[Marxism] John Kerry and the political economy of taxation: stalling for time
bendien at tomaatnet.nl
Fri Mar 26 08:09:13 MST 2004
So far, as I have previously noted, the US tweedle-dee tweedle-dum elections
are really about nothing very much, the main reason being that the federal
government is heavily in the hock and cannot deliver very much to voters,
except through a radical restructuring of federal operations, a politically
highly charged issue which cannot really be tackled before the votes are
John Kerry promises in a speech at Wayne State University in Detroit today,
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 overrode 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 more than 2.2 million jobs were lost since Bush took office.
Kerry is viewed by most voters as best suited to improve the economy.
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 abroad, they avoid paying
any US tax. In Kerry's scheme, companies would pay taxes on their
international earnings on a PAYE basis. The new system would apply to
profits earned in future years only. Companies could defer taxes if they
located a business in a foreign country that serves that nation's markets. A
U.S. company would thus benefit from a tax break if 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. But how could such a policy possibly be enforced,
if the cars could easily be imported via another associated company ?
Kerry's campaign claims the 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, or a 5 percent reduction in the total corporate tax take.
Thus, almost all corporations would see their tax bills lowered. The
exception would be the top 1 percent of corporations who would pay slightly
But how significant is this policy initiative really ? 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 maybe one percent or so of total tax revenue.
Just looking at the 2002 figures, the structure of the federal tax take is
Individual Income Taxes $858.3 billion
Social Insurance and Retirement Receipts $700.8 billion
Corporation Income Taxes $148 billion
Miscellaneous 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 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
A Joint Committee on Taxation report found that Enron claimed a $2.3 billion
in profit between 1996 and 1999 in reports to its investors, while reporting
a $3 billion tax loss to the IRS. In a useful article in the Boston Globe
(from which I've taken part of this story), Stephen J. Glain took the story
further and pointed out (24 February 2004), 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).
DoC data in fact show 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 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, a daily journal
on tax law and legal issues, concluded from an analysis of the Commerce
Department data for 2001, that the US companies recorded 46 percent of their
total overseas profits in these tax havens, even though these countries
accounted for only 19 percent of the overseas economic activity of these
companies, as measured by the value of their assets, sales, costs of
equipment, and number of employees.
According to Treasury officials, the internationalisation of business
actually makes it increasingly difficult to even track and audit accurately
what American business earns abroad, anyway. Specifically,
1. The criminalisation of business is proceeding apace. In 1998, the
National Bureau of Economic Research, a nonprofit research institute,
discovered that $154 billion -- equal to 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. tens of thousands of tax lawyers are meantime hired by the corporations
to wade through the 17,000 pages of tax legislation on the books, to find
new ways to dodge the existing laws, and part of the cost of that can also
be written off for tax purposes.
3. new business legislation, in part introduced by the Bush administration,
in fact makes it even easier for US business to claim foreign countries with
low tax rates as their official headquarters for tax purposes.
4. US businesses often manipulate prices to artificially prop up profits in
low-tax countries and lower them in the United States.
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
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
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.
Keith Ashdown, vice president of policy and communications at Taxpayers for
Common Sense, a nonpartisan US budget watchdog, put it this way: "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 added, "Congress
talks tough when companies move offshore to places like the Cayman Islands,
but they don't get tough".
So where are the 10 million jobs going to come from ? So far, the answer is
- targeted tax credits and tax cuts, ending tax breaks and loopholes, and
reducing wasteful federal spending
- substituting domestic energy production for imported energy
- increasing the number of internet connections
- reducing health care costs to employers
- enforcing international trade agreements more, or changing them to US
- cracking down on corporate fringe benefits
- overhauling labor legislation, and raising the minimum wage
How that is going to work out, I have yet to see. if Kerry says he can slash
the budget deficit by half in one term, then that means increasing federal
income and reducing federal debts. If however taxes are being cut, not
raised, then it must be shown that the tax base will expand under a new
regime for any more income to be obtained from it. But how are federal debts
going to be reduced ? This can only be done by reducing federal spending,
but how will this create new jobs ? The only way he could do it would be
through a radical restructuring of federal government operations.
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