I am sitting here reading the fine print in a contract to buy a house for a price that is three times what I sold my house in Minnesota for. I am not UMC in Miami, I guess. Forgive me if I am even less coherent than normal — and that I haven't had a chance to do more commenting.
Oh, well, back to taxing the nowhere and everywhere profits of multinationals. The world-wide network of tax treaties rests on the arm's-length notion, which, I have argued (and the comments seem to be moving somewhat — somewhat — toward accepting), misses nowhere and everywhere profit. This is real important, as failure to tax nowhere and everywhere profit guts business income taxes as a source of revenue for countries. (Yes, tax jocks, the current US regs, whiile pretending to be arm's-length regs, do capture some nowhere and everywhere income.)
Well, it is time to talk about multinationals again. I am somewhat over my head here, as this is a developing area, and I am not current in the literature. That said, here goes.
The classic analysis of the “extra” profitability of multinationals looks to market barriers. If there weren't barriers to forming a multinational, there would be new ones created seeking that extra profit. As more multinationals are formed, the extra profit goes away. After all, it must be costly to set up a business that can function legally and practically as one enterprise in many countries, or everybody would do it. Back when there were few multinationals, the market barrier analysis seemed to tell the whole story. Today?
There have been a lot of insightful comments on my posts. sorry that I haven't had time to comment back. Been dealing with horrendous computer problems. Comments on comments soon.
Yesterday, I noted, and one great comment (by the ominously named Consultant) telegraphed, that stripping is the ball game when it comes to protecting the US business income tax base. What is going on? One can get a feel for the hidden concerns here by reading between the lines of the Treasury report that I gave a link to yesterday.
In a few days, I will write more about the “extra” value in a multinational. Today, as promised, I want to talk about expatriot corporations.
A bunch of US corporations moved to Bermuda on paper to reduce US taxes. In such a transaction, technically, the old shareholders of the US operating corporation become shareholders of a new Bermuda holding company, which ends up owning the old US operating corporation. Because the old US corporation becomes a subsidiary of the new public Bermuda company, expatriation transactions are referred to as “inversions.” The tax benefits of inversions have been there for some time. But, inversions became popular only recently as corporate managers and the stock markets began accepting Bermuda corporations more.
I feel like taking a little break — two or three days —from international taxation.
Fortunately, there are even more important — at least in the medium term — tax topics. The most pressing tax issues today are presented by two time bombs in current law: (i) the sunset of the Bush tax cuts and (ii) the metastasis of the alternative minimum tax.
John Kerry's acceptance speech last night made reference to the US rules for taxing multinationals. I thought that his comment presents a nice opportunity to pull together some of the prior analysis and extend it to outsourcing.
Kerry promised to:
close the tax loopholes that reward companies for shipping jobs overseas. Instead, we will reward companies that create and keep good paying jobs where they belong, in the good old U.S.A. We value an America that exports products, not jobs. And we believe American workers should never have to subsidize the loss of their own job.