<p>I agree, it absolutely chooses winners and losers. Companies, individuals, interest groups. Which is why I’m completely for simplifying the tax code, taking out all the breaks…even if my family pays more. Alot of industries, actions and individuals shouldn’t be subsidized. Maybe nobody should be. It is such a complicated, ridiculous system we have.</p>
<p>Often listen to Amy Goodman on the drive back home, and while her views are clearly at one end of the spectrum, she had an interesting segment on keeping US taxes low by using off-shore subsidiaries for intellectual property. She seemed to indicate that it’s common practice in Silicon Valley (I believe ebay/apple were mentioned) where the royalties paid out for licensing patents made the bottom line of the US ops low, but the shell companies on the receiving side were in places like the Cayman Islands where the money accumulated sans current taxes. Then apparently the US companies lobby congress for “one-time” favorable rates to repatriate the profits back. I’m curious if this model is accurate and what the size of this “industry” is.</p>
<p>There are so many tax havens…I don’t know what to highlight.</p>
<p>[Corporate</a> Tax Evasion](<a href=“http://academic.udayton.edu/clarakim/inequality/articles/6-economic/corporate_tax_evasion.htm]Corporate”>http://academic.udayton.edu/clarakim/inequality/articles/6-economic/corporate_tax_evasion.htm)</p>
<p>"Corporate Tax Shelter in Cayman Island</p>
<p>The Senate report in July of 2008 found that as many as 9,000 U.S.-related entities are registered at a single Grand Cayman address, the five-story Ugland House. That is the number of entities that listed a U.S. billing address, although not all are U.S.-controlled. In some cases the address belongs to a U.S. bank or brokerage house that is acting on behalf of a foreign entity. As of March 2008, Ugland House was home to 18,857 business tenants. That was up from 12,748 reported tenants in August 2004. (“Senate probes increase in offshore accounts,” by Martin Vaughan, Wall Street Journal, July 24, 2008, A12).</p>
<p>Cayman Island Tax Shelters for Bailed-out Banks</p>
<p>In February of 2009, a whistle-blower reported to Congress about the corporate use of Cayman Island subsidiary companies to avoid/evade/dodge taxes. Cayman Island is used by companies, investment funds and wealthy individuals as offshore tax havens. The witness had to be under federal witness protection program because the stakes were so high.</p>
<p>Cayman Island has no income, capital gains or sales taxes, providing tax haven for many American companies, including the bailedout US banks. Goldman Sachs has 15 subsidiaries; Bank of America has 59; Citi Group has 90; and Merril Lynch has 158 subsidiaries just in Cayman Islands. Together these banks collected more than $227 Billion of taxpayers’ money, while trying to dodge taxes. US government loses about $100 billion/year of tax revenue from these companies evading taxes. The Caymans, a British territory with 47,000 residents, has two registered companies for every citizen, and a mutual fund or hedge fund for every five residents according to GAO (by Sheryl Adkins, CBS News, CBS Weekend, podcast, 2-27-2009).</p>
<p>Creating Shell Companies to Avoid Taxes</p>
<p>If Congress passes a law requiring foreign subsidiaries of U.S. government contractors to pay employment taxes, by 2018, about $846 million of taxes would be collected. When companies win a lucrative military contract of rebuilding Iraq, they quickly create shell companies in Caribbean outposts to duck millions in taxes and skirt U.S. lawsuits. It is legal, at least as of 2008.</p>
<p>For instance, after winning a deal worth $2 billion, Combat Support Associates established its subsidiary in the Cayman Island, a British territory and tax haven. The subsidiary, CSA Ltd., now employs 2,000 American citizens in Kuwait, where they support U.S. forces moving in and out of Iraq. Yet, as a foreign corporation, CSA Ltd. Does not pay Social Security and Medicare taxes for these workers. The company also says it is outside the jurisdiction of U.S. courts, so federal labor rules and anti-discrimination laws don’t apply either (“Islands are tax haven for contractor,” by Richard Lardner, Associated Press, Dayton Daily News, May 8, 2008, A15)."</p>
<p>[Microsoft</a> use of low-tax havens drives down tax bill | Reuters](<a href=“Reuters | Breaking International News & Views”>Reuters | Breaking International News & Views)</p>
<p>"hings were rosy in the giant software company’s just-ended fiscal fourth quarter, which produced record sales of nearly $17.4 billion, a 30 percent increase in after-tax profit, and a 35 percent gain in earnings per share.</p>
<p>But for the U.S. Internal Revenue Service and foreign tax authorities, things weren’t so rosy. Microsoft reported only $445 million in taxes in the U.S. and other foreign countries, just 7 percent of its $6.32 billion in pre-tax profit.</p>
<p>Given the rancor in Congress and in the country about how to tackle the nation’s budget deficit and debt, including how companies stash profits overseas and enjoy lucrative tax breaks, it is instructive to see how the top brass at Microsoft’s Redmond, Washington, headquarters achieved this eye-popping tax result.</p>
<p>Partly it was because the company had a one-time refund of $461 million from the IRS for previous overpayments and because of its over-estimation of tax rates in previous quarters. There may be increased sales of products to consumers overseas, though it is not clear from company disclosures how much of a factor this might be.</p>
<p>But Microsoft is straightforward about the core reason for its lower tax bill: It is increasingly channeling earnings from sales to customers throughout the world through the low-tax havens of Ireland, Puerto Rico and Singapore."</p>
<p>This is yet another area which would be handily resolved by Kluge’s All-Purpose Solution to (Practically) Everything.</p>
<p>Don’t tax corporations at all. After all, corporations don’t eat, they don’t date Paris Hilton, they don’t really (hush-this part is the real secret)* exist.* They’re fictitious entities - kind of like SpongeBob Squarepants, or the people who “really” caused 9/11.</p>
<p>Tax the real people who own them - you know, the shareholders, based on the profits of the corporation - wherever they are “earned.” It’s not that complicated - large businesses which are held in partnership form do it that way. (Bechtel used to be the example I used, but I don’t know if they’ve incorporated since then.) What does this solve? Well, to begin with, it doesn’t matter where they “park” their profits - the profits belong to the shareholders, who have to pay taxes on it if they live in the U.S. Also, corporations which accumulate large hordes of cash without distributing it to shareholders as dividends - hmmm, not such a good investment anymore. Might have to re-think that strategy. I’d toss in a limit on the amount of executive compensation which could be deducted from the gross to arrive at taxable income for the business, like what used to exist at the $1MM level - above that, the shareholders pay tax on the money the CEO gets. (If they want to pay him out of their profits, fine. Otherwise…) </p>
<p>A side benefit: getting rid of the “corporation as person” fiction might do a bit to repair the damage to the U.S. Supreme Court’s reputation after Citizens United. </p>
<p>In short, maybe treating things as they are, instead of kowtowing to a pointless fiction, is a good idea.</p>
<p>Your idea only works if the corporations distribute the profits. Corporations would not have to distribute all the profits, but enough for shareholders to pay the tax.</p>
<p>Otherwise, there are going to be huge cash flow problems for shareholders. You could get rid of the double taxation of dividends this way. So, there actually might be some support for this in the business community.</p>
<p>You have to get cooperation from other countries for this to work.</p>
<p>Of course dividends wouldn’t be taxed. Same for capital gains on shares of corporate stock purchased after the big changeover. The company’s annual profits (or losses) are divided amongst the shareholders, and taxed directly to each shareholder in proportion to their ownership interest. A company which pays out less in dividends than it earns in profits will expose its shareholders to taxation on the retained profits which is not offset by actual cash payouts, which will tend to discourage the accumulation of excess cash in corporations. Accordingly, if a corporation does that the shareholders would be consciously re-investing in their anticipation of the growth in value of the company each year.</p>
<p>Asset tax. Tax credit if you create jobs here. Works for me.</p>
<p>"Accordingly, if a corporation does that the shareholders would be consciously re-investing in their anticipation of the growth in value of the company each year. "</p>
<p>I, don’t know about that but corporations only have to spin off the amount that shareholders would pay in taxes. Of course, to be fair…and not to screw shareholders from high tax places…the payout would have to be large…maybe 50 to 60% of profits.</p>
<p>I don’t see why a payout of 50 to 60% of profits is “large” - those are “profits.” The corporation can pay out 100% of profits each year (aside from an adequate contingency fund) and issue new stock to raise additional cash if it is needed for expansion or whatever. Then the shareholders can buy additional stock in the resulting larger company, or not, as they see fit. </p>
<p>I know, it takes all the mystery and magic out of it. I guess that’s the downside.</p>
<p>I don’t quite see it that way.</p>
<p>Corporations do need retained earnings to grow…</p>
<p>Otherwise…the companies are just running in place.</p>
<p>Many major companies are not paying out 50-60% of earnings in taxes and to shareholders right now.</p>
<p>Of course, for whatever new system is implemented, they’ll all just hire a new team of tax attorneys and lobbyists to get around it.</p>
<p>Actually, corporations don’t need retained earnings to grow - they need need capital to grow. It doesn’t have to be retained earnings. That’s my point. Investing in a corporation which doesn’t pay all profits out as dividends is just a way to reinvest your (own) profits year after year. But under the “corporation is a separate person” tax system that reinvestment of the shareholder’s profits is done behind the scenes. That creates lot of opportunity for shenanigans - like parking profits overseas. And that’s why profitable corporations are not paying dividends, even while sitting on hordes of cash - far more than they need for operations or expansion.</p>
<p>I know corporations need capital to grow…and retained earnings is a cheap way to get the capital. Companies don’t have to go into the capital markets to raise capital…which can be expensive and at times hard to get. It’s hard to do long term projects if you have to worry about raising capital all the time.</p>
<p>The private company I do some work for does not pay out a large portion of earnings to shareholders, because it is difficult to raise capital at times. We do have to pay taxes on those earnings however. So we do pay out enough to cover the taxes.
It’s true…it will be harder to park profits overseas.</p>
<p>Details, details! You need to understand, dstark - I’m a Big Picture guy here. :D</p>
<p>(But, yeah - your company is an example of how most corporations would probably adapt to the new environment under the new Kluge corporate tax law.)</p>
<p>:)…</p>