May 14, 2012

The Ryan Budget and Territorial Taxation

Have you looked at Paul Ryan’s budget?  Among its many proposals benefiting the ubber-rich at the expense of the poor, it calls for a shift away from our system of taxation based upon worldwide income.  In doing so, the plan would exempt from U.S. taxation foreign profits earned by multinational corporations.  This aspect of the proposal is little understood and has received almost no press coverage, but it speaks volumes about the lengths conservatives will go to enrich the 1%. 

Today, when a U.S. citizen earns interest on investments held in a foreign bank or trust, he’s required to report the income to the IRS, subjecting it to U.S. taxation.  The same is true for corporate profits booked by overseas subsidiaries.  However, tax lawyers and accountants have found sophisticated ways that the rich use to shield income and avoid such liabilities.  This is crucial to note and the subject of an earlier blog I wrote.  If you’re unfamiliar with the issue of transfer pricing, go to this link.  It will be worth your time. 

The problem with Ryan’s proposed shift to a territorial system of taxation goes beyond a loss of revenue, which would be substantial.  (The Tax Policy Center estimates that his plan will result in a $4.6 trillion shortfall in revenue by 2022--$10 trillion if the Bush tax cuts are retained as Ryan proposes).  In my mind, the more significant problem is that it will result in regulatory arbitrage.  What do I mean by that?  Have you ever noticed how many U.S. businesses incorporate in states (Delaware, for example) outside their places of operation?  They often do that in order to take advantage of a less intrusive regulatory environment.  AIG, for example, was able to choose its federal regulator and opted for the Office of Thrift Supervision (it had ingeniously purchased a small S&L to give itself the option).  AIG's management knew it would receive little sophisticated supervision as a result, which was part of the truth behind the company's implosion.  The OTS, which was familiar only with the simple business model of thrifts, was completely unprepared to regulate the complexity of AIG's businesses.  In a similar way, if we allow a shift to territorial taxation, it will encourage our multinational corporations to book more income in less intrusive tax havens and move their operations (and probably more jobs) offshore.  They will do it to enrich shareholders at the expense of workers.

The proposal is moronic and must have been written by the Chamber of Commerce, which cares nothing about working class Americans.  The fact that Paul Ryan is pitching it is an indication that he and the other Republicans who support it are bought by moneyed interests and are party to the institutionalized corruption that jeopardizes the health of our nation.  What is painfully clear in all this is that a faction of America's leadership not only wants to reduce corporate income tax rates, but to eliminate it all together.  But conservatives have no middle ground.  Either corporations are people, in which case they must pay their fair share of income tax and help build the roads, schools and other public projects that benefit them, or they are not people and shouldn't be allowed to fund super pacs that give them the ability to buy elections and elected officials.  

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