DOOM! PANIC! Corporate inversions! DO SOMETHING! This isn’t the first time politicians have gotten their dresses over their heads in a pseudo-patriotic panic over legal transactions, as Ajay Gupta explains for Tax Analysts ($link):
FIRPTA is a statute conceived in xenophobia and dedicated to the proposition that not all investors are created equal. It is nothing more or less than the embodiment of a congressional desire to limit the grasp of foreign investors on domestic real estate.
“FIRPTA” is the Foreign Investment in Real Property Tax Act, and it requires buyers of U.S. real estate to withhold 10% of the gross purchase price paid to non-U.S. sellers. In practice, it functions as a trap for unwary U.S. buyers who fail to withhold, leaving them liable for the withholding liability on top of their purchase price. It arose out of the panic over a wave of Japanese purchases of U.S. real estate — a panic that we can now see clearly as madness. Yet FIRPTA lives on, long after the Japanese moved on to other things.
Things like this tell us that the best way to deal with the current panics, like corporate inversions, is to not “do something” that will surely be half-baked and haunt the tax law forever.
Megan McArdle, Burger King and the Whopper About Taxes (my emphasis):
As my colleague Matt points out, most Americans — including a lot of journalists who write about this — seem to be under the misimpression that companies that invert, or people who renounce their citizenship, are doing so to get a lower tax rate on income they earn here. And in a few intellectual-property-based businesses, which can make aggressive use of transfer pricing strategies to declare most of their income in low- or no-tax countries, these complaints have some basis. In most cases, however, including Burger King, they’re doing it because the U.S. inexplicably insists on taking a big chunk off the top of all their foreign income, and making their lives miserable in the process.
But, but, deserters! Traitors!
If you are wondering why Burger King might be attracted to Canada, read How Much Lower are Canada’s Business Taxes? (William McBride, Tax Policy Blog):
First, Canada has a much lower corporate tax rate: 15 percent at the federal level plus another 11 percent on average from provincial corporate taxes. Compare that to the U.S. federal corporate tax rate of 35 percent plus an average state corporate tax rate of about 4 percent.
Second, Canada has a territorial tax system, meaning there is no additional repatriation tax on foreign profits. The U.S. has a worldwide tax system, which applies a repatriation tax to foreign profits when those profits are brought back to the U.S. The repatriation tax is basically the difference between the foreign corporate tax rate and the U.S. corporate tax rate, which is typically more than 10 percent. The average foreign corporate tax rate in the developed world is 25 percent.
Third, the U.S. is not particularly competitive in terms of taxing shareholders. Canada integrates its corporate tax with shareholder taxes to avoid double-taxation. In the U.S. it just piles up, so the integrated corporate tax rate on equity financed investment is over 50 percent.
A corporation pays 35% federal tax on its net income, leaving 65% for the shareholders. If it gets distributed to a top-bracket taxpayer, it gets hit at 20%, plus the 3.8% Obamacare surtax. That is a combined effective rate of 50.47% — and that’s low, as it doesn’t count phase-outs or state taxes. Yet congresscritters profess astonishment that anybody would find that a problem worth solving.
Howard Gleckman, Could The U.S. Fix Taxation of Multinational Corporations With A Sales-Based Formula? (TaxVox) “Instead of focusing on the real disease—an increasingly dysfunctional corporate income tax—we are obsessing over a symptom—firms such as Burger King engaging in self-help reform by relocating their legal residences overseas.”
Paul Neiffer, $563 Cost a Taxpayer $6,320:
If the taxpayers had simply paid the $563 of additional tax owed on the original assessment, that is all they would have been out-of-pocket. However, when they went to court, the IRS determined that they had made a math error in their original calculation of AMT and reassessed the tax owed from $563 to $6,883 or an increase of $6,320. Since this calculation was now correct, the Tax Court honored the IRS calculation and suddenly the taxpayers suddenly owed another $6,320 just for going to court.
TaxProf, The IRS Scandal, Day 475. It links to this from George Will: “The IRS is the most intrusive and potentially punitive institution of the federal government and it is a law enforcement institution and it is off the rails and it is now thoroughly corrupted.”
And the IRS Commissioner thinks all his agency needs is more money.
David Brunori, Repealing the Bad Franchise Tax is a Good Idea (Tax Analysts Blog). “Eighteen states still impose a franchise tax; they shouldn’t.”
By all means, lets make state tax credits an issue. The Branstad re-election campaign is making a big deal about how his campaign opponent, Jack Hatch, bottled up a GOP bill that would have reduced developer fees in tax credit deals — fees that Mr. Hatch makes a good living collecting.
Senator Hatch could truthfully explain that his committee snuffed every GOP tax bill last session, so that bill didn’t receive special treatment. Still, it doesn’t look good.
Yet this ignores the real scandal with state incentive credits: they are inherently corrupt.
For starters, the credits for low-income housing and historic rehabilitation go disproportionately to well-connected insiders who know people and know how to pull strings — at the expense of real estate owners without the connections — and arguably at the expense of renters who might benefit more from housing aid not run through developers.
But also that’s true of the other credits. Special deals go to Microsoft, Google and Facebook because they are big and they know how to play the system. Tax credits go to big fertilizer companies for doing what they would do anyway, while other poor schmucks without lobbyists and fixers pay full-freight on their income and property taxes. NASCAR and the Field of Dreams played on glamour and celebrities to keep sales taxes they collect, while other sellers of amusements have to collect the same sales taxes and turn them over to the state. And Governor Branstad has handed out these tax credits generously.
I’m fine with the Governor’s criticism of Senator Hatch for tax credit deals; I don’t care for them either. Still, the Governor should keep his old MP helmet handy, because he is calling down fire near his own position.
Claire Celsi, PR is like pork scraps and pickle juice (IowaBiz.com). Sounds yummy.