The Panama Papers have burst onto the scene as the latest WikiLeaks release showing how powerful people all over the world use tax havens to shield their money from their respective governments.
This revelation ranks right up there with the news that the New England Patriots are a pretty good football team and that Bill Clinton likes women.
The only real question is to ask who is naïve enough to believe that people don’t move assets around to protect them from a predatory government. The entire foundation of the U.S. tax code is built on this assumption. The federal government wants you to save for retirement so they create a deduction to incentivize you to do so. When you are done Turbo Taxing and discover that you owe money, but are eligible to shift from a taxable account to a 401(k) or IRA to limit or wipe out your tax burden, if it is practical you do it.
Why? Because while it ties up some of your savings and investment into accounts that cannot be accessed until later in life, you receive an immediate significant return on that money simply due to avoiding paying a hypothetical 25 percent tax on the dollars that you shifted.
Real estate agents have been touting the benefits of home ownership for decades using the deductibility of interest paid on a mortgage as a key cost saver. The message is clear. Change your behavior in order to garner a tax benefit.
While the everyone does it excuse is no excuse at all, the truth is that when a country like the United States has a usurious 40 percent tax rate (the second highest in the world), it would be insane for any U.S. based corporation not to keep as much of its profits invested overseas. In fact, it would be a dereliction of their management team’s duty to their shareholders to bring that money back to the U.S.
The real outrage in this situation is President Barack Obama’s knee-jerk reaction that there should be “international tax reform” because as The Guardian quotes him, “We shouldn’t make it legal to engage in transactions just to avoid taxes.” Instead, Obama extolled, “the basic principle of making sure everyone pays their fair share.”
Ouch. The poor wind energy producers who exist solely because of a tax credit that incentivizes investors like Warren Buffett to avoid taxes by putting their money into what otherwise would be a bad investment are clearly on Obama’s chopping block.
And Elon Musk, the ultimate venture socialist, who has rung the bell of benefitting from government tax credits in both his solar and Tesla auto businesses. Eliminate the credits and government subsidies and Musk is just a long ago after shave scent.
While it should be no surprise, Obama fundamentally misunderstands the basis for these tax shelters – taxes are too high and just as water runs downhill, money always seeks the lowest tax rate.
Here in the United States, Obama can do something about corporate money escaping the tax man’s grasp by taking a very simple, yet radical, step – by eliminating the corporate income tax altogether.
If this were to occur, much of the more than $4 trillion of corporate revenues that are parked overseas would be repatriated to the benefit of the U.S. economy. Small and mid-sized businesses would have an immediate and powerful cash flow injection that would allow them to expand, hire and yes, even give raises. By denying the federal government approximately $340 billion in short term revenues, the deficit would temporarily go up, but the stimulative impact of the unprecedented level of direct and permanent cash infusion into the economy would be exponential.
Or all of the countries in the world could somehow shut down the tax haven loopholes that have offended Obama’s sensibilities, creating lots of work for lobbyists around the world to find and create new dodges to replace the old.
For me, I’ll take the zero percent corporate tax rate and eliminate one of the main incentives that cause companies to either leave the U.S., or to keep their profits offshore. Unwittingly, the Panama Papers and WikiLeaks may have done society a favor if a true examination of why people and corporations hide their funds from government’s avaricious hand.
Rather than wringing their hands about these tax avoidance tactics, lawmakers on the left and right should come together and do what is in the United States’ interest and significantly lower if not outright eliminate the corporate income tax.
This simple, yet radical, proposal would have the important effect of attracting capital investment into the now tax free haven creating economic growth that benefits the entire economy. The up-front cost would seem to be enormous at $342 billion, and in the first year the budget deficit would necessarily spike. However, the entire rationale behind corporate decisions to keep more than would be eliminated, bringing much of that capital back to the U.S. where it would contribute to a private sector growth boom.
What’s more, small and medium sized businesses would be freed from their tax burdens allowing them to reinvest these resources toward expansion, increased wages to enhance employee retention and for personal profit. The resulting tax revenue increases from an expanded, higher paid workforce, along with the diminished cost of providing social services to the newly and more fully employed would eventually offset the loss of corporate tax revenue.