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Follow Up: Stephen Colbert On Tax Inversions…

August 28th, 2014 · 10 Comments
Follow Ups · Policy

Since we talked about Burger King and tax inversion yesterday, I figured it was only fair to point out that Stephen Colbert was ahead of the trend, since he did a couple of tax inversion segments (though he calls them “corporate inversion” segments) on his show on July 30:

(To further give credit where credit is due, I learned about this because my significant other was watching it he was on the Stairmaster and I was stuffing my face with Thai food.) I find the point that Obama makes about having a headquarters in a foreign country while most operations are in the U.S. to be less than satisfying for two reasons- first, are there really that many large companies whose businesses aren’t sufficiently international that it only makes intuitive sense for them to be based in the U.S.? Second, about three seconds of Thai-food-enabled pondering led me to the suspicion that most policies of a “your business is here so your taxes are here” nature is going to take the business away rather than bring the taxes in. Remember kids, a decent tax policy has got to work with the incentives of producers and consumers, not against them. OR…and I know this is totally out there, but perhaps the U.S. could work on providing institutional value to the companies that it houses such that the companies would find it worthwhile to pay the higher taxes and stay put. In this way, Allan Sloan seems to be going down a reasonable path in the second video when he suggests that the benefits that the U.S. can provide to companies be matched with the responsibility to pay U.S. taxes.

People seem to like analogies, so I’ve potentially got one for you- say my apartment is more expensive than the ones in the building next door. It would be absurd for me to be obligated to keep renting the more expensive apartment, but I might choose to do so if the more expensive apartment were also nicer. If it wasn’t, it’s completely reasonable for me to move…but most likely unreasonable for me to expect to keep using the roof deck, gym, etc. of the building that I moved out of. On a corporate level, however, we basically do have a system where residents and non-residents alike can use the facilities, so it’s not surprising that we are seeing the behaviors that we are seeing.

Tags: Follow Ups · Policy

10 responses so far ↓

  • 1 Daniel Reasoner // Aug 28, 2014 at 6:29 pm

    The analogy of building facilities use doesn’t quite fit. What are the facilities to which you refer? Roads, electric grid, the domestic customer base? Economic news flash – we want the foreign involvement in our domestic market. Foreign owned facilities contributing to domestic production is a good thing. Such activity provides jobs and contributes to domestic economic activity. Consider Japanese auto plants.
    Would it be better for the US if the newly Canadian firm left the US altogether? Of course not. The US want the domestic production of goods and services, which besides driving the economy, provides vast amounts of income and sales tax revenue to the government.
    The contribution of corporate income tax to government revenue is so small that to discourage companies from investing in US facilities is foolish demagoguery.
    If you want people to rent from you make the value exchange such that the transaction will take place (without force would be nice).

  • 2 salimbag // Aug 28, 2014 at 6:42 pm

    Yes. What “institutional” advantages are you referring to. Can you give an example?

  • 3 econgirl // Aug 28, 2014 at 9:28 pm

    Legal and liability protections, protection of property rights, access to liquidity, etc. I get what your saying about the benefits of foreign business activity, of course, my point is that it seems extraordinarily difficult to keep companies in the country for tax purposes if the government isn’t able to offer anything in return.

  • 4 Daniel Reasoner // Aug 29, 2014 at 9:47 am

    That’s the deal I think. Governments who attempt to extort tax revenue from companies who operate within their countries increase operating costs beyond the value of operating (headquartering) there. Short of force, there is no way to sustain an economic inefficient practice. Perhaps if the US lowered its corporate tax rate to the market rate and stoppped taxing revenue generated outside the us, countries would find headquarting in the US more desirable.

  • 5 Wilson Dizard // Aug 29, 2014 at 7:36 pm

    @ Daniel: Corporations that have prospered in the US do so largely because of social assets paid for by other taxpayers; and as a result of the culture of lawfulness here that’s conspicuously absent in places like Somalia & the haunts of reactionary propagandists like yourself. Contrary to your self-serving & risible assertions about the need to lower the corporate tax rate, repeated reductions in both the nominal & effective corporate tax rate (as well as the highest marginal rate on earned income) have conspicuously failed to generate the trickle down benefits promised by right-wing lawmakers and corporate sock-puppets. Against that conclusive evidence from in vivo tests of those crackpot theories, we can contrast the effectiveness of tax regimes in Canada and Japan that put corporations on notice that their cynical freeloading will be shut down like a battered Yugo: Home
    Japan shows how we could stop corporations from evading taxes by using tax havens
    There are ways that Canada could curb corporations from using tax havens to avoid paying their fair share of taxes. The Japanese government has shown us one way to do this.
    Japan has a law called the Tax Haven Counter Measure Law. It applies to any Japanese subsidiary in a low tax jurisdiction with a tax rate of 20% or less. Under this law, the Japanese parent is taxed on the undistributed earnings of these foreign subsidiaries.
    In this way, Japanese companies cannot set up subsidiary companies to hold copyrights, patents, leases, etc, in tax haven countries that then lease these back to the parant company for a fee and thereby lower their taxable profits in Japan.
    Japan also has the concept of “Economic Logic” which is often used to deny special treatment to companies in tax havens. Under this concept, if the businesses could reasonably be carried on in Japan, the ‘economic logic’ of them being offshore is lacking, and is hence denied.
    There are a few exceptions made. For example, where the subsidiary is in a country where the tax rate is more than 20%, the earnings can be excluded from current taxation only if (i) the company has staff, assets, and premises to conduct the business, (ii) the management, control, and governance is carried out in that country, and (iii) the transactions with related parties are less than 50% of all transactions. This approach effectively prohibits shell companies while allowing corporations to still set up legitimate businesses even in countries with lower corporate tax rates.
    Japanese multinational corporations are prevented quite effectively from the use of tax havens by having a very simple law which was first enacted in the late 70’s. Yet Japanese companies are able to compete globally. China treats its multinational corporations in a similar way.
    The Japanese corporate tax rate is in the range of 38-39%, much higher than the US, UK, and most other OECD countries. The temptation to avoid paying this rate of taxes would be very strong for Japanese corporations and without such a law Japan would probably have a lot of difficulty collecting what was rightfully due.
    Although the combined federal and provincial corporate tax rate in Canada is quite low at roughly 25%, many Canadian companies are using tax havens to lower their Canadian taxes.
    Some of the most common strategies are setting up subsiduaries in tax havens and then selling their patents, trade marks or other intellectual property to them. The subsidiary then turns around and leases these back to the parent company for a substatial fee. The fee payments become an expense for the parent company, which lowers their profits in Canada, and also the taxes due on those profits.
    Loans between parent and tax havens based subsidiary are another way to play this game. Transfer pricing, where a commodity or good is sold to a tax haven based subsidiary which then sells it to a final customer at a much higher price is another commonly used strategy to reduce profits and taxes payed in Canada.
    Canadian tax law tries to limit some of these practices by inisting that the “arm’s length” principle should apply to transactions between related parties and that prices chared should be in line with what migth be charged if the contracting parties were independent. In practice, this arm’s length principle has been very difficult to enforce. It works for commodities such as copper or wheat that are widely traded on open markets, but has not worked very well when it is difficult to determine a fair price such as for drug patents or trademarks.
    Japan has shown that there are better ways to effectively limit corporate tax avoidance using tax havens. What is lacking is the political will to stand up to corporate tax abuse.
    For more details check out Japan tax haven rules overview from the Japan Tax Site. (link is external)

    Tackle the Tax Havens

  • 6 Wesley // Aug 29, 2014 at 11:41 pm

    What benefits, exactly, are we talking about?

    Roads, stable economic environments, legal and liability protections, etc. all exist well within the bounds of much lower levels of taxation. We know this, because they did before.

    You do not need to have among the highest corporate tax rates in the world in order to pay for these things. The federal government has no legitimate claim to 35% of a companies net income, unless, of course, you can clearly argue than the 35% of the income for a corporation is directly attributable to these “conditions” that also happen to exist in most of the 1st world economies, for much lower tax rates.

    Unless, of course, you’re suggesting that Ireland is just a lawless den of scum and villainy all of the sudden?

    This is the weakest bit of tripe I’ve ever seen. Political agendas have literally overtaken any and all sound economic principles. Socialism.

  • 7 Daniel Reasoner // Aug 30, 2014 at 11:32 am

    @Wilson : Name calling and demonization do not lend strength to your argument, which I gather involves effective confiscation of foreign productivity/ownership. While I am sure you have heartfelt normative economic opinion, they don’t translate well into objective reasoning.
    You believe that firms that operate in the country of your birth own a portion of their productivity to you because of …..fairness, I gather. A line of such reasoning might be that an operating fee (corporate income tax) allows the host country to capture some of the cost to the country of the corporation operating within their borders. It is hard to imagine how corporation cost to a country would be in excess of the economic benefits of production. In any event, I believe that is the general idea.
    Indeed, some corporations may choose to pay this extortion fee as it is lower in cost than moving abroad (or other alternative). As the extortion fee increases however, the cost approaches that of the next best alternative. That alternative might be to go abroad, change business model, or abandon the business enterprise.
    There is nothing personal or emotional in this reasoning. It is just how efficient economic systems work.

  • 8 Jeff // Oct 8, 2014 at 5:00 pm

    “That’s the deal I think. Governments who attempt to extort tax revenue from companies who operate within their countries increase operating costs beyond the value of operating (headquartering) there. Short of force, there is no way to sustain an economic inefficient practice.”

    It always amazes me when I hear people saying that the US is helpless before market forces and therefore must compete on price when it comes to taxes. This is a country that became first world, and in fact went from nothing to global superpower over a century of consistent 30%-50% tariffs. Are people able to get economic degrees without learning the fundamentals of economic history of the country they live in?

  • 9 Snah Falo Namreg // Oct 28, 2014 at 4:42 am

    Sorry, english is not my native language.

    Who ever played Sim City etc. will note that government spending, taxes and economic promotion are difficult to optimize.
    Taking the social peace to this, it is impossible.

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