Topic: Tax and Budget Policy

More Companies Escaping America’s Masochistic Corporate Tax System

Last August, I shared a list of companies that “re-domiciled” in other nations so they could escape America’s punitive “worldwide” tax system.

This past April, I augmented that list with some commentary about whether Walgreen’s might become a Swiss-based company.

And in May, I pontificated about Pfizer’s effort to re-domicile in the United Kingdom.

Well, to paraphrase what Ronald Reagan said to Jimmy Carter in the 1980 presidential debate, here we go again.

Here’s the opening few sentences from a report in the Wall Street Journal.

Medtronic Inc.’s agreement on Sunday to buy rival medical-device maker Covidien COV PLC for $42.9 billion is the latest in a wave of recent moves designed—at least in part—to sidestep U.S. corporate taxes. Covidien’s U.S. headquarters are in Mansfield, Mass., where many of its executives are based. But officially it is domiciled in Ireland, which is known for having a relatively low tax rate: The main corporate rate in Ireland is 12.5%. In the U.S., home to Medtronic, the 35% tax rate is among the world’s highest. Such so-called “tax inversion” deals have become increasingly popular, especially among health-care companies, many of which have ample cash abroad that would be taxed should they bring it back to the U.S.

It’s not just Medtronic. Here are some passages from a story by Tax Analysts.

Teva Pharmaceuticals Inc. agreed to buy U.S. pharmaceutical company Labrys Biologics Inc. Teva, an Israeli-headquartered company, had an effective tax rate of 4 percent in 2013. In yet another pharma deal, Swiss company Roche has agreed to acquire U.S. company Genia Technologies Inc. Corporations are also taking other steps to shift valuable assets and businesses out of the U.S. On Tuesday the U.K. company Vodafone announced plans to move its center for product innovation and development from Silicon Valley to the U.K. The move likely means that revenue from intangibles developed in the future by the research and development center would be taxable primarily in the U.K., and not the U.S.

So how should we interpret these moves?

Tax Exiles Flee America: Blame the Greedy Politicians

The U.S. government is driving some of its most productive citizens abroad.  The only beneficiaries are countries such as Singapore and Switzerland, which offer sanctuary to Americans fleeing avaricious Uncle Sam.

Three years ago Eduardo Saverin, one of Facebook’s founders, joined 1780 other Americans in renouncing their citizenship.  Heading overseas allowed him to reduce the federal government’s take when his company went public.

Just 231 people gave up their citizenship in 2008.  Last year the number was 2999.  The first three months of 2014 was 1001, up from 679 for the first quarter of last year. 

Tax flight is not an option for most people.  However, the rich have more choices internationally.  And they increasingly are telling Uncle Sam goodbye.

So are big corporations, such as Pfizer, which is seeking to buy the British pharmaceutical company AstraZeneca.  The acquisition would allow Pfizer to move its headquarters to the United Kingdom, which employs a “territorial” tax system, with taxes collected only where the income is earned, in contrast to Washington’s worldwide levy. 

About 50 firms have moved their headquarters over the last three decades, half of them since 2008.  Last month the Obama administration decried the practice and proposed to increase the share of foreign ownership required for inversions.

Traditionally the entrepreneurial and productive wanted to come to America.  Many still do.  But the choice is no longer so clear-cut. 

Paul Martin: The Bill Clinton of Canada, Only Much Better

Imagine how weird it would be if the Cato Institute and Americans for Tax Reform praised Barack Obama for fiscal responsibility. And think how inconceivable it would be for the Heritage Foundation and the National Taxpayers Union to applaud Tim Geithner for economic stewardship.

The Canadian version of that happened while I was at the conference of the World Taxpayers Association in Vancouver two weeks ago.

The event was organized by the Canadian Taxpayers Federation and the main speaker was Paul Martin of the Liberal Party, who served as finance minister from 1993 to 2002, and then as prime minister from 2003 to 2006. I should add, for context, that the Liberal Party in Canada is not a classical liberal party with a track record of free markets and small government.

But Paul Martin was honored because he was responsible, while finance minister, for one of the best records of fiscal restraint of any policymaker in recent history (click here for international comparisons).

I’ve pointed out that the burden of spending fell under Bill Clinton, and I’ve even acknowledged that the federal budget hasn’t grown much under Obama, at least once you get past his first couple of years. But Paul Martin was far more frugal. And since Canada has a parliamentary system, there’s no ambiguity about who deserves credit. He restrained spending when his party had control.

What happened to generate the good results? For all intents and purposes, he imposed a spending freeze. And I’m talking a nominal spending freeze, not the kind of fake fiscal discipline you get when politicians make “cuts” off an inflated baseline. Because the budget was successfully restrained, that addressed both the problem of too much spending and the symptom of red ink.

The D.C. ‘Fitness Tax’ in Context

An important local story in Washington, D.C. this week is the D.C. City Council’s proposed tax overhaul package. The package would restructure the tax code and reduce revenue by $67 million a year. Unfortunately, special interests may be poised to defeat generally good, pro-growth reform.

The proposal passed 11–2 on its first reading. It was the byproduct of months of study and debate. Under the plan, income tax rates would be cut, which would benefit middle-income residents. The standard deduction would be increased, particularly benefiting lower-income residents. The DC Fiscal Policy Institute estimates that middle-income families with incomes between $50,000 and $75,000 would save an average $400 annually.

It also would lower the corporate tax rate from 9.975 percent to 8.25 percent by 2019, while cutting the “death tax” and eliminating some wasteful tax credits.

These changes would provide much needed relief to D.C. residents and businesses, and make D.C. a little more competitive with its neighbors.

To partly offset the loss in revenue, the city council decided to expand the sales tax base to include some currently untaxed services, such as carpet cleaning, beautician services, and storage facilities. It would keep the sales tax rate at 5.75 percent, lower than Maryland and Virginia. 

However, one particular service industry is trying to sink the entire deal. The sales tax base expansion would include fitness services, such as gym and yoga studio memberships. One gym, Vida Fitness, is leading the charge against the “D.C. Fitness Tax,” urging customers and D.C. residents to sign a petition opposing treating fitness services like most other retail goods and services. Contrary to what Vida Fitness and others say, this isn’t a new tax only affecting their industry; it is simply the expansion of the general sales tax base to include their industry’s products.

I’m not in favor of new taxes, but it is also not fair that gyms are exempt from sales taxes that hit most other retailers and their customers. As Wes Rivers of the DC Fiscal Policy Institute described it, “D.C. residents already pay sales tax on exercise equipment, running shoes, and yoga mats.” Twenty-two states include fitness services in their sales tax bases.

Middle-income residents will save more in income taxes than people will pay in increased sales taxes on gym memberships. Many of those taxpayers likely belong to gyms and yoga studios, so Vida Fitness’ opposition may hurt its customers more than it helps.

The city council should go further in cutting tax rates, but this package is a good first step. It moves D.C.’s tax code a little away from the income tax and towards the consumption tax, which is a more fair and efficient tax structure. Hopefully, policymakers won’t let special interests derail a generally pro-growth reform in D.C.

The Rush to Expand the VA

The Senate voted 93-3 on Wednesday to expand health care spending for veterans. Under the Senate bill, veterans would be able to access health care services from facilities outside the Department of Veterans Affairs (VA) system.

The headlines from the last few weeks clearly illustrate the need to reform this massive system, but the Senate’s rushed plan would dramatically increase veterans’ health care spending without tackling needed fundamental reforms.

Just before the vote, the Congressional Budget Office (CBO) released a preliminary estimate of the bill’s costs. Because of the hurried nature of introduction and debate, CBO was not able to fully review and estimate costs.

CBO says that the new program would increase spending by $35 billion over 10 years. But that doesn’t tell the full story. CBO expects initial set-up of the new program would take several years with veteran enrollment ramping up over time. And the bill just authorizes the new spending until 2016. So it appears that the CBO estimate of $35 billion just includes the cost over the first three years.

Over the longer term, CBO estimates that added annual spending would be $50 billion a year. So if the current bill is enacted and the added spending extended in the future, it would raise federal spending by about $385 billion over the next decade, as illustrated in the chart below the jump.

Tea Party Discovers Eric Cantor’s Record on Federal Spending

I was as surprised as everybody else by David Brat’s defeat of Eric Cantor yesterday. But I’m not really surprised that Tea Party-type voters were tired of Cantor’s voting record. In 2010, I noted that Cantor, Rep. Kevin McCarthy, and Rep. Paul Ryan had published a book, Young Guns, which cast the Republican congressional leaders who preceded them as a group that “betrayed its principles” and was plagued by “failures from high-profile ethics lapses to the inability to rein in spending or even slow the growth of government.”

But, I wondered, how credible were the messengers? Once you ruin a brand, it can take a long time to restore it. And part of the solution is owning up to your own errors, not just pointing the finger.

Sadly, I discovered at the time that the authors didn’t have very clean hands when it came to the overspending and overregulation of the Bush years. Most relevantly for today, I found that Rep. Cantor voted for the Bush administration’s No Child Left Behind Act in 2001, expanding federal control over education. He voted for the costly Iraq war in 2002. He voted for the Medicare Prescription Drug, Improvement, and Modernization Act in 2003, which was projected to add more than $700 billion to Medicare costs over the following decade. He voted for the Emergency Economic Stabilization Act of 2008, which included the $700 billion TARP bailout. 

To be fair, he did get A’s and B’s in the annual ratings of Congress by the National Taxpayers Union, which means he had a better record on spending than most of his colleagues. But as the Tea Party’s been complaining, that’s not saying much.

David Brat, a professor of economics, promised in his campaign to “fight to end crony capitalist programs that benefit the rich and powerful.” While I’m disappointed in his opposition to sensible immigration reform, I hope that if he does get to Washington he’ll bring a revitalized Tea Party message of fiscal responsibility and opposition to big business cronyism.

Eric Cantor’s Website

My Daily Caller op-ed today looks at the website of a typical modern politician, Rep. Sean Patrick Maloney (D-NY). His site is designed to impress voters and the media in his district with all the federal benefits he has brought home. Maloney is taking a pork and constituent service approach to gaining reelection.

There are other approaches to electoral success. Senator Rand Paul (R-KY) has a strategy of championing principles and specific issues that broadly resonate. The detail on Paul’s website is much better than most. Under “Issues,” he describes his general approach to each policy topic and discusses his stands on particular bills. Under “Budget” he provides a 106-page plan to cut spending.  

Looking at Rep. Eric Cantor’s (R-VA) website, you can see that he followed neither the pork nor the principled approach. If Cantor brought pork home to his district, he does not do a very good job telling people about it.

Regarding big ideas or describing his positions on issues, Cantor’s congressional website is nearly empty. Unlike most members, he does not even have an “Issues” section to explain his approach to tax reform, the budget, economic growth, civil liberties, energy, or other policies. His website is fluff.

Cantor’s primary defeat seems partly due to a lack of trust, meaning that voters in his district did not really know where he stood on issues or how he would vote. His website seems to have reflected his strategy of not taking hard stands and having few guiding principles. In his district, that ended up being a losing strategy.

(As majority leader, Cantor also runs this website. But for all the resources that office must have, this site is also very fluffy).