"New Tax Ideas from John Kerry"

Juriaan Bendien

Sitting here in wintry Amsterdam, it looks to me the US tweedle-dee
tweedle-dum elections are really about nothing very much yet, the main
reason being that the federal government is heavily in the hock, and really
cannot deliver very much to voters, except through a radical restructuring
of federal operations, but this is a politically highly charged issue, which
cannot really be tackled before the votes are cast.

This is the problem of politics in the age of futures economics: you have to
build confidence in what you will do in the future, before you can even know
what you will have to do in the future This helps explain the political
commercials trying to convince voters that the election is really about
something else instead, such as terrorism possibilities which might or could
exist.In reality, the ability of the US government to sustain its lavish and
absurd spending regime without placing any additional tax burden on
Americans, depends crucially

(1) on the faith of other countries in the "American Dream" and their
willingness to keep pouring money into the USA (it's a kind of "don't
panic" confidence-building maneouvre, a marketing exercise) and

(2) the ability of Americans to keep offloading the costs of their
consumerism to other countries. If, however, there is for some reason a halt
of the inflow of capital, or even net capital flight out of the USA, then
the whole system would start to crumble. The reduction of the exchange-rate
of the dollar seems like a stroke of genius, but not if it becomes an
uncontrollable heamorraging downwards. In that eventuality, the biggest
captains of industry would be motivated to intervene directly, simply for
the purpose of safeguarding the credit system from breaking down.

Radicals often don't like to think about government taxes, it seems to be a
conservative or reformist theme, but the fact is that it involves an
appropriation of hundreds of billions of dollars of new income created by
workers, which is spent for regulating and regimenting people's lives in
civil society as well as to support businesses, bureaucracies and the army.
So it's worth taking a look at.

Jeez, Wayne...

John Kerry promised in a speech at Wayne State University in Detroit
on 26 March, to create 10 million jobs and keep them in America,
and said he would cut corporate taxes by 5 percent, eliminating tax
loopholes that push jobs overseas. He aims to carry out "the most
far-reaching changes in international corporate tax law in four
decades" (Associated Press).

Kerry bypassed his advisers, who opposed corporate tax cuts on political
grounds. But, as AP puts it, he aims for "a blend of loophole-cutting
populism and business-friendly moderation", aiming to cast his package as
jobs-producing tax reform. The main polls show jobs are the top issue with
most voters, as between 2 and 3 million jobs were lost since Bush took
office. Kerry is viewed by most voters as best suited to improve the
economy,
because at least he has the opportunity to implement some kind of
alternative
to the crazy Republican spending plans, which include a billion-dollar
venture to
explore Mars and suchlike.

Legal Jungle

Whatever the integrity of the tax collectors, legally the US tax system is,
in truth, a nightmarisch, perverse bureaucratic jungle. Testifying before a
"Subcommittee on select revenue measures on international tax policy and
competitiveness" on 13 June 2002, Treasury expert Barbara Angus put it very
politely, in was must be the understatement of the year: "The many layers of
rules in our current system arise in large measure because of the
difficulties inherent in satisfactorily defining and capturing income for
tax purposes, particularly in the case of activities and investments that
cross jurisdictional boundaries. However, the complexity of our tax law
itself
imposes a significant burden on US companies. Therefore, we also must work
to simplify our international tax rules." Yep.

She explained that US tax policy "remains rooted in tax principles developed
in the 1950s and 1960s. That was
a time when America's foreign direct investment was preeminent abroad and
competition from imports to the United States was scant. Today, we have a
truly global economy, in terms of both trade and investment. The value of
goods traded to and from the United States increased more than three times
faster than GDP between 1960 and 2000, rising to more than 20 percent of
GDP. The flow of cross-border investment, both inflows and outflows, rose
from a scant 1.1 percent of GDP in 1960 to 15.9 percent of GDP in 2000." The
effect of that is, that a tax system that was designed to be progressive is
in reality more and more absolutely regressive. Proportionally, the tax
burden of smaller companies actually works out higher than the big
companies.

The OECD likewise says very politely the US tax system is "very complex".
Although the US tax burden is proportionally low if judged by international
standards, the stimuli to work, save and create new businesses are reduced
there purely by the sheer cost involved in operating the tax system. This
creates political pressure for introducing a simple, straightforward
consumption tax, but, depending on how that would be implemented, it would
in reality reduce the buying power of ordinary consumers even more, and it
would reduce the incomes of poor people proportionally even more. A
consumption tax would be progressive, only if it taxed luxury consumption
and the bigger assets. But the rich have not normally been known to impose
more tax burdens on themselves.

Tinkering

The current taxation legislation allows American companies to defer paying
taxes on income earned by their foreign subsidiaries until they bring it
back to the United States. If they keep the money overseas, they avoid
paying any US tax. In Kerry's vision, companies would pay taxes on their
international earnings on a PAYE basis, and, he says, the new system would
apply to profits earned in future years only. Companies could then defer
taxes if they located a business in a foreign country that serves that
nation's markets. Associated Press suggests satirically that a US company
would then benefit from a tax break, if e.g. it sited a car factory in India
to sell cars in India, "but not if it relocated abroad to sell cars back to
the US or Canada". Point however is, how could such a policy possibly be
enforced, if the cars could easily be imported via another, associated
company ? The US Government prohibited US corporates from operating in Iran,
but even so not only did they just offload to Dubai for export byb
intermediaries to Iran, they were operating in Iran anyhow (including
Halliburton).

AP says Kerry's campaign team claims the corporate tax change would yield a
net saving of $12 billion a year, enabling a reduction of the corporate tax
rate from 35 percent to 33.25 percent, perhaps a 5 percent reduction in the
total corporate tax take. Thus, almost all corporations would see their tax
bills lowered. The exception would then be the top 1 percent of corporate
earners who would pay slightly more.

But how significant is this policy initiative really? Let's face it, this
is only tinkering. The truth is that US corporate taxes in 2003 accounted
for only 7.4 percent of the total federal tax receipts, the second-lowest
level on record since 1983. Therefore, the proposed change would affect only
a tiny amount of total tax revenue. Just looking at the 2002 figures, the
structure of the total federal revenue was as follows:

Individual Income Taxes $858.3 billion

Social Insurance and Retirement Receipts $700.8 billion

Corporation Income Taxes $148 billion

Miscellaneous other taxes and receipts $79 billion

Excise Taxes $67 billion

Total federal receipts $1,853 billion

It's clear then, that corporate taxes represent less than a tenth of the
total federal levy; in reality, the bulk of federal levies take the form of
income taxes on wages and salaries, plus social insurance schemes. Of
course, federal taxes are not the only taxes there are; you also have
to consider state government taxes and local authority taxes. Once
they are taken into account, the corporate tax payment is even less
as a share of the total tax take (it's actually difficult to estimate the
total tax take of all states and local authorities together, since
few people do this sort of calculation).



Tip of the Iceberg



A Joint Committee on Taxation report discovered to everyone's consternation
that Enron claimed a $2.3 billion in profits between 1996 and 1999 in
reports to its investors, while reporting an astonishing $3 billion tax loss
to the IRS. But that's just the tip of the iceberg. In a topical article in
the Boston Globe (24 February 2004), from which I've shamelessly borrowed
bits here, Stephen J. Glain takes the story further, and points out that
nearly half of the estimated $233 billion in foreign earnings of all US
corporations in 2001 was held in foreign tax havens, up from 38 percent in
1999 and 23 percent in 1988 (Department of Commerce data, December 2003).
The DoC data in fact suggest that corporate earnings held in offshore tax
havens like Luxembourg or the Cayman Islands have doubled over the last 15
years. Those two countries have tax rates of around 0.9 percent and 5.2
percent, respectively, compared with 28-35 percent in the United States.


Martin A. Sullivan, an economist and columnist for TaxNotes, the daily
journal on tax law and legal issues, concluded from his analysis of the
Commerce Department data for 2001, that the US companies recorded 46 percent
of their total overseas profits, i.e. nearly half, in these tax havens,
even though these countries
accounted for only 19 percent of the overseas economic activity of these
companies, if measured by the value of their assets, sales, costs of
equipment, and number of employees.



Dodgy Business



According to Treasury officials, the internationalisation of business in
reality makes it increasingly difficult to even track and audit accurately
what American business actually earns abroad anyway, never mind taxing it.
Specifically, here's eight facets of the situation one might ponder:



1. The criminalisation of capitalism (as anticipated in Ernest Mandel's
short Marxist social history of the crime story) is now proceeding apace. In
1998, the National Bureau of Economic Research, a nonprofit research
institute, discovered that $154 billion (half the gap between "book value"
and "tax-declared" income for that year), could not be reconciled using
conventional accounting methods, and attributed at least part of the
difference to deceptive accounting practices.



2. So-called "abusive trust arrangements" obscure the true ownership of
financial and property assets, or the substance of the transactions
involved. They are trusts intended only to avoid tax; the individual
indirectly controls the disposition of the income and assets through some
other individual designated as a trustee, which enables all sorts of tax
deductions. The IRS estimated a while ago, that around $5 trillion will be
inherited or transferred from one generation to the next by 2015, much of it
through a variety of trusts, but a burgeoning number of trust arrangements
are of the abusive, offshore type. The offshore trust arrangement
conveniently shields assets from creditors and escape US jurisdiction. The
financial asset protection racket is immensely lucrative (e.g. Bahamas,
Belize, Cayman Islands). To combat those arrangements, the IRS's Criminal
Division now has all sorts of ongoing investigations, but in reality it's
impossible to identify more than a fraction of the total amount of scams in
the intricate legal mazes. They don't even have the staff to do the work.



3. Armies of tax lawyers and specialists are hired by the corporations to
wade through an unbelievable 17,000 pages of tax legislation on the books,
to devise new techniques to dodge taxes, and, perversely, part of the cost
of that activity can even be written off for tax purposes, if you know how.
The costs of compliance, the OECD estimated, are perhaps as high as half (!)
the yield of the tax, because of the expense of the legal and accounting
professionals needed to operate it for the purpose of minimising tax
liability, and to apply the welter of rules for financial and tax
accounting.



4. New business legislation, in part introduced by the Bush administration,
in fact makes it even easier for US business to claim foreign countries with
lower tax rates as their official headquarters for tax purposes, and
absolves the wealthy from an even greater portion of estate duties and
earnings.



5. Corporate income is parked abroad through "cross-sharing". First, a
parent company licenses its trademark or copyright to an affiliated company
in a country with lower taxes. Then that country effectively becomes the
repository for the income earned from the license, which is not recorded
within the US, and reduces the parent company's taxes below the US domestic
rate.



6. Businesses sell their products at artificially low prices to subsidiaries
based in a tax haven, keeping the corporation's US tax exposure to a
minimum. The subsidiary then sells the goods locally, at market rates, at a
larger profit that is taxed at the foreign country's lower rate. This
"transfer pricing" permits US business to divert income into low-tax
countries, and then repatriate those profits to improve the financial report
during a bad earnings year. Conversely, a US business can also buy a product
from a foreign subsidiary at an artificially high price. When the US company
then resells the product in the United States through various
intermediaries, the profit appears smaller, hence attracts a lower US tax
rate.



7. Gross profit statements submitted to the IRS often diverge markedly from
the ones cited on Wall Street, taking advantage of differences between
official tax-accounting rules and financial reporting to stock holders
required by corporate statutes and Accountant's Association codes.



8. Self-employed persons (proprietors) underreport their real income for tax
purposes, currently estimated at $132 billion by the Tax Advocate, including
$81 billion attributable to independent contractor sole proprietors).



A Giant Sucking Sound...



Keith Ashdown, the vice president of policy and communications at Taxpayers
for Common Sense, a nonpartisan US budget watchdog, framed the situation
less politely: "When it comes to corporate taxation, all you can hear is a
giant sucking sound. This is legal money laundering, and it's bleeding the
federal Treasury white".



Sheldon Cohen, IRS commissioner under President Lyndon Johnson, and now an
attorney at the Washington law firm Morgan, Lewis & Bockius adds to this,
"Congress talks tough when companies move offshore to places like the Cayman
Islands, but they don't get tough". The reality is that the US Government
practically needs a tax revolution, but insofar as it vastly simplified
collection, spending and enforcement regimes, it would reduce employment in
the tax business. If it didn't at least do that, there would be little point
in exercise. The question is then whether that loss could be offset by a
corresponding gain in economic growth, but that really depends on whether
sufficient additional net income can be distributed to ordinary consumers in
a way which would actually increase the number of jobs.



And this is really the crucial question, i.e. where exactly are the 10
million jobs going to come from? So far, the answer is, apparently,
through:

— targeted tax credits and tax cuts, ending tax breaks and loopholes, and
reducing wasteful federal spending


— substituting domestic energy production for imported energy sources


— increasing the number of internet connections linking people into the
globalised cyberworld


— reducing health care costs to employers


— enforcing international trade agreements more, or changing them to US
advantage


— cracking down on corporate fringe benefits


— overhauling labor legislation, and raising the minimum wage



Lot of Jobs, or Job's Lot



But how exactly that is going to work out, I have yet to see. If the
politicians claim they can slash the federal budget deficit by half in one
term, then that means increasing federal income, and reducing federal
expenditures and debts.



If however taxes are being cut, not raised, then it must be shown that the
tax base will expand
under a new regime if any more income is to be obtained from it, or at
least, that the US economy is expected to grow, so that the tax take and the
tax base increases. But how exactly are federal debts going to be reduced?
If taxes are cut, then debt reduction can basically only be achieved by
reducing federal spending, but then how will this create new jobs?



Really the only way Kerry could do it, would be through a radical overhaul
of federal government operations as a whole. Some enlightened public
servants have already made great efforts to improve budgeting techniques and
reporting, but obviously they aren't in control of spending blow-outs.



The true size of federal government employment (including contract-related
jobs, as well as civil service, military and postal service jobs), was said
to be 12.1 million in late 2002, an increase of about 1.1 million since
1999. If that hadn't offset the loss of private sector jobs, unemployment
would have been much higher. The size of the regular fulltime federal
workforce now has fallen, only because nearly 1 million jobs were cut,
mostly at the Department of Energy, NASA and the Department of Defense.



So much for the marvels of private enterprise, the real art of which, in our
times, seems to be one of offloading costs somewhere else, or projecting
them into the future, while running off with the loot you can grab now, on a
"live now, pay later" basis. In addition, of course, there's the whopper of
an estimated $166 billion cost for the bloody adventures in Iraq and
Afghanistan, expensive new weapons systems (mostly quite unnecessary), and
other defense spending adventures, which will push government expenditure
through the roof.