I remember sitting on my father’s couch watching the 1992 vice-presidential debate between Dan Quayle, Al Gore, and the little known military hero James Stockdale (who was on the ticket
with Ross Perot). Part of the reason I remember this debate so vividly is that this was one of the first political debates I watched when I really understood the issues. As I watched intently, trying to contemplate the debate intellectually, I was taken aback when Stockdale stepped up to the podium and began, “Who I am I? Why am I here?” Today, I felt exactly like Vice Admiral Stockdale.
Earlier this week I was invited to attend a seminar series on current issues in international taxation. Given that the topic sounded interested, I decided to attend (oh, they offer free catered lunch at each session—that helped my decision). This afternoon, I sat at the large conference table and the seminar began with the speaker turning to each of us at the table and asked us to introduce ourselves. There were thirty-four of us in attendance, representing thirty-one different countries.* As we made our way around the table, I realized that sitting around this table were, literally, the brightest minds in the world. Nearly every one of these men and women were the top graduate at the top law school in their native country. It was an honor to spend the afternoon with these attorneys, but terribly embarrassing to realize that I single-handedly dragged the average IQ of the room down so significantly. I decided to take my grandfather’s advice and “stay silent and let people suspect you’re an idiot rather than open your mouth and prove it.”
For anyone who might be interested in today’s topic, we discussed cross-border tax arbitrages
for multi-national corporations. Basically, I can summarize the thesis in one sentence: huge tax breaks exist, which are completely legal and ethical, for corporations organized in multiple countries who have very smart attorneys. That leaves me with one question: why? These are not secret loopholes, but rather well-known escapes from significant tax liability, free for corporations to take advantage of if their attorneys can correctly organize both the corporate structure and the specific transactions. It could be that my mind is just too small to understand, but I am not sure why these bones were tossed into the tax code. Maybe more study would prove this wrong, but it seems that this is incredible motivation for corporations to take their business overseas; I just can’t figure out why international corporations should receive tax breaks over domestic ones.
* My program consists predominantly of American attorneys who specialize in taxation, but, apparently, mostly international corporate attorneys were invited to this series.
9 comments:
To answer your question: You are Billy Bad A&*(^( and you are there because you are the most brilliant man I know. I am so totally proud of you guys. And congrats to W for the new job. Keep the blogging going! I miss you!
You are there because you deserve to be there. I would like to believe you are there because you are your father's son, but we all know the truth is that you are "super-intelligent", hard-working, personable and witty. And of course, you are just like your father!!
Love,
Father
You are there because you kissed the right rears and greased the right palms. Duh.
Oh, and by the way... THAT picture is exactly how I picture you! The audio track to that image is you, mumbling into the table, "I'm going to fail. I'm going to fail. Oh, my God, why am I here? I'm going to fail."
George.
Anon. 4:27: Clearly, you need to go out and meet more men. I'm afraid you live very sheltered life.
Father: Awww...only the words of a father.
Linda: No, if I had were greasing the right palms and kissing the right rears, the result would NOT be more time at law school.
So, you are all wrong, the reason I am here is that my nervous energy forces me too hard and bite off more than I should chew.
The point of my post was actually to see if anyone could think of a good reason to give tax breaks to international corporations. Any thoughts on that?
Jeez.. someone's cranky!
Alright then... It's not as if foreign production is evil. We're a free market economy, and no corporation can survive if it produces at a price higher than what the market will bear. By giving international tax breaks, encouraging corporations to go over borders to acquire cheaper labor, the tax code preserves American production, not just here in the US but also overseas. Could we compete with Hong Kong for the Italian market for.... oh, toasters... if Hong Kong could take full advantage of their $5/day workforce but the American market was bound to use American $5.75/hour workforce? The only way to do so would be to cut quality, and that's not really competing, is it? The trick is to think globally. The American market is not confined to these borders.
So what about domestic corporations? Are they screwed? Well, some of them have figured out how to harnass a $5/day workforce right here within our borders. They're not LEGAL, mind you, but the need to stay competitive drives our illegal immigrant problem. Let's face it.. we need them. And the government knows it. If they didn't, they wouldn't be building a token wall to contain a 10th of our southern border, they'd be raiding the industrial plants in TX, NM, AZ, and CA, wouldn't they?
So WalMart tried this experiment back in the 90's. Remember the whole "Made in America" campaign, where WalMart vowed to stick with American-made products? Turned out that that ideal competed with another ideal: "Always the lowest price... ALWAYS." WalMart left it up to the American public to determine what was more important to them, and clearly, the answer was price. That's not say that the "Made in America" campaign isn't at least mildly successful. There are certainly people out there who purposefully shop for items made here, with American labor (they hope). But it turned out to be a fringe market, and there was even a Newsweek article recently about a family that tried to shop without purchasing any Chinese products for one month and failed.
So the answer to your question, I believe, is that the only way that the American free market can compete globally is by taking advantage of the cheaper workforce available to them overseas. This, in turn, has driven the social shift in THIS country from industrial production to professional services... which cannot be manufactured overseas.
Linda, that's a very thoughtful response, but not quite answering my issue. I realize that you are the NAFTA expert (and I bow to your expertise in that field). What I am talking about is the tax consequences of filing articles of incorporation in multiple nations. I am not getting into moving labor overseas.
Here's a basic scenario: Company A, an American company, makes $1,000,000 in America. Generally, that would be taxed at the corporate rate of, say 35%, so they need to pay $350,000 in tax (we're keeping this simple, so forget all the deductions they would take). Now, Company B does the same exact work as Company A (same production in the same locations), but Company B has smart attorneys who realize that they can incorporate a subsidiary in X Country and have certain portions of their income come in through the subsidiary. By taking advantage of certain deductions and conflicts between the two nation's laws, it is possible to have that $1,000,000 in income is not subject to tax in X Country or in America (I'm ignoring the complexities of how to get that done).
So, the domestic company that just has their incorporation in the U.S. pays 35% tax. The company that has a carefully created subsidiary in another nation has the potential to use the two nation's laws in such a way that they have no tax in either nation, even though everything except a few pieces of paper look identical to what Company A is doing.
The ways that corporations do this are well known--Congress knows--but my question is why don't they care?
I'm outside my realm. My instinct would be to look at the whole mousetrap. Since this is the result of manipulating how two different nations' tax laws intersect, is the answer simply that there's no way to restructure our laws in a way that wouldn't upset either the domestic or diplomatic apple carts?
I think there's something similar going on with farm subsidies in this country. The government is completely aware of the fact that Dave Letterman owns thousands of acres of farmland and collects literally millions in tax subsidies a year as a result of the ownership, but they can't close the "loophole" on him because doing so would destroy the family farms and permitting it ensures that viable farmland is actually farmed.
So is it possible that the way each nation has their tax schemes structured serves and protects a purpose that is great enough that it doesn't really matter that there are some unintentional fringe benefits for those big enough and smart enough to take advantage of it?? [shrug]
Oh, and NAFTA expert? Mwa-ha-ha. Funny.
I meant to say "farm subsidies"... not "tax subsidies." BIG difference.
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