Tuesday, March 12, 2013

Corporate Profits Are Everybody's Punching Bag - I Say ABOLISH THEM





Nothing quite stirs up a debate like corporate profits.  In America the debate is especially ferocious because the left considers corporate profits their money and they truly believe that if they could only seize all those evil profits that they could make the world a perfect place.   Corporations who protect their profits from taxation are routinely vilified.

Reports: US 'Corporate Tax Dodgers' Keeping More Money Overseas Common Dreams
'Why should ordinary taxpayers have to sacrifice while highly profitable corporations are using accounting acrobatics and tax havens to avoid paying their fair share?'

At a time of record corporate profits, U.S. "corporate tax dodgers" are parking more of their profits offshore, taking advantage of tax loopholes to shield billions from U.S. taxes, according to new analyses in the Wall Street Journal and Bloomberg.

The WSJ looked at 60 U.S. companies that parked a combined $166 billion offshore last year, allowing 40% of their annual profits to escape U.S. taxes. In Bloomberg's analysis of 83 companies, there was a $183 billion expansion over the past year in non-U.S. holdings, for a combined total across the 83 companies of $1.46 trillion in offshore profits.

The trend is clear: figures from both papers show an increase from last year in offshore profits — up 15% using WSJ figures and a 14.4% increase using Bloomberg's data.
That's clearly a scathing indictment of corporate profits. The business friendly website Zero Hedge also chirped in on the issue.

Which 'Patriotic' US Companies 'Invested' The Most Cash Overseas Last Year?

Over the years and decades Congress has passed numerous laws that encourage and reward American corporations who offshore, relocate to foreign shores and cease investing and producing in the US.   Effectively, Congress has made it very profitable for corporations to fire US workers and just pack up and leave.  It has been estimated that $2 trillion in corporate profits are now sitting offshore.

$2 Trillion in Corporate Profits Perched Overseas
In a small effort to help assist during Admin’s sporadic posting week, I thought I would revisit the issue of US corporate taxes, and the resultant $2 trillion in profits that are sitting overseas, and which are unlikely to be brought into the US anytime soon due to the corporate tax rates in effect. Please forgive any typos as I am typing this directly into WordPress.

I just read today that Admin’s second most favorite company (sitting squarely behind IKEA in the number one spot), GE, has $108 billion in profits sitting overseas, which is being used to invest in overseas projects. Overall, there is believed to be around $2 trillion total in profits that foreign arms of US companies have made that are not being transferred to parent companies in the US owing to the corporate tax rate of 35%, which is, of course, the world’s highest. Those transfers will not be made, as it would be irrational for a company to do so.

Everyone knows that corporations pay little or no tax on their US profits, for a great many reasons – tax breaks, R+D credits, etc etc etc. Total corporate tax take is around $300 billion a year. However, any overseas profits brought back on shore would be hit with the full corporate tax rate, as the various rorts have already been used to minimize the tax on onshore profits. If the full $2 trillion were to be repatriated, it would mean an approximate tax bill of some $700 billion dollars. That is not going to happen, as the companies would rather be investing the $700 billion rather than just giving it away to the IRS. Further, if the money were repatriated, and the $1.3 trillion left after the tax take was invested in the US, the income on the money would be subject to the draconian 35% tax rate – as I have said, which is the highest in the world (at least the developed world). So the long and the short of it is, corporations are way ahead of the game if they do not bring the money home. Even very modest returns on their $2 trillion investment means the corporations are generating billions in income more than if they were to bring the money into the US.

A further issue is that transfer pricing is being rorted mightily. Companies are doing all possible to make sure their overseas arms post a profit, and for their US entities to not post a profit. The best way to do this is to ensure that the overseas entities sell goods to their US entities at inflated prices, thus maximizing overseas profits and minimizing US profits. And vice versa. There is huge incentive to do this, and it is being done on a very large scale, despite attempts to keep it from happening.

An interesting fact is that around $1.5 trillion of the overseas profits are actually held in US banks. The overseas entities send their profits to US banks to hold, and it is not deemed to be returned to the US. It is simply a foreign entity having accounts in the US. The main reason it is done is to protect the parent corporation from swings in the exchange rate of the US dollar. So rather than holding the profits in ringits or baht or whatever, the foreign arms open a US bank account and deposit the foreign earnings into JP Morgan, US treasuries, or whatever.

So, to summarize, the curent tax system 1) gives corporations incentive to leave foreign profits overseas, and not bring the profits back to the US, and 2) gives incentives to artificially minimize US profits by transferring the profits to the overseas arms of the US corporations so as to minimize US tax. It takes a particular kind of stupid to come up with a system that achieves exactly the opposite of what it should.

I understand that this can be a very complex issue, but the current system is promoting the flow of capital out of the US into countries that the US is competing against in a world-wide marketplace. It seems to me that the tax rate should reflect the global market, and a corporate tax rate of around 15 to 20% would eliminate the incentive which exists to 1) minimize US earnings in favor of foreign earnings, and 2) hold profits overseas. It would result in a significant increase in US capital expenditure, which would make the US more internationally competitive, and would create high-end, good paying jobs, and would make direct competitor nations less competitive at the same time, starving them of capital and profits.
If the above words are not a solid justification to reduce corporate taxes and repatriate US corporate profits back to the US to promote capital investment and economic growth, I don't know what is.

If Americas are wondering why our economy is in shambles and high paying jobs have disappeared, they have no further to look than the corporate tax system.  America has the highest corporate tax rate on the planet and even if nobody is paying it because of offshore tax loopholes, there are ZERO incentives for corporations to repatriate that big pile of money back to the US.

For starters, liberals are lusting to steal that big pile of money and other perverse incentives besides taxation such as healthcare costs and draconian regulatory costs function as severe impediments to jump starting our economy.

Every year the Competitive Enterprise Institute publishes a study on the cost of regulation.

Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State
• Estimated regulatory costs, while "off budget," are equivalent to over 48% the level of federal spending itself.  



That's a pretty gosh darn mind-boggling figure in regulatory compliance costs.  Add $1.750 trillion in regulatory compliance costs to the US corporate tax structure and it's clearly evident that America is not a friendly place to park capital and invest.  In fact, America does just about everything humanly possible to chase capital, business and jobs offshore and as far away from America as possible.

Just imagine the economic benefits of repatriating $2 trillion in corporate profits 'tax free' back to America.  Just imagine substantially reducing the prohibitively costly nightmare of a regulatory compliance state.

America would become a friendly place to park capital, make investments and hire folks.

But in America, sanity and what is good for the prosperity of the people is verboten.  The Democrats would freak out because they would deprived of their primary pleasure, namely tossing a few measly crumbs to those they deliberately impoverished.  For the Democrats, the people are nothing more than dependent zoo animals that they pet on election day and feed at will.  The Republicans really aren't any different and their goal is feeding the military industrial complex and the perpetual war machine.

Yet, a quick tweak of the tax laws on the issue of repatriation of corporate profits and a tweak of the regulatory compliance monster could dramatically reboot our economy and restore prosperity.

Meanwhile, the politicos have decided that the poor should remain poor, that the American middle class must be wiped out whatever the cost and that blasting America back to the Stone Age is a desirable and achievable goal.  Well, maybe not quite the Stone Age but Uncle Sam's Plantation truly reeks of feudalism and the days of masters salivating as overlords of their pathetic, compliant and obedient serfs.

1 comment:

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