Against Check the Box
I’ve heard that there’s some disappointment in the administration that they haven’t gotten the level of progressive love they feel they deserve for their ambitious proposals to curb abusive corporate tax loopholes. These are the kind of issues where, if it’s hashed out behind closed doors, the bad guys are destined to win. But if the fight turns public, the good guys will win. Pat Garofalo observes that congressional critics of the plans don’t have much to say for themselves, with Rep. Joe Crowley (D-NY) simply saying he’s “wary because the tax changes would hurt Citigroup Inc., his New York district’s largest private-sector employer.”
As far as bad reasons for doing something go, note that this one is unusually bad. The NY-7 isn’t like some huge swathe of Nebraska where people depend on in-district employment. It’s primarily composed of a residential section of Queens—itself a part of America’s densest city—and the vast majority of Crowley’s employed constituents will either commute to out-of-district jobs or else work in small neighborhood businesses.
But it’s worth taking a look at how absurd some of the abuses the administration is trying to curb are. Take, for example, the “check the box” rule. The Washington Post described this as “a Clinton-era rule known as ‘check the box,’ which permits firms to more easily transfer cash between countries.”
It’s important to note, however, that this isn’t a reversal of some deliberate Clinton administration strategy. Instead, what happened is that the Clinton administration promulgated a rule that was designed to simplify the classification of different kinds of subsidiaries. Within months of the rule coming out, the career civil servants in the Treasury Department noted that there was potentially a huge tax loophole here. The way it works is that a multinational company can set up two subsidiaries, one Acme Corp Cayman Islands and the other Acme Corp Germany. Then it sets up a Cayman Islands holding company, whose job is to own both subsidiaries. Then in order to make sure that the subsidiary located in high-tax Germany registers no profits, they have Acme Corp Germany take out high interest loans from Acme Corp Cayman Islands. This has the impact of ensuring that even though the business activity undertaken in Germany is generating all of the profits, they register as being untaxed Cayman Islands profits. Then you “check the box” and make the subsidiaries all disappear into the holding company.
That’s dumb. Which is why as soon as it was noted, an effort was put in place to change it. But a ferocious lobbying battle opened up, with the apologists for tax havens arguing that, basically, it was Germany’s ox that was getting gored here so Americans shouldn’t care. Over the years, however, that turns out to be wrong. The availability of this loophole is a significant incentive for companies to invest in their overseas subsidiaries and take advantage of the tax shell game. It’s a loophole that nobody ever intended to create, and that should be done away with forthwith. Eliminating may be bad for some firms who currently enjoy the loophole, but it’s not going to hurt overall employment levels for Joe Crowley’s constituents or for anyone else’s.
14 Responses to “Against Check the Box”
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May 11th, 2009 at 2:46 pm
It would be nice if the prostitutes for the johns who caused our entire economy to nearly implode would stop servicing those johns long enough to let people fix some of the mess they created.
Yes, Crowley, I’m calling you an unprincipled whore. Worried about the effect of this tax proposal on Citigroup’s workers. Yeah, right.
May 11th, 2009 at 3:01 pm
But a ferocious lobbying battle opened up, with the apologists for tax havens arguing that, basically, it was Germany’s ox that was getting gored here so Americans shouldn’t care. Over the years, however, that turns out to be wrong.
Well, Germany’s ox is being gored, so at least that part isn’t wrong.
The availability of this loophole is a significant incentive for companies to invest in their overseas subsidiaries and take advantage of the tax shell game.
Of course, to the extent that Germany has a lower corporate income tax rate than the US, what will happen is that these structures will be unwound and the US corporations will make additional payments to the German treasury and there will be no net impact on US corporate tax revenues or US jobs. That is, right now a company can do as you describe and pay corporate income tax at Cayman island rates (that is, zero), instead of the 28 percent (or whatever it is now) German rate. If these rules are repealed then foreign US subsidiaries will just pay the German 28 percent rate, which is still less than the US 35 percent (plus state) rate.
Why would they wind up their German operations that are taxed at 28 percent to operate in the US and get taxed at 35 percent (more, if there is a state income tax). Further, it’s likely that the German tax base is not as broad as the US’ (though I don’t know for sure), so not only is the rate lower, less income is taxed.
May 11th, 2009 at 3:05 pm
Why not just have Obama’s people threaten more businesses. The only difference between he and Chavez is that Obama doesn’t have to use troops yet.
May 11th, 2009 at 3:10 pm
Ugh, Citibank doesn’t pay anywhere near 35% tax, nor do most major American corporations.
May 11th, 2009 at 3:17 pm
I go with Hennessy on the subject:
http://keithhennessey.com/2009/05/06/potus-worldwide-tax/
May 11th, 2009 at 3:18 pm
shooter is so right. Closing corporate tax loopholes is exactly the same thing as being a tyrannical dictator.
May 11th, 2009 at 3:48 pm
Ugh, Citibank doesn’t pay anywhere near 35% tax, nor do most major American corporations.
Right. But they would pay much closer to that rate if they were forced to conduct all of their business in the United States. And they get to report a 35% tax benefit for untaxed foreign earnings for financial statement purposes even if their effective rate is much lower.
In any event, if Obama was serious he would just end deferral of US income taxes on the overseas subsidiaries of US corporations. Instead, we get this mostly ineffective piecemeal junk.
May 11th, 2009 at 3:51 pm
Why doesn’t Germany (or, for that matter, everyone) just ban deduction of intra-corporate-structure payments, with a sufficiently broad definition of “intra-corporate-structure”? Then the loans don’t work as a tax dodge because the tax code correctly recognizes that they are a sham; Acme Germany pays its taxes; and everyone’s happy.
(It doesn’t work if you take out high-interest loans from some *other* corporation, because then you really are giving up your profits to the other corporation. This kind of corporate money laundering can only be done in-house.)
Incidentally, if the officers of Acme Germany treated it like a corporation in its own right that they had fiduciary duties to, they would refuse the loan arrangement that eats all their profits. They’d go elsewhere for cheaper financing, or accumulate a cash reserve that eliminates the need for so many loans, or something that actually gives Acme Germany some profitability. (Imagine, if you held stock *in Acme Germany*, how this deal would look to you. Those are the people the CEO of Acme Germany is theoretically working for.) The fact that they don’t and can’t do this tells you exactly how many corporations you are really dealing with here: one.
May 11th, 2009 at 9:35 pm
Matt-You and the WaPo have no clue what ‘check the box’ or the tax haven issue is about.
There seems to be conflation between entity/flow through taxation with international transfer pricing. And that’s just the start of it.
So sad that this issue will not be discussed intelligently by anyone in the press or political blogosphere.
May 11th, 2009 at 10:02 pm
This could possibly be right, but the fact that nobody else (after the UK and Japan finish getting rid of it) taxes the income of its corporations worldwide suggests that maybe it is not a great idea to tax the profits that our corporations make through purely foreign operations in Germany to begin with. Moreover, the fact that Germany allows our country to play these shell games when investing in Germany and doesn’t take their corporations at all when they invest in US subsidiaries suggests that they think that the way that we tax corporations is not a good idea.
Secondly, isn’t the real problem that our corporate tax rate is higher than anywhere but Japan? As long as that is true, it is hard to avoid an incentive to invest abroad. For example, if we get rid of the check-the-box rules and all other sorts of deferal of US tax on foreign income, why wouldn’t US capital tend to just move out of US corporations and get invested directly in foriegn corporations that are allowed to do this sort of tax avoidance in Germany?
May 12th, 2009 at 9:32 am
Matthew,
You should try to get the quotes right if you’re going to criticize someone. Here’s what the Bloomberg article actually said:
Crowley said he favors taking steps to “protect U.S. multinational companies, including Citibank, which is the largest private-sector employer in Queens, so they are not subject to double taxation overseas.”
Note-he’s talking about all of Queens, not just his district. A lot of people commute into Queens to work at the big Citigroup building in Long Island City, and a lot of people from all over Queens work there as well. They buy their lunches there, park their cars there, and spend lots of other money as well, providing jobs for the type of people who do live predominately in Crowley’s district.
There may be other reasons Crowley favors protecting Citi, but attacking him for wanting to protect jobs in Queens makes you look out of touch.
May 12th, 2009 at 12:38 pm
We should eliminate the corporate income tax entirely. Pay for it by eliminating the lower tax rates for capital gains and dividends, further simplifying and de-biasing the tax code. That would:
- dramatically improve the international competitiveness of US companies
- take 00’s of billions in deadweight loss out of the economy by eliminating accounting and legal costs
- take a big bite out of lobbying, because there’d be no loopholes to lobby for
- pension funds and 401ks would benefit from the higher stock markets and bigger dividends that would result, while eliminating special treatment for other investors.
May 12th, 2009 at 3:30 pm
[...] a rule known as “check the box,” which has amounted to a loophole allowing companies to easily shift income into low tax [...]
May 13th, 2009 at 1:49 am
[...] as Matt Yglesias describes Crowley’s district: The NY-7 isn’t like some huge swathe of Nebraska where people depend on in-district employment. [...]