One key item preventing small business start-ups, as well as also severely harming existing small businesses, is extremely high, and continually growing, energy costs. And this extreme energy cost pressure, and uncertainty of future energy costs increases, are likewise weighing heavily on job creation by these small businesses.
It appears that one of the reasons gas prices, and all energy costs, are so high is due to oil future contract speculators, who seem to be able to push up the price of oil with high volume trading, without suffering any financial consequences for taking such an action, that harms the entire country so much.
From my perspective, this action is a loophole that these oil futures contract speculators are taking advantage of. There is no penalty, tax, or fee that they are now required to pay to the US Government for their harmful actions.
Thus, my proposal here is for the US Government to initiate a pretty healthy Small Business Energy Cost Savings Bank transaction fee on every oil futures contract by any Big Financial Corp, by any large Energy Trading firm, and by any large hedge fund.
In addition, there should be a US Government Small Business Energy Cost Savings Bank transaction fee on every oil futures contract made by any speculator.
The US Government transaction fees raised here should be used primarily to fund a wise, highly-vetted US Government Energy Cost Savings Bank tax incentive targeted to directly benefit smaller businesses. In addition, some of the money raised should be used to reduce the US Deficit.
An additional benefit here, is that this very healthy transaction fee should reduce oil prices a bit by making it somewhat less attractive for oil contract speculators to push up the price of oil through high volume trading by somewhat cutting into the potential profit generated from lucrative, but high-risk, speculative oil future contract trading.
Sunday, July 31, 2011
Big Corp Tax Loophole Closer #35: Accelerated Tax Depreciation Method
In my earlier Big Corp Tax Loophole Closer #8, my recommendation was to change the present very short tax depreciation lifes that all Big Corps use to depreciate their property for federal income tax purposes, to the much longer economic lifes of the same property used by Big Corps to depreciate this property in their audited financial statements.
My very rough estimate was that the tax raised by the US Government over the next 10 years would be up to $1 trillion for making that substantial, and fair, change in tax lifes.
The reason this amount raised is so large is that not only are the present tax lifes much shorter than the midpoint of the Tax Class Lifes of the property, but also the Tax Class Lifes are usually much shorter than the economic lifes of the property used in Big Corp’s audited financial statements.
But when a country has $14 trillion of debt, which is rising each year like weeds, I think there is a second Big Corp Tax Loophole on Tax Depreciation that also needs to be closed. This one relates to the highly accelerated tax depreciation methods used to depreciate property for federal income tax purposes.
Granted, periodically, when the US economy is particularly weak, like it has been in the past three and a half years, the US Congress will pass legislation that temporarily steps up tax depreciation in the first year.
Thus, in Dec 2010, the US Congress passed 100% first-year tax expensing of equipment for late 2010 and all of 2011 purchases, as well as another dose of 50% bonus tax depreciation for 2012 equipment purchases.
When I study the impact of past 50% bonus tax depreciation, the findings are consistent…..almost no job creation from it.
However, Big Corp earnings increase substantially from it, and there is a bump in real US real GDP growth from it.
Frankly, I think it makes no economic sense to give Big Corps either 100% first-year tax expensing for equipment purchases or 50% first-year bonus tax depreciation. The US Government is simply throwing away US taxpayers money in the short term, on these initiatives.
The only way 100% first-year tax expensing and 50% first-year bonus tax depreciation granted to Big Corps makes any sense, is if it is tied to US Big Corp full-time payroll count increases in the year of addition, and also this tax depreciation is recaptured proportionately in the next say four years, if these US Big Corp payroll counts get reduced.
But even with these 100% and 50% first-year tax depreciation incentives, there still is long-term depreciation lifes and methods, that apply to subsequent year additions. This Big Corp Tax Loophole Closer relates to that.
Focusing now on Accelerated Tax Depreciation Methods, it is just incredible how substantial the acceleration is for these Tax Depreciation Methods. Let me illustrate.
For the very popular MACRS Five Year Property Life category, the Tax Depreciation Method is Double Declining Balance, using the half-year convention.
Thus, for any MACRS Five Year Property, an incredible 52% of the Property’s cost is tax depreciated in only the first two years. And for a really tax aggressive Big Corp, if it buys this Property on Dec 31, 2013, it gets a 52% total tax depreciation deduction in only 366 days….in only one year and one day.
Also, for any MACRS Five Year Property, an incredible 71% of the Property’s cost is tax depreciated in only the first three years. And for a really tax aggressive Big Corp, if it buys this Property on Dec 31, 2013, it gets a 71% total tax depreciation deduction in only two years and one day.
And the same holds for the other MACRS Tax Class Lifes. A very tax aggressive Big Corp can buy MACRS Seven Year Property on December 31, 2013, and get total tax depreciation of 39% of the Property’s cost in only one year and one day, and get total tax depreciation of 56% of the Property’s cost in only two years and one day. And the Big Corp gets this highly-charged accelerated tax depreciation on property that has a midpoint Tax Class Life of 13 years.
Clearly, this is a substantial Big Corp Tax Loophole.
When I combine the Closing of the two Big Corp Tax Loopholes of Shorter Tax Lifes and Accelerated Tax Depreciation Methods, my very rough estimate is that the total CBO positive scoring over the next 10 years is up to $2 trillion.
I wouldn’t start making these Tax Depreciable Life and Accelerated Method changes until Property additions made starting in say 2013 or 2014, after the country has gotten out of its horrible job situation.
The economic damage to Big Corps from these two proposal is substantially softened here due to these corporate tax loophole closers being treated as a Temporary Tax Difference under US generally accepted accounting principles. The total federal income tax deductions for these Property expenditures will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big Corps from my proposals here.
If the US Government decides to squeeze the elderly, with cuts of Medicare and Social Security benefits, and at the same time, allows these unreasonable Highly Accelerated Tax Methods and Substantially Shorter Tax Lifes for Property, Plant and Equipment, the elderly should be absolutely incensed, not just at the Republicans, but also at the Democrats.
If this were to happen, it wouldn’t even surprise me to see some of the elderly to take it out on the unfairly tax advantaged Equipment located in retail stores they shop at, by pasting "Tax Cheat" stickers on this Equipment!
My very rough estimate was that the tax raised by the US Government over the next 10 years would be up to $1 trillion for making that substantial, and fair, change in tax lifes.
The reason this amount raised is so large is that not only are the present tax lifes much shorter than the midpoint of the Tax Class Lifes of the property, but also the Tax Class Lifes are usually much shorter than the economic lifes of the property used in Big Corp’s audited financial statements.
But when a country has $14 trillion of debt, which is rising each year like weeds, I think there is a second Big Corp Tax Loophole on Tax Depreciation that also needs to be closed. This one relates to the highly accelerated tax depreciation methods used to depreciate property for federal income tax purposes.
Granted, periodically, when the US economy is particularly weak, like it has been in the past three and a half years, the US Congress will pass legislation that temporarily steps up tax depreciation in the first year.
Thus, in Dec 2010, the US Congress passed 100% first-year tax expensing of equipment for late 2010 and all of 2011 purchases, as well as another dose of 50% bonus tax depreciation for 2012 equipment purchases.
When I study the impact of past 50% bonus tax depreciation, the findings are consistent…..almost no job creation from it.
However, Big Corp earnings increase substantially from it, and there is a bump in real US real GDP growth from it.
Frankly, I think it makes no economic sense to give Big Corps either 100% first-year tax expensing for equipment purchases or 50% first-year bonus tax depreciation. The US Government is simply throwing away US taxpayers money in the short term, on these initiatives.
The only way 100% first-year tax expensing and 50% first-year bonus tax depreciation granted to Big Corps makes any sense, is if it is tied to US Big Corp full-time payroll count increases in the year of addition, and also this tax depreciation is recaptured proportionately in the next say four years, if these US Big Corp payroll counts get reduced.
But even with these 100% and 50% first-year tax depreciation incentives, there still is long-term depreciation lifes and methods, that apply to subsequent year additions. This Big Corp Tax Loophole Closer relates to that.
Focusing now on Accelerated Tax Depreciation Methods, it is just incredible how substantial the acceleration is for these Tax Depreciation Methods. Let me illustrate.
For the very popular MACRS Five Year Property Life category, the Tax Depreciation Method is Double Declining Balance, using the half-year convention.
Thus, for any MACRS Five Year Property, an incredible 52% of the Property’s cost is tax depreciated in only the first two years. And for a really tax aggressive Big Corp, if it buys this Property on Dec 31, 2013, it gets a 52% total tax depreciation deduction in only 366 days….in only one year and one day.
Also, for any MACRS Five Year Property, an incredible 71% of the Property’s cost is tax depreciated in only the first three years. And for a really tax aggressive Big Corp, if it buys this Property on Dec 31, 2013, it gets a 71% total tax depreciation deduction in only two years and one day.
And the same holds for the other MACRS Tax Class Lifes. A very tax aggressive Big Corp can buy MACRS Seven Year Property on December 31, 2013, and get total tax depreciation of 39% of the Property’s cost in only one year and one day, and get total tax depreciation of 56% of the Property’s cost in only two years and one day. And the Big Corp gets this highly-charged accelerated tax depreciation on property that has a midpoint Tax Class Life of 13 years.
Clearly, this is a substantial Big Corp Tax Loophole.
When I combine the Closing of the two Big Corp Tax Loopholes of Shorter Tax Lifes and Accelerated Tax Depreciation Methods, my very rough estimate is that the total CBO positive scoring over the next 10 years is up to $2 trillion.
I wouldn’t start making these Tax Depreciable Life and Accelerated Method changes until Property additions made starting in say 2013 or 2014, after the country has gotten out of its horrible job situation.
The economic damage to Big Corps from these two proposal is substantially softened here due to these corporate tax loophole closers being treated as a Temporary Tax Difference under US generally accepted accounting principles. The total federal income tax deductions for these Property expenditures will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big Corps from my proposals here.
If the US Government decides to squeeze the elderly, with cuts of Medicare and Social Security benefits, and at the same time, allows these unreasonable Highly Accelerated Tax Methods and Substantially Shorter Tax Lifes for Property, Plant and Equipment, the elderly should be absolutely incensed, not just at the Republicans, but also at the Democrats.
If this were to happen, it wouldn’t even surprise me to see some of the elderly to take it out on the unfairly tax advantaged Equipment located in retail stores they shop at, by pasting "Tax Cheat" stickers on this Equipment!
Saturday, July 30, 2011
Big Corp Tax Loophole Closer #34: Tax on Non-Profit Hospital Excessive Profits
I earlier performed an extensive review of the financial statements, mostly audited ones, of 25 Big Catholic Non-Profit Hospital Organizations and 136 Big Non-Catholic Non-Profit Hospital Organizations, whose Total Operating Revenues in fiscal year ended (FYE) 2010 totaled $427.1 bil. My best estimate is that these 161 Big Non-Profit US Hospitals comprised 38% of the Total Operating Revenues of all US Non-Profit Hospitals in 2010.
These 161 Big Non-Profit Hospital Organizations generated $17.2 bil of Hospital Operating Income in FYE 2010. When I project that over all US Non-Profit Hospitals, my best estimate is that Total Hospital Operating Income of all Non-Profit Hospitals in FYE 2010 totaled $45.2 bil.
This Hospital Operating Income includes as deductions Depreciation Expense, Bad Debt Expense, and for the most part, Interest Expense on all Debt. There is very little Investment Income included in Hospital Operating Income. The predominant portion of Investment Return Income and Losses is shown by these Hospital Organizations below Hospital Operating Income, as Non-Operating Income.
Also, from this research, my best estimate is that the Total Net Assets (i.e. Excess of Total Assets over Total Liabilities) of all Non-Profit Hospital Organizations presently is a bit above $700 bil, and that their Total Investments in Debt and in Equity Securities are just short of $600 bil.
From my extensive sample of these 25 Big Catholic and 136 Big Non-Catholic, Non-Profit Hospital Organizations, here are the most recent percentage increases in Total Hospital Operating Income over the immediately preceding year:
……………………………...........Catholic………......Non-Catholic
Annual FYE 2009…………......19%........................34%
Annual FYE 2010…………......27%........................19%
Year to Date FYE 2011…….....14%........................25%
Three Year Annual Average..20%.......................26%
The Affordable Health Care Plan results in a substantial portion of the uninsured, getting insurance, and also results in many of the underinsured, getting better insurance.
Thus, Hospital Operating Income of all Hospital Organizations should increase sharply starting in 2014, due to the elimination of a good chunk of the Bad Debt Expense, and the addition of presently unrecorded Charity Care Income.
Anyway, I gave my best shot at estimating the future income of all Non-Profit Hospitals, assuming a conservative annual earnings growth rate of 12%, much lower than the actual average annual growth rate of 20% to 26% shown above. I also assume that the annual return on the massive Investments of these Non-Profit Hospitals was 6% per year. Further, I assumed that after the Affordable Health Care Plan totally kicks in, Bad Debt Expense of the Hospitals will decrease by 60%, and previously unrecorded Charity Care Income will increase by 40%.
Based on the above assumptions, my best estimate is that all of these Non-Profit Hospitals will generate Total Net Income of $13.4 trillion over the next 20 years, and not a dime of it taxed.
And when I ran the numbers, starting in 2014, the key Hospital Operating Income as a Percentage of Total Operating Revenue ratio for Non-Profit Hospitals in the aggregate, on an after-tax basis, will be higher than that of the majority of the companies in the 30 Dow Industrials.
Granted, the optimal answer here is that Non-Profit Hospitals just have to substantially reduce their stiff patient fees, not just to Medicare and Medicaid patients, but to everyone.
With the opportunity to massively reduce hospital patient fees, there is an enormous opportunity to reduce the US Debt.
Given these extremely high projected profits by Non-Profit Hospitals, my recommendation here is for the US Government to apply an income tax in any year that a Non-Profit Hospital Organization generates extremely high profits. After all, these are Non-Profit Organizations.
Below here are my recommended US federal income tax rates I would institute for each year, all applied just to the Non-Profit Hospital Organizations generating an excessively high Hospital Operating Margin Percentage (i.e. Hospital Operating Income as a Percentage of Total Operating Revenues).
Hospital Operating.........................US Federal Income
.......Margin %....................................Tax Rate
.....Up to 5%............................0%
.....5% to 10%.........................35% on the excess profit above 5%
....10% to 15%.......................70% on the excess profit above 10%
....Above 15%........................90% on the excess profit above 15%
All of the tax proceeds raised here should be used to reduce the US Deficit.
These 161 Big Non-Profit Hospital Organizations generated $17.2 bil of Hospital Operating Income in FYE 2010. When I project that over all US Non-Profit Hospitals, my best estimate is that Total Hospital Operating Income of all Non-Profit Hospitals in FYE 2010 totaled $45.2 bil.
This Hospital Operating Income includes as deductions Depreciation Expense, Bad Debt Expense, and for the most part, Interest Expense on all Debt. There is very little Investment Income included in Hospital Operating Income. The predominant portion of Investment Return Income and Losses is shown by these Hospital Organizations below Hospital Operating Income, as Non-Operating Income.
Also, from this research, my best estimate is that the Total Net Assets (i.e. Excess of Total Assets over Total Liabilities) of all Non-Profit Hospital Organizations presently is a bit above $700 bil, and that their Total Investments in Debt and in Equity Securities are just short of $600 bil.
From my extensive sample of these 25 Big Catholic and 136 Big Non-Catholic, Non-Profit Hospital Organizations, here are the most recent percentage increases in Total Hospital Operating Income over the immediately preceding year:
……………………………...........Catholic………......Non-Catholic
Annual FYE 2009…………......19%........................34%
Annual FYE 2010…………......27%........................19%
Year to Date FYE 2011…….....14%........................25%
Three Year Annual Average..20%.......................26%
The Affordable Health Care Plan results in a substantial portion of the uninsured, getting insurance, and also results in many of the underinsured, getting better insurance.
Thus, Hospital Operating Income of all Hospital Organizations should increase sharply starting in 2014, due to the elimination of a good chunk of the Bad Debt Expense, and the addition of presently unrecorded Charity Care Income.
Anyway, I gave my best shot at estimating the future income of all Non-Profit Hospitals, assuming a conservative annual earnings growth rate of 12%, much lower than the actual average annual growth rate of 20% to 26% shown above. I also assume that the annual return on the massive Investments of these Non-Profit Hospitals was 6% per year. Further, I assumed that after the Affordable Health Care Plan totally kicks in, Bad Debt Expense of the Hospitals will decrease by 60%, and previously unrecorded Charity Care Income will increase by 40%.
Based on the above assumptions, my best estimate is that all of these Non-Profit Hospitals will generate Total Net Income of $13.4 trillion over the next 20 years, and not a dime of it taxed.
And when I ran the numbers, starting in 2014, the key Hospital Operating Income as a Percentage of Total Operating Revenue ratio for Non-Profit Hospitals in the aggregate, on an after-tax basis, will be higher than that of the majority of the companies in the 30 Dow Industrials.
Granted, the optimal answer here is that Non-Profit Hospitals just have to substantially reduce their stiff patient fees, not just to Medicare and Medicaid patients, but to everyone.
With the opportunity to massively reduce hospital patient fees, there is an enormous opportunity to reduce the US Debt.
Given these extremely high projected profits by Non-Profit Hospitals, my recommendation here is for the US Government to apply an income tax in any year that a Non-Profit Hospital Organization generates extremely high profits. After all, these are Non-Profit Organizations.
Below here are my recommended US federal income tax rates I would institute for each year, all applied just to the Non-Profit Hospital Organizations generating an excessively high Hospital Operating Margin Percentage (i.e. Hospital Operating Income as a Percentage of Total Operating Revenues).
Hospital Operating.........................US Federal Income
.......Margin %....................................Tax Rate
.....Up to 5%............................0%
.....5% to 10%.........................35% on the excess profit above 5%
....10% to 15%.......................70% on the excess profit above 10%
....Above 15%........................90% on the excess profit above 15%
All of the tax proceeds raised here should be used to reduce the US Deficit.
Big Corp Tax Loophole Closer #33: Intellectual Property Transfers
Intellectual Property has become the most valuable assets of many US Multinational Corps.
Since this Intellectual Property ends up being used in many countries, an intense focus is spent by US Multinational Corps to determine where this Intellectual Property gets placed around the globe, and how it gets transferred or shared around the globe.
A key aspect to this Intellectual Property planning is the optimal tax strategy.
Clearly, you see Big US Multinational Corp use foreign tax havens to their best advantage.
Much of the Intellectual Property of US Multinational Corps results from R&D work done the US. These Corps get upfront R&D federal income tax deductions, as well as R&D tax credits, for this work.
Let's say that after this Intellectual Property Asset has been developed in the US, that the plan is for the US Multinational Corp to transfer this property to a foreign subsidiary of affiliate in the foreign tax haven of Ireland, which has a 12.5% corporate income tax rate, or to Puerto Rico, where the corporate income tax rate is even lower.
How should this Intellectual Property Asset Transfer be handled for US federal income tax purposes?
Here's my proposal to be fair to both US citizens and to the US Multinational Corp.
In all cases where Intellectual Property is transferred by a US Multinational Corp to one of its foreign subsidiaries or foreign affiliates, this transaction is always treated for US federal income tax purposes as a taxable sale, with ordinary gain or ordinary loss treatment. In nearly all cases, an ordinary gain results.
But how to fairly compute the selling price, which is key to determine the ordinary gain recognized?
I think the US tax rules should only allow this Intellectual Property Transfer Price to be computed one way.....the single best way it can be derived.....period
And what is that best method of ascertaining a transfer price?
That doesn’t seem too difficult in theory, or frankly, even in practice.
The US Multinational Corp making the transfer is certain to have already done future incremental revenues and related incremental income projections for the intellectual property after it is transferred to the Intl location. Thus, present value of future incremental income is the winning selling price here over the period of time the foreign subsidiary or foreign affiliate is expected to benefit from the use of the intellectual property transferred.
This is a with and without computation.....that is.....what is the expected future income of the foreign subsidiary or foreign affiliate assuming it has the use of this intellectual property, and then what is the expected future income of this foreign subsidiary or foreign affiliate assuming this intellectual property doesn’t get transferred, and then the difference would be the incremental income.
And lastly, this incremental income would need to be discounted to derive a present value on transfer date. The IRS should issue rules for how to compute the future expected incremental annual income, how to determine the number of years to discount these earnings, and also how the discount rate is to be determined.
Also, there should be subsequent "look-back" rules, several years or so out, to make sure the incremental income estimates used by the US Multinational Corp to derive the transfer price were reasonable. And then in cases where it is determined that the subsequent review shows that the initial estimated annual incremental income was both clearly and substantially understated, a new computation of the transfer price is made, with a resultant increase in ordinary income recognized for US federal income tax purposes.
All of the tax proceeds from my proposal here should be used to reduce the US Deficit.
Since this Intellectual Property ends up being used in many countries, an intense focus is spent by US Multinational Corps to determine where this Intellectual Property gets placed around the globe, and how it gets transferred or shared around the globe.
A key aspect to this Intellectual Property planning is the optimal tax strategy.
Clearly, you see Big US Multinational Corp use foreign tax havens to their best advantage.
Much of the Intellectual Property of US Multinational Corps results from R&D work done the US. These Corps get upfront R&D federal income tax deductions, as well as R&D tax credits, for this work.
Let's say that after this Intellectual Property Asset has been developed in the US, that the plan is for the US Multinational Corp to transfer this property to a foreign subsidiary of affiliate in the foreign tax haven of Ireland, which has a 12.5% corporate income tax rate, or to Puerto Rico, where the corporate income tax rate is even lower.
How should this Intellectual Property Asset Transfer be handled for US federal income tax purposes?
Here's my proposal to be fair to both US citizens and to the US Multinational Corp.
In all cases where Intellectual Property is transferred by a US Multinational Corp to one of its foreign subsidiaries or foreign affiliates, this transaction is always treated for US federal income tax purposes as a taxable sale, with ordinary gain or ordinary loss treatment. In nearly all cases, an ordinary gain results.
But how to fairly compute the selling price, which is key to determine the ordinary gain recognized?
I think the US tax rules should only allow this Intellectual Property Transfer Price to be computed one way.....the single best way it can be derived.....period
And what is that best method of ascertaining a transfer price?
That doesn’t seem too difficult in theory, or frankly, even in practice.
The US Multinational Corp making the transfer is certain to have already done future incremental revenues and related incremental income projections for the intellectual property after it is transferred to the Intl location. Thus, present value of future incremental income is the winning selling price here over the period of time the foreign subsidiary or foreign affiliate is expected to benefit from the use of the intellectual property transferred.
This is a with and without computation.....that is.....what is the expected future income of the foreign subsidiary or foreign affiliate assuming it has the use of this intellectual property, and then what is the expected future income of this foreign subsidiary or foreign affiliate assuming this intellectual property doesn’t get transferred, and then the difference would be the incremental income.
And lastly, this incremental income would need to be discounted to derive a present value on transfer date. The IRS should issue rules for how to compute the future expected incremental annual income, how to determine the number of years to discount these earnings, and also how the discount rate is to be determined.
Also, there should be subsequent "look-back" rules, several years or so out, to make sure the incremental income estimates used by the US Multinational Corp to derive the transfer price were reasonable. And then in cases where it is determined that the subsequent review shows that the initial estimated annual incremental income was both clearly and substantially understated, a new computation of the transfer price is made, with a resultant increase in ordinary income recognized for US federal income tax purposes.
All of the tax proceeds from my proposal here should be used to reduce the US Deficit.
Big Corp Tax Loophole Closer #32: Foreign Tax Havens
There are so many low-income-taxed foreign tax havens that many Big US Multinational Corps and Foreign Corps use. Among these are:
Cayman Islands
Bermuda
Ireland
Netherlands Antilles
Luxembourg
Bahama
British Virgin Islands
Switzerland
By shifting a huge amount of their worldwide earnings into low-tax foreign tax havens, these multinational corps can substantially increase their worldwide consolidated after-tax net income.
In addition, by using foreign tax havens, these multinational corps are also able to increase their ability to use their foreign tax credits on a worldwide basis.
My proposal here is that the US Government "Economic Substance Doctrine" (economic substance over legal form) should apply to situations where, even though a corporation is legally incorporated in one of the foreign tax havens, if its management and control is located predominately in the US, then this corporation cannot claim foreign corporation status for US federal income tax purposes.
All of the tax proceeds from closing this substantial Big Corp Tax Loophole should be used to reduce the US Deficit.
Cayman Islands
Bermuda
Ireland
Netherlands Antilles
Luxembourg
Bahama
British Virgin Islands
Switzerland
By shifting a huge amount of their worldwide earnings into low-tax foreign tax havens, these multinational corps can substantially increase their worldwide consolidated after-tax net income.
In addition, by using foreign tax havens, these multinational corps are also able to increase their ability to use their foreign tax credits on a worldwide basis.
My proposal here is that the US Government "Economic Substance Doctrine" (economic substance over legal form) should apply to situations where, even though a corporation is legally incorporated in one of the foreign tax havens, if its management and control is located predominately in the US, then this corporation cannot claim foreign corporation status for US federal income tax purposes.
All of the tax proceeds from closing this substantial Big Corp Tax Loophole should be used to reduce the US Deficit.
Big Corp Tax Loophole Closer #31: Delaware Tax Haven
The US State of Delaware is much like a Domestic Cayman Islands tax haven for the avoidance of state income taxes. 63% of Fortune 500 companies are incorporated in the state of Delaware. And there are 6,500 empty shell companies on North Orange Street in Wilmington, DE.
Delaware has no income tax on corporations operating outside the state. Also, there is no income tax on royalties received.
And by setting up corporations in Delaware, companies are able to avoid income taxes in other states. Particularly in these hard economic times, states want to make sure that income that’s earned in their state is actually taxed in their state. That seems only reasonable.
There are all kinds of creative ways that companies can minimize their total state income tax by using the Delaware tax shelter vehicle.
One common way is for parent companies to establish Delaware holding companies as subsidiaries. Then, these parent companies transfer to these subsidiaries ownership of things like trademarks, patents and investments. Delaware does not tax holding companies set up to own and collect income from such lucrative intangible assets.
The parent companies of these shell Delaware holding companies usually pay royalties to the Delaware subsidiaries for using those assets. By doing so, they can claim income tax deductions in states where they actually do business. The shells also funnel profit, tax free, back to their parents, in the form of dividends and loans.
So what does this have to do with US taxes raised to at least somewhat close this clearly rampant, abusive US State Tax Loophole?
Well, as one easy way to at least somewhat limit the Delaware tax loophole, I recommend that the US government should apply a 2% additional federal tax annually on all consolidated US taxable income for all US and foreign companies that are incorporated in Delaware.
And then, I would have the US transfer 50% of this federal income tax received back to all US states in some fair, reasonable manner, for the Feds to decide, such as relative revenues generated by these companies in each state.
And the US would retain the other 50%, which is to be used to reduce the US Deficit.
Delaware has no income tax on corporations operating outside the state. Also, there is no income tax on royalties received.
And by setting up corporations in Delaware, companies are able to avoid income taxes in other states. Particularly in these hard economic times, states want to make sure that income that’s earned in their state is actually taxed in their state. That seems only reasonable.
There are all kinds of creative ways that companies can minimize their total state income tax by using the Delaware tax shelter vehicle.
One common way is for parent companies to establish Delaware holding companies as subsidiaries. Then, these parent companies transfer to these subsidiaries ownership of things like trademarks, patents and investments. Delaware does not tax holding companies set up to own and collect income from such lucrative intangible assets.
The parent companies of these shell Delaware holding companies usually pay royalties to the Delaware subsidiaries for using those assets. By doing so, they can claim income tax deductions in states where they actually do business. The shells also funnel profit, tax free, back to their parents, in the form of dividends and loans.
So what does this have to do with US taxes raised to at least somewhat close this clearly rampant, abusive US State Tax Loophole?
Well, as one easy way to at least somewhat limit the Delaware tax loophole, I recommend that the US government should apply a 2% additional federal tax annually on all consolidated US taxable income for all US and foreign companies that are incorporated in Delaware.
And then, I would have the US transfer 50% of this federal income tax received back to all US states in some fair, reasonable manner, for the Feds to decide, such as relative revenues generated by these companies in each state.
And the US would retain the other 50%, which is to be used to reduce the US Deficit.
Big Corp Tax Loophole Closer #30: Interest Shifting
Maximizing capital contributions to foreign subsidiaries, which have low income tax rates, is a very prevalent tax strategy use by US Big Multinational Corps.
This practice results in shifting income from the high-taxed US to the lower taxed foreign subsidiary.
To at least somewhat close this abusive Big Corp tax loophole, for US federal income tax purposes, I would include in US taxable income each year, a fair computation of imputed inter-company interest income, for foreign subsidiaries that have an unreasonably high amount of cumulative capital contributions.
The Feds need to decide the fair numbers here. But let me just give an illustration of how I think it could work.
One way to determine if a low income taxed foreign subsidiary, like one in Ireland or in Singapore, is unreasonably overcapitalized, is to compare the foreign subsidiary’s total capital contributions on its balance sheet to its total interest-bearing debt.
If this ratio is deemed to be too high, then imputed interest income on some measure of this excess capital should be added each year to US federal taxable income of the US parent.
The substantial amount of US taxes raised from this proposal should be used to reduce the US Deficit.
This practice results in shifting income from the high-taxed US to the lower taxed foreign subsidiary.
To at least somewhat close this abusive Big Corp tax loophole, for US federal income tax purposes, I would include in US taxable income each year, a fair computation of imputed inter-company interest income, for foreign subsidiaries that have an unreasonably high amount of cumulative capital contributions.
The Feds need to decide the fair numbers here. But let me just give an illustration of how I think it could work.
One way to determine if a low income taxed foreign subsidiary, like one in Ireland or in Singapore, is unreasonably overcapitalized, is to compare the foreign subsidiary’s total capital contributions on its balance sheet to its total interest-bearing debt.
If this ratio is deemed to be too high, then imputed interest income on some measure of this excess capital should be added each year to US federal taxable income of the US parent.
The substantial amount of US taxes raised from this proposal should be used to reduce the US Deficit.
Friday, July 29, 2011
Big Corp Tax Loophole Closer #29: Marketing, Selling, Advertising Bump
Clearly, the major problem with the US economy is insufficient business demand. Something is needed to really give it a jolt.
To stimulate the dormant US business demand, my proposal here is to give a refundable tax credit on Marketing, Selling and Advertising costs of US businesses of all sizes incurred from now until Dec 31, 2012. I would make the percentage credit a bit higher for the rest of 2011 than for 2012.
So where's the Big Corp Tax Loophole closing, and related funding?
Well, it’s potentially substantial.
I would give say a 5% tax credit for the Marketing, Selling and Advertising costs in the remainder of the current year, and say a 2.5% tax credit in 2012, but then more than pay for it many times over, for the next ten-year CBO scoring period, by extending the life that all future Marketing/Selling/Advertising costs of Big US Corps are to be deducted over to say one year, 18 months or even two years.
I wouldn't start extending the life until after the country is completely out of this horrible structural recession...thus start scaling it in after say three years.
The positive CBO scoring on this should be off the charts.
And all businesses would get a very nice bump up of their reported GAAP earnings from just this, since the tax credit increases reported GAAP earnings, but the life extension is treated as a temporary tax difference.
And from a fairness standpoint, many Marketing, Selling and Advertising costs incurred are in essence Investments, benefiting businesses for many, many years.
The really cool part about the tax credit on Marketing, Selling and Advertising costs is that there are an infinite number of ways to very easily fine tune them to get the desired result.
For instance, if you wanted to reduce its CBO cost, you could just allow a tax credit on Marketing, Selling and Advertising Costs over and above some base period amounts, like the way the R&D tax credit works, and then you would also have the flexibility to significantly increase the percentage tax credit.
Also, if you wanted to increase the CBO favorable scoring, choosing a two-year life for amortizing these costs for federal income tax purposes would give you a monumentally more favorable CBO scoring than choosing a one-year life.
Another way to reduce the CBO cost here is to allow, or perhaps even require, US Multinational Corps to use their foreign earnings repatriation tax, with a related somewhat incentivized favorable dividend received deduction percentage, to 100% fund the same amount of tax credit for their Marketing, Selling and Advertising costs incurred.
And in a wise highly-incentivized twist, I would also consider allowing Big US Multinational Corps to fund the tax owed from extending their tax lifes for their Advertising, Marketing and Selling Costs with a like amount of tax owed from repatriating some of their foreign earnings at a somewhat discounted US federal income tax rate.
This Marketing, Selling, and Advertising Tax Credit would work especially well when it is combined with something like a 100% expensing of equipment, and even also with a Jobs Tax Credit and Investment Tax Credit combination. This Marketing, Selling, and Advertising Tax Credit would make those other tax incentives explosively effective.
To stimulate the dormant US business demand, my proposal here is to give a refundable tax credit on Marketing, Selling and Advertising costs of US businesses of all sizes incurred from now until Dec 31, 2012. I would make the percentage credit a bit higher for the rest of 2011 than for 2012.
So where's the Big Corp Tax Loophole closing, and related funding?
Well, it’s potentially substantial.
I would give say a 5% tax credit for the Marketing, Selling and Advertising costs in the remainder of the current year, and say a 2.5% tax credit in 2012, but then more than pay for it many times over, for the next ten-year CBO scoring period, by extending the life that all future Marketing/Selling/Advertising costs of Big US Corps are to be deducted over to say one year, 18 months or even two years.
I wouldn't start extending the life until after the country is completely out of this horrible structural recession...thus start scaling it in after say three years.
The positive CBO scoring on this should be off the charts.
And all businesses would get a very nice bump up of their reported GAAP earnings from just this, since the tax credit increases reported GAAP earnings, but the life extension is treated as a temporary tax difference.
And from a fairness standpoint, many Marketing, Selling and Advertising costs incurred are in essence Investments, benefiting businesses for many, many years.
The really cool part about the tax credit on Marketing, Selling and Advertising costs is that there are an infinite number of ways to very easily fine tune them to get the desired result.
For instance, if you wanted to reduce its CBO cost, you could just allow a tax credit on Marketing, Selling and Advertising Costs over and above some base period amounts, like the way the R&D tax credit works, and then you would also have the flexibility to significantly increase the percentage tax credit.
Also, if you wanted to increase the CBO favorable scoring, choosing a two-year life for amortizing these costs for federal income tax purposes would give you a monumentally more favorable CBO scoring than choosing a one-year life.
Another way to reduce the CBO cost here is to allow, or perhaps even require, US Multinational Corps to use their foreign earnings repatriation tax, with a related somewhat incentivized favorable dividend received deduction percentage, to 100% fund the same amount of tax credit for their Marketing, Selling and Advertising costs incurred.
And in a wise highly-incentivized twist, I would also consider allowing Big US Multinational Corps to fund the tax owed from extending their tax lifes for their Advertising, Marketing and Selling Costs with a like amount of tax owed from repatriating some of their foreign earnings at a somewhat discounted US federal income tax rate.
This Marketing, Selling, and Advertising Tax Credit would work especially well when it is combined with something like a 100% expensing of equipment, and even also with a Jobs Tax Credit and Investment Tax Credit combination. This Marketing, Selling, and Advertising Tax Credit would make those other tax incentives explosively effective.
Big Corp Tax Loophole Closer #28: Big Corp Dividends
In all fairness, especially since the US has $14.3 trillion of debt, I think individual cash dividends received from Big US Corps should be taxed at ordinary federal income tax rates.
It's just not right for hard-working employees to get taxed at up to more than twice the income tax rate that cash dividend recipients are taxed at.
It's just not right for hard-working employees to get taxed at up to more than twice the income tax rate that cash dividend recipients are taxed at.
Big Corp Tax Loophole Closer #27: Gross Receipts Tax on Lobbying Firms
Special interest lobbying firms have played such a major role in where the US unfortunately is today:
…..9.2% Unemployment Rate
…..16% Combined Unemployment/Underemployment Rate
…..$14.4 trillion National Debt
…..Sky high Energy Costs
…..Sky high Health Care Costs
…..Tepid GDP growth
…..High percentage of Homes Under Water
I think a wise initiative would be for the US Government to now institute an annual gross receipts tax on the lobbying revenue of firms engaged in lobbying.
I would make this annual gross receipts tax on firms engaged in lobbying highly progressive. To be fair, I think a certain amount of gross receipts from lobbying should be tax free. But above this exempt amount, there should be a gross receipts tax starting at say 10%, which progressively keeps increasing so that the largest amount of gross receipts from lobbying would get taxed at say 70%. Thus, the more special interest lobbying you do, the higher gross receipts tax rate you pay.
Clearly, the lobbying sections of the large law firms should be assessed this gross receipts tax on their gross receipts from lobbying. But also, I think non-profit organizations involved heavily in lobbying for industry special interests should also be subject to this gross receipts tax.
When you think about it, there are a handful of large non-profit organizations that have severely damaged the US economy in the 2000s Lost Decade, and continue to do so.
All Big US Multinational Corp non-profit organizations like the Business Roundtable, the Chamber of Commerce, numerous special industry organizations, as well as many other organizations, have successfully lobbied for the offshoring of US jobs, despite the massively detrimental effect to the country and to its citizens, and thus, in all fairness, should be assessed an annual gross receipts tax.
Big Oil lobbying organizations like the American Petroleum Institute have also severely damaged the US economy by playing a key role in the placing of excessive energy cost burdens on US citizens and US businesses, and thus should clearly be assessed an annual gross receipts tax.
Also, three very influential non-profit health care organizations played instrumental roles in creating the 2000s Lost Decade, where health care costs went through the roof to US individuals, to US businesses, and to the US and State Governments.
More than any other organization, I think the American Hospital Association has been a major cause of these massively higher health care costs.
Also, through their effective efforts, the America’s Health Insurance Plans and the America Pharmaceutical Association both added much to the country’s health care costs.
And the efforts of all three of these health care lobbying organizations caused the Affordable Health Care legislation to be hundreds of billions of dollars higher than it should have been. Thus, all three of these health care non-profit organizations, should be assessed a gross receipts tax.
People a lot smarter than me can determine specifically which other non-profit organizations performing lobbying should, in all fairness, be assessed an annual gross receipts tax.
All of the tax proceeds from this Gross Receipts Tax should be used to reduce the US Deficit.
And there is a second major benefit. Due to this high Gross Receipts Tax on excessive lobbying, perhaps this could also reduce somewhat the extent of special interest lobbying, which has placed such financial strains on the US economy, and on US job creation.
…..9.2% Unemployment Rate
…..16% Combined Unemployment/Underemployment Rate
…..$14.4 trillion National Debt
…..Sky high Energy Costs
…..Sky high Health Care Costs
…..Tepid GDP growth
…..High percentage of Homes Under Water
I think a wise initiative would be for the US Government to now institute an annual gross receipts tax on the lobbying revenue of firms engaged in lobbying.
I would make this annual gross receipts tax on firms engaged in lobbying highly progressive. To be fair, I think a certain amount of gross receipts from lobbying should be tax free. But above this exempt amount, there should be a gross receipts tax starting at say 10%, which progressively keeps increasing so that the largest amount of gross receipts from lobbying would get taxed at say 70%. Thus, the more special interest lobbying you do, the higher gross receipts tax rate you pay.
Clearly, the lobbying sections of the large law firms should be assessed this gross receipts tax on their gross receipts from lobbying. But also, I think non-profit organizations involved heavily in lobbying for industry special interests should also be subject to this gross receipts tax.
When you think about it, there are a handful of large non-profit organizations that have severely damaged the US economy in the 2000s Lost Decade, and continue to do so.
All Big US Multinational Corp non-profit organizations like the Business Roundtable, the Chamber of Commerce, numerous special industry organizations, as well as many other organizations, have successfully lobbied for the offshoring of US jobs, despite the massively detrimental effect to the country and to its citizens, and thus, in all fairness, should be assessed an annual gross receipts tax.
Big Oil lobbying organizations like the American Petroleum Institute have also severely damaged the US economy by playing a key role in the placing of excessive energy cost burdens on US citizens and US businesses, and thus should clearly be assessed an annual gross receipts tax.
Also, three very influential non-profit health care organizations played instrumental roles in creating the 2000s Lost Decade, where health care costs went through the roof to US individuals, to US businesses, and to the US and State Governments.
More than any other organization, I think the American Hospital Association has been a major cause of these massively higher health care costs.
Also, through their effective efforts, the America’s Health Insurance Plans and the America Pharmaceutical Association both added much to the country’s health care costs.
And the efforts of all three of these health care lobbying organizations caused the Affordable Health Care legislation to be hundreds of billions of dollars higher than it should have been. Thus, all three of these health care non-profit organizations, should be assessed a gross receipts tax.
People a lot smarter than me can determine specifically which other non-profit organizations performing lobbying should, in all fairness, be assessed an annual gross receipts tax.
All of the tax proceeds from this Gross Receipts Tax should be used to reduce the US Deficit.
And there is a second major benefit. Due to this high Gross Receipts Tax on excessive lobbying, perhaps this could also reduce somewhat the extent of special interest lobbying, which has placed such financial strains on the US economy, and on US job creation.
Big Corp Tax Loophole Closer #26: Tax on Shipping US Jobs Overseas
I have three recommendations here for fairly and wisely raising tax revenues from companies that move US jobs overseas.
First, as a disincentivize for Big Corp offshoring of US jobs, I think all separation costs and all other costs, resulting from a plant closing or other US business closing, or in which a US plant or other US business is moved offshore, should not be deductible for federal income tax purposes by the corporation moving its US plant or other US business offshore.
Second, any US Big Corp manufacturer moving its plant overseas should get a reasonably computed and fair tax recapture of its Domestic Production Activities Tax Deduction for all past years in which it received this very lucrative tax deduction (this tax deduction started in 2005).
I find it hard to understand how US Big Corp manufacturers can think it’s perfectly all right to continue to reap the enormous tax benefits from the Domestic Production Activities Tax Deduction, and then to coldly close US manufacturing plants by moving them overseas to a low wage, low environment standard, and/or low-taxed foreign country.
So, US citizens pay twice. First, they help finance these substantial Domestic Production Activities Deduction tax subsidies granted to US Big Corp Manufacturers. And then, they subsequently lose their jobs when these same manufacturing companies move their jobs overseas. Just a horribly disgusting, heartless situation.
And then to pour salt on their open wounds, these same US Big Corp Manufacturers are now lobbying intensely for an 85% US tax holiday on their foreign earnings repatriation. Just incredible heartless greed.
And third, in all subsequent years, the Domestic Production Activities Tax Deduction percentage for companies that have moved US jobs overseas should be reduced.
The Feds can quantify what fair numbers would be related to my above last two recommendations related to the Domestic Production Activities Tax Deduction for these US Big Manufacturing Corps that move their US jobs overseas.
All of the tax proceeds here will be used to reduce the US Deficit.
First, as a disincentivize for Big Corp offshoring of US jobs, I think all separation costs and all other costs, resulting from a plant closing or other US business closing, or in which a US plant or other US business is moved offshore, should not be deductible for federal income tax purposes by the corporation moving its US plant or other US business offshore.
Second, any US Big Corp manufacturer moving its plant overseas should get a reasonably computed and fair tax recapture of its Domestic Production Activities Tax Deduction for all past years in which it received this very lucrative tax deduction (this tax deduction started in 2005).
I find it hard to understand how US Big Corp manufacturers can think it’s perfectly all right to continue to reap the enormous tax benefits from the Domestic Production Activities Tax Deduction, and then to coldly close US manufacturing plants by moving them overseas to a low wage, low environment standard, and/or low-taxed foreign country.
So, US citizens pay twice. First, they help finance these substantial Domestic Production Activities Deduction tax subsidies granted to US Big Corp Manufacturers. And then, they subsequently lose their jobs when these same manufacturing companies move their jobs overseas. Just a horribly disgusting, heartless situation.
And then to pour salt on their open wounds, these same US Big Corp Manufacturers are now lobbying intensely for an 85% US tax holiday on their foreign earnings repatriation. Just incredible heartless greed.
And third, in all subsequent years, the Domestic Production Activities Tax Deduction percentage for companies that have moved US jobs overseas should be reduced.
The Feds can quantify what fair numbers would be related to my above last two recommendations related to the Domestic Production Activities Tax Deduction for these US Big Manufacturing Corps that move their US jobs overseas.
All of the tax proceeds here will be used to reduce the US Deficit.
Big Corp Tax Loophole Closer #25: Stock Compensation Excess Tax Benefits
In the very popular non-qualified employee stock compensation plans, when a company employee exercises a stock option, the corporation generally, and in a very largesse manner, receives a federal income tax deduction for the excess of the market price of the stock at the exercise date over the exercise price. For common stocks that have increased substantially in price, the federal income tax deduction that the corporation receives can be frankly obscene in amount.
To the extent that this excess is greater than the amount of compensation expense already recorded by the corporation, the federal income tax benefit the corporation receives from this excess is recorded by the corporation as a direct credit to Additional Paid-in Capital in the Stockholders Equity section of the balance sheet, thereby bypassing the income statement.
Some people call this excess tax benefit a windfall tax benefit to the corporation.
Frankly, I think the entire federal income tax deduction the corporation gets from stock option exercises by employees is a corporate tax loophole. This tax deduction is being triggered by an increase in the stock price. Existing stockholders do get dilution from the stock value being transferred to these stock option holders, but from a tax standpoint, the corporation hasn’t paid anything for that value accruing to the employee due to the stock price appreciating.
But after giving due consideration to the economic damage to Big Corps, my proposal here is to not remove this entire corporate tax loophole, but instead just the loophole related to the excess, or windfall, tax benefit explained earlier.
If the entire corporate tax loophole was closed, Big Corps would be receiving substantial hits to their earnings each year.
However, there is no income tax expense charge to the income statement from disallowing the US federal income tax deduction by the corporation from just this excess or windfall benefit to the corporation, since under US generally accepted accounting principles, this excess benefit presently doesn’t get reflected in the income statement, but instead goes directly to Stockholders’ Equity on the balance sheet.
If the Big Corp tax loophole were closed disallowing the entire corporate federal income tax deduction the Big Corp receives for the excess of market price over exercise price at exercise date, then my best estimate is that the additional tax revenue raised by the US Government over the next 10 years would be up to $1 trillion.
The reason for this is that any fair CBO scoring of tax revenue raised by the US Government has to factor in reasonable increases in the stock market over the next ten years. Further, the stock market has already nearly doubled in the past two plus years, and thus there are many stock options outstanding now where the current stock market price is substantially above the locked-in exercise price.
But my recommendation would be to just close a portion of this Big Corp tax loophole…just the portion of the Big Corp federal income tax deduction related to excess, or windfall, tax benefits. Given the devastating US Debt level, it is only fair that this Big Corp tax loophole be closed.
My hunch is that the additional tax raised over the next 10 years from closing just this portion of this Big Corp tax loophole, related to this excess, or windfall, tax benefit, is somewhere between $200 bil and $500 bil, depending upon what assumed stock price increases that the CBO uses in doing its scoring.
To the extent that this excess is greater than the amount of compensation expense already recorded by the corporation, the federal income tax benefit the corporation receives from this excess is recorded by the corporation as a direct credit to Additional Paid-in Capital in the Stockholders Equity section of the balance sheet, thereby bypassing the income statement.
Some people call this excess tax benefit a windfall tax benefit to the corporation.
Frankly, I think the entire federal income tax deduction the corporation gets from stock option exercises by employees is a corporate tax loophole. This tax deduction is being triggered by an increase in the stock price. Existing stockholders do get dilution from the stock value being transferred to these stock option holders, but from a tax standpoint, the corporation hasn’t paid anything for that value accruing to the employee due to the stock price appreciating.
But after giving due consideration to the economic damage to Big Corps, my proposal here is to not remove this entire corporate tax loophole, but instead just the loophole related to the excess, or windfall, tax benefit explained earlier.
If the entire corporate tax loophole was closed, Big Corps would be receiving substantial hits to their earnings each year.
However, there is no income tax expense charge to the income statement from disallowing the US federal income tax deduction by the corporation from just this excess or windfall benefit to the corporation, since under US generally accepted accounting principles, this excess benefit presently doesn’t get reflected in the income statement, but instead goes directly to Stockholders’ Equity on the balance sheet.
If the Big Corp tax loophole were closed disallowing the entire corporate federal income tax deduction the Big Corp receives for the excess of market price over exercise price at exercise date, then my best estimate is that the additional tax revenue raised by the US Government over the next 10 years would be up to $1 trillion.
The reason for this is that any fair CBO scoring of tax revenue raised by the US Government has to factor in reasonable increases in the stock market over the next ten years. Further, the stock market has already nearly doubled in the past two plus years, and thus there are many stock options outstanding now where the current stock market price is substantially above the locked-in exercise price.
But my recommendation would be to just close a portion of this Big Corp tax loophole…just the portion of the Big Corp federal income tax deduction related to excess, or windfall, tax benefits. Given the devastating US Debt level, it is only fair that this Big Corp tax loophole be closed.
My hunch is that the additional tax raised over the next 10 years from closing just this portion of this Big Corp tax loophole, related to this excess, or windfall, tax benefit, is somewhere between $200 bil and $500 bil, depending upon what assumed stock price increases that the CBO uses in doing its scoring.
Big Corp Tax Loophole Closer #24: Hedge Fund and Private Equity Manager Compensation
I have been surprised at just how many companies are now owned, under the radar screen, by hedge funds. Just locally in my Evansville, IN area, two of the largest companies.....Berry Plastics and Springleaf (the former American General Finance) are both now owned by hedge funds. I bet more than 95% of the people in the Evansville area are not aware of this. And I am pretty sure it is like this all over the country.
A common hedge fund and private equity manager compensation arrangement includes two parts, that could be something like this:
*The manager receives a fee of 2% of the value of the fund and this is taxed at ordinary rates.
*The manager also receives 20% of the annual profits of the fund and this is taxed at a very attractive capital gain tax rate.
Clearly, the part that is a tax loophole is that all fund manager compensation should be taxed at ordinary rates, particularly for the larger hedge funds. Frankly, it is just crazy to allow hedge fund managers a much lower tax rate than what working stiffs must pay.
I can see the advantage to the economy, and to job creation, of letting the manager of a smaller private equity fund get part of her compensation income taxed at capital gain tax rates.
My recommendation is to tax all fund manager compensation for managing a hedge fund, above a certain size, to be taxed to the manager as ordinary income. The feds can decide what the size cut off should be.
A common hedge fund and private equity manager compensation arrangement includes two parts, that could be something like this:
*The manager receives a fee of 2% of the value of the fund and this is taxed at ordinary rates.
*The manager also receives 20% of the annual profits of the fund and this is taxed at a very attractive capital gain tax rate.
Clearly, the part that is a tax loophole is that all fund manager compensation should be taxed at ordinary rates, particularly for the larger hedge funds. Frankly, it is just crazy to allow hedge fund managers a much lower tax rate than what working stiffs must pay.
I can see the advantage to the economy, and to job creation, of letting the manager of a smaller private equity fund get part of her compensation income taxed at capital gain tax rates.
My recommendation is to tax all fund manager compensation for managing a hedge fund, above a certain size, to be taxed to the manager as ordinary income. The feds can decide what the size cut off should be.
Thursday, July 28, 2011
Big Corp Tax Loophole Closer #23: R&D Initial Capitalization as Intellectual Property Asset
When a US Multinational Corp spends money in the US to develop specific intellectual property, this company immediately gets a federal income tax deduction for these R&D costs.
Regarding these R&D costs incurred to develop specific intellectual property, to be used around the world, in order to generate profits globally, there are several ways that this could work. Let me address two of them.
One option is that this US Multinational Corp could plan to transfer this intellectual property to foreign subsidiaries after all the related US R&D costs have been incurred and the intellectual property is completed.
Under this first option, my recommendation is that, after technological feasibility, there should be a reasonably supportable allocation of these future R&D costs between expected US use and expected Non-US use. And for federal income tax purposes, the R&D costs allocated to Non-US use, instead of being currently deducted for US federal income tax purposes, should instead be initially capitalized as an Intellectual Property asset, since in all likelihood, these costs are expected to be recovered upon later intellectual property transfer.
Then when the intellectual property is actually transferred to foreign subsidiaries, these allocated Non-US R&D costs now capitalized as an intellectual property asset will be used to reduce the amount of gross profit recognized upon intellectual property transfer to foreign subsidiaries, which is in economic substance a sale, no matter what the legal form of transferring the intellectual property to the foreign subsidiary might be.
A second option is that the US Multinational Corp could incur R&D costs to develop intellectual property and could plan to later share, in a cost-sharing arrangement, this intellectual property with foreign subsidiaries after all the related R&D costs are incurred and the intellectual property is completed.
In this second option, my recommendation is that, after technological feasibility, to allocate these future R&D costs, in a reasonably supportable manner, between expected US use and Non-US use. And for federal income tax purposes, all such future R&D costs allocated to Non-US use should not be immediately deducted for federal income tax purposes, but instead should be initially capitalized as an intellectual property asset, since in all likelihood, these costs are expected to be recovered from a planned subsequent cost sharing with foreign subsidiaries.
Then, these R&D costs now capitalized as an intellectual property asset would subsequently be amortized, for federal income tax purposes, over the term of the cost-sharing agreement with foreign subsidiaries.
The economic damage to US Big Multinational Corps from these two proposals is substantially softened here due to this corporate tax loophole closer being treated as a Temporary Tax Difference under US generally accepted accounting principles. The total federal income tax deductions for these costs will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big US Multinational Corps from my two proposals.
The CBO scoring of these two proposals over the next 10 years, and for many years thereafter, will be significantly positive. All of the tax proceeds raised should be used to reduce the US Deficit.
Regarding these R&D costs incurred to develop specific intellectual property, to be used around the world, in order to generate profits globally, there are several ways that this could work. Let me address two of them.
One option is that this US Multinational Corp could plan to transfer this intellectual property to foreign subsidiaries after all the related US R&D costs have been incurred and the intellectual property is completed.
Under this first option, my recommendation is that, after technological feasibility, there should be a reasonably supportable allocation of these future R&D costs between expected US use and expected Non-US use. And for federal income tax purposes, the R&D costs allocated to Non-US use, instead of being currently deducted for US federal income tax purposes, should instead be initially capitalized as an Intellectual Property asset, since in all likelihood, these costs are expected to be recovered upon later intellectual property transfer.
Then when the intellectual property is actually transferred to foreign subsidiaries, these allocated Non-US R&D costs now capitalized as an intellectual property asset will be used to reduce the amount of gross profit recognized upon intellectual property transfer to foreign subsidiaries, which is in economic substance a sale, no matter what the legal form of transferring the intellectual property to the foreign subsidiary might be.
A second option is that the US Multinational Corp could incur R&D costs to develop intellectual property and could plan to later share, in a cost-sharing arrangement, this intellectual property with foreign subsidiaries after all the related R&D costs are incurred and the intellectual property is completed.
In this second option, my recommendation is that, after technological feasibility, to allocate these future R&D costs, in a reasonably supportable manner, between expected US use and Non-US use. And for federal income tax purposes, all such future R&D costs allocated to Non-US use should not be immediately deducted for federal income tax purposes, but instead should be initially capitalized as an intellectual property asset, since in all likelihood, these costs are expected to be recovered from a planned subsequent cost sharing with foreign subsidiaries.
Then, these R&D costs now capitalized as an intellectual property asset would subsequently be amortized, for federal income tax purposes, over the term of the cost-sharing agreement with foreign subsidiaries.
The economic damage to US Big Multinational Corps from these two proposals is substantially softened here due to this corporate tax loophole closer being treated as a Temporary Tax Difference under US generally accepted accounting principles. The total federal income tax deductions for these costs will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big US Multinational Corps from my two proposals.
The CBO scoring of these two proposals over the next 10 years, and for many years thereafter, will be significantly positive. All of the tax proceeds raised should be used to reduce the US Deficit.
Big Corp Tax Loophole Closer #22: Corporate Inversions
A corporation organized in the U.S. pays federal taxes on its worldwide income, whereas a foreign corporation pays federal taxes only on its "U.S. source" income.
When a U.S. corporation undergoes a corporate inversion, the U.S. corporation becomes a subsidiary of a foreign corporation ("parent") organized in a tax haven country - a country that imposes little or no tax on corporations. The new parent corporation receives income throughout the world, and pays U.S. taxes only on the U.S.-source income generated by its U.S. subsidiary.
If the U.S. corporation did not engage in the corporate inversion, income from all sources, whether U.S. or foreign, would be subject to U.S. taxes. By engaging in a corporate conversion, the corporation no longer pays federal income taxes on its foreign source income.
Here’s how a corporate inversion works. A U.S. corporation creates a parent company in a tax-haven country, a country that imposes little or no taxes on income received by international corporations headquartered in that country. The U.S. corporation then engages in a merger or reorganization, the result of which makes the U.S corporation a subsidiary of the foreign parent.
Clearly, this is a massive tax loophole.
My recommendation is for the US government to either require the legal reversal of all existing corporate inversions that now exist.
Or alternatively, you could keep legally the corporate inversion structures the way they are now. However, for US federal income tax purposes, the parent corporation, located in the tax-haven country, must file a US corporation income tax return and is taxed in the US each year on its worldwide income…thus, tax based on economic substance rather than based on legal form. The economic substance here is that the only reason this corporate inversion occurred was to save worldwide corporate taxes. It has no other legitimate purpose.
The money raised under this proposal should be used to reduce the US Deficit.
When a U.S. corporation undergoes a corporate inversion, the U.S. corporation becomes a subsidiary of a foreign corporation ("parent") organized in a tax haven country - a country that imposes little or no tax on corporations. The new parent corporation receives income throughout the world, and pays U.S. taxes only on the U.S.-source income generated by its U.S. subsidiary.
If the U.S. corporation did not engage in the corporate inversion, income from all sources, whether U.S. or foreign, would be subject to U.S. taxes. By engaging in a corporate conversion, the corporation no longer pays federal income taxes on its foreign source income.
Here’s how a corporate inversion works. A U.S. corporation creates a parent company in a tax-haven country, a country that imposes little or no taxes on income received by international corporations headquartered in that country. The U.S. corporation then engages in a merger or reorganization, the result of which makes the U.S corporation a subsidiary of the foreign parent.
Clearly, this is a massive tax loophole.
My recommendation is for the US government to either require the legal reversal of all existing corporate inversions that now exist.
Or alternatively, you could keep legally the corporate inversion structures the way they are now. However, for US federal income tax purposes, the parent corporation, located in the tax-haven country, must file a US corporation income tax return and is taxed in the US each year on its worldwide income…thus, tax based on economic substance rather than based on legal form. The economic substance here is that the only reason this corporate inversion occurred was to save worldwide corporate taxes. It has no other legitimate purpose.
The money raised under this proposal should be used to reduce the US Deficit.
Big Corp Tax Loophole Closer #21: US Government Subsidies to Ethanol Industry
Given the huge US Deficit, coupled with so many studies showing that US Government subsidies to the US Ethanol Industry make little economic sense, my recommendation is to kill all US Government Ethanol Subsidies to all Big US Corps above a certain size. The Feds can decide what the size cutoff should be.
I think there should be substantial tax incentives for wise green energy investments, but in all fairness, green Ethanol tax incentives should not be more robust than that of any other green energy tax incentive.
The money raised here should be used to reduce the US Deficit.
I think there should be substantial tax incentives for wise green energy investments, but in all fairness, green Ethanol tax incentives should not be more robust than that of any other green energy tax incentive.
The money raised here should be used to reduce the US Deficit.
Big Corp Tax Loophole Closer #20: Janitor's Insurance
Many companies buy what is called “key-man” life insurance on particularly key employees, where the company is the beneficiary. This only makes sense because if a company loses a critical executive due to death, the company gets monetarily rewarded with the life insurance proceeds upon the death of the key employee.
The insurance premiums paid by the company each year are not tax deductible, for federal income tax purposes, and then the life insurance proceeds the company receives upon the employee’s death is tax exempt, for federal income tax purposes.
Each year, the company records on its books the increase in the cash surrender value of the life insurance policy as a long-term asset on its balance sheet, and with a like amount an increase in earnings on its income statement. This increase in cash surrender value each year is not taxable income.
Here’s the problem. Some smooth financial operators have seen the financial advantage of buying key-man life insurance on any employee of a company since just the tax benefits alone make the insurance policy quite advantageous to the company.
And to pile on, many of these life insurance policies are continued even after employees have left the company.
Clearly, buying life insurance policies for just regular employees of the company (thus the phrase Janitors’ Insurance or Peasants’ Insurance) is flat out abuse of the tax law.
Thus, my recommendation would be to just allow this favorable tax treatment to be on the life insurance policies on truly key employees…such as the Corporate Executive Management Team. Thus I recommend that there be no new Janitors’ Insurance policies allowed in the future.
The tricky part is what to do with all of the many present Janitors’ Insurance policies out there now?
I recommend that if the company decides to continue to keep this insurance coverage until the person dies, then fine, but the life insurance proceeds upon death gets reflected to the company as ordinary taxable income, for federal income tax purposes.
But then I would lessen the economic blow here by giving the company an incentive to cash in these life insurance policies now. I would let them cash them in during 2011 for their cash surrender value, and then the cash proceeds received by the company would be taxed as ordinary income at a favorable federal income tax rate of perhaps something like 15%.
The point here is that the country would be a lot better off if all of these Janitors’ Insurance policies are cashed in by companies for their cash surrender values as soon as possible.
And then to give even more of an incentive for companies to cash them in now, I would raise the federal income tax rate on the cash surrender value by say 2% per year for each additional year the insurance policy is retained by the company.
The tax proceeds received by the US government from this recommendation should be used to reduce the US Deficit.
The insurance premiums paid by the company each year are not tax deductible, for federal income tax purposes, and then the life insurance proceeds the company receives upon the employee’s death is tax exempt, for federal income tax purposes.
Each year, the company records on its books the increase in the cash surrender value of the life insurance policy as a long-term asset on its balance sheet, and with a like amount an increase in earnings on its income statement. This increase in cash surrender value each year is not taxable income.
Here’s the problem. Some smooth financial operators have seen the financial advantage of buying key-man life insurance on any employee of a company since just the tax benefits alone make the insurance policy quite advantageous to the company.
And to pile on, many of these life insurance policies are continued even after employees have left the company.
Clearly, buying life insurance policies for just regular employees of the company (thus the phrase Janitors’ Insurance or Peasants’ Insurance) is flat out abuse of the tax law.
Thus, my recommendation would be to just allow this favorable tax treatment to be on the life insurance policies on truly key employees…such as the Corporate Executive Management Team. Thus I recommend that there be no new Janitors’ Insurance policies allowed in the future.
The tricky part is what to do with all of the many present Janitors’ Insurance policies out there now?
I recommend that if the company decides to continue to keep this insurance coverage until the person dies, then fine, but the life insurance proceeds upon death gets reflected to the company as ordinary taxable income, for federal income tax purposes.
But then I would lessen the economic blow here by giving the company an incentive to cash in these life insurance policies now. I would let them cash them in during 2011 for their cash surrender value, and then the cash proceeds received by the company would be taxed as ordinary income at a favorable federal income tax rate of perhaps something like 15%.
The point here is that the country would be a lot better off if all of these Janitors’ Insurance policies are cashed in by companies for their cash surrender values as soon as possible.
And then to give even more of an incentive for companies to cash them in now, I would raise the federal income tax rate on the cash surrender value by say 2% per year for each additional year the insurance policy is retained by the company.
The tax proceeds received by the US government from this recommendation should be used to reduce the US Deficit.
Wednesday, July 27, 2011
Big Corp Tax Loophole Closer #19: Place Legal and Advertising Deduction in the Proper Country
A typical Big Pharma Corp does a substantial portion of its Research and Development on new drugs in the US, gets a US federal and a US state income tax deduction for these R&D costs, and also a US R&D tax credit, to boot.
Then after drug discovery, it transfers the intellectual property (the drug compound) to a foreign tax haven, like Puerto Rico and Ireland, where the drug is manufactured, and thus the massive amount of profit is recognized in this tax haven.
And then a good chunk of the manufactured drugs are sold to US customers.
Much of the advertising spending occurs in the US, and thus the federal income tax deduction is taken in the US, where the tax rate is higher.
Also, later, the bulk of the legal costs related to a drug are incurred in the US, and thus the federal income tax deduction is taken in the higher-taxed US.
And again in both cases, frequently nearly all of the profit related to the drug is recognized in the low-taxed foreign tax haven.
Clearly, something is really wrong here. There’s a mismatch of the profit being recognized on the drug in the low-taxed foreign tax haven, and the advertising, legal, and many other costs related to that same drug being tax deducted in the higher-taxed US.
To correct for this clear Big Corp tax loophole, my recommendation is that the US Government should legislate in this situation for economic substance over legal form, by not allowing federal income tax deductions for these advertising, legal, and other costs related to this drug, where the majority of the profit related to this same drug, has been recognized for income tax purposes in a low-taxed foreign tax country.
And it's not just Big Pharma Corps. Many Big US Manufacturers and Big US Corps in other industries also replicate the same mismatching of where the bulk of the profit on the product or service is recognized (the low-tax foreign tax haven), and where many of the large expenses related to this same product or service are deducted (the higher-tax US).
Thus my recommendation is that the US Government should not allow federal income tax deductions for these advertising, legal, and other costs, related to a product or service, incurred by any Big US Manufacturer or by any Big US Corp in any other industry, where the bulk of the profit on this same related product or service is being recognized in a low-tax foreign tax haven.
Then after drug discovery, it transfers the intellectual property (the drug compound) to a foreign tax haven, like Puerto Rico and Ireland, where the drug is manufactured, and thus the massive amount of profit is recognized in this tax haven.
And then a good chunk of the manufactured drugs are sold to US customers.
Much of the advertising spending occurs in the US, and thus the federal income tax deduction is taken in the US, where the tax rate is higher.
Also, later, the bulk of the legal costs related to a drug are incurred in the US, and thus the federal income tax deduction is taken in the higher-taxed US.
And again in both cases, frequently nearly all of the profit related to the drug is recognized in the low-taxed foreign tax haven.
Clearly, something is really wrong here. There’s a mismatch of the profit being recognized on the drug in the low-taxed foreign tax haven, and the advertising, legal, and many other costs related to that same drug being tax deducted in the higher-taxed US.
To correct for this clear Big Corp tax loophole, my recommendation is that the US Government should legislate in this situation for economic substance over legal form, by not allowing federal income tax deductions for these advertising, legal, and other costs related to this drug, where the majority of the profit related to this same drug, has been recognized for income tax purposes in a low-taxed foreign tax country.
And it's not just Big Pharma Corps. Many Big US Manufacturers and Big US Corps in other industries also replicate the same mismatching of where the bulk of the profit on the product or service is recognized (the low-tax foreign tax haven), and where many of the large expenses related to this same product or service are deducted (the higher-tax US).
Thus my recommendation is that the US Government should not allow federal income tax deductions for these advertising, legal, and other costs, related to a product or service, incurred by any Big US Manufacturer or by any Big US Corp in any other industry, where the bulk of the profit on this same related product or service is being recognized in a low-tax foreign tax haven.
Big Corp Tax Loophole Closer #18: Manufacturing Bouncebacks
A typical Big Pharma Corp does a substantial portion of its Research and Development on new drugs in the US, gets a US federal and US state income tax deduction for these R&D costs, and also a US R&D tax credit, to boot.
Then after drug discovery, it transfers the intellectual property (the drug compound) to a foreign tax haven, like Puerto Rico and Ireland, where the drug is manufactured, and thus the massive amount of profit is recognized in this tax haven.
And then a good chunk of the manufactured drugs are sold to US customers, some of whom even live very close to where the R&D was performed on the drug in the first place.
What a Roundhouse transaction…..a clear Manufacturing Bounceback or Boomerang!
But after this Roundhouse transaction goes full circle, when Uncle Sam and the US States put their hands in their pockets, they find no corporate income tax receipts. In fact, they both gave income tax deductions to the drug company for the R&D costs, and also granted R&D tax credits, but tax havens like Puerto Rico and Ireland are where the massive profits from the drug are located, and income taxed at an incredibly very favorable income tax rate, and particularly so in Puerto Rico.
And now these Drug companies are lobbying the US heavily to be able to repatriate, at a very favorable US tax rate, all of their very low-taxed foreign earnings, which are now parked in their foreign tax havens.
Gosh, I call this just flat out piling on. The US Federal Government and the US States are under severe financial stress and they let these Big Drug companies get away with avoiding so much in corporate income taxes.
Clearly, from a fairness standpoint, something needs to be done here.
My recommendation here is that in a drug Roundhouse transaction, where a Big US drug company does the drug research in the US, and then the resultant drug is manufactured in a foreign tax haven, and then subsequently sold back to the US, I think it is only fair that there should be some kind of a tax or import duty shared by the US government and the US State government on the drug sold to the US customer.
And it’s just not Big Pharma. Many other Big US manufacturers replicate the same Roundhouse transactions.
Thus I think there should be the same kind of a tax or import duty on a Big US Corp on all of its manufactured products, manufactured in a foreign tax haven, or manufactured in a foreign country where there are low wages or substandard clean air standards, and then these products are sold to a US customer.
Then after drug discovery, it transfers the intellectual property (the drug compound) to a foreign tax haven, like Puerto Rico and Ireland, where the drug is manufactured, and thus the massive amount of profit is recognized in this tax haven.
And then a good chunk of the manufactured drugs are sold to US customers, some of whom even live very close to where the R&D was performed on the drug in the first place.
What a Roundhouse transaction…..a clear Manufacturing Bounceback or Boomerang!
But after this Roundhouse transaction goes full circle, when Uncle Sam and the US States put their hands in their pockets, they find no corporate income tax receipts. In fact, they both gave income tax deductions to the drug company for the R&D costs, and also granted R&D tax credits, but tax havens like Puerto Rico and Ireland are where the massive profits from the drug are located, and income taxed at an incredibly very favorable income tax rate, and particularly so in Puerto Rico.
And now these Drug companies are lobbying the US heavily to be able to repatriate, at a very favorable US tax rate, all of their very low-taxed foreign earnings, which are now parked in their foreign tax havens.
Gosh, I call this just flat out piling on. The US Federal Government and the US States are under severe financial stress and they let these Big Drug companies get away with avoiding so much in corporate income taxes.
Clearly, from a fairness standpoint, something needs to be done here.
My recommendation here is that in a drug Roundhouse transaction, where a Big US drug company does the drug research in the US, and then the resultant drug is manufactured in a foreign tax haven, and then subsequently sold back to the US, I think it is only fair that there should be some kind of a tax or import duty shared by the US government and the US State government on the drug sold to the US customer.
And it’s just not Big Pharma. Many other Big US manufacturers replicate the same Roundhouse transactions.
Thus I think there should be the same kind of a tax or import duty on a Big US Corp on all of its manufactured products, manufactured in a foreign tax haven, or manufactured in a foreign country where there are low wages or substandard clean air standards, and then these products are sold to a US customer.
Big Corp Tax Loophole Closer #17: Disallow Deferral of all Foreign Earnings
In Big Corp Tax Loophole Closer #16, I recommended that the US Government should disallow deferral of earnings of Puerto Rico Controlled Foreign Corps.
In this Big Corp Tax Loophole Closer #17, I am expanding that recommendation to disallow the deferral of all foreign earnings of all companies.
To give an excellent insight on this issue, let me study the US Big Multinational Medical Corps, most of which are Big Pharma Corps.
From a review of income tax footnotes in their SEC filings, I found ten of them whose foreign tax breaks (i.e. the tax benefits from having lower tax rates in foreign jurisdictions) exceeded $1 billion each over the most recent three years. Here they are, along with their related foreign tax breaks, which totaled $28.5 bil for the years 2008 through 2010:
………………..............(mils of $s)
JNJ.............................6,532
Merck.........................4,970
Abbott Labs................3,266
Amgen........................2,874
Pfizer..........................2,729*
Eli Lilly.......................2,205
Medtronic...................1,901
Bristol Myers Squibb...1,878
Gilead Sciences...........1,094
Covidien.....................1,083
Total for all 10...........28,532
*Pfizer's foreign tax breaks amount above is unusually low, for its size, because of certain transactions related to its merger with Wyeth.
To be financially transparent, seven of these ten companies specifically pointed out which foreign jurisdictions had significant Tax Incentives which they took advantage of.
All seven mentioned Puerto Rico’s tax incentives, four of them mentioned Ireland, three of them mentioned Singapore, and two of them mentioned Switzerland. And most of them stated that there were tax incentives in other foreign countries, which they took advantage of, without mentioning the foreign countries specifically.
The three Big Medical Corps which did not specifically mention any foreign country were Abbott Labs, Gilead Sciences and Covidien. You have to wonder where the SEC was here.
Here are the US Pretax Income (PTI), International Pretax Income, Worldwide Pretax Income, and the related International Pretax Income Percentage Mix for each of these ten Big Medical Corps for the most recent three years:
.......................................................World.....Intl
............................US..........Intl........Wide......PTI
...........................PTI..........PTI.........PTI......Mix %
...........................(millions of US dollars)
Pfizer...............(7,869)....37,812.....29,943...126%
Abbott Labs.......1,146.....17,617.....18,763....94%
Eli Lilly*............3,718......6,857.....10,575....65%
Medtronic..........3,988......6,144.....10,132....61%
JNJ...................20,112....29,519.....49,631....59%
Amgen................6,736.....8,800.....15,536....57%
Merck................11,682....15,192.....26,874....57%
Covidien.............2,573......3,139.......5,712....55%
BristolMyersSq...8,786.....7,663.....16,449....47%
Gilead Sciences...6,489.....3,600.....10,089....36%
Total.................57,361..136,343...193,704....70%
* Eli Lilly includes its Puerto Rico earnings in its US total.
Yeah, these Big Medical Corps have successfully shifted 70% of their earnings, along with the related jobs, overseas.
It's not just about lower wages in places like Puerto Rico, it's more markedly due to tax savings. When you take the $28.5 bil of foreign tax breaks of these Big Medical Corps for the most recent three years, and divide it by the $193.7 bil of worldwide pretax income, you get a drop in these companies’ effective income tax rates in total of an incredible 14.7%...I’m not kidding, just do the math.
This is why Big Medical Corps lobby so intensively for an 85% tax holiday for foreign earnings repatriation. They got one in 2004, and now they are pushing for another.
It is pretty clear to me that the country clearly needs more financially astute members in the US Congress, on both sides of the aisle, looking out for the country's best interests, like Chris Van Hollen in the House and Mike Crapo in the Senate. And these members of US Congress also need more staff members who have extensive financial expertise. This is the main reason the country has a $14.3 trillion debt, and an unemployment rate of 9.2%. The US Government has no chance when it goes up against the financially savvy, greedy, deceptive, awesomely-powerful Big Corps and their lobbyists.
The above numbers are just for Big Medical Corps, and only for three years. When you extrapolate this to all US Big Multinational Corps, the projected total foreign tax breaks would be clearly off the charts.
My recommendation here is to disallow the deferral of all foreign earnings, starting in 2012. Also, there should be no 85% tax holiday on the estimated $2.0 trillion of unremitted foreign earnings that will exist as of the end of 2011.
Because of the horrible US job and US debt situation we now face, I would consider some wise tweaking of the foreign earnings repatriation tax rules to allow for some one-time somewhat discounted federal income tax rates on some of these $2.0 trillion of unremitted earnings, but it is critical that these initiatives are enacted wisely, and thus only when they clearly and directly create a sufficient number of good full-time US jobs.
Although they say otherwise, the majority of Big Corps have no interest in creating US jobs. They like it precisely where they are now, where their wage costs are low, their employees work extremely hard, and it is very easy for them to find good replacement employees on the cheap. Big Corp earnings benefit immensely in this environment.
In this Big Corp Tax Loophole Closer #17, I am expanding that recommendation to disallow the deferral of all foreign earnings of all companies.
To give an excellent insight on this issue, let me study the US Big Multinational Medical Corps, most of which are Big Pharma Corps.
From a review of income tax footnotes in their SEC filings, I found ten of them whose foreign tax breaks (i.e. the tax benefits from having lower tax rates in foreign jurisdictions) exceeded $1 billion each over the most recent three years. Here they are, along with their related foreign tax breaks, which totaled $28.5 bil for the years 2008 through 2010:
………………..............(mils of $s)
JNJ.............................6,532
Merck.........................4,970
Abbott Labs................3,266
Amgen........................2,874
Pfizer..........................2,729*
Eli Lilly.......................2,205
Medtronic...................1,901
Bristol Myers Squibb...1,878
Gilead Sciences...........1,094
Covidien.....................1,083
Total for all 10...........28,532
*Pfizer's foreign tax breaks amount above is unusually low, for its size, because of certain transactions related to its merger with Wyeth.
To be financially transparent, seven of these ten companies specifically pointed out which foreign jurisdictions had significant Tax Incentives which they took advantage of.
All seven mentioned Puerto Rico’s tax incentives, four of them mentioned Ireland, three of them mentioned Singapore, and two of them mentioned Switzerland. And most of them stated that there were tax incentives in other foreign countries, which they took advantage of, without mentioning the foreign countries specifically.
The three Big Medical Corps which did not specifically mention any foreign country were Abbott Labs, Gilead Sciences and Covidien. You have to wonder where the SEC was here.
Here are the US Pretax Income (PTI), International Pretax Income, Worldwide Pretax Income, and the related International Pretax Income Percentage Mix for each of these ten Big Medical Corps for the most recent three years:
.......................................................World.....Intl
............................US..........Intl........Wide......PTI
...........................PTI..........PTI.........PTI......Mix %
...........................(millions of US dollars)
Pfizer...............(7,869)....37,812.....29,943...126%
Abbott Labs.......1,146.....17,617.....18,763....94%
Eli Lilly*............3,718......6,857.....10,575....65%
Medtronic..........3,988......6,144.....10,132....61%
JNJ...................20,112....29,519.....49,631....59%
Amgen................6,736.....8,800.....15,536....57%
Merck................11,682....15,192.....26,874....57%
Covidien.............2,573......3,139.......5,712....55%
BristolMyersSq...8,786.....7,663.....16,449....47%
Gilead Sciences...6,489.....3,600.....10,089....36%
Total.................57,361..136,343...193,704....70%
* Eli Lilly includes its Puerto Rico earnings in its US total.
Yeah, these Big Medical Corps have successfully shifted 70% of their earnings, along with the related jobs, overseas.
It's not just about lower wages in places like Puerto Rico, it's more markedly due to tax savings. When you take the $28.5 bil of foreign tax breaks of these Big Medical Corps for the most recent three years, and divide it by the $193.7 bil of worldwide pretax income, you get a drop in these companies’ effective income tax rates in total of an incredible 14.7%...I’m not kidding, just do the math.
This is why Big Medical Corps lobby so intensively for an 85% tax holiday for foreign earnings repatriation. They got one in 2004, and now they are pushing for another.
It is pretty clear to me that the country clearly needs more financially astute members in the US Congress, on both sides of the aisle, looking out for the country's best interests, like Chris Van Hollen in the House and Mike Crapo in the Senate. And these members of US Congress also need more staff members who have extensive financial expertise. This is the main reason the country has a $14.3 trillion debt, and an unemployment rate of 9.2%. The US Government has no chance when it goes up against the financially savvy, greedy, deceptive, awesomely-powerful Big Corps and their lobbyists.
The above numbers are just for Big Medical Corps, and only for three years. When you extrapolate this to all US Big Multinational Corps, the projected total foreign tax breaks would be clearly off the charts.
My recommendation here is to disallow the deferral of all foreign earnings, starting in 2012. Also, there should be no 85% tax holiday on the estimated $2.0 trillion of unremitted foreign earnings that will exist as of the end of 2011.
Because of the horrible US job and US debt situation we now face, I would consider some wise tweaking of the foreign earnings repatriation tax rules to allow for some one-time somewhat discounted federal income tax rates on some of these $2.0 trillion of unremitted earnings, but it is critical that these initiatives are enacted wisely, and thus only when they clearly and directly create a sufficient number of good full-time US jobs.
Although they say otherwise, the majority of Big Corps have no interest in creating US jobs. They like it precisely where they are now, where their wage costs are low, their employees work extremely hard, and it is very easy for them to find good replacement employees on the cheap. Big Corp earnings benefit immensely in this environment.
Sunday, July 24, 2011
Big Corp Tax Loophole Closer #16: Disallow Earnings Deferral of Puerto Rico Controlled Foreign Corps
Section 936 of the U.S. Internal Revenue Code (IRC) is widely believed to have been the driving force behind the phenomenal growth of U.S.-based manufacturing companies establishing and operating in the U.S. Commonwealth of Puerto Rico.
The primary financial benefit offered to U.S.-based companies under Section 936 was the ability to repatriate Puerto Rico source income free of U.S. federal taxes. In other words, you could bring money earned in Puerto Rico back to operations in the US mainland with no tax penalty.....Absolutely, incredible.
Then, in the Clinton Presidential years in 1996, Section 936 was considered precisely what it is...corporate welfare. Thus, the economic stimulus legislation passed by the U.S. Congress that year precluded any companies not already operating under Section 936 from doing so, and also instituted a 10-year phase-out for existing Section 936 companies.
The phase-out of this investment incentive was widely forecast to be the death of manufacturing in Puerto Rico. However, this didn't happen. Manufacturing in Puerto Rico continued to flourish
One reason for this continued manufacturing growth in Puerto Rico is that although Section 936 was sunseted, another section of the Internal Revenue Code found new life.....the section concerning Controlled Foreign Corporations (CFCs). The section on CFCs had been part of the tax code for years, but the benefits under Section 936 were so good that many tax professionals simply ignored CFCs.
While Puerto Rico is part of the U.S. (as a commonwealth), it is outside the federal income tax jurisdiction. Companies in Puerto Rico can qualify as CFCs and enjoy the same legal protections as those on the U.S. mainland, while at the same time having their profits deferred from U.S. federal taxes until repatriated to the parent company. Also, manufacturing and export service entities on the island pay a maximum income tax of only 7%.
Those Puerto Rico earnings taxed at such low rates, will ultimately be taxed at the U.S. federal level when repatriated to the U.S., but the company can choose the most tax-advantageous time to bring it home. Most, if not all Section 936 companies operating in Puerto Rico have converted to CFCs.
This is why US multinational corps operating in Puerto Rico are lobbying so hard for a foreign earnings repatriation tax holiday in the US. They got one in 2004, and would really like to have another one.
My recommendation would be for the US Government to disallow deferral of earnings of Puerto Rico Controlled Foreign Corps.
Also, the US Government should give due consideration to this incredible CFC corporate tax loophole in deciding how to wisely implement a foreign earnings repatriation initiative.
The primary financial benefit offered to U.S.-based companies under Section 936 was the ability to repatriate Puerto Rico source income free of U.S. federal taxes. In other words, you could bring money earned in Puerto Rico back to operations in the US mainland with no tax penalty.....Absolutely, incredible.
Then, in the Clinton Presidential years in 1996, Section 936 was considered precisely what it is...corporate welfare. Thus, the economic stimulus legislation passed by the U.S. Congress that year precluded any companies not already operating under Section 936 from doing so, and also instituted a 10-year phase-out for existing Section 936 companies.
The phase-out of this investment incentive was widely forecast to be the death of manufacturing in Puerto Rico. However, this didn't happen. Manufacturing in Puerto Rico continued to flourish
One reason for this continued manufacturing growth in Puerto Rico is that although Section 936 was sunseted, another section of the Internal Revenue Code found new life.....the section concerning Controlled Foreign Corporations (CFCs). The section on CFCs had been part of the tax code for years, but the benefits under Section 936 were so good that many tax professionals simply ignored CFCs.
While Puerto Rico is part of the U.S. (as a commonwealth), it is outside the federal income tax jurisdiction. Companies in Puerto Rico can qualify as CFCs and enjoy the same legal protections as those on the U.S. mainland, while at the same time having their profits deferred from U.S. federal taxes until repatriated to the parent company. Also, manufacturing and export service entities on the island pay a maximum income tax of only 7%.
Those Puerto Rico earnings taxed at such low rates, will ultimately be taxed at the U.S. federal level when repatriated to the U.S., but the company can choose the most tax-advantageous time to bring it home. Most, if not all Section 936 companies operating in Puerto Rico have converted to CFCs.
This is why US multinational corps operating in Puerto Rico are lobbying so hard for a foreign earnings repatriation tax holiday in the US. They got one in 2004, and would really like to have another one.
My recommendation would be for the US Government to disallow deferral of earnings of Puerto Rico Controlled Foreign Corps.
Also, the US Government should give due consideration to this incredible CFC corporate tax loophole in deciding how to wisely implement a foreign earnings repatriation initiative.
Big Corp Tax Loophole Closer #15: Repeal Manufacturing Tax Deduction for Big Oil Corps
Presently, US Big Oil Corps are allowed to claim annually a Section 199 Manufacturing Tax Deduction.
My proposal is to repeal Section 199 for all Big Oil Corps, starting in 2011.
The amount raised here by the US Government, which is pretty significant in amount, should be used to reduce the US Deficit.
My proposal is to repeal Section 199 for all Big Oil Corps, starting in 2011.
The amount raised here by the US Government, which is pretty significant in amount, should be used to reduce the US Deficit.
Big Corp Tax Loophole Closer #14: Big Oil Royalties Paid as Disguised Income Taxes
US Big Oil Corps have been accused of disguising royalty payments made to foreign governments as foreign income taxes. This permits these US Big Oil Corps to reduce their US federal income taxes by obtaining a foreign tax credit for any income taxes paid to a foreign government.
My proposal here is that foreign royalties paid by US Big Oil Corps to foreign governments cannot be considered foreign income taxes paid to a foreign government, and thus they also cannot be included as foreign income tax credits.
Disguising Royalty Payments to foreign governments as foreign income taxes is so clearly abusive that I think the US Government should make my proposal here retroactive.
All the money raised here should be used to reduce the US Deficit.
My proposal here is that foreign royalties paid by US Big Oil Corps to foreign governments cannot be considered foreign income taxes paid to a foreign government, and thus they also cannot be included as foreign income tax credits.
Disguising Royalty Payments to foreign governments as foreign income taxes is so clearly abusive that I think the US Government should make my proposal here retroactive.
All the money raised here should be used to reduce the US Deficit.
Big Corp Tax Loophole Closer #13: Big Oil Percentage Depletion
Depletion is the exhaustion of natural resources, such as oil wells. Big Oil Corps get a US federal income tax deduction for their depletion.
Many years ago, the US Congress passed tax legislation that allowed Big Oil Corps to compute their depletion federal income tax deduction in two ways, either by Cost Depletion or by Percentage Depletion.
Cost Depletion is similar to computing Depreciation under the units of production method.
Percentage Depletion is computed as a percentage of the gross income from the oil well in each year.
And in a bizarre twist, Congress also let Big Oil Corps deduct percentage depletion in a year in which it is higher than cost depletion. However, when the higher percentage depletion is claimed in a given year, the tax basis of the oil well doesn’t get reduced by the percentage depletion actually claimed, but rather by the lower Cost Depletion that wasn’t claimed in that year.
Therefore, Big Oil Corps are allowed to deduct, in total over the life of the well, substantially more than the cost of the oil well.
Obviously this is a corporate tax loophole, and a pretty abusive one. But yet, the US Congress has never had the courage to close this Big Oil corporate tax loophole, because so many in Congress are in the pockets of Big Oil, and also many of them are also scared to death of Big Oil, because of its awesome power.
My proposal here is to kill Percentage Depletion for Big Oil Corps for all years from 2011 and forward.
The money raised here will all be used to reduce the US Deficit.
There will be significantly positive CBO scoring to the US Government from this proposal, for the next 10 years and for many years thereafter.
Many years ago, the US Congress passed tax legislation that allowed Big Oil Corps to compute their depletion federal income tax deduction in two ways, either by Cost Depletion or by Percentage Depletion.
Cost Depletion is similar to computing Depreciation under the units of production method.
Percentage Depletion is computed as a percentage of the gross income from the oil well in each year.
And in a bizarre twist, Congress also let Big Oil Corps deduct percentage depletion in a year in which it is higher than cost depletion. However, when the higher percentage depletion is claimed in a given year, the tax basis of the oil well doesn’t get reduced by the percentage depletion actually claimed, but rather by the lower Cost Depletion that wasn’t claimed in that year.
Therefore, Big Oil Corps are allowed to deduct, in total over the life of the well, substantially more than the cost of the oil well.
Obviously this is a corporate tax loophole, and a pretty abusive one. But yet, the US Congress has never had the courage to close this Big Oil corporate tax loophole, because so many in Congress are in the pockets of Big Oil, and also many of them are also scared to death of Big Oil, because of its awesome power.
My proposal here is to kill Percentage Depletion for Big Oil Corps for all years from 2011 and forward.
The money raised here will all be used to reduce the US Deficit.
There will be significantly positive CBO scoring to the US Government from this proposal, for the next 10 years and for many years thereafter.
Big Corp Tax Loophole Closer #12: Foreign Earnings Repatriation Recapture Tax from US Jobs Lost
In the American Job Creation Act(AJCA) of 2004, there was a very controversial provision that permitted US multinational corps to repatriate their previously unremitted foreign earnings. The emphasis here was that the US multinational would then be able to create US jobs from the many billions of dollars of funds that would be repatriated to the US.
Clearly, this was a boondoggle. Multinational corps like Microsoft, Pfizer and the like had previously shifted their taxable income from the higher tax rate US to substantially lower tax rate in places like Ireland, Singapore, Hong Kong, and yes even Puerto Rico.
Normally, when these foreign earnings are repatriated, the dividend received in the US is taxed at the much higher US federal income tax rate. However, in this AJCA Act of 2004, due to effective lobbying by these large corps, these multinationals were able to repatriate, for a one year window, their foreign earnings with 85% of the dividends received being tax free.
Needless to say, very many multinationals corps took advantage of this, and mostly to the maximum extent possible.
The overwhelming majority of these multinational corps have not created US jobs with this additional money being available in their US coffers. Thus, given the horrible US debt situation, I think there should now be a recapture tax related to some of this massive tax benefit received, computed based on the extent US jobs that have been lost by these US companies subsequent to these repatriations.
Computing this recapture tax gets a bit tricky. Here is how I would do it. I would want to have five separate year computations, the first one in 2011.
First, I would get a total US full-time employee job count of each of these companies immediately after they received the foreign earnings repatriation funds in the US. And then I would get a total US full-time employee job count for each of these companies at the end of 2011. And then for these companies that have lost US jobs over this roughly six or seven year period, the 2011 recapture tax would be computed by multiplying this company’s foreign earnings repatriation tax loophole received (i.e. the dividend received X 85% X 35%) X twice the % of US jobs lost over this period.
And then for each of the next four years, a similar recapture tax computation is made but for the % of US jobs lost in each year. Thus, the end result, if a company has lost US jobs consistently for the first six or seven year period, and also in each subsequent year for four years, it would be paying five years of foreign earnings repatriation recapture tax. And then for a company that has created jobs consistently over the entire period, it wouldn’t have to pay any recapture foreign earnings repatriation tax in any year. But these US jobs created can’t be from business acquisitions….you back them out.
All the money raised here from this recapture tax of these large US multinational corps will be used to reduce the US Deficit.
Clearly, this was a boondoggle. Multinational corps like Microsoft, Pfizer and the like had previously shifted their taxable income from the higher tax rate US to substantially lower tax rate in places like Ireland, Singapore, Hong Kong, and yes even Puerto Rico.
Normally, when these foreign earnings are repatriated, the dividend received in the US is taxed at the much higher US federal income tax rate. However, in this AJCA Act of 2004, due to effective lobbying by these large corps, these multinationals were able to repatriate, for a one year window, their foreign earnings with 85% of the dividends received being tax free.
Needless to say, very many multinationals corps took advantage of this, and mostly to the maximum extent possible.
The overwhelming majority of these multinational corps have not created US jobs with this additional money being available in their US coffers. Thus, given the horrible US debt situation, I think there should now be a recapture tax related to some of this massive tax benefit received, computed based on the extent US jobs that have been lost by these US companies subsequent to these repatriations.
Computing this recapture tax gets a bit tricky. Here is how I would do it. I would want to have five separate year computations, the first one in 2011.
First, I would get a total US full-time employee job count of each of these companies immediately after they received the foreign earnings repatriation funds in the US. And then I would get a total US full-time employee job count for each of these companies at the end of 2011. And then for these companies that have lost US jobs over this roughly six or seven year period, the 2011 recapture tax would be computed by multiplying this company’s foreign earnings repatriation tax loophole received (i.e. the dividend received X 85% X 35%) X twice the % of US jobs lost over this period.
And then for each of the next four years, a similar recapture tax computation is made but for the % of US jobs lost in each year. Thus, the end result, if a company has lost US jobs consistently for the first six or seven year period, and also in each subsequent year for four years, it would be paying five years of foreign earnings repatriation recapture tax. And then for a company that has created jobs consistently over the entire period, it wouldn’t have to pay any recapture foreign earnings repatriation tax in any year. But these US jobs created can’t be from business acquisitions….you back them out.
All the money raised here from this recapture tax of these large US multinational corps will be used to reduce the US Deficit.
Big Corp Tax Loophole Closer #11: Upfront Costs on all Financial Instruments
The excessive greed of a handful of Big Financial Corps played a key role in the meltdown of the US economy. And many US citizens, as well as many smaller businesses, are still suffering severely from the aftershocks of this financial meltdown.....but, Big Corps, not suffering so much.
Many pundits have wanted to assess a substantial annual tax on these Big Financial Corps, and to use the tax proceeds raised to reduce the US Deficit.
The problem with this approach is that it would impact the annual earnings of these Big Financial Corps, some of whom are still suffering.
I think I might have a better way to fairly deal with this situation, by still raising a substantial amount of money from them for the US Government to reduce its massive amount of debt, but at the same time, by also softening somewhat the economic damage to these Big Financial Corps.
In my Big Corp Tax Loophole Closer #2: Upfront Costs on Big Financial Derivatives, I proposed that all external and internal upfront costs related to all financial derivatives of Big Financial Corps should be deferred, for federal income tax purposes, and amortized over the life of the related financial derivatives.
Now in this Big Corp Tax Loophole Closer #11, I am expanding these upfront costs to include all of the same internal and external costs related to all financial instruments of these same Big Financial Corps, including Foreign ones operating in the US.
Financial instruments are a very broad category and include all of the many large financial assets and large financial liabilities on the balance sheet of a financial institution.
Thus, my proposal here is to review all of the huge dollars of financial assets and financial liabilities on the balance sheet of a Big Financial Institution, and determine how these financial assets and financial liabilities got there and what length of time they will stay there on the balance sheet. Further, my proposal here is for all the upfront costs, both external and internal ones, necessary to set up these financial assets and financial liabilities are not tax deducted immediately, as they are presently, but rather are all initially deferred, for federal income tax purposes, and allocated to the related financial asset or as reduction to the financial liability. Then the timing of the tax deduction of these deferred costs would follow the movement of the related financial assets and financial liabilities.
There are substantial amounts of internal financial institution costs incurred necessary to acquire each of the financial assets and financial liabilities. These would include employee salaries, commissions, incentive compensation, employee benefit costs, travel and many other costs. And there could also be a lot of external costs to acquire these assets…examples would be items like external legal costs and CPA firm services for accounting and tax advice. Many of these costs are presently tax deducted immediately, when incurred.
To get a better understanding of a large financial institution, below here are the relevant large financial assets on Wells Fargo's balance sheet at Dec 31, 2010:
………………………………………......................Asset
…………………………………………....................Mix
Securities Available for Sale…...$173 bil (14%)
Loans…………………………............$734 bil (58%)
Total Assets…………………........$1,258 bil
And on Wells Fargo’s 2010 income statement, here are the key employee costs:
Salaries……………………………………….................$13.9 bil
Commissions and Incentive Compensation…...$8.7 bil
Employee Benefits…………………………….............$4.7 bil
Total Employee Related Costs………………........$27.3 bil (54%)
Total Non-interest Expenses………………..........$50.5 bil
The first step is to allocate all of the bank’s internal costs and external costs to each of these asset categories. Then, these costs need to be allocated further to each separate asset within each asset category.
The large Securities Available For Sale assets are mostly those nebulous debt securities that are not going to be sold in the near future, but neither are they acquired to be held to maturity. Thus the intent is to sell them at some point of time down the road. Thus, my proposal here is that all internal and external costs necessary to acquire the Available for Sale Securities, should be initially deferred for federal income tax purposes, and subsequently amortized over the life of the debt security.
The massive Loan asset category above (total of $734 bil) all have terms. Thus my proposal here is for all internal and external costs necessary to acquire these loans should be initially deferred for federal income tax purposes, and subsequently amortized over the term of the related loans.
There are couple of other relevant asset categories.
Trading Assets are ones that are planned to be sold in the near term. My proposal is that for federal income tax purposes, all internal and external costs necessary to acquire Trading Assets that are debt securities, should be amortized over the debt life. All internal and external costs necessary to acquire Trading Assets that are equity securities should not be tax deductible until those assets are sold.
Companies' Mortgage Servicing Rights assets have economic lives used in their audited financial statements. Thus my proposal is that all internal and external costs necessary to acquire Mortgage Servicing Rights should be initially deferred for federal income tax purposes, and subsequently amortized by using their economic lives, rather than by using the present artificial tax life.
And here are the relevant large financial liabilities of Wells Fargo at Dec 31, 2010:
……………………………………………………...............% of
……………………………………….............................Total
………………………………………………….................Assets
Interest-bearing Deposits……………….$657 bil (52%)
Short-term borrowings………………….....$55 bil (4%)
Long-term debt…………………………......$157 bil (7%)
Just like for the assets explained earlier, for a financial institution to obtain the financing of these three categories of liabilities, there had to be substantial internal bank costs incurred. These would include employee salaries, commissions, incentive compensation, employee benefit costs, travel and many other costs. And there could also be a lot of external costs to obtain the financing here, as well.
Thus, under my proposal here, first the financial institution should allocate all of the internal and external costs to each of these three categories of liabilities, and then allocate them further to each specific debt instrument. For all of these liabilities that have a fixed term, all of the related internal and external costs should be initially deferred for federal income tax purposes, and subsequently amortized over the term of the related liability.
I wouldn’t apply this corporate tax loophole closing to smaller US financial institutions, but just to the clearly very large US Big Financial Institutions. I would also apply this proposal to all large Foreign Financial Institutions operating in the US.
The economic damage to the US Big Financial Firms from this proposal is substantially softened here due to this corporate tax loophole closer being treated as a Temporary Tax Difference under US generally accepted accounting principles. The total federal income tax deductions for these costs will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big US Financial Institutions from my proposal.
There should be substantially positive CBO scoring to the US Government from this proposal, for the next 10 years and for many years thereafter.
Many pundits have wanted to assess a substantial annual tax on these Big Financial Corps, and to use the tax proceeds raised to reduce the US Deficit.
The problem with this approach is that it would impact the annual earnings of these Big Financial Corps, some of whom are still suffering.
I think I might have a better way to fairly deal with this situation, by still raising a substantial amount of money from them for the US Government to reduce its massive amount of debt, but at the same time, by also softening somewhat the economic damage to these Big Financial Corps.
In my Big Corp Tax Loophole Closer #2: Upfront Costs on Big Financial Derivatives, I proposed that all external and internal upfront costs related to all financial derivatives of Big Financial Corps should be deferred, for federal income tax purposes, and amortized over the life of the related financial derivatives.
Now in this Big Corp Tax Loophole Closer #11, I am expanding these upfront costs to include all of the same internal and external costs related to all financial instruments of these same Big Financial Corps, including Foreign ones operating in the US.
Financial instruments are a very broad category and include all of the many large financial assets and large financial liabilities on the balance sheet of a financial institution.
Thus, my proposal here is to review all of the huge dollars of financial assets and financial liabilities on the balance sheet of a Big Financial Institution, and determine how these financial assets and financial liabilities got there and what length of time they will stay there on the balance sheet. Further, my proposal here is for all the upfront costs, both external and internal ones, necessary to set up these financial assets and financial liabilities are not tax deducted immediately, as they are presently, but rather are all initially deferred, for federal income tax purposes, and allocated to the related financial asset or as reduction to the financial liability. Then the timing of the tax deduction of these deferred costs would follow the movement of the related financial assets and financial liabilities.
There are substantial amounts of internal financial institution costs incurred necessary to acquire each of the financial assets and financial liabilities. These would include employee salaries, commissions, incentive compensation, employee benefit costs, travel and many other costs. And there could also be a lot of external costs to acquire these assets…examples would be items like external legal costs and CPA firm services for accounting and tax advice. Many of these costs are presently tax deducted immediately, when incurred.
To get a better understanding of a large financial institution, below here are the relevant large financial assets on Wells Fargo's balance sheet at Dec 31, 2010:
………………………………………......................Asset
…………………………………………....................Mix
Securities Available for Sale…...$173 bil (14%)
Loans…………………………............$734 bil (58%)
Total Assets…………………........$1,258 bil
And on Wells Fargo’s 2010 income statement, here are the key employee costs:
Salaries……………………………………….................$13.9 bil
Commissions and Incentive Compensation…...$8.7 bil
Employee Benefits…………………………….............$4.7 bil
Total Employee Related Costs………………........$27.3 bil (54%)
Total Non-interest Expenses………………..........$50.5 bil
The first step is to allocate all of the bank’s internal costs and external costs to each of these asset categories. Then, these costs need to be allocated further to each separate asset within each asset category.
The large Securities Available For Sale assets are mostly those nebulous debt securities that are not going to be sold in the near future, but neither are they acquired to be held to maturity. Thus the intent is to sell them at some point of time down the road. Thus, my proposal here is that all internal and external costs necessary to acquire the Available for Sale Securities, should be initially deferred for federal income tax purposes, and subsequently amortized over the life of the debt security.
The massive Loan asset category above (total of $734 bil) all have terms. Thus my proposal here is for all internal and external costs necessary to acquire these loans should be initially deferred for federal income tax purposes, and subsequently amortized over the term of the related loans.
There are couple of other relevant asset categories.
Trading Assets are ones that are planned to be sold in the near term. My proposal is that for federal income tax purposes, all internal and external costs necessary to acquire Trading Assets that are debt securities, should be amortized over the debt life. All internal and external costs necessary to acquire Trading Assets that are equity securities should not be tax deductible until those assets are sold.
Companies' Mortgage Servicing Rights assets have economic lives used in their audited financial statements. Thus my proposal is that all internal and external costs necessary to acquire Mortgage Servicing Rights should be initially deferred for federal income tax purposes, and subsequently amortized by using their economic lives, rather than by using the present artificial tax life.
And here are the relevant large financial liabilities of Wells Fargo at Dec 31, 2010:
……………………………………………………...............% of
……………………………………….............................Total
………………………………………………….................Assets
Interest-bearing Deposits……………….$657 bil (52%)
Short-term borrowings………………….....$55 bil (4%)
Long-term debt…………………………......$157 bil (7%)
Just like for the assets explained earlier, for a financial institution to obtain the financing of these three categories of liabilities, there had to be substantial internal bank costs incurred. These would include employee salaries, commissions, incentive compensation, employee benefit costs, travel and many other costs. And there could also be a lot of external costs to obtain the financing here, as well.
Thus, under my proposal here, first the financial institution should allocate all of the internal and external costs to each of these three categories of liabilities, and then allocate them further to each specific debt instrument. For all of these liabilities that have a fixed term, all of the related internal and external costs should be initially deferred for federal income tax purposes, and subsequently amortized over the term of the related liability.
I wouldn’t apply this corporate tax loophole closing to smaller US financial institutions, but just to the clearly very large US Big Financial Institutions. I would also apply this proposal to all large Foreign Financial Institutions operating in the US.
The economic damage to the US Big Financial Firms from this proposal is substantially softened here due to this corporate tax loophole closer being treated as a Temporary Tax Difference under US generally accepted accounting principles. The total federal income tax deductions for these costs will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big US Financial Institutions from my proposal.
There should be substantially positive CBO scoring to the US Government from this proposal, for the next 10 years and for many years thereafter.
Saturday, July 23, 2011
Big Corp Tax Loophole Closer #10: Brand and Marketing Investments
I think there are four major industries making substantial contributions to the 2000s Lost Decade, which has gotten us to where we are today, with:
…..$14.3 trillion of US debt
…..Unemployment rate of 9.2%
…..Combined Unemployment/Underemployment rate of more than 16%
…..The Employed full-time, scared to death of losing their jobs
…..The Elderly flat out scared.
…..High percentage of homes underwater
And these four major industries are:
…..Big Oil
…..Big Financial
…..Big Health Insurance
…..Big Pharma
And it’s really just a handful of very greedy Big Corps in these four industries that have caused this incredible damage to the US economy.
These handful of Big Corps in these four industries are all spending tons of money now, attempting to restore their incredibly damaged Brand. And, Big Corps in Health Care are also now investing a lot of money trying to lock up new health care customers.
These brand costs include public relations costs, government relations costs, advertising costs and marketing costs. And these costs are both internal ones and external ones.
We are continually bombarded over the airways with ads of these Big Corps, attempting to restore their severely damaged brands.
And in the beginning of the year when you turn 65, it is just incredible all the mailings you get bombarded with from Big Health Insurance Corps, attempting to scare you to death, and locking you in as a health insurance customer from the time you are 65 until the day you die.
Anyway, for federal income tax purposes, my first proposal would be to amortize over a reasonable period of time, all internal and external costs incurred by Big Health Insurance Corps, where they are in substance, investments made in an attempt to acquire new health insurance customers. I think this reasonable period of time for amortization would be the average length of time these Big Health Insurance Corps would get a premium earnings stream from these customers. And if you wanted to short cut this, perhaps an amortization of 15 years would be reasonable. These costs are presently immediately tax deducted, for federal income tax purposes.
My second proposal, for federal income tax purposes, would be to amortize over the remaining patent life of the specific drug, all advertising and marketing costs, both internal and external ones, made by Big Pharma related to the specific drug being marketed. These costs are presently immediately tax deducted, for federal income tax purposes.
My third proposal relates to all of the remaining substantial internal and external brand restoration costs of these Big Corps in all four of these industries, including public relations costs, government relations costs, advertising costs and marketing costs.
Why in the world should the US Government give these Big Corps tax incentives of an immediate federal income tax deduction for these investments that they are making attempting to restore their severely-damaged brands?
And why should the ones so severely hurt by their actions…..US citizens…..be the ones that should now be effectively paying them, through an immediate federal income tax deduction, for their attempts to restore their brand?
It’s like….OK, you really hurt me economically, and now you want to pile on by making me pay you in your attempt to look better? This is flat out crazy!
What is fair? Perhaps, no federal income tax deduction at all…..or perhaps, a 15 year amortization like brand acquisitions get.
But clearly, these Big Corps in these four industries should be ponying in quite a healthy amount of money to help the country get out of its horrible employment and deficit mess.
They can do this in a fair way, and have the economic effect softened, by being required to have the federal income tax benefit of their brand restoration costs delayed for a while, by having it amortized over a reasonable period of time…..perhaps, 5 years would be reasonable.
By doing this, these Big Corps would be chipping in to help the US get out of its economic crater on both the employment and debt front.
I would only require the changes from immediate tax deduction to an amortization period of 5 to 15 years for the above brand and health care customer investment costs for just the really Big Corps in these four industries. Thus, the Big 5 Oil Companies operating heavily in the US, including Royal Dutch Shell and BP, the Big 2 Health Insurance Corps, and then perhaps the largest five to ten US corps in both the Big Financial and Big Pharma industries.
The economic damage to Big Corps from this proposal is substantially softened here due to this corporate tax loophole closer being treated as a Temporary Tax Difference under US generally accepted accounting principles. The total federal income tax deductions for these Brand and other expenditures will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big Corps from my proposals here.
There will be substantially positive CBO scoring to the US Government from these proposals, for the next 10 years and for many years thereafter.
…..$14.3 trillion of US debt
…..Unemployment rate of 9.2%
…..Combined Unemployment/Underemployment rate of more than 16%
…..The Employed full-time, scared to death of losing their jobs
…..The Elderly flat out scared.
…..High percentage of homes underwater
And these four major industries are:
…..Big Oil
…..Big Financial
…..Big Health Insurance
…..Big Pharma
And it’s really just a handful of very greedy Big Corps in these four industries that have caused this incredible damage to the US economy.
These handful of Big Corps in these four industries are all spending tons of money now, attempting to restore their incredibly damaged Brand. And, Big Corps in Health Care are also now investing a lot of money trying to lock up new health care customers.
These brand costs include public relations costs, government relations costs, advertising costs and marketing costs. And these costs are both internal ones and external ones.
We are continually bombarded over the airways with ads of these Big Corps, attempting to restore their severely damaged brands.
And in the beginning of the year when you turn 65, it is just incredible all the mailings you get bombarded with from Big Health Insurance Corps, attempting to scare you to death, and locking you in as a health insurance customer from the time you are 65 until the day you die.
Anyway, for federal income tax purposes, my first proposal would be to amortize over a reasonable period of time, all internal and external costs incurred by Big Health Insurance Corps, where they are in substance, investments made in an attempt to acquire new health insurance customers. I think this reasonable period of time for amortization would be the average length of time these Big Health Insurance Corps would get a premium earnings stream from these customers. And if you wanted to short cut this, perhaps an amortization of 15 years would be reasonable. These costs are presently immediately tax deducted, for federal income tax purposes.
My second proposal, for federal income tax purposes, would be to amortize over the remaining patent life of the specific drug, all advertising and marketing costs, both internal and external ones, made by Big Pharma related to the specific drug being marketed. These costs are presently immediately tax deducted, for federal income tax purposes.
My third proposal relates to all of the remaining substantial internal and external brand restoration costs of these Big Corps in all four of these industries, including public relations costs, government relations costs, advertising costs and marketing costs.
Why in the world should the US Government give these Big Corps tax incentives of an immediate federal income tax deduction for these investments that they are making attempting to restore their severely-damaged brands?
And why should the ones so severely hurt by their actions…..US citizens…..be the ones that should now be effectively paying them, through an immediate federal income tax deduction, for their attempts to restore their brand?
It’s like….OK, you really hurt me economically, and now you want to pile on by making me pay you in your attempt to look better? This is flat out crazy!
What is fair? Perhaps, no federal income tax deduction at all…..or perhaps, a 15 year amortization like brand acquisitions get.
But clearly, these Big Corps in these four industries should be ponying in quite a healthy amount of money to help the country get out of its horrible employment and deficit mess.
They can do this in a fair way, and have the economic effect softened, by being required to have the federal income tax benefit of their brand restoration costs delayed for a while, by having it amortized over a reasonable period of time…..perhaps, 5 years would be reasonable.
By doing this, these Big Corps would be chipping in to help the US get out of its economic crater on both the employment and debt front.
I would only require the changes from immediate tax deduction to an amortization period of 5 to 15 years for the above brand and health care customer investment costs for just the really Big Corps in these four industries. Thus, the Big 5 Oil Companies operating heavily in the US, including Royal Dutch Shell and BP, the Big 2 Health Insurance Corps, and then perhaps the largest five to ten US corps in both the Big Financial and Big Pharma industries.
The economic damage to Big Corps from this proposal is substantially softened here due to this corporate tax loophole closer being treated as a Temporary Tax Difference under US generally accepted accounting principles. The total federal income tax deductions for these Brand and other expenditures will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big Corps from my proposals here.
There will be substantially positive CBO scoring to the US Government from these proposals, for the next 10 years and for many years thereafter.
Big Corp Tax Loophole Closer #9: Section 197 Intangible Assets
Section 197 Intangible Assets include a multitude of items, including Goodwill, Going Concern Value, Trademarks, Trade Names, Workforce in Place, Information Base, Customer Lists, Patents, Copyrights, License, and Franchises. And the amounts of Company Intangible Assets on corporate balance sheets have been growing like the weeds in my woods.
These Section 197 Intangible Assets are now tax deductible for federal income tax purposes over a 15 year period.
Many of these intangible assets have economic benefits to the business far beyond 15 years, and thus there is clearly a Corporate Tax Loophole here that, in all fairness, needs to be closed, particularly given the massive amount of US Debt that we have.
And why in the world should the US government be giving substantial tax incentives for companies to make acquisitions, like they clearly are with this 15 year tax life for Intangible Assets? Nearly always, jobs are lost when acquisitions are made. The US Government should be giving tax incentives to create jobs, not to reduce jobs.
I think the Feds should revisit this 15 year tax life for all of these Intangible Assets. And they should compare it with the economic lives of the various intangible assets actually being used by companies in their audited financial statements.
Clearly, for Intangible assets that companies are not amortizing at all on their books due to US generally accepted accounting principles, this 15 year tax life makes no economic sense. It is flat out wrong. It should be significantly lengthened.
And for the Intangible assets that companies are amortizing on their books due to US generally accepted accounting principles, I think that for federal income tax purposes, it makes much more sense to use the economic life actually being used in its audited financial statements, rather than this artificial 15 year tax life.
I would only require this change for really Big Corps, with total Intangible Assets of at least $1 bil.
I also wouldn’t start making this Intangible Asset Life change until Intangible Asset additions made starting in say 2013 or 2014, after the country has gotten out of its horrible job situation.
The economic damage to Big Corps from this proposal is substantially softened here due to this corporate tax loophole closer being treated as a Temporary Tax Difference under US generally accepted accounting principles. The total federal income tax deductions for these Intangible Asset expenditures will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big Corps from my proposal here.
There will be significantly positive CBO scoring to the US Government from this proposal, for the next 10 years and for many years thereafter.
These Section 197 Intangible Assets are now tax deductible for federal income tax purposes over a 15 year period.
Many of these intangible assets have economic benefits to the business far beyond 15 years, and thus there is clearly a Corporate Tax Loophole here that, in all fairness, needs to be closed, particularly given the massive amount of US Debt that we have.
And why in the world should the US government be giving substantial tax incentives for companies to make acquisitions, like they clearly are with this 15 year tax life for Intangible Assets? Nearly always, jobs are lost when acquisitions are made. The US Government should be giving tax incentives to create jobs, not to reduce jobs.
I think the Feds should revisit this 15 year tax life for all of these Intangible Assets. And they should compare it with the economic lives of the various intangible assets actually being used by companies in their audited financial statements.
Clearly, for Intangible assets that companies are not amortizing at all on their books due to US generally accepted accounting principles, this 15 year tax life makes no economic sense. It is flat out wrong. It should be significantly lengthened.
And for the Intangible assets that companies are amortizing on their books due to US generally accepted accounting principles, I think that for federal income tax purposes, it makes much more sense to use the economic life actually being used in its audited financial statements, rather than this artificial 15 year tax life.
I would only require this change for really Big Corps, with total Intangible Assets of at least $1 bil.
I also wouldn’t start making this Intangible Asset Life change until Intangible Asset additions made starting in say 2013 or 2014, after the country has gotten out of its horrible job situation.
The economic damage to Big Corps from this proposal is substantially softened here due to this corporate tax loophole closer being treated as a Temporary Tax Difference under US generally accepted accounting principles. The total federal income tax deductions for these Intangible Asset expenditures will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big Corps from my proposal here.
There will be significantly positive CBO scoring to the US Government from this proposal, for the next 10 years and for many years thereafter.
Big Corp Tax Loophole Closer #8: It’s More Than Just Corporate Jets
Corporate Jets have taken center stage, but so many of the tax depreciable lives used to depreciate Property for federal income tax purposes are much shorter than their economic lives. Thus, this clearly is a substantial tax loophole, which the country just can’t afford, given its incredibly high US Debt level.
For instance, the Seven-Year Modified Accelerated Cost Recovery (MACRS) Property category includes property with a Class Life of 10 years and up to just short of 16 years. By depreciating this property for tax purposes as Seven-Year Property, the present tax depreciation deductions occur over a period of eight years. If instead, this tax depreciation deduction was lengthened to say the midpoint of this Class Life, or 13 years, the US Government’s CBO positive scoring over the next 10 years would be off-the-charts.
I think the Feds should review in detail all of the properties in its various Categories of Class Lifes and the resultant Tax Depreciation Lifes, and compare that with the actual best estimate of Economic Lifes of all individual property assets included in each of the Property categories of real companies. These Economic Lifes for a specific company are readily available because they are included in each company's computerized fixed asset system. And for all large companies, and many smaller companies, these company's fixed assets are audited annually by their external CPA firms.
And in cases where the Tax Depreciable Lives are both clearly and substantially shorter than the Economic Lifes of the Property being used by companies, I think consideration should be given to increasing the Tax Depreciable Lives to the actual Economic Lifes being used to depreciate the property in each company's audited financial statements.
I would only apply this lengthening of Tax Depreciable Lifes to really Big Corps, with Total US Property, Plant and Equipment above say $1 bil.
I also wouldn’t start making this Tax Depreciable Life change until Property additions made starting in say 2013 or 2014, after the country has gotten out of its horrible job situation.
The economic damage to Big Corps from this proposal is substantially softened here due to this corporate tax loophole closer being treated as a Temporary Tax Difference under US generally accepted accounting principles. The total federal income tax deductions for these Property expenditures will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big Corps from my proposal here.
There will be substantially positive CBO scoring to the US Government from this proposal, for the next 10 years and for many years thereafter. My quick back of the envelope computation says that the total positive CBO scoring to the US Government over the next 10 years could very well be up to $1 trillion.....after all, the impact of just adjusting corporate jets by several years amounted to $3 bil, and that didn't adjust them to their longer economic lifes.
And when you think about it, in all fairness, how in the world can the US Government require that the Medicare age for when benefits begin be increased from age 65 to age 67, and also require that the annual inflation adjustment factor of Social Security benefits be reduced, when at the same time, it is not requiring a business to correct its tax life for depreciating a piece of property that is egregiously too short in comparison to its audited economic life?
And even if these lifes were properly adjusted to their audited economic lifes for federal income tax purposes, as they should be, these companies would still be getting the huge economic benefit of an accelerated depreciation method.
If the US Government decides to squeeze the elderly, with cuts of Medicare and Social Security benefits, and at the same time, allows these unreasonable tax lifes for Property, Plant and Equipment, the elderly should be absolutely incensed, not just at the Republicans, but also at the Democrats.
For instance, the Seven-Year Modified Accelerated Cost Recovery (MACRS) Property category includes property with a Class Life of 10 years and up to just short of 16 years. By depreciating this property for tax purposes as Seven-Year Property, the present tax depreciation deductions occur over a period of eight years. If instead, this tax depreciation deduction was lengthened to say the midpoint of this Class Life, or 13 years, the US Government’s CBO positive scoring over the next 10 years would be off-the-charts.
I think the Feds should review in detail all of the properties in its various Categories of Class Lifes and the resultant Tax Depreciation Lifes, and compare that with the actual best estimate of Economic Lifes of all individual property assets included in each of the Property categories of real companies. These Economic Lifes for a specific company are readily available because they are included in each company's computerized fixed asset system. And for all large companies, and many smaller companies, these company's fixed assets are audited annually by their external CPA firms.
And in cases where the Tax Depreciable Lives are both clearly and substantially shorter than the Economic Lifes of the Property being used by companies, I think consideration should be given to increasing the Tax Depreciable Lives to the actual Economic Lifes being used to depreciate the property in each company's audited financial statements.
I would only apply this lengthening of Tax Depreciable Lifes to really Big Corps, with Total US Property, Plant and Equipment above say $1 bil.
I also wouldn’t start making this Tax Depreciable Life change until Property additions made starting in say 2013 or 2014, after the country has gotten out of its horrible job situation.
The economic damage to Big Corps from this proposal is substantially softened here due to this corporate tax loophole closer being treated as a Temporary Tax Difference under US generally accepted accounting principles. The total federal income tax deductions for these Property expenditures will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big Corps from my proposal here.
There will be substantially positive CBO scoring to the US Government from this proposal, for the next 10 years and for many years thereafter. My quick back of the envelope computation says that the total positive CBO scoring to the US Government over the next 10 years could very well be up to $1 trillion.....after all, the impact of just adjusting corporate jets by several years amounted to $3 bil, and that didn't adjust them to their longer economic lifes.
And when you think about it, in all fairness, how in the world can the US Government require that the Medicare age for when benefits begin be increased from age 65 to age 67, and also require that the annual inflation adjustment factor of Social Security benefits be reduced, when at the same time, it is not requiring a business to correct its tax life for depreciating a piece of property that is egregiously too short in comparison to its audited economic life?
And even if these lifes were properly adjusted to their audited economic lifes for federal income tax purposes, as they should be, these companies would still be getting the huge economic benefit of an accelerated depreciation method.
If the US Government decides to squeeze the elderly, with cuts of Medicare and Social Security benefits, and at the same time, allows these unreasonable tax lifes for Property, Plant and Equipment, the elderly should be absolutely incensed, not just at the Republicans, but also at the Democrats.
Friday, July 22, 2011
One Last Chance for a Grand Debt Ceiling Deal
I'd give the Grand Debt Ceiling Deal one more shot. And then if this fair compromise for both parties doesn't work out, it should be on with a Clean Debt Ceiling Deal that will take you through 2013, and then moving on to bold job creation, which is what the country is shouting out for.
I would split the difference between the $800 billion and $1.2 trillion in tax revenues. And some of that $200 billion could even be the wise closing of additional tax loopholes, and also could be some other astute creative revenue raising measures that would also spur job creation.....such as raising foreign earnings repatriation tax with a somewhat discounted tax rate, and using only say 80% of these tax proceeds to fund clearly job creating initiatives like a Jobs Tax Credit, Green Commercial Building Retrofits, or US Infrastructure Projects, and the remainder for Deficit Reduction.
And in return, I would up the first-year 50% bonus tax depreciation for 2012 equipment purchases to first-year 100% tax expensing, which substantially increases Big Corp profits in 2012, and thus also increases stock prices. And if you wanted to also include some payroll count increase requirements for the really Big Corps, that would also spur substantial job creation, which also would feed into Big Corp profit increases in 2013 and beyond, with the resultant additional increases in stock prices, down the road.
It would be a huge win for both sides. But more importantly, it's a monumental win for the country.
I would split the difference between the $800 billion and $1.2 trillion in tax revenues. And some of that $200 billion could even be the wise closing of additional tax loopholes, and also could be some other astute creative revenue raising measures that would also spur job creation.....such as raising foreign earnings repatriation tax with a somewhat discounted tax rate, and using only say 80% of these tax proceeds to fund clearly job creating initiatives like a Jobs Tax Credit, Green Commercial Building Retrofits, or US Infrastructure Projects, and the remainder for Deficit Reduction.
And in return, I would up the first-year 50% bonus tax depreciation for 2012 equipment purchases to first-year 100% tax expensing, which substantially increases Big Corp profits in 2012, and thus also increases stock prices. And if you wanted to also include some payroll count increase requirements for the really Big Corps, that would also spur substantial job creation, which also would feed into Big Corp profit increases in 2013 and beyond, with the resultant additional increases in stock prices, down the road.
It would be a huge win for both sides. But more importantly, it's a monumental win for the country.
Big Corp Tax Loophole Closer #7: 50% Bonus Tax Depreciation
In the tax bill passed in late 2010, there is a provision that permits all companies to get 50% first-year bonus tax depreciation for equipment purchases made in 2012.
When I study the past attempts at stimulating the US economy with bonus tax depreciation, it is very clear that there has been very little, if any, job creation from it.
However, there has been a substantial near-term US Debt increase from it, in every case.
My proposal here is to turn this 50% bonus tax depreciation for equipment purchases in 2012 into a much more effective job creator.
Thus, Big Corps, over a certain size, making equipment expenditures in 2012, are allowed 50% first-year bonus tax depreciation, but only if the Big Corp also increases its full-time payroll count sufficiently from Dec 31, 2011 to Dec 31, 2012. I’ll let the Feds decide what a reasonable first-year 50% bonus tax depreciation amount per job added should be.
In addition, the Big Corp receiving first-year 50% bonus tax depreciation for equipment purchases made in 2012, must have their full-time payroll count remain at least at their Dec 31, 2012 level for the following four years, or else the tax benefits from this 50% bonus tax depreciation is recaptured, on a proportionate basis.
This proposal’s near term effect on US Debt should be significantly positive.
And from a fairness standpoint, the US government should be legislating so that the entire country benefits from capital expenditures made by Big Corps, not just the Big Corps.
When I study the past attempts at stimulating the US economy with bonus tax depreciation, it is very clear that there has been very little, if any, job creation from it.
However, there has been a substantial near-term US Debt increase from it, in every case.
My proposal here is to turn this 50% bonus tax depreciation for equipment purchases in 2012 into a much more effective job creator.
Thus, Big Corps, over a certain size, making equipment expenditures in 2012, are allowed 50% first-year bonus tax depreciation, but only if the Big Corp also increases its full-time payroll count sufficiently from Dec 31, 2011 to Dec 31, 2012. I’ll let the Feds decide what a reasonable first-year 50% bonus tax depreciation amount per job added should be.
In addition, the Big Corp receiving first-year 50% bonus tax depreciation for equipment purchases made in 2012, must have their full-time payroll count remain at least at their Dec 31, 2012 level for the following four years, or else the tax benefits from this 50% bonus tax depreciation is recaptured, on a proportionate basis.
This proposal’s near term effect on US Debt should be significantly positive.
And from a fairness standpoint, the US government should be legislating so that the entire country benefits from capital expenditures made by Big Corps, not just the Big Corps.
Big Corp Tax Loophole Closer #6: 100% Tax Expensing of Equipment
In the tax bill passed in late 2010, there is a provision that permits all companies to get 100% first-year expensing of equipment from August 2010 until December 2011.
Clearly, this provision substantially improved the earnings of many large corporations, and also increased US real GDP growth.
But it did very little, if any, job creation, in the aggregate.
My proposal is to now tweak this 100% first-year tax expensing of equipment for all equipment acquired for the remainder of 2011, to turn it into an effective job creator.
Thus, Big Corps, over a certain size, making equipment expenditures from Aug 1, 2011 through Dec 31, 2011, are allowed 100% first-year tax expensing of equipment, but only if the Big Corp also increases its full-time payroll count sufficiently from Aug 1, 2011 to Dec 31, 2011. I’ll let the Feds decide what a reasonable first-year 100% expensing amount per job added should be.
In addition, the Big Corp receiving first-year 100% expensing of equipment for purchases from Aug 1, 2011 through Dec 31, 2011, must have their full-time payroll count remain at least at their Dec 31, 2011 level for the next four years, or else the tax benefits from this 100% first-year tax expensing is recaptured, on a proportionate basis.
This proposal’s near term effect on US Debt should be significantly positive.
And from a fairness standpoint, the US Government should be legislating so that the entire country benefits from capital expenditures made by Big Corps, not just the Big Corps.
Clearly, this provision substantially improved the earnings of many large corporations, and also increased US real GDP growth.
But it did very little, if any, job creation, in the aggregate.
My proposal is to now tweak this 100% first-year tax expensing of equipment for all equipment acquired for the remainder of 2011, to turn it into an effective job creator.
Thus, Big Corps, over a certain size, making equipment expenditures from Aug 1, 2011 through Dec 31, 2011, are allowed 100% first-year tax expensing of equipment, but only if the Big Corp also increases its full-time payroll count sufficiently from Aug 1, 2011 to Dec 31, 2011. I’ll let the Feds decide what a reasonable first-year 100% expensing amount per job added should be.
In addition, the Big Corp receiving first-year 100% expensing of equipment for purchases from Aug 1, 2011 through Dec 31, 2011, must have their full-time payroll count remain at least at their Dec 31, 2011 level for the next four years, or else the tax benefits from this 100% first-year tax expensing is recaptured, on a proportionate basis.
This proposal’s near term effect on US Debt should be significantly positive.
And from a fairness standpoint, the US Government should be legislating so that the entire country benefits from capital expenditures made by Big Corps, not just the Big Corps.
Thursday, July 21, 2011
Big Corp Tax Loophole Closer #5: LIFO Inventory
For US federal income tax purposes, businesses are permitted to use Last-in, First-out (LIFO) inventory.....yeah, another way of saying this is the oldest bought is still here (FISH....First-in, Still Here). By using LIFO, businesses get to increase their Cost of Goods Sold Expense Tax Deduction, and thus get to decrease their Taxable Income, and thus also get to reduce their US federal income tax bill.
Under US generally accepted accounting principles, LIFO is one of the many ways that businesses can value their inventory on their balance sheets. The precision of accountants is clearly overrated.
The IRS has the LIFO conformity rule, which lets businesses use LIFO for federal income tax purposes only if they also value their inventory on their financial statements at LIFO.
Companies that economically benefit from using LIFO the most are ones whose inventories have increased in price the most.
Many companies using LIFO are pricing a good chunk of their inventory at prices of decades ago. Does that make any sense? I don't think so.
Just focusing on four US Big Oil Companies, here are their related Dec 31, 2010 Inventories for their Crude Oil and Petroleum Products on their books, and how much it would change if these inventories were instead valued at the much more relevant current cost to replace this inventory.
………………………………………..........Step Up To
…………………………...Inventory…Replacement...Inventory at
…………………………....at LIFO………....Cost…….....Current Cost
………………………..…….........(in millions of US dollars)………
Exxon Mobil……………9,852……….21,300…………...31,152
Chevron………………….3,589………...6,975…………...10,564
ConocoPhillips………..4,254…………6,794…………...11,048
Marathon Oil…………..3,049…………4,166………….....7,215
Total…………………...20,744………..39,235…………..59,979
My proposal here is to eliminate LIFO for all US Multinational Corps in all industries, which have a significant amount of their US inventory priced at LIFO. The cutoff amount is subject to debate, but I would consider something like total LIFO inventory of $100 mil or more….or perhaps, a bit more than $100 mil. And all US Multinational Corps with LIFO inventory less than $100 mil, could elect to switch out of LIFO, and get the same tax benefits under this proposal.
I wouldn’t require pure domestic businesses to switch out of LIFO.
The economic damage to Big Corps from this proposal is substantially softened here.
For the US Multinational Corps that would be required to switch out of LIFO for US federal income tax purposes under my proposal here, the logical action will be for them to also switch out of LIFO in their financial statements. Thus, there will be no income tax expense charge in their income statement from this switch out of LIFO. Further, by switching out of LIFO, this should increase their Gross Margins and their Pretax earnings on their income statements, as well as significantly increase their total inventory and their total stockholders’ equity, both on their balance sheets.
I wouldn’t require the initial switch out of LIFO to be paid for in US federal income taxes immediately. Instead, I would let them pay for it equally in 7 years starting in say Year 4 and continuing to Year 10.
I would also let US Multinational Corps switching out of LIFO here to be permitted to repatriate some of their foreign earnings in either 2011 or 2012, and also receive a significant tax benefit. Let me explain with an illustration.
Say US Multinational Corp A switched out of LIFO starting in 2012. From this switch out of LIFO, the resultant additional US federal income tax owed for this switch is say $140 million.
Under my proposal, Corp A would be permitted to repatriate an amount of its foreign earnings, which results in additional US federal income tax of $140 mil. This $140 mil is then used to liquidate the $20 mil of LIFO tax owed in each of the 7 years from 2015 to 2021.
The end result is that Corp A gets immediate access to a significant amount of its foreign earnings parked overseas. And Corp A, in essence, doesn’t have any US federal income tax owed from this foreign earnings repatriation, to boot.
There will be substantially positive CBO scoring to the US Government from this proposal, for the next 10 years and for many years thereafter.
Under US generally accepted accounting principles, LIFO is one of the many ways that businesses can value their inventory on their balance sheets. The precision of accountants is clearly overrated.
The IRS has the LIFO conformity rule, which lets businesses use LIFO for federal income tax purposes only if they also value their inventory on their financial statements at LIFO.
Companies that economically benefit from using LIFO the most are ones whose inventories have increased in price the most.
Many companies using LIFO are pricing a good chunk of their inventory at prices of decades ago. Does that make any sense? I don't think so.
Just focusing on four US Big Oil Companies, here are their related Dec 31, 2010 Inventories for their Crude Oil and Petroleum Products on their books, and how much it would change if these inventories were instead valued at the much more relevant current cost to replace this inventory.
………………………………………..........Step Up To
…………………………...Inventory…Replacement...Inventory at
…………………………....at LIFO………....Cost…….....Current Cost
………………………..…….........(in millions of US dollars)………
Exxon Mobil……………9,852……….21,300…………...31,152
Chevron………………….3,589………...6,975…………...10,564
ConocoPhillips………..4,254…………6,794…………...11,048
Marathon Oil…………..3,049…………4,166………….....7,215
Total…………………...20,744………..39,235…………..59,979
My proposal here is to eliminate LIFO for all US Multinational Corps in all industries, which have a significant amount of their US inventory priced at LIFO. The cutoff amount is subject to debate, but I would consider something like total LIFO inventory of $100 mil or more….or perhaps, a bit more than $100 mil. And all US Multinational Corps with LIFO inventory less than $100 mil, could elect to switch out of LIFO, and get the same tax benefits under this proposal.
I wouldn’t require pure domestic businesses to switch out of LIFO.
The economic damage to Big Corps from this proposal is substantially softened here.
For the US Multinational Corps that would be required to switch out of LIFO for US federal income tax purposes under my proposal here, the logical action will be for them to also switch out of LIFO in their financial statements. Thus, there will be no income tax expense charge in their income statement from this switch out of LIFO. Further, by switching out of LIFO, this should increase their Gross Margins and their Pretax earnings on their income statements, as well as significantly increase their total inventory and their total stockholders’ equity, both on their balance sheets.
I wouldn’t require the initial switch out of LIFO to be paid for in US federal income taxes immediately. Instead, I would let them pay for it equally in 7 years starting in say Year 4 and continuing to Year 10.
I would also let US Multinational Corps switching out of LIFO here to be permitted to repatriate some of their foreign earnings in either 2011 or 2012, and also receive a significant tax benefit. Let me explain with an illustration.
Say US Multinational Corp A switched out of LIFO starting in 2012. From this switch out of LIFO, the resultant additional US federal income tax owed for this switch is say $140 million.
Under my proposal, Corp A would be permitted to repatriate an amount of its foreign earnings, which results in additional US federal income tax of $140 mil. This $140 mil is then used to liquidate the $20 mil of LIFO tax owed in each of the 7 years from 2015 to 2021.
The end result is that Corp A gets immediate access to a significant amount of its foreign earnings parked overseas. And Corp A, in essence, doesn’t have any US federal income tax owed from this foreign earnings repatriation, to boot.
There will be substantially positive CBO scoring to the US Government from this proposal, for the next 10 years and for many years thereafter.
Big Corp Tax Loophole Closer #4: Big Oil Intangible Drilling Costs
For US federal income tax purposes, Big Oil and Big Oil-related Corps are presently permitted to deduct in the first year, 70% of their Intangible Drilling Costs (IDCs). These IDC expenditures include labor, fuel, materials, supplies truck rent, repairs to drilling equipment, and depreciation for drilling equipment. The portion not deducted in the first year is amortized over 5 years.
My proposal here is to require 100% of these IDC expenditures of Big Oil Corps and Big Oil-related Corps to instead be initially capitalized and amortized over 10 years.
I would not apply my above proposal to smaller Oil and Oil-related companies.
The economic damage to Big Oil Corps and Big Oil-related Corps from this proposal is substantially softened here due to this corporate tax loophole closer being treated as a Temporary Tax Difference under US generally accepted accounting principles. The total federal income tax deductions for these IDC expenditures will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big Oil Corps and Big Oil-related Corps from my proposal here.
There will be significantly positive CBO scoring to the US Government from this proposal, for the next 10 years and for many years thereafter.
My proposal here is to require 100% of these IDC expenditures of Big Oil Corps and Big Oil-related Corps to instead be initially capitalized and amortized over 10 years.
I would not apply my above proposal to smaller Oil and Oil-related companies.
The economic damage to Big Oil Corps and Big Oil-related Corps from this proposal is substantially softened here due to this corporate tax loophole closer being treated as a Temporary Tax Difference under US generally accepted accounting principles. The total federal income tax deductions for these IDC expenditures will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big Oil Corps and Big Oil-related Corps from my proposal here.
There will be significantly positive CBO scoring to the US Government from this proposal, for the next 10 years and for many years thereafter.
Wednesday, July 20, 2011
Big Corp Tax Loophole Closer #3: Health Insurance Claims and Premiums
Health insurance companies are able to deduct each year, for federal income tax purposes, some of their estimated insurance claim liabilities, even though they are not fixed in amount.
In addition, health insurance companies are also able to defer each year, for federal income tax purposes, the taxability of some of their unearned premiums received in cash.
In both of the above cases, these Health Insurance companies are receiving federal tax benefits that are inconsistent with the general federal income tax principles of not getting federal income tax deductions until they are fixed, and of taxing revenues, for federal income tax purposes, when they are received in cash.
My proposals here are to allow all Big Health Insurance Corps to deduct insurance claims only in the year when they are fixed, and to recognize premium revenues in the year when they are received in cash.
I would not apply my above proposal to smaller Health Insurance companies.
The economic damage to the US Big Health Insurance Corps from this proposal is substantially softened here due to this corporate tax loophole closer being treated as a Temporary Tax Difference under US generally accepted accounting principles. The total federal income tax deductions and revenues from these insurance claims and premiums will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big Health Insurance Corps from my proposals here.
There should be significantly positive CBO scoring to the US Government from these proposals, for the next 10 years and for many years thereafter.
In addition, health insurance companies are also able to defer each year, for federal income tax purposes, the taxability of some of their unearned premiums received in cash.
In both of the above cases, these Health Insurance companies are receiving federal tax benefits that are inconsistent with the general federal income tax principles of not getting federal income tax deductions until they are fixed, and of taxing revenues, for federal income tax purposes, when they are received in cash.
My proposals here are to allow all Big Health Insurance Corps to deduct insurance claims only in the year when they are fixed, and to recognize premium revenues in the year when they are received in cash.
I would not apply my above proposal to smaller Health Insurance companies.
The economic damage to the US Big Health Insurance Corps from this proposal is substantially softened here due to this corporate tax loophole closer being treated as a Temporary Tax Difference under US generally accepted accounting principles. The total federal income tax deductions and revenues from these insurance claims and premiums will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big Health Insurance Corps from my proposals here.
There should be significantly positive CBO scoring to the US Government from these proposals, for the next 10 years and for many years thereafter.
Big Corp Tax Loophole Closer #2: Upfront Costs on Big Financial Derivatives
With all of the horrible financial havoc that financial swaps and other financial derivatives have played on the US and world economies, I think the last thing we want to do is to give tax incentives for any financial derivative, which believe it or not, we presently do.
The Big Financial firms arranging the swaps and other financial derivatives incur a lot of both upfront external costs, including outside professional fees, and upfront internal costs, including employee, employee benefit, travel, and other related costs, in designing, implementing and marketing these very complex swap and other financial derivative transactions.
And frequently, there are also lucrative compensation programs for various executives and employees in which compensation is based on measures such as fees and positive interest spreads earned in swap or other financial derivative transactions.
My proposal here is that all of the substantial upfront external and internal costs incurred by the Big Financial firm that end up resulting, either directly or indirectly, in the generation of the fees received by the financial firm related to the financial derivative, including an allocation of employee costs, related employee benefit costs, and related travel and other costs, as well as all compensation driven by the level of swap fees and other financial derivative fees, should not be tax deductible in the year these costs are incurred.
Instead, in all fairness, all of these upfront costs should be initially deferred for federal income tax purposes, and amortized over the life of the related swap and other financial derivative transactions. Thus, from a fairness standpoint, for federal income tax purposes, the entire costs related to the financial derivatives would be spread over the entire life of the financial derivative, which is how the income is also recognized.
I wouldn’t apply this corporate tax loophole closing to smaller US financial institutions, but just to the clearly very large US Big Financial Institutions. I would apply this proposal to all Foreign Financial Institutions entering into these financial derivative transactions in the US.
The economic damage to the US Big Financial Firms from this proposal is substantially softened here due to this corporate tax loophole closer being treated as a Temporary Tax Difference under US generally accepted accounting principles. The total federal income tax deductions from these financial derivative transactions will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big Financial Institutions from my proposal.
There should be substantially positive CBO scoring to the US Government from this proposal, for the next 10 years and for many years thereafter.
The Big Financial firms arranging the swaps and other financial derivatives incur a lot of both upfront external costs, including outside professional fees, and upfront internal costs, including employee, employee benefit, travel, and other related costs, in designing, implementing and marketing these very complex swap and other financial derivative transactions.
And frequently, there are also lucrative compensation programs for various executives and employees in which compensation is based on measures such as fees and positive interest spreads earned in swap or other financial derivative transactions.
My proposal here is that all of the substantial upfront external and internal costs incurred by the Big Financial firm that end up resulting, either directly or indirectly, in the generation of the fees received by the financial firm related to the financial derivative, including an allocation of employee costs, related employee benefit costs, and related travel and other costs, as well as all compensation driven by the level of swap fees and other financial derivative fees, should not be tax deductible in the year these costs are incurred.
Instead, in all fairness, all of these upfront costs should be initially deferred for federal income tax purposes, and amortized over the life of the related swap and other financial derivative transactions. Thus, from a fairness standpoint, for federal income tax purposes, the entire costs related to the financial derivatives would be spread over the entire life of the financial derivative, which is how the income is also recognized.
I wouldn’t apply this corporate tax loophole closing to smaller US financial institutions, but just to the clearly very large US Big Financial Institutions. I would apply this proposal to all Foreign Financial Institutions entering into these financial derivative transactions in the US.
The economic damage to the US Big Financial Firms from this proposal is substantially softened here due to this corporate tax loophole closer being treated as a Temporary Tax Difference under US generally accepted accounting principles. The total federal income tax deductions from these financial derivative transactions will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big Financial Institutions from my proposal.
There should be substantially positive CBO scoring to the US Government from this proposal, for the next 10 years and for many years thereafter.
Subscribe to:
Posts (Atom)