Invert This.

Corporate "inversions" have been in the news a lot lately. An inversion takes place when a US corporation merges with a foreign corporation and re-incorporates outside the US in a jurisdiction with lower effective tax rates than in the US. The latest inversion making waves is the pending merger of Miami-based Burger King with Canadian donut purveyor Tim Horton's which will have the effect of re-domiciling Burger King to Canada and dropping its effective tax rate by at least 15%.

At 40%*, the United States has the second highest corporate tax rate in the world (UAE is #1 at 55%). it is also one of only two nations that I’m aware of (the other is Eritrea) that applies that rate extra-territorially. In other words, the US government applies that tax rate to all of a company's (or individual's) income no matter where it is earned, not just to that which is earned within the borders of the United States.

The first duty of a company's management is the fiduciary duty to maximize the return to its owners. It has no duty, patriotic or otherwise to pay more taxes than it is required to. The case law says so. In an opinion written by Second Circuit judge Learned Hand in the case Helvering v. Gregory in 1934 he wrote:

"Any one may so arrange his affairs that his taxes be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes."

If the US government wants to stop the wave of inversions that has been taking place it needs to make the US tax system more competitive with the rest of the world. Lowering the corporate tax rate would be a good start. Ending universal taxation as well would be even better. Trying to prevent companies from leaving will be futile.
 
*The corporate income tax rate is approximately 40%. The marginal federal corporate income tax rate on the highest income bracket of corporations (currently above USD 18,333,333) is 35%. State and local governments may also impose income taxes ranging from 0% to 12%, the top marginal rates averaging approximately 7.5%. A corporation may deduct its state and local income tax expense when computing its federal taxable income, generally resulting in a net effective rate of approximately 40%. The effective rate may vary significantly depending on the locality in which a corporation conducts business. The United States also has a parallel alternative minimum tax (AMT) system, which is generally characterized by a lower tax rate (20%) but a broader tax base.

Tyranny In Our Time

President Obama’s cousin, Dr. Milton Wolf has a must-read column in the Washington Times today about how Obama is using federal government agencies to harass, intimidate and even punish political enemies. Case in point, the evolving IRS scandal in which we are learning that the IRS has been targeting conservative organizations applying for 501(c)(4) tax-exempt status with onerous and largely irrelevant information demands, sitting on their applications until they give up. An excerpt:

Americans are beginning to recognize the disturbing similarities between President Obama and the fallen Richard Nixon, but the comparison that may matter more is between Mr. Obama and King George III.

“He has erected a multitude of New Offices, and sent hither swarms of Officers to harass our people and eat out their substance,” in the words of the Declaration of Independence.

King George’s assault on the Americans’ natural freedoms was oppressive, intolerable and deserving of a revolution. The truth is, the intrusion, restriction and outright harassment that our government subjects us to today is far beyond what the colonists faced from their tyrannical king. If it was tyranny in 1776, then, by God, it is tyranny today.

Consider the enormous coercive power of the Internal Revenue Service and its lust to wield it. The IRS admits to systematically identifying and harassing political dissidents who dare to disagree with the political bosses. The IRS created what could be considered an enemies list starting with conservative Tea Party groups. It targeted any group calling itself “patriot” or daring to teach the Constitution or Bill of Rights.

Read the whole thing.

Top 10 Percent of Earners Paid 71 Percent of Federal Income Taxes

Tell me again. Who is it that isn’t paying their “fair share?”

Words Matter–Obama’s Promises Versus Reality

Watch this video and then tell me again why anyone can seriously consider sending this guy back for a second term.

 

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"This Is Not How a Free Society Treats People"

There's a great guest post over at Zero Hedge by Simon Black . He is commenting on the proposal by Chuckie (don't get between me and that camera if you know what's good for you) Schumer to impose a punitive exit tax on Americans, natural born or naturalized, who renounce their citizenship. he was prompted to do this after hearing the news that Brazilian-born, naturalized US citizen and Facebook co-founder Eduardo Saverin had opted to renounce his US citizenship and that doing so might save him $65 million in capital gains taxes when Facebook completes its IPO. From the post:

But no. Saverin left behind a lot of value and decided to move on to greener pastures in Singapore. Now the do-gooders in Congress are cooking up new legislation (the EX-PATRIOT Act) designed to permanently bar ‘renunciants’ like Saverin from re-entering the United States.

It’s interesting that, rather than change their ways of doing business and introducing legislation that provides incentives for productive people to come here and stay here, they maintain policies that chase people away, and introduce new ones to lock the door after they’re gone.

The lesson here (especially for natural-born citizens) is this: simply by accident of birth, you are born with a lifelong obligation that you never signed up for to finance the corrupt misdealings of the political class. And if you choose to abandon this obligation, they will bar you from ever entering your homeland again.

Regardless of what the propaganda says, this is not how a free society treats people. It might look and feel like a representative democracy on the surface, but under the hood it’s the modern day equivalent of feudal serfdom.

Last year 1,800 American citizens opted to do the same thing as Eduardo Saverin. They did the analysis and decided that the burdens imposed by their citizenship outweighed the benefits. IRS overreach in requiring foreign banks to report on accounts held by US citizens are just making it hard for Americans to open bank accounts where they may be living overseas and the US is the only country on the planet that taxes its citizens on their income earned outside the country. 

Eduardo Saverin made a completely rational decision and he should not be vilified or punished for it.

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The Wisdom of Winston

Samizdata's Quote of the Day today:

We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle

- Winston Churchill

The fact that this isn't self-evident is a crying shame.

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Lower Tax Rates Lead to Higher Tax Revenues

“Tax cuts for the rich are what led to this massive deficit,” is what the Democrats keep yelling. The facts (you know, those pesky things lefties are oblivious to?) are different.  CBO numbers show that from 2003, when the Bush tax cuts went into effect, and 2006, the last year of Republican majorities in both houses of Congress, tax revenues to the Treasury rose from $1.783 trillion to $2.407 trillion, a 35% increase.

Federal Tax Revenues

2003

2006

	Billions	% of GDP	Billions	% of GDP
Individual	794	7.3	1,044	8
Corporate	12	1.2	354	2.7
Other Tax	857	7.9	1,009	7.7
Total	1,783	16.5	2,407	18.4

 

In January 2007, both houses of Congress were taken over by the Democrat Party at a point when under a Republican Congress the deficit was $160 billion, its lowest point in five years. Go here to see what happened next.

 

(H/T MBG!)

What Will Happen When the Bush Tax Cuts Expire?

According to Gary Wickert a tsunami, actually three of them, will sweep over the economy one after the other and they won't just affect "the rich":

First Wave

Bush Tax Cuts Expire. Congress didn’t even have the strength of character to stay and vote on extending the Bush tax cuts before running home to protect their professional political careers. These tax cuts all expire on January 1, 2011. Thereafter, the top income tax rate will rise from 35% to 39.6%, the same rate at which two-thirds of small business profits are taxed. The lowest rate will rise from 10% to 15%. All the rates in between will also rise. Somewhere I seem to recall a promise about tax cuts for 95% of “working families.”

Second Wave

Obamacare will be the focus of congressional wrangling over the next two years, but it is unlikely to be repealed in that time. There are over 20 huge and completely new taxes contained within the new health care law which was hurried through Congress without being read and passed against the will of the American people. Several will first go into effect on January 1, 2011.

Third Wave

The Alternative Minimum Tax and Employer Tax Hikes. The AMT, which was originally intended simply to make sure that wealthy taxpayers didn’t use tax shelters and other tactics to avoid having to pay any taxes at all (a good start for an argument for a flat tax), affected nearly 4 million families last year. Starting in 2011, it will affect over 28 million families.

There's much more. Read the whole thing.

How to Make Atlas Shrug....

....Or to reach even further back into literature, how to kill the goose that laid the golden egg. Forbes publisher Richard Karlgaard explains why increasing tax rates is counter-productive to increasing tax revenues (for those that still don't get it) and notes that the effect is non-linear:

The more you tax and regulate things, the less you get of those things. What's really important to understand is that the "less you get" part is not linear. There's a tipping point at which you may get nothing if you pile on too many burdens. The supplier always has a choice to supply or not. Capital can go on strike. Atlas can shrug.

That's the theory, but is it true? Let's ask Rolling Stone Keith Richard:

"The whole business thing is predicated a lot on the tax laws," says Keith, Marlboro in one hand, vodka and juice in the other. "It's why we rehearse in Canada and not in the U.S. A lot of our astute moves have been basically keeping up with tax laws, where to go, where not to put it. Whether to sit on it or not. We left England because we'd be paying 98 cents on the dollar. We left, and they lost out. No taxes at all.” [my emphasis]

QED. Nothing like a nice little example from the real world to prove the point.

(h/t Bob)