About That Proposed One-Time $280 Billion Tax on Foreign Corporate Profits …

President Obama’s administration has announced that he wants to impose a one-time tax levy of up to 14% on the $2 trillion in foreign profits American companies have built up and not repatriated in exchange for making repatriation on future foreign profits that were subject to at least a 19% tax rate tax-free, encouraging domestic investment.

While the second goal is admirable if one wants to stop American companies from jumping ship to our allies – Canada, the United Kingdom, and Switzerland in particular – through a move called a corporate inversion, which I once explained, there is no chance this existing proposal gets voted through Congress because of the first clause.  Old-line companies with heavy ties to the White House would be severely harmed.  General Electric alone would have an entire year of profits obliterated, as would most of the other components in the S&P 500 and Dow Jones Industrial Average.

In an act of grand political theatre, President Obama has proposed a 14% one-time asset grab of all foreign business profits held by American companies. It doesn’t stand a snowball’s chance in hell of succeeding, and everybody knows that.

Given the downside, it’s clear that’s not the intent of the proposal.  If the Democratic party wanted to do this, it could have easily achieved it when it controlled both chambers of the legislature and the White House.  It didn’t because it knows not only would it hurt the Federal government’s budget in the long-term, it would lead to a loss of influence and power.  People like Nancy Pelosi, when she was the Speaker of the House, don’t actually want this no matter what lip service they pay.  They’re smarter than that.  The woman is essentially a walking hedge fund with a portfolio so large it puts her in the top 1% of the top 1%.  The financial disclosure show she owns between $1,000,001 and $5,000,000 worth of Apple, Inc., common stock alone, for Heaven’s sake, which could be hit extraordinarily hard if confiscated.

To understand how this would play out if it became law, imagine you were on the Board of Directors for the McDonald’s Corporation.  You’re going to show up, grab a cup of coffee, sit down, and write out a very quick list that serves as a game plan for management to maximize shareholder value:

1. McDonald’s Corporation goes to the United Kingdom and sets up a new business.  We’ll call it Golden Arches, PLC.
2. McDonald’s Corporation transfers all of its equity, shares, and other ownership stakes in non-U.S. based operations, joint partnerships, affiliates, and to Golden Arches, PLC.
3. McDonald’s Corporation handpicks a new CEO, CFO, key executives, and board of directors for Golden Arches, PLC.
4. McDonald’s Corporation sells a small amount of float – we’ll say 10% or 20% – of Golden Arches, PLC in an IPO on the London Stock Exchange so the business can begin life as a stand-alone entity.
5. McDonald’s Corporation spins off the remaining 80% or 90% of Golden Arches, PLC to its shareholders, breaking itself apart entirely with the U.S. business retaining no rights or exposure to anything outside of the borders of the United States.

Now, what have we accomplished?

1. All of those high-paying, tax-generating executive jobs move to London rather than the suburbs of Chicago.
2. The U.S. government collects not a dime that it intended to collect.
3. The U.S. business, and it’s U.S. policies and culture, begin losing significant influence around the world as it can no longer use its ownership in foreign subsidiaries to dominate their behavior.  This should not be taken lightly.  McDonald’s is a symbol of the United States in a lot of places.  When the mess with Russia began, for example, one of the first things Putin did was threaten the McDonald’s restaurants in his country with shut-down as retaliation under the pretense of health inspections due to some problems at a handful of locations.  We, as a nation, exert influence through commercial spheres just as much as military spheres.  It’s idiotic to give up that kind of power in exchange for nothing.
4. American investors get to enjoy the lawfully ratified tax treaty between the United States and the United Kingdom.  Golden Arches PLC could repatriate a ton of its foreign earnings to Her Majesty’s shores, then ship them out as dividends to the American investors who, at this point, could collect those dividends tax-free inside of their IRAs, 401(k) plans, and pension plans.

Why would the President suggest a policy that, past actions have indicated, he clearly doesn’t believe is best for the country?  It’s political theatre, designed to benefit both Republicans and Democrats.  In other words, it’s Washington being Washington.

[mainbodyad]The Democrats get to look like they are asking corporations to pay their “fair share” – a meaningless term that is made all the more meaningless when you realize Federal tax receipts are at an all-time high record if 2015 projections turn out to be accurate, bringing more than $3.34 trillion into the sovereign coffers.  In inflation-adjusted dollars, that’s more than triple what President Clinton had in real purchasing power when he took the Oath of Office and saw $1.09 trillion in purchasing power equivalent gush into the Treasury.  Even more damning, the economy has grown faster in real terms than the population adjustment, meaning it translates into more real tax dollars available per citizen.  The narrative there is some sort of lack is incredible given that the real problem lies on the spending side of the ledger, which takes all but a few seconds to see if you crack open the spreadsheets.

In fact, as I’ve pointed out previously, when you adjust for purchasing power parity in many years, the United States collects more tax dollars per citizen than countries like France.  We could easily, almost overnight, have a system of free-at-the-point-of-use healthcare, free-at-the-point-of-learning higher education, and a host of other social welfare benefits without raising taxes by a single penny.  The problem?  Vested interests don’t want to give up their share of the Federal pie, which has become so corrupt by this point, you have the Pentagon practically ordering Congress to stop buying planes and weapons it doesn’t want just so it can kick cash back into election districts for the sake of buying votes.  Our three biggest line items, representing virtually all budgetary expenditures, are sacred cows to so many voters there’s no hope of reforming them.  Look at Social Security.  It’s a nonsensical system that disproportionately taxes poor and working class entrepreneurs and distributes those benefits with no regard to need at all.  Fun fact: Bill Gates will be entitled to draw a Social Security check within a few years.  Warren Buffett already does.  In what universe does this make sense?  If you want a pension system, I’ll repeat what I’ve said previously: Copy Australia’s.  It’s better if the aim is to reduce poverty.

This whole “we just need more money” theme resonates with a certain minority of left-leaning, financially illiterate, disenfranchised voters who are given a convenient target for their anxiety, while those on the right side of the political spectrum get to jump up and down, screaming, “See?  The socialists just want to take more of your money!”  This provides ample ammunition and fundraising opportunity for the upcoming election cycle.  Politicians win.  Voters fall for it again and again, year after year.

The Republicans are just as much to blame for this.  They had an opportunity to live their low-tax mantra back when President Obama begged them to slash the payroll tax by 50% to help the working poor and middle class.  They refused and wanted a tax cut for the wealthy, instead.  It lost them all credibility on the topic.  The President settled for an absolute 2% drop, which made a significant difference in the lives of a lot of people.  It was, in my opinion, a terrible miscalculation on the part of the conservative right.  They were so concerned with avoiding the appearance of giving Obama a win, they literally killed what would have been the biggest tax cut on workers in generations.

Beyond that, though, the whole discussion of foreign earnings taxation is boring at this point.  We’ve talked about it over and over again.  Nothing has changed.  Liberal and conservative economists are still mostly united on a plan that would solve the whole thing instantly: Abolish all tax shelters, abolish all corporate taxes, and start treating individuals as the tax-level entity.  The government would look at someone like Mitt Romney and view him as the business, with him owing his share of the taxes on all profits directly or indirectly earned.  Own shares of Exxon Mobil?  Congratulations, you get a K-1 statement just as if it were an LLC or LP.  There are already multi-billion dollar enterprises traded on the stock exchanges using structures like this.  Practically all privately owned family businesses formed in the past twenty years is structured like this.  It’s not hard.

Few outside of economics go for it because they either have a vested interest in the status quo (e.g., real estate brokers not wanting to lose the home interest mortgage deduction as it would inevitably lead to a decrease in the nominal value of housing in the short-term, which would lower their commissions – it happened in Kansas) or they don’t understand that abolishing the corporate income tax does not mean a tax cut for the rich (they would be paying those same taxes directly and personally).  The latter mistaken belief often arises when a person isn’t familiar with how business is actually conducted in this country; the fact that most legal forms are already pass-through, including, but not limited to:

• Sole Proprietorships
• General Partnerships
• Limited Partnerships
• Limited Liability Companies with Partnership Taxation
• Master Limited Partnerships
• Sub-Chapter S Corporations
• Royalty Unit Trusts

You could avoid liquidity concerns easily (which wouldn’t be a problem, anyway, as the free market wouldn’t tolerate non-distribution of cash sufficient enough to pay the tax liability for very long) by having the financial regulators require all publicly traded companies to include something known as a “partnership tax distribution clause” based on some conservative, high-tax rate calculation unless a super-majority of equity holders vote to exempt the entity from the requirement.  It’s standard operating procedure.  We have them inserted in every LLC we’ve ever owned.

I have no hope it will happen.  Look at the proposal a couple of years ago Congress almost passed about income taxes.  They were going to simplify the system so a majority of the country could calculate, file, and pay their taxes in a matter of seconds for absolutely free but Intuit, the maker of Turbo Tax, used its lobbying influence to have it killed as it would have been catastrophic for their revenue.

[mainbodyad]The worry that I have with the two parties playing this, “Let’s propose something we don’t think is really a good idea just so we can pander to the illogical segments in our base” is that, sooner or later, those illogical segments can take over the asylum.  Nobody in power or proximity thought that Republican John Boehner actually wanted to default on the debt ceiling even though it very well could have sent us into a sovereign meltdown from which it might take years, if not a generation, to recover.  Like him or hate him, he’s too smart, and too reasonable, to do such a thing.  He was almost pushed into it because the party told the narrative for long enough that representatives from fringe parts of the country were added to the ranks, acting on a conviction based on economic illiteracy.

The Democrats might very well spawn their own monster, every bit as rabid and clueless, if they aren’t careful.  Look at the polling data on young people in the past decade who now view the term “socialism” favorably (part of whom appear to do so because they have no idea that socialism is not the same thing as thinking you should take care of your neighbor or provide basic social welfare programs, which are not incompatible with free market capitalism).  If you keep telling people they are entitled to “more” – never specific, always ambiguous, just “more” – of other peoples’ efforts, resources, and achievements, there will come a point when they believe you, thinking they should be able to live with a certain degree of comfort despite doing nothing to deserve or earn it.  Nation after nation has destroyed its economic engine with such policies and there is nothing that makes the United States magical or special enough to withstand it if it is ever permitted to take root.

Personally, I am convinced at this point the cause is almost entirely the 24/7 news cycle.  It’s turned everything into a farce with the constant need to tweet, in real-time, the business of running the nation as if it were a play-by-play contact sport rather than reasonable people from both side of the aisle trying to what is best for present and future generations of Americans.