President Bush Supports a Tax Hike
And you thought the day would never come: earlier this week, President Bush signed into law a bill that (gasp) increases federal taxes. The bill, HR 6081, known as the “Heroes Earnings Assistance and Relief Tax Act,” creates or extends a host of special tax breaks for military members and their families, which in itself is a move no sane member of Congress would oppose. But heretically, the bill pays for its tax cuts by closing an existing tax loophole.
The tax break in question, which Talking Taxes discussed in detail a few months back, allowed KBR, a former subsidiary of the Halliburton company, to avoid hundreds of millions of dollars in federal Social Security and Medicare taxes by pretending its Iraq-based employees were working for a Cayman-Islands based “shell company.”
Just as tax breaks for the military have no enemies (the House voted unanimously on this one), the KBR payroll tax dodge had no friends. So for any head of state not guided by the “no new taxes” mantra, signing this bill would be a no-brainer. But in this case, we’ll call it a pleasant surprise.
Now, as the NWLC’s Joan Entmacher asks, why can’t we get Congress and the President to apply the same logic to the egregious “carried interest” tax break for hedge fund millionaires?
Top Destinations in 2009
Last week’s travel section of the New York Times lists the top 44 vacation destinations for 2009. Neither Bermuda nor the Cayman Islands were on the list. And it looks like neither will make the top destination list for the headquarters of U.S. multinational corporations. The “hot” tax haven this year is cool Switzerland.
In the last few months, three large U.S. businesses that are currently chartered in Bermuda have announced that they are packing up and moving to Switzerland. Meanwhile, former hot spot, The Cayman Islands, seems to have lost its allure. Two U.S. companies incorporated there have announced headquarter moves to Switzerland and one plans to reincorporate in Ireland in 2009.
What is driving companies away from the islands of corporate tax relief? It appears to be Obamaphobia. As a Senator, the president-elect sponsored the Stop Tax Haven Abuse Act (which never came to a vote) that would have reduced the effectiveness of tax havens (and his campaign promised to crack down on havens.)
So why Switzerland? The Swiss impose a low corporate tax rate and exempt the foreign profits of home corporations from Swiss corporate taxes (unlike the United States, which taxes the worldwide profits of corporations based here). In addition, the Swiss have a tax treaty with the United States. Such agreements prevent the double-taxation of income and provide mechanisms that allow taxing authorities to exchange information with each other. The companies are betting that any legislation will target only countries like Bermuda and the Caymans that are not part of our treaty network.
What can we learn from these recent moves? First, headquarters are clearly quite mobile. Second, any corporate tax reform must consider how rates and tax systems influence where companies invest as well as where they choose to locate their headquarters. (These companies could have settled back in the United States but chose not to!) Maybe we don’t care that much where companies are located as long as they continue to invest in the U.S. Third, we need to take a closer look at the role of tax havens in any international tax system and what are the best ways to combat abuse.
Finally, we need to look more carefully at our tax treaty network. When and if the Obama administration tries to crack down on havens, should a treaty immunize a country’s corporations from scrutiny? Instead of lamenting the mobility of headquarters, let’s use this episode as a call to action for informed reform of our international tax system.