In his State of the Union address less than a month ago President Obama brought up a basic minimum corporate tax. He noted that “companies get tax breaks for moving jobs and profits overseas” and that American companies should not be allowed to use these mechanisms to avoid paying their fair share.
But in order to change this status quo, legislators need to close the loopholes that allow companies to drive down their effective tax rates far below the official rate. This needs to happen. There are far too many corporate tax loopholes—which are deductions, credits, and other tax expenditures that benefit certain activities—and they often result in very different marginal tax rates for different companies who conduct very similar business activities. It is these loopholes which allow corporations to pay an average rate of 12%, even though the statutory rate is 35%. It is these loopholes that allowed the 100 largest U.S. multinational corporations to pay about $16 billion of U.S. tax on approximately $700 billion of foreign active earnings in 2004 – an effective tax rate of about 2.3%.We must close these loopholes to align the effective corporate tax rate with the official rate.
About three years ago, the U.S. Internal Revenue Service (IRS) caught wind that Swiss bankers from Swiss banking giant, UBS, were traveling to the United States and systematically offering wealthy Americans the opportunity to evade taxes. They also learned UBS formed offshore non-U.S. companies for investors’ assets and then engaged in an aggressive cover-up to conceal these activities.
After an intense investigation by the IRS, the United States Department of Justice (DOJ) pursued both criminal and civil charges against the giant Swiss bank. Federal prosecutors dropped criminal charges eighteen months later, however, after the bank admitted to fraud and conspiracy, paid a $780 million fine, and satisfied DOJ prosecutors that it had dismantled its offshore banking operations.
In August 2009, UBS agreed to a settlement with DOJ on the civil charges and as part of the deal, offered to hand over the names of 4,450 tax evading Americans to the IRS. For a moment, it looked like the Swiss government—in a grasping act of self-preservation—would step in and forbid UBS from handing over the names. But at the last minute, the two houses of Swiss Parliament agreed to stick to the deal.
This week, the lawyers of Teodoro Nguema Obiang, the son of Equatorial Guinea’s longtime President, released a statement calling the Obama administration’s seizure of $71 million worth of assets a “character assassination.”
In October of last year the U.S. Department of Justice (DoJ) unsealed an asset forfeiture claim against some of Obiang’s U.S. assets, including a $38 million Gulfstream private jet, a $35 million Malibu mansion, a Ferrari, and dozens of pieces of memorabilia of pop singer none other than Michael Jackson, which are worth about $2 million. Authorites came to Obiang’s home and seized much of these items, although they still haven’t been able to get custody of the plane. The DoJ filing claims Obiang derived the assets from “the misappropriation, theft, or embezzlement of public funds by or for the benefit of a public official.”
Given Obiang’s salary of $82,000 as Equatorial Guinea’s Minister of Forestry, it seems rather unlikely that the funds could have come from anywhere else. Obiang himself has vaguely—and insultingly—explained “I have been very lucky in business…and I like to live well.” His lawyers, who are perhaps a bit more astute, have claimed he “was granted a 20-year concession to harvest timber in the country in the mid-1990s and that made him a ‘very wealthy man’ by 2005 when he bought most of the assets.” I’d like to see the data on those numbers.
Last week, Global Financial Integrity released its annual country-specific report on the drivers and dynamics of illicit financial flows. This year, GFI examined Mexico. GFI defines illicit financial flows as “cross-border movement of money that is illegally earned, transferred, or utilized… [Generally involving] the transfer of money earned through illegal activities.” These activities can include corruption, transactions involving contraband goods, criminal activities, and tax evasion.
While Iran claims its nuclear ambitions are benign—Tehran continues to maintain it is perusing nuclear power for “energy purposes”—the rest of the world has remained skeptical. For years, the international community has grown increasingly alarmed by Tehran’s growing ambitions. Mostly they watch, sometimes they speak, and occasionally they act with adequate decisiveness.
Among OECD countries, the United States has been the most willing to act. In fact, the United States has maintained some kind of sanctions on Iran—with varying degrees of severity—since the Islamic Revolution in 1979.[1] These have, largely, been to no avail. Analysts generally agree that previous sanctions “have not prevented Iran from making progress in its nuclear program.”
In response to an escalating threat, the United States has escalated its response. In March, Obama administration cautiously pursued economic sanctions against Iran’s oil. These have efforts have been complicated by political realities in both countries, however. In the United States, President Obama has worried excessively harsh sanctions could affect the price of oil, a political reality he is particularly sensitive of so close to an election. Washington has also worried sanctions would undermine Iran’s opposition Green Movement.
I heard a lot of things I liked during President Obama’s State of the Union address this evening. I also heard a couple of things I didn’t like. I’ll get to those.
I want to talk specifically about his statements on corporate taxation. I’ll have to leave his statements on individual taxes to someone else. From the transcript of tonight’s State of the Union:
Right now, companies get tax breaks for moving jobs and profits overseas. Meanwhile, companies that choose to stay in America get hit with one of the highest tax rates in the world. It makes no sense, and everyone knows it…So let’s change it. [N]o American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas. From now on, every multinational company should have to pay a basic minimum tax.
Obama is referring to a number of things here, but most notably he’s talking about tax code overhaul and simplification. This approach involves two components. First, legislators would close loopholes that allow companies to drive down their effective tax rates far below the official rate. Second, Obama and members of Congress would lower the corporate tax rate.
As you probably are already aware, it seems Mitt Romney can’t make up his mind on a lot of issues. He has been able to make his mind on one thing, though—quite clearly and quite decisively, mind you. That one thing is that Mitt Romney doesn’t like paying taxes.
After much several months hemming, hawing, and waffling on the issue, Mitt finally bowed to mounting pressure on Monday to release his tax returns. But Mitt isn’t going to keep us waiting in suspense he finally decides to hand over his returns. While talking to reporters, he gave us a sneak peek of what’s to come: 15 percent. That’s his approximate effective tax rate. By the way, Romney has assessed his own net worth around $190 to $250 million (other estimates put it at the higher end of those figures). So I’d say he’s getting a pretty good deal.
The rules that allow Mitt to pay such a low rate are the same that allow Warren Buffet to pay a lower rate than his secretary. The majority of Mitt’s (and Buffet’s) income comes from capital gains (these are profits from the sale of stocks, bonds and real estate) and the tax rate on that kind of income is 15%. It’s not illegal, but that doesn’t mean it’s not wrong.
This week, barring some extraordinary unforeseen circumstance, the U.S. House of Representatives will vote to reject President Obama’s request to raise the debt ceiling.
“Oh no,” I can already hear America’s collective sigh. “Are you kidding me? Again?”
Well, actually, not again.
In case you need a reminder of the horrific events of last August (I certainly don’t want one), in what should have been a routine vote, Congress nearly failed to raise the debt ceiling, which would have sparked an economic Armageddon. I do not use that term lightly. Just in case you need another reminder, the debt ceiling has nothing to do with how much debt theU.S. government takes on, just how much it promises to pay back. Failing to raise the debt ceiling is not the same as cutting the budget—it’s just reneging on payments that have already been promised.
The global financial crisis—including the housing market bubble in the United States, the plummeting of the stock market, soaring unemployment and the resulting Great Recession worldwide—sparked an inundation of ideas about what we should do next or what we should have done differently. Many of these ideas are not new. In fact, many of them are very old. As a result, particularly in the United Statesand in Europe, we’ve seen a resurgence of economic thought from the full spectrum of thought—from Frederick Hayek and Milton Friedman to John Maynard Keynes.
One of the ideas that’s gained some traction and popularity in the wake of the crisis—which many perceive to be one of the most spectacular market failures of all time—is the financial transactions tax (FTT). In this idea, governments levy a tax on specific financial transactions (for example, on the sale of currency, bonds, or stocks), not on financial institutions themselves.
In 1998, an article in the Washington Post argued bin Laden was able to “shroud his finances in such secrecy and with so many front companies that American officials acknowledge it could take years to decipher them.” At the time, U.S. officials understood that the key to bin Laden’s power was wealth—which was extensive as he inherited a substantial sum of money from his prosperous Saudi father. Yet they were often stymied in their ability to track his or other terrorists’ resources as they did not have the capability to comprehensively track, freeze, and seize assets.
After 9/11 that changed. One important reason for the turnaround was the increased focus on terrorist financing by officials, academics, and intelligence officers, which resulted in a better understanding of the practice. Jack Williams, an expert in Law and the Middle East at Georgia State University College, put it this way: “Post 9/11, we’ve learned an awful lot about how terror organizations finance themselves, how they select their targets, the importance financial institutions have for them as a target or for growing their enterprises.”
The New Year is a great time for resolutions. Of course most of these resolutions are made on a personal basis. But resolutions can also be made on a national and international level. So in that spirit, here are five realistic resolutions to help theUnited Statesand the international community achieve more financial transparency in 2012:
1. The U.S. passes the Incorporation Transparency Act. This bill would require companies to disclose the names of the beneficial owners of corporations and limited liability companies (LLCs) when formed. This would close a major loophole that criminals exploit to launder their funds within U.S. boarders and strengthen law enforcement officials’ ability to keep criminal and tax evading money out of the United States.
2. FATF lists tax evasion as a predicate offense to money laundering. If FATF implemented this reform banks and financial institutions in member countries would need to examine and evaluate incoming deposits for signs of tax evasion for reporting. As Rebecca Wilkins, senior counsel at Citizens for Tax Justice, put it: “Tax evasion — whether committed by individuals or corporations — is a crime and its victims are honest taxpaying citizens all over the world. The proceeds of those crimes are the funds that should have been paid to the government and are badly needed to fund critical services, especially in these difficult times.”
Cheating in sports has existed for as long as the sports themselves. During the ancient Olympic Games in Olympia, Greece, officials placed pedestals inscribed with athletes’ names at the entrance of the stadium. The names were not of great athletes, but of those who violated the rules of the Games, in order to punish them into perpetuity. In today’s version of public dishonor, our media nationally broadcasts the names and crimes of steroid-injecting baseball players, blood-doping cyclists, and plotting figure-skaters. Other athletes, who are perhaps not directly cheating in their sports, are engaging in morally reprehensible behavior. Nearly daily, headlines read of stories like Michael Vick’s dog fighting, allegations against Ben Roethlisberger for sexual assault, and Tiger Wood’s extramarital affairs.
It doesn’t seem to be getting any better. In a 2008 article on the “death of honor in sports,” Marc Ellenbogen grieves the loss of athletes like Babe Ruth and Hank Aaron, noting that sports are now riddled with “greed, dishonor, and arrogance.” But at the end of his article, in what is now a twisted irony, he murmurs he is thankful there are “still athletes like Tiger Woods …who young people can look up to.” Less than two years after these words were written, Woods publicly admitted to having been unfaithful to his wife, telling reporters he had believed his athlete status meant that “normal rules didn’t apply.”
It’s not just athletes. In May of last year, the International Federation of Association Football (In French: Fédération Internationale de Football Association or FIFA), suspended two of its officials: Mohamed bin Hammam of Qatar and Jack Warner of Trinidad and Tobago. The national body accused these men of attempting to bribe the 25 heads of the Caribbean football associations who were voting in an upcoming FIFA presidential election. Allegedly, Warner offered them cash gifts of $40,000 each in exchange for their votes for Bin Hammam. Warner adamantly denied the allegations against him.
The yawning gap between the transparency rhetoric of companies and the reality of their actions ...
February 10, 2012
In his State of the Union address less than a month ago President Obama brought ...
February 10, 2012
When the G20 signed the Convention on Mutual Administrative Assistance in Tax Matters in November ...
February 9, 2012
About three years ago, the U.S. Internal Revenue Service (IRS) caught wind that Swiss bankers ...
February 8, 2012
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