is Medtronic, a medical device maker currently headquartered in Minneapolis, Minnesota, USA. The tax haven they are acquiring is Covidien, also a medical device maker but headquartered in Dublin, Ireland. Ireland's top income tax rate for corporations is 12%, significantly less than the United States' 35% top income tax rate for corporations.

Guess where the headquarters of Medtronic will be after the acquisition? It's already decided. No surprise, it will be in Dublin, according to Medtronic's press release. That means the new Medronic will likely funnel all profits into Dublin and keep it out of the U.S.

Now, Medtronic did say in its press release that they will commit an additional $10 billion in technology investments over the next 10 years. Nevertheless, billions of dollars in overseas profits will not be introduced to the U.S. economy.

In fact, Medtronic is already withholding overseas profits from the U.S. economy. On page 12 of its 2013 annual report, they disclosed that "repatriation of certain earnings of subsidiaries outside the U.S. may result in substantial U.S. tax cost."  The way I translate that is they have no plans to repatriate overseas profits under penalty of the Internal Revenue Code.

This acquisition is just the latest example. The trend has already started. The Internal Revenue Code is essentially causing the job creators to leave the U.S.  The best way to stop that is to repeal the Internal Revenue Code.

The FairTax proposal (H.R. 25) will do just that – repeal income taxes not only for corporations but also individuals and replace the revenue with a consumption tax. With corporate income taxes no more, global companies would be able to freely move their overseas profits to the U.S. tax free. With more money in U.S. banks, there would be more money to loan. The more money borrowed in the U.S., the more money spent in the U.S., the more jobs created in the U.S. 

For more information about the FairTax, visit the official FairTax website at http://www.fairtax.org

Sunday, April 24, 2011

Dennis Calabrese and Mike Papantonio debate the FairTax



In this video aired on Fox Business, Dennis Calabrese and Mike Papantonio debate the FairTax bills that have been introduced in Congress. The FairTax bills (H.R. 25 and S.B. 13) propose a national sales tax on new goods and services to replace the current personal and corporate income tax. Businesses large and small would be exempt from paying the FairTax if the purchase is for business purposes. As part of the FairTax, all households would get a prebate (a rebate paid in advance) every month for sales tax paid for purchases up to the poverty level for that size of household. The FairTax bill also calls for the repeal of the16th Amendment, the constitutional amendment that authorized the federal income tax.

Dennis argued for the FairTax and Mike argued against it. Mike used an example of a person making $15,000 per year who wants to buy a car and that the tax on the car purchase would eat up that person’s buying power. Dennis counterargued that the FairTax eliminates the corporate income tax that gets passed on to its customers. As a result, car manufacturers and dealers would be able to pass that savings on to their customers in the form of lower sticker prices.

I agree with Dennis’s counter argument and have an additional counter argument of my own that I would like to share. In reality, most people who make that small amount of income buy used vehicles for transportation, because that is all they could afford. Since purchases of used goods are exempt from the FairTax, that person would not have to pay any FairTax if the car purchased was a used car.

I believe that the current personal income tax and corporate income tax systems has hurt and continues to hurt the economy in the United States. It discourages productivity by taxing the income progressively. It encourages borrowing and spending and by granting deductions for purchases, contributing to the current credit crisis. It encourages corporations to keep their profits on overseas operations out of the United States to avoid taxation on those profits instead of bringing profits back to the United States where it could be used to create jobs in the United States. Finally, it requires a lot of resources to administer and enforce.

I favor the FairTax because it encourages productivity and discourages spending, allowing more Americans to save money. The FairTax eliminates the corporate income tax, encouraging corporations to locate their operations into the United States and create jobs. The FairTax also requires a lot less resources to administer and enforce since only businesses would be required to file tax returns.

Please let your Representative and Senator know that you support the FairTax bills.

Friday, April 15, 2011

CNBC Documentary Shows Problems with Income Tax Compliance and Enforcement

Last night, CNBC aired The American Tax Cheat, a program produced by CNBC and hosted by Becky Quick. The documentary showed how huge of a problem tax evasion is and how easy the tax code can turn otherwise law abiding citizens into criminals by evading taxes. According to the documentary, as much as $300 billion dollars goes uncollected every year due to tax evasion.

The documentary mostly showed the IRS going after individual citizens. Some of those citizens flat out refused to pay income taxes while others relied on tax professionals that used illegal methods. Either way, the citizens that were caught were penalized severely.

The documentary also mentioned how complex the tax code is, that many taxpayers do not understand the tax code, and that the tax preparation industry rely on the complexity of the tax code. The cost of a professionally prepared return averaged $245, according to the documentary.

The documentary clearly shows the need for the FairTax. The FairTax bill (H.R. 25 and S.B. 13) proposes a national sales tax on new goods and services to replace the current personal and corporate income tax. As part of the FairTax, all households would get a prebate (a rebate paid in advance) every month for sales tax paid for purchases up to the poverty level for that size of household. The FairTax bill also calls for the repeal of the16th Amendment, the constitutional amendment that authorized the federal income tax.

The FairTax compels everyone (citizens, tourists, undocumented persons, and even criminals) in the United States to pay taxes without requiring them to fill out forms. The businesses would collect the tax and submit it to the government. If businesses don’t, the business would be held responsible, not their law abiding customers.

Because individuals won’t have to fill out forms, they won’t have to pay professionals to pay taxes. That money would be better spent taking the family to a ball game, amusement park, or pay other bills.