Last Week I received an email from reader Eric in response to the “U.S. Corporate Tax Dodge” by Barry Ritholtz. First, let’s discuss the “fair tax” proposal of Ritholtz.

In his article, Ritholtz sides with Fortune author Allan Sloan who wrote about Positively Un-American Tax Dodges.

Ritholtz and Sloan are upset at U.S. corporate executives who engage in “inversion”, defined “moving the location of incorporation to a tax haven and skipping out on paying U.S. taxes”.

Sloan says “The spectacle of American corporations deserting our country to dodge taxes while expecting to get the same benefits that good corporate citizens get is unacceptable”.

Ritholtz proposes 5 measures that would promote “fair taxes“.

  1. Kick them out of U.S. stock indexes
  2. Create a one-time tax holiday that allows companies to repatriate off-shore cash at a reduced tax rate of 15 percent.
  3. Require “publicly traded U.S. companies and U.S. subsidiaries of publicly traded foreign companies to disclose two numbers from the tax returns they file with the IRS: their U.S. taxable income for a given year, and how much income tax they owed.”
  4. Lower the top tax rate from 35% 25% or 20% but close all the loopholes
  5. Stop single-company legislation: Thanks to K Street’s army of lobbyists, tax legislation, loopholes and giveaways are concocted that benefit single industries or companies.

“The U.S. provides an outstanding place for these companies to operate and for their employees and executives to live and work. They should pay their fair share,” says Ritholtz.

Reply from Reader Eric

Reader Eric sent his comments to Ritholtz and copied me.

Mr. Ritholtz,

Concerning your complaint against companies leaving the US to cut their tax rates, would you apply the  same logic to people in New York State who relocate to Florida, for example, to eliminate their state income and estate tax and also to avail of lower property taxes?

Don’t New York state residents enjoy many of the same benefits you list for these various tax dodging corporations?

Is it really fair that these selfish individuals stop paying their fair share of NY State taxes by permanently relocating to Florida or Arizona?

Doesn’t this sort of selfish behavior increase the tax burden on those New State residents who, for whatever reasons, don’t relocate?

Would you support legislation to outlaw relocating within the US in order to assure that everyone pays their “fair” share of taxes?


My Response to Eric

I replied to Eric and copied my friend Pater Tenebrarum at the Acting Man blog. Here is my reply to Eric.

Funny you mention relocation and taxes that because I was just reading something on unfair taxation today in reference to candlemakers: Amazon Charges Penny for Shipping Following France Ruling Shipping Cannot Be Free; “No Competition” Laws

Pater Tenebrarum had an excellent column on something quite similar in 2010: Krugman Favors Protectionism.

Let us however step back for a moment from this discussion and for argument’s sake accept the notion that the yuan’s exchange rate is too low and would rise if left to float. How can that harm the US? Krugman asserts that a trade deficit is ‘negative’, but why should that be so? Trade is after all a voluntary economic activity. When people engage in trade, they do so because both parties to the trade deem it to their economic advantage.  It follows that there can be nothing ‘negative’ about this. China’s merchants wouldn’t sell their goods for dollars if they did not prefer these dollars over their merchandise, and conversely US consumers would not trade their dollars for Chinese merchandise if they thought the trade harmful to their economic well-being. Just because there is a national border between these sets of traders this basic economic fact is not magically suspended. If trade deficits were worth worrying about, why not also worry about the trade deficit between, say, New York and Philadelphia?

A case can be made there should be no corporate taxation at all.

That said, I will assert US policy is ludicrous. It encourages capital flight – in terms of both dollars and jobs.

Heinz replied “For reasons I don’t quite understand, Barry Ritholtz, who makes his living from the capital markets, over and over again propagates statist views.”

EU and Loopholes

Also consider an excellent post by Tenebrarum on the Misguided Urge to Close Loopholes.

Recently Apple’s CEO was forced to defend his company’s use of such loopholes in front of a very hostile Congress. Everybody seems agreed that tax loopholes are somehow bad. But are they really?

Ludwig von Mises reportedly once remarked that ‘tax loopholes allow capitalism to breathe’.

What is a loophole? If the law does not punish a definite action or does not tax a definite thing, this is not a loophole. It is simply the law. . . . The income-tax exemptions in our income tax are not loopholes. The gentleman who complained about loopholes in our income tax . . . implicitly starts from the assumption that all income over fifteen or twenty thousand dollars ought to be confiscated and calls therefore a loophole the fact that his ideal is not yet attained. Let us be grateful for the fact that there are still such things as those the honorable gentleman calls loopholes. Thanks to these loopholes this country is still a free country.

Murray Rothbard had this to say in ‘Man, Economy and State’:

“Many writers denounce tax exemptions and levy their fire at the tax-exempt, particularly those instrumental in obtaining the exemptions for themselves. These writers include those advocates of the free market who treat a tax exemption as a special privilege and attack it as equivalent to a subsidy and therefore inconsistent with the free market. Yet an exemption from taxation or any other burden is not equivalent to a subsidy. There is a key difference. In the latter case a man is receiving a special grant of privilege wrested from his fellowmen; in the former he is escaping a burden imposed on other men. Whereas the one is done at the expense of his fellowmen, the other is not. For in the former case, the grantee is participating in the acquisition of loot; in the latter, he escapes payment of tribute to the looters. To blame him for escaping is equivalent to blaming the slave for fleeing his master.

It is clear that if a certain burden is unjust, blame should be levied, not on the man who escapes the burden, but on the man or men who impose it in the first place. If a tax is in fact unjust, and some are exempt from it, the hue and cry should not be to extend the tax to everyone, but on the contrary to extend the exemption to everyone. The exemption itself cannot be considered unjust unless the tax or other burden is first established as just.

Thus, uniformity of treatment per se cannot be established as a canon of justice. A tax must first be proven just; if it is unjust, then uniformity is simply imposition of general injustice, and exemption is to be welcomed. Since the very fact of taxation is an interference with the free market, it is particularly incongruous and incorrect for advocates of a free market to advocate uniformity of taxation.”

Uniform Fairness

Ritholtz wants uniformity and fairness.

I agree.

Taxation at 0% would not only provide it, businesses would come to the US instead of escape from the US. How bad would that be?

Personal Note: I am in a remote part on Glacier National Park. Cell phone and internet access is very limited, often nonexistent. I may be quite slow in answering emails and may be posting a bit less this week. 

Mike “Mish” Shedlock