Daily Archives: May 9, 2009

Obamanomics 101, closing the loopholes ……..

(NPR, All Things Considered) May 4, 2009 · President Obama sent a broadside Monday across the bow of those companies that now avoid taxes by keeping much of their business on the books of offshore subsidiaries. The practice is perfectly legal right now (1), but the White House wants that to change. 

President Obama vowed Monday to “detect and pursue” American tax evaders(2) and go after their offshore tax shelters. 

In announcing a series of steps aimed at overhauling the U.S. tax code, Obama complained that existing law makes it possible to “pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, N.Y.” 

The president said he wants to prevent U.S. companies from deferring tax payments by keeping profits in foreign countries rather than recording them at home, and called for more transparency in bank accounts that Americans hold in notorious tax havens like the Cayman Islands. 

“If financial institutions won’t cooperate with us, we will assume that they are sheltering money in tax havens and act accordingly,” Obama said. (3) 

The president, who hammered on this issue during his long campaign for the White House, said at a White House event that his plan would generate $210 billion in new taxes over 10 years and “make it easier” for companies to create jobs at home. (4) Over a decade, $210 billion would make a modest dent in a federal deficit expected to swell to $1.2 trillion in 2010. 

He said the government also is hiring nearly 800 new IRS agents to enforce the U.S. tax code. (5) 

Under the plan, companies would not be able to write off domestic expenses for generating profits abroad. The goal is to reduce the incentive for U.S. companies to base all or part of their operations in other countries. (6a) 

“The plan will reduce the ability of U.S. companies to compete in foreign markets,” said John Castellani, who heads the Business Roundtable, which represents some of the largest U.S. companies. “We believe it will not only reduce jobs, but it will also cripple economic growth here in the United States. It just couldn’t have come at a worse time.”

Gary Hufbauer, a senior fellow with the Peterson Institute for International Economics, says eliminating the deduction on U.S. expenses associated with foreign profits would encourage multinationals to move more of their essential functions abroad. (6b) 

“Those are the good jobs at good pay that America should want,” Hufbauer said. “I mean, do we want these headquarters’ expenses to be incurred in Singapore or London?” (6c) 

Treasury Secretary Timothy Geithner said the proposals would end “indefensible tax breaks and loopholes which allow some companies and some well-off citizens to evade the rules that the rest of America lives by.” (7) Geithner called them “common-sense changes designed to restore balance to our tax code.” 

Once again I ask you  – can you believe what you just read? I highlighted in the copy some key statements woven into this story. Here are my observations based on these key statements in the same order they appear in the story. 

  1. First and very important to note, while the administration may not like it, the practice they are complaining about is not illegal.
  2. Even though it is not illegal, the President referred to the users of this “legal loophole” as “American tax evaders.” He also vowed to “detect and pursue” them. What does that mean? If it’s not illegal, does this mean the administration plans to bully, harass and attempt to publicly embarrass these companies? At a minimum it means that Obama’s full scale assault on capitalism and American business will continue. The administration seems to be intent on making the business community the bad guys for everything in the eyes of the public. Of course, the savior for the average citizen in “Obama World” is more government oversight and control.
  3. Now for the scariest statement in the article “If financial institutions won’t cooperate with us, we will assume that they are sheltering money in tax havens and act accordingly,”  – what does he mean by this? In America, there is a presumption of innocence until proven guilty. We don’t assume guilt and persecute. Plus let’s not forget that what these companies are doing is not illegal under the current rules. The financial institutes the President is referring to are in foreign countries so what is their incentive to cooperate with his administration? So without the cooperation of these foreign institutes the result will mostly likely be a smear campaign against these “evil corporations”.
  4. The President goes on to assert that by closing these loopholes it will “make it easier” for companies to create jobs at home. What?? So paying higher taxes will stimulate job growth? What school of economics teaches this business theory? This quite possibly the dumbest thing I have heard from the administration so far.
  5. We are also finally getting to see how the president is going to stimulate job growth. He is going to make government bigger by adding IRS agents to persecute real businesses. This will result in increased job loss in the private sector. Is it possible to have a prosperous economy with a giant government workforce? Who are you going to tax in that model? The last time this model was tried we referred to it as the Soviet Union and as I recall their economy collapsed.
  6. (a, b,& c) In yet another stroke of business genius, the administration asserts that by eliminating certain write off and deductions it will reduce the incentive for U.S. companies to base all or part of their operations in other countries. However, conventional wisdom would indicate just the opposite is likely to occur. Rather than moving things back to the U.S., it is more likely that large multinational companies would move their headquarters offshore taking high paying executive and management positions with them.
  7. Of course this brilliant strategy would not have been be complete without a comment on this “common sense” approach to fair taxes by everyone’s favorite “tax evader” Treasury Secretary Timothy Geithner who is certainly an expert on “indefensible tax breaks and loopholes which allow ……some well-off citizens to evade the rules that the rest of America lives by.” Apparently it is O.K. to be a “tax cheat” as long as you have a cabinet post but “make no mistake”, this won’t be tolerated in the private sector. The arrogance of this administration is at times overwhelming considering how little any of them seem to understand about how business works in the real world. Maybe they should all go get a job at a company that produces a product. Then they could learn what it takes to satisfy customers, to stay competitive, and make a profit so that the business can succeed. 

So what is the solution – instead of creating more ways to tax businesses which drives jobs to other countries, let’s lower business taxes to stimulate job growth domestically. The U.S. has some of the highest business taxes in the industrialized world which is why jobs are leaving the country. The U.S. has been steadily climbing the world rankings for business taxes. We are currently ranked #1. Since 2000, Japan, Germany, France, Canada, Greece, Italy and Mexico have all lowered their business taxes to stimulate business growth, some by more than 10%. Since 1993 U.S. business tax rates have remained virtually flat. Currently, the effective federal business tax rate is 39.3% in the U.S. which is down from 39.4% in 2000. Japan is at 30% down from 40.9% in 2000. However most of Europe has rates between 25 and 35%. Of course, China arguably the world’s largest competitor is communist and they succeed in the global economy on the back of their people and the ability to play by their own rules. 

This administration has capitalism and business squarely in it’s sights. America became the great nation it is by becoming the preeminent economic force in the world. Government jobs do not improve the economy or the GNP. The only way that America can remain a powerful and respected nation that can protect its’ people, its’ sovereignty and its’ way of life is to remain an economic powerhouse. The only way this happens is, we change our tax laws to make America more competitive, instead of forcing us to compete with one hand tied behind our back. 

I have made the tough decisions, always with an eye toward the bottom line. Perhaps it’s time America was run like a business. – Donald Trump 

The budget should be balanced, the treasury should be refilled, the public debt should be reduced and the arrogance of public officials should be controlled.  – Ross Perot