Gimme Shelter

by Eric Martin

Clearly, the unrelenting class warfare rampant in this country, and the onerous tax burdens that result, are taking their toll on top U.S. corporations:

...Ben Armbruster highlighted a Forbes report on the taxes paid by top corporations last year. According to Forbes, General Electric managed to make $10.3 billion in pretax income, but paid nothing into the U.S. Treasury, as it counted its losses in the U.S., while registering its profits overseas. As Forbes put it, “GE Capital has displayed an uncanny ability to lose lots of money in the U.S. (posting a $6.5 billion loss in 2009), and make lots of money overseas (a $4.3 billion gain).”

And then there’s Exxon-Mobil, which paid more in income taxes than any other U.S. company last year, just none of it to the U.S.:

Exxon tries to limit the tax pain with the help of 20 wholly owned subsidiaries domiciled in the Bahamas, Bermuda and the Cayman Islands that (legally) shelter the cash flow from operations in the likes of Angola, Azerbaijan and Abu Dhabi. No wonder that of $15 billion in income taxes last year, Exxon paid none of it to Uncle Sam, and has tens of billions in earnings permanently reinvested overseas.

Instead, the $15 billion was divided among the countries where Exxon has set up one of its hundreds of foreign subsidiaries. In total, Exxon 122 foreign subsidiaries, including 32 in countries that are officially labeled tax havens by the U.S. government...

In each of the last two years, the Obama administration has proposed eliminating the loopholes and incentives in the tax code that allow companies to set up subsidiaries in these low- or no-tax countries, which help them lower their effective tax rate by 20 points or more. Both times, the administration saw its efforts rebuffed by Congress and the Big Business lobby, which means that a $100 billion annual tax burden will continue to be shifted onto U.S. taxpayers (including corporations) that don’t engage in this sort of tax evasion.

But Exxon is not only avoiding U.S. taxes. As Mother Jones’ Adam Weinstein pointed out, the company also has the chutzpah to complain about high taxation, as its website claims that “energy innovation is already on the ropes because of excessive taxes, and it will be forever consigned to the dustbin by any new taxes on windfall profits.” Plus, the Big Oil lobby is currently running ads against what it calls “new energy taxes,” which is actually an effort by the Obama administration to cut $36 billion in senseless tax loopholes and subsidies for the oil industry.

On the other hand, top executives from these corporations pay a very low effective income tax rate.

Comments

[CharlesWT]

"...engage in this sort of tax evasion."

It's only tax evasion if what they are doing is illegal. Otherwise, it's tax avoidance.

[Eric Martin]

Duly noted.

[hairshirthedonist]

Charles is right, which is why the law needs to change.

[Ugh]

Plus, the Big Oil lobby is currently running ads against what it calls “new energy taxes,” which is actually an effort by the Obama administration to cut $36 billion in senseless tax loopholes and subsidies for the oil industry.

The Oil & Gas companies "have their own Code", in the words of one rather famous tax practitioner.

[Hogan]

Yeah, if I got to write the laws, I could do a lot of heinous but legal stuff.

[Slartibartfast]

I wonder what happens to the price of gasoline & other petroleum products if the tax loopholes are closed? Any ideas, Eric?

[CaseyL]

I wonder what happens to the price of gasoline & other petroleum products if the tax loopholes are closed? Any ideas, Eric?

I'm not Eric, but I'll take a shot at this one.

Up to $6/gallon, I imagine. Enough for there to be a really, really strong push for alternative energy. Or, heck, one in favor of nationalizing the oil companies... after all, it looks like we're gonna get about a 30% ROI for the TARP bailout.

[Slartibartfast]

Up to $6/gallon, I imagine.

$0/gallon inclusive? $6/gallon would result in the recovery, at current consumption rates, of ~$1 trillion dollars in tax revenues. That's an order of magnitude off the estimate given above.

Taxpayers will pay the tax one way or the other, I think.

[Jacob Davies]

Slarti: I wonder what happens to the price of gasoline & other petroleum products if the tax loopholes are closed?

Hard to say exactly but you can get an rough idea by looking at the revenues of the major US oil companies, who are presumably the ones benefiting the most from the loopholes.

The three largest US oil companies, ExxonMobil, Chevron, and ConocoPhillips have combined annual revenues of about $829 billion. So, the $36 billion in loopholes amounts to about 4% of total revenue. How it works its way through the system is another matter, but whichever way, the effect is going to be small because the revenues of those companies are so large.

[Kent]

It looks like the story at Forbes has changed. It no longer says that Exxon "paid none of it to Uncle Sam." Instead, there's the following:

<< Though Exxon's financial statement's don't show any net income tax liability owed to Uncle Sam, a company spokesman insists that once its final tax bill is figured, Exxon will owe a "substantial 2009 tax liability." How substantial? "That's not something we're required to disclose, nor do we." >>

[JimF]

Corporations benefit from most of the same public services as the rest of us. They should be willing to pay in. If they are not we need to reconsider how we treat them as legal entities.

[Eric Martin]

Couple thoughts Slarti:

Higher gas prices wouldn't be the worst outcome for alternative energy impetus, but there is also a massive slice of profit that could be used to mitigate the demands of paying taxes on corporate earnings in the U.S.

I mean, Exxon's had a handful of its most profitable quarters ever in the past few years.

[Jacob Davies]

Slarti: Taxpayers will pay the tax one way or the other, I think.

In the end, mostly, yes, but the ability of producers to change price levels is somewhat limited and you would expect some of it to come out of corporate profits, especially in the short term, and especially since profits have been relatively high (in ROI terms) in recent years.

But there's a different question, which is "Which taxpayers, and how much?" Energy subsidies are regressive, because wealthier people consume much more energy for obvious reasons - bigger houses & cars, less public transit, more flying, more consumption in general. They're also regressive to the extent that they allow higher corporate profits to accrue to investors.

There's a good case to be made for much higher energy taxes, because of the unpriced externalities & hidden subsidies of fossil fuel consumption. So even if this results in marginally higher gas prices, the overall welfare effect should be positive.

[Slartibartfast]

Higher gas prices wouldn't be the worst outcome for alternative energy impetus, but there is also a massive slice of profit that could be used to mitigate the demands of paying taxes on corporate earnings in the U.S.

I'm not sure where you're going with this, Eric. I'm simply asking: who do you think ultimately pays the tax, if the loophole is closed? I suspect the answer is that the tax is passed on as an expense to the consumer.

What the ultimate effect of doing that is, is less interesting to me. If you're looking to incentivize using less gasoline, you could just add another tax to the string of existing taxes on gasoline and accomplish that. If you're trying to accomplish some sort of social justice, on the other hand, I'd want to hear your thoughts on how you think it's going to succeed.

[matttbastard]

OT: Hope publius graciously (and of course temporarily) comes out of semi-retirement to provide his expert analysis of the recent blow that was dealt to net neutrality via a recent decision by the United States Court of Appeals for the District of Columbia Circuit.

[Bernard Yomtov]

I wonder what happens to the price of gasoline & other petroleum products if the tax loopholes are closed? Any ideas, Eric?

I'm not Eric, but I'll take a shot at this one.

Up to $6/gallon, I imagine.

I think this is unrealistic. The US consumes about 307 billion gallons of petroleum a year. Slightly less than half of that - 138 billion gallons - is gasoline.

So even if you assume that all the $36 billion tax gets paid by gasoline buyers, and that consumption drops 50%, and the amount of the tax stays the same - all pretty wild assumptions - you get just over a fifty cent price increase.

[russell]

I wonder what happens to the price of gasoline & other petroleum products if the tax loopholes are closed?

Maybe they would go up.

And then maybe we would organize ourselves so that everyone doesn't drive themselves in their own individual car one freaking mile to the store everytime they need a quart of milk.

Or maybe all of our land development wouldn't assume that everyone will drive themselves in their own individual car 25 miles each way to go to work every freaking day.

So, maybe not all bad.

In any case, we'd collectively make a reasonable decision based on the actual cost of delivering petroleum products to the US market.

Or, maybe the owners of Exxon could live with 4% less ROI, and nothing else would need to change.

In any case, the choice of "we need to transfer $100B to the owners of very large corporations or else the price of oil will go up" seems somewhat false. I'm guessing other options are available.

They want to be "persons"? They should pay their freaking taxes. I sure as hell do.

[Jacob Davies]

Let me try another angle on this: industry-specific subsidies represent a restriction or distortion of the choices available to consumers, and that's true even if the end result is just lower prices of that industry's particular good.

The fact that, in the end, the same amount of money is paid in total by consumers does not take into account that the choices of consumers were distorted by the presence of a subsidy.

Imagine that oranges and apples both have a natural price of $1 taking into account producer costs & transport & profit margin, and nobody eats anything but apples & oranges. Now the government introduces a subsidy on oranges that amounts to 20c each, so the price of oranges drops to 80c, and raises taxes by an amount equivalent to the annual consumption of fruit times 20c.

The net effect overall is that we all pay the same amount of money for fruit. But consumer choice and fairness is affected. Apple-lovers will be subsidizing orange-lovers; those who are indifferent will buy oranges even though they'd be just as happy with an apple; apple producers will be hurt and orange producers will be helped.

Those are unavoidable consequences of subsidies and loopholes that allow one industry to pay a lower effective rate than another. There are sometimes reasons to do that, but I can't think of one for the oil industry, who already profit from unpriced externalities of their product.

Oil-product consumption is not evenly distributed across the population. Yes, most people drive - but not all - and most burn gas or oil to heat their house. But the amount people fly for leisure, the size of houses, the size of cars, those things vary a lot. Forcing people whose oil consumption is relatively low to subsidize those whose oil consumption is high is extremely perverse.

[elm]

Slartibartfast: Taxpayers will pay the tax one way or the other, I think.

Did you just use the word "taxpayers" in a way that excludes our beloved corporate citizens?

In a sense, that does cut right to the heart of the topic (enormous & profitable corporations avoiding paying tax), though it answers nothing.

who do you think ultimately pays the tax, if the loophole is closed? I suspect the answer is that the tax is passed on as an expense to the consumer.

Who do you suppose pays that tax now? (After all, it comes from somewhere either in government debt or additional tax on everyone else).

Why do you think they could pass that that entire amount along to their customers? It would be remarkable, indeed, if a significant fraction did not come from their corporate profits (reducing their dividend paid).

[Phil]

Apropos of this thread, I started my cycling-to-work program for the year today, since it's an unseasonable 80 F in Cleveland today. Considering I had hernia surgery a month ago, I was pretty happy with my time, too. And that's that much less I used in gas today.

[Kent]

Hearty congratulations to Phil! If I bike to work once a week I consider it a win.

[Slartibartfast]

Did you just use the word "taxpayers" in a way that excludes our beloved corporate citizens?

Nope. I think they'd pay, too. Just rather less, as a percentage of their income, in general.

Oil-product consumption is not evenly distributed across the population. Yes, most people drive - but not all - and most burn gas or oil to heat their house. But the amount people fly for leisure, the size of houses, the size of cars, those things vary a lot. Forcing people whose oil consumption is relatively low to subsidize those whose oil consumption is high is extremely perverse.

Yes, sure. Of course the change in price might affect tax burden. It might even do so in a way that would be...well, unjust. What if increased gas prices hit hardest those who could least afford to pay, and have the least ready cash and time available to adapt? That's the thing that bugs me most about gas-tax proposals as a panacea for incentivizing alternate-energy exploration: the potential for harm rarely seems to get discussed.

In general, I'm in favor of doing away with anything resembling loopholes. I just suspect that in this case, the effect might not be quite so much of a slam-dunk win as you'd like it to be.

[Tony P.]

Hey, Phil

This may seem like a weird question, but do you happen to know the elevation difference between the ends of your bike commute?

Yes, I know that the round-trip elevation difference is zero:)

--TP

[Jacob Davies]

Slarti: the effect might not be quite so much of a slam-dunk win as you'd like it to be

Yeah, although I hope I didn't sound too much like I thought it was simple, because I don't think it's simple. One problem is that because of the fundamentally-out-of-whack disconnect between spending and taxes that we've gotten used to, the question of "Who's gonna pay for all this?" has just been punted down the road. It is impossible to accurately assess the net distributional effects of taxes or spending when the two are so disconnected. Maybe an increase in tax revenues from oil now means less pressure to raise taxes progressively, and the net distributional effect is regressive, it's hard to say.

Assuming that current taxes and spending are a good model for the future simply cannot be correct, because one or the other or both has to change.

However, in general, when the tax is assessed on corporations that do not have unlimited power to raise prices and are presently generating substantial profits, and when the product whose price will rise is one that is consumed somewhat proportionately to income, you are likely to see a progressive effect, and in any case since this tax is fairly small compared to overall revenues, any effect will also be small.

I would not support a general tax on fossil fuels that did not come with a guarantee of net progressive effect. So I don't think it's a slam-dunk. But it's a good target because the effective subsidies that create cheap gas result in a lot of things that make Americans unhealthy and unhappy, that I genuinely believe they would choose not to do if gas was priced at a level that reflected hidden costs. And in a saner budget world, that money could be spent on things like jobs and education. I think it's important to take account of preferences revealed through spending, although I think it's not the end of the story, but in order for that to work, prices have to accurately reflect costs.

[russell]

I just suspect that in this case, the effect might not be quite so much of a slam-dunk win as you'd like it to be.

Bernard and Jacob's comments to the side, you could well be correct.

Because:

who do you think ultimately pays the tax, if the loophole is closed? I suspect the answer is that the tax is passed on as an expense to the consumer.

The idea that the tax burden should be borne by Exxon's owners in the form of a reduced ROI doesn't even appear to be one of the options.

Nor, of course, is the idea that the tax burden should be shifted to Exxon's owners in the form of an increase in the capital gains tax rate.

It's a complex question, I'm sure, with trade-offs and compromises to be made, no matter which way we slice it.

My point here is just to point out that some options don't even appear to be on the table.

[Tony P.]

I would not support a general tax on fossil fuels that did not come with a guarantee of net progressive effect.

Imagine the following scenario:
1) Impose a $1/gal tax on gasoline; and
2) Cut $138 billion off income taxes in the bottom brackets.

If Bernie's numbers are right, this would be (to first order) a revenue-neutral change from the status quo. In other words, it's just as good (or just as bad) a fiscal option as what we've got now.

Whatever the current incidence of taxes-plus-fuel-related-costs may be across the population, I have to think my scenario would shift that incidence toward the higher end of the income distribution. Am I wrong to think that?

I know I'm a commie pinko socialist redistributionist for thinking it, of course.

--TP

[Jack]

Whatever the current incidence of taxes-plus-fuel-related-costs may be across the population, I have to think my scenario would shift that incidence toward the higher end of the income distribution. Am I wrong to think that?

I think this just wouldn't happen - even though it's revenue neutral, the Republican spin machine would make this out to be that those who just are out of the bottom brackets would be told that they're supporting the lower classes. Unless you created some sort of sliding scale - this thing would be dead on delivery.

Just think of the modest healthcare bill that just squeezed through Congress. Americans are just so in love with cars and consider it to be part of our lifestyle. Why, to suggest otherwise, it would be UnAmerican!

However, I do have to admit, I like the idea as well.

[elm]

the Republican spin machine would make this out to be that those who just are out of the bottom brackets would be told that they're supporting the lower classes

So sad, yet so true. I have known many people who earned slightly more than minimum wage (thus paying almost no income tax) who were convinced that the flat tax proposals of Steve Forbes -- billionaire -- was intended to benefit them.

I never was able to explain the progressive nature of income tax, effective vs. marginal tax rates, deductions, tax credits, or the differences between payroll taxes and income taxes. (It's quite possible that I'm just bad at explanations.)

[CharlesWT]

"1) Impose a $1/gal tax on gasoline; and
 2) Cut $138 billion off income taxes in the bottom brackets."

Except that people with low incomes are paying little or no income taxes already. For them, the price of gas would increase with no benefit from the decrease in taxes.

[Tony P.]

Jack and elm,

Let us remember -- and remind people who listen to GOP propaganda -- that Bill Gates pays income tax "in the bottom brackets" just like you and me. If we levy $1000 less in tax on the first $50K of income, Gates saves $1000 just like his gardener does.

That's the difference between low-end tax cuts and high-end tax cuts. Low-end tax cuts apply to EVERYBODY.

--TP

[cleek]

That's the difference between low-end tax cuts and high-end tax cuts. Low-end tax cuts apply to EVERYBODY.

make it an income-based credit. tada!

[TheRadicalModerate]

The mistake that you're making here is assuming that Exxon is a US company. It's not--it's a multi-national company and, as such, will shop its tax burden around to the countries that are willing to give it the best deal.

Want to see Exxon kicking something into the US Treasury? Just lower corporate tax rates to something close to the global average. There are enormous advantages to Exxon centralizing operations and revenue recognition in the US--those advantages just don't happen to exceed the 5%-10% extra that would have to be paid in taxes.

I know that you're all outraged that corporations can actually, like, you know, do basic arithmetic and act in their own best interests. You can hold on to that outrage and keep US corporate taxes uncompetitively high and get no revenue, or tone down the self-righteousness, lower the rates to something approaching the global average, and get a nice chunk of revenue for the treasury.

[Hartmut]

What about taxing profits where they are made?
Since it is unlikely that US consumers will do trips to the Cayman islands to fill up their (gas) tanks, the energy companies have to sell their stuff in-country. Or is it all through middlemen, so that Exxon&Co can keep their earnings technically out?

[Jesurgislac]

The mistake that you're making here is assuming that Exxon is a US company.

Evidently you know nothing about Exxon. Of course it's a US company. Google "Jersey Standard Oil" sometime.

Want to see Exxon kicking something into the US Treasury? Just

...seize and sell all Exxon assets in the United States for non-payment of taxes.

Of course it will never happen: in an oligarchy like the US, corporate citizens like Exxon have much more power than the the ordinary voter... which is what makes the US an oligarchy rather than a democracy.

[Brett Bellmore]

"As Forbes put it, “GE Capital has displayed an uncanny ability to lose lots of money in the U.S. (posting a $6.5 billion loss in 2009), and make lots of money overseas (a $4.3 billion gain).” "

And in the middle of a terrible economic downturn in the US, too! How paradoxical...

I'm quite open to the possibility that there's some book keeping irregularities going on here. But it's not like its impossible for a multi-national corporation which does most of it's business overseas to lose money in the US, and make money overseas. Or the converse.

IOW, this is something where you actually need to present evidence in order to justify implying wrongdoing.

[Brett Bellmore]

I mean, let's quote this:

"the cash flow from operations in the likes of Angola, Azerbaijan and Abu Dhabi."

The last time I looked, none of these places were within the US. Why the hell should profits made there be attributed to the US, anymore than profits made in Ohio be attributed to Dubai?

For all the hysterics, there's not much substance to this story. "Company with operations in several countries made money in some of them, lost money in others, and paid taxes accordingly." A real yawner, if you ask me.

[Phil]

This may seem like a weird question, but do you happen to know the elevation difference between the ends of your bike commute?

As it happens, I do! The difference is about 100 ft elevation, downhill on the way to work and uphill on the way back.

I use a GPS app on my iPhone called RunKeeper Pro to track my rides, and it's really useful. For example, here's a public link to yesterday morning's commute: http://rnkpr.com/a4kma0

[McKinneyTexas]

TRM has it right. Capital goes where it is taxed least. The belief that a single national government can compel anyone's money (anyone, that is, with the ability to move their money elsewhere), absent draconian laws that would create far more problems than they could ever solve, to stay in a high tax jurisdiction is simply naive. US corporate tax rates are too high to be competitive with other jurisdictions. The obvious solution is to lower corporate tax rates to the point where not only would ostensibly American companies declare their income in the US, others currently utilizing other tax havens would do likewise, with a significant uptake in overall corporate tax revenues. Progressives, for the most part, would eat their young than cut marginal tax rates on corporations and the entire country will pay the price of their ideological rigidity.

[Slartibartfast]

when the tax is assessed on corporations that do not have unlimited power to raise prices and are presently generating substantial profits

It does all come down to this, doesn't it? I think that there have been studies, though, that the price of gasoline is relatively inelastic to demand. I could be wrong, but to me this means that oil companies can, in fact, pass on their tax burden to the end consumer, and demand won't slow much in response.

I'm not talking about what should happen, but more about what I think can (and, I suspect, probably will) happen.

The idea that the tax burden should be borne by Exxon's owners in the form of a reduced ROI doesn't even appear to be one of the options.

Again, I'm not talking about what should happen. But I'm confused, because I thought we were talking about Exxon (as a data point) in the context of corporate income tax, which is of course different from capital gains.

My point here is just to point out that some options don't even appear to be on the table.

I'm all for making the tax code more equitable all around, provided that it doesn't further complicate said code, and also provided that the unintended-consequences factor isn't really horrible. I think the problem is the closure of tax loopholes shifts the tax burden from the taxpayers to either of a) the consumers of the end products (in the form of gasoline, fuel oil, etc), who are in general taxpayers, or b) the shareholders. russell's idea doesn't address the loophole-closure question so much as it proposes a notionally more equitable way to tap into the cash flow.

cleek's idea to tax capital gains as income is a good (but not a new) one. Objections to the purported suppression effect on investment could be addressed by keeping investment protected (I lack the proper terminology) somewhat akin to a (for example) 401k, only you're free to remove money as you please. The catch would be that once you pull your money out, it becomes regular income, and is taxed as such.

I haven't put a lot of thought into that notion, I admit. The problem with complicating the tax code like that is people game the system. I can't say as I blame them.

I do think that Tony P.'s assessment upthread might be missing some factors, such as the extent to which a $1/gallon tax affects disposable income on the lower end of the income scale vs. on the upper end. And what happens to the price of groceries, for instance, when fuel prices (i.e. transportation cost) rise?

All of the above is, of course, in my humble and mostly economically ignorant opinion. Feel free to poke holes in it.

[Ugh]

Taxes, hooray!

TheRadicalModerate: or tone down the self-righteousness, lower the rates to something approaching the global average, and get a nice chunk of revenue for the treasury.

GE and Exxon paid nothing to the U.S. Treasury in income taxes according to the quoted articles. Why would they decide to start paying taxes to the U.S. treasury because the marginal rate was lowered from 35% to, say, 25%? Why wouldn't they just stick with 0%?

Brett: But it's not like its impossible for a multi-national corporation which does most of it's business overseas to lose money in the US, and make money overseas.

Of course. But, it's also possible that, e.g., Multi-national X needs to borrow funds to run its worldwide operations and decides to locate 100% of that borrowing in the United States, even though it earns 60% of its profits overseas. Thus, 100% of its interest expense goes to lowering its U.S. income, even though 60% (or more) of that expense is related to overseas operations.

Brett: The last time I looked, none of these places were within the US. Why the hell should profits made there be attributed to the US, anymore than profits made in Ohio be attributed to Dubai?

The US reserves the right to tax its citizens and residents on their worldwide income. However, it does not always fully exercise this right, especially with respect to overseas subsidiaries of US corporations who earn what is supposedly "active" income. The US also grants a tax credit for foreign taxes paid to mitigate the double taxation of income.

Brett: For all the hysterics, there's not much substance to this story. "Company with operations in several countries made money in some of them, lost money in others, and paid taxes accordingly." A real yawner, if you ask me.

Company X has operations in Germany that generate $100 million in revenues each year and, before interest expense, earns a $10 million profit. However, Company X pays $10 million in interest to Company Y, organized in the Cayman Islands, whose sole asset is a loan to Company X. Company X thus has no income from its German operations and pays no tax. Company Y earns $10 million in interest income each year upon which the Cayman Islands imposes no tax (or taxes at 1 or 2%).

Oh, and, Company X and Company Y happen to each be wholly owned by Company A, which has earned $10 million from these subsidiaries, tax-free.

So, can you see how it might not be quite as simple as "Company with operations in several countries made money in some of them, lost money in others, and paid taxes accordingly"?

[Eric Martin]

What Ugh said.

This is not about venue shopping alone.

This about US corporations availing themselves of US markets, and US jurisdicion, and then creating tax shelters and using shells (and shell games) to avoid US taxes.

There are loopholes that can and SHOULD be closed to prevent this. Closing loopholes is a lot smarter - fiscally - then just lowering the corporate rate to a level where it is competitive with the Cayman Islands.

[Marty]

"This about US corporations availing themselves of US markets, and US jurisdicion, and then creating tax shelters and using shells (and shell games) to avoid US taxes."

No, this is about globalized free trade. A silly concept embraced by both parties and a huge number of renowned economists who can't process the ineqaulity of how different governments view global markets and companies.

It would actually be better for us, meaning all of us, if we used policy to drive investment into US jobs rather than overseas jobs. The tax consequences would be better if they did more here.

I don't care if Exxon pays zero income tax if they employ a half million mopre people here at competitive middle class salaries. It would be a good trade off.

Yeah,s and closing a few loopholes would be ok, just not sufficient.

[russell]

The mistake that you're making here is assuming that Exxon is a US company. It's not

Then they have no claim to US personhood.

Capital goes where it is taxed least.

This is incorrect. Capital goes where the overall ROI is likely to be greatest. Not the same thing.

Progressives, for the most part, would eat their young than cut marginal tax rates on corporations and the entire country will pay the price of their ideological rigidity.

I'm open to an extremely low corporate income tax rate, possibly including zero, accompanied by all personal capital gains taxed at the same rate as income.

I'm sure that wouldn't fly for 1,000 reasons, and I'm sure someone will provide them, but ideological rigidity is not a problem I personally have.

I will leave the comparison to folks who believe "cut taxes" to be the Swiss Army knife of all economic questions to whoever cares to make it.

[russell]

Also, what Marty said, each and every word.

[elm]

Hartmut: What about taxing profits where they are made?

I'm not sure if that's a rhetorical question or not, but that is how it's supposed to work, but tax sheltering transactions dodge around this.

For one example, you're the CEO of OilCo, you imported $1 billion in oil into the U.S., incurred another $1 billion in costs within the U.S., and sold it for $3 billion total.

At this point, it looks like you made $1 billion profit within the U.S. and would pay tax on it.

To avoid the tax, you should make it look like you made no profit in the U.S., so phone the OilCo office in the British Virgin Islands and arrange to buy 10 plastic Bic pens from them for $100 million dollars each.

After that transaction, OilCo U.S. made no profit and OilCo British Virgin Islands made $1 billion (minus a dollar for the pens).

Fortunately (for you) the British Virgin Islands has 0 corporate income tax, so ultimately you own no tax.

In the real world, they disguise the transactions somewhat better, but the heart of tax sheltering is to create extra transactions and complexity that disappear profits in one jurisdiction and reappear them elsewhere (or that convert them from ordinary profits to capital gains or from capital losses to ordinary losses, etc...).

[elm]

TheRadicalModerate: If Exxon isn't a U.S. company, why should they receive favorable treatment under the U.S. tax code? The policy change proposed in the original posting is to end special treatment for the hydrocarbon industry.

Marty: I don't care if Exxon pays zero income tax if they employ a half million mopre people here at competitive middle class salaries. It would be a good trade off.

What incentive have they to do the latter? They're not going to pay a penny more for labor than they have to. If they could find a way to move those jobs to Uzbekistan for $1/day, they'd do it in a heartbeat.

[Eric Martin]

The obvious solution is to lower corporate tax rates to the point where not only would ostensibly American companies declare their income in the US, others currently utilizing other tax havens would do likewise, with a significant uptake in overall corporate tax revenues. Progressives, for the most part, would eat their young than cut marginal tax rates on corporations and the entire country will pay the price of their ideological rigidity.

Do you know how low some rates are in preferred havens? This would not help us in the long run.

Unless you could show empirically at what rate we would attract enough biz to offset the loss of revenue and then some.

I'm not rigid. I'm a pragmatist. But I do know that European countries and other jurisdiction manage to collect corporate tax at a higher effective rate than the US. How do they do that?

[Marty]

"What incentive have they to do the latter? They're not going to pay a penny more for labor than they have to. If they could find a way to move those jobs to Uzbekistan for $1/day, they'd do it in a heartbeat."

Yes, they would. So it seems reasonable to have a policy agenda to make it more profitable to employ people here. Perhaps some level of loophole closing, reduced tax rate and substantial credits for repatriating jobs that gets them to the same zero taxes.*

Raging against the world we created to advance our economic interests, now that it is having the opposite effect, is really a waste of time.

*(IMHO,I believe some of the advantages of security of having those tasks performed in the US still creates a risk preference if you provide financial equity.)

[Marty]

"I'm not rigid. I'm a pragmatist. But I do know that European countries and other jurisdiction manage to collect corporate tax at a higher effective rate than the US. How do they do that?"

Well, nothing says they do. In fact, here it says they don't. And many of those countries near the top (Japan,Germany) are working to solve the saame problems we have.

[Slartibartfast]

Though Exxon's financial statement's don't show any net income tax liability owed to Uncle Sam, a company spokesman insists that once its final tax bill is figured, Exxon will owe a "substantial 2009 tax liability." How substantial? "That's not something we're required to disclose, nor do we."

I'm having a hard time finding where corporate income tax is categorized by country. It doesn't appear to be in the annual report. If it's not in any of the financials, the implication in the above-quoted paragraph is unsupported: that ExxonMobil paid no (or negligible) US income tax last year.

[jonnybutter]

I think that there have been studies, though, that the price of gasoline is relatively inelastic to demand.

Sorry, but your weasel word here is 'relatively', Slarti. Of course the price is inelastic compared to the price of less essential things. But I believe Jacob is right to say that the oil co.s don't have unlimited ability to raise prices. I don't have a cite, but I believe gasoline consumption actually fell slightly during the last price spike (correct me if I'm wrong please). And of course, the price is only relatively inelastic in the short term - something I'm sure oil companies are quite cognizant of.

I too would worry that a higher price (direct or via a tax) for fuel would affect lower income people (like me!) more severely, however I think it's standard liberal-wonk CW that there would be subsidies for poor and perhaps Western people. Maybe that wouldn't be a net change in narrow terms, but what do narrow terms really mean, in the end?

It's laughable, however, to hear apologists for the modern GOP (which is not to say Slarti) express sympathy for low income people - in terms of higher gas costs, higher cost of goods and services, etc, or in any terms. The conservative party in the US has, sadly, but one principle, other than the will to power for its own sake: take care of high-income people and corporations, whatever the consequences for everybody else. Watch what they do, not what they say.

[Slartibartfast]

weasel word

Thanks for the presumption of dishonesty.

I know Wiki is non-dispositive, but you might want to notify them that they're being weaselly, too.

[Eric Martin]

Well, nothing says they do. In fact, here it says they don't. And many of those countries near the top (Japan,Germany) are working to solve the saame problems we have.

No Marty, the link you provided mentions statutory tax rates, not effective tax rates.

Our statutory rates are high, but the effective rate paid is very low.

[jonnybutter]

Thanks for the presumption of dishonesty.

Not presuming *dishonesty* on your part. What you said is true - fuel prices are relatively inelastic. (Perhaps I should have used 'wiggle room' instead.) No offense meant. I was just trying to make the point that 'relative', for the purposes of this thread, is meaningless out of context, and that the inelasticity only obtains in the short run - and hoped you (or someone) might actually respond to it.

[Marty]

"Our statutory rates are high, but the effective rate paid is very low."

Except this CBO paper from 2005 puts us in about the same place from an effective rate standpoint. And the trend in this document shows us moving higher in comparison not lower.

[Jesurgislac]

But I do know that European countries and other jurisdiction manage to collect corporate tax at a higher effective rate than the US. How do they do that?

Corporations aren't treated as persons for lobbying purposes in the EU as they are in the US. So while tax shelters and shell games and oligarchical politics are a problem everywhere, the political system in the EU is not as nakedly oligarchic as it is in the US - a fact which US corporations resent like hell.

[Hogan]

Capital goes where it is taxed least.

All other things being equal, maybe. Capital also goes where infrastructure is well maintained, an appropriately educated workforce is available, and top executives would care to live. Otherwise New York would be a scarred wasteland of subsistence agriculture practiced with wood and bone implements, and Alabama and Mississippi would be the economic dynamos of the country, if not the world.

[Slartibartfast]

Thanks for the response, jb. Noted, and I'll try to keep the testiness to a minimum. Hit me wrong, it did.

and that the inelasticity only obtains in the short run

Really, really outside of my comfort window, here, but I'd say that it only obtains at that level in the short run. In the long run, who knows? We're all dead in the long run. If speculation is allowed, I'd say that it probably takes the market a little time to respond to the move in price, but that response is likely not going to be anywhere near what would be needed to keep the total revenue at some constant number of dollars.

Meaningful response is going to have to be supplied by someone bearing a clue. Which is not me, as regards this topic.

[Eric Martin]

Marty,

The CBO link (now they're an authority! ;)) shows us middle of the pack in effective rate.

So, some jurisdictions collect more, others less.

[jonnybutter]

In the long run, who knows?

True enough, but despite the fact that I have no more special knowledge (if not less) than do you about this topic, I don't think it's a very big leap to decide that absent public policy which subsidizes/encourages road-based vehicular traffic - especially of the private sort - as the overwhelming primary component of transport in this country, the price of fuel would surely become more elastic. In short, the price of gasoline is relatively inelastic now because there is often little or no effective alternative to it. Maybe I'm missing your point, but, you know, when demand goes down...

Eric's original point stands, AFAIC. This tax break shouldn't be available. The corollary is that the price of fuel shouldn't be so relatively inelastic, and that the long run - or medium run, depending on how you look at it - is the only trajectory we have in which to consider affecting that. We massively subsidize, in various ways, travel by private car in this country, and i don't think it's efficient in any broad sense. You have to start sometime.

[Slartibartfast]

Eric's original point stands, AFAIC. This tax break shouldn't be available.

I'm not sure that Eric's cites support that companies like ExxonMobil are taking advantage of anything at all. In fact, ExxonMobil paid almost 50% tax on income last year, so if they're dodging taxes, they're doing it rong.

[Slartibartfast]

It's interesting to note that Forbes' article has been redacted not only to note that the details of their income tax payments aren't available to the general public, but also this part has been completely removed:

No wonder that of $15 billion in income taxes last year, Exxon paid none of it to Uncle Sam, and has tens of billions in earnings permanently reinvested overseas.

That segment now reads:

Exxon tries to limit the tax pain with the help of 20 wholly owned subsidiaries domiciled in the Bahamas, Bermuda and the Cayman Islands that (legally) shelter the cash flow from operations in the likes of Angola, Azerbaijan and Abu Dhabi. Exxon has tens of billions in earnings permanently reinvested overseas.

[elm]

Slarti: ExxonMobil is apparently pretty effective at avoiding U.S. income tax. Their high effective tax rate is explicitly explained in the Forbes piece "The oil companies are oddities among the multinationals because many of the oil-rich countries where they do business levy even higher taxes than the U.S."

Presumably those jurisdictions have fewer loopholes that permit them to avoid tax. The remaining question, then, is why the U.S. permits and continues to permit use of accounting trickery to conceal income and why the U.S. should continue hydrocarbon-industry specific tax breaks?

[Slartibartfast]

ExxonMobil is apparently pretty effective at avoiding U.S. income tax.

Please tell me how you know that.

[Ugh]

ExxonMobil paid almost 50% tax on income last year, so if they're dodging taxes, they're doing it rong.

Their 10K reads to me it was more like 43%, but they say it was 47% in note 18, which gives a break-down of US and non-US taxes, and...looks like total federal income taxes paid for 2009 was negative $156,000,000. Also note the reconciliation between hypothetical US tax rate and their actual effective rate (which is due, it seems to me, primarily to the foreign taxes they pay).

I like how that the US tax on non-US operations was $32 million, on net income (after income taxes, foreign I presume) of $17.688 billion, for a rate of US tax on foreign earnings of 0.18% (to be fair, this could be from Exxon using its foreign tax credits to offset part of the US tax on foreign earnings).

Also, Exxon has taken positions on its tax return that do not meet the necessary threshold for taking the (full) benefit of the position on the financial statements to the tune of $4.7 billion. And it's still being audited in the United States back to its 1989 tax year.

Also, the amount of foreign earnings that Exxon has indicated will be "indefinitely reinvested" and thus never subject to US tax and for which no US tax must be reported on its financials? $42 billion.

[jonnybutter]

I'm not sure that Eric's cites support that companies like ExxonMobil are taking advantage of anything at all. In fact, ExxonMobil paid almost 50% tax on income last year, so if they're dodging taxes, they're doing it rong.

?? They're (legally, presumably) not paying US taxes, which I thought was the point we were discussing. That is a subsidy. Public policy which fosters an overwhelming national reliance, to the exclusion of other forms, on road-based vehicular transport (which keeps the price of fuel inelastic) is also effectively a subsidy to, among others, the oil companies. You can argue that we should have those subsidies or that we shouldn't, but I don't think it's debatable that that's what they are. And I'd say the burden of proof is heavier on those who favor subsidies.

[Slartibartfast]

I found what you're looking at, Ugh.

I'm wondering why, if ExxonMobil is really trying hard to avoid taxation, they don't simply set up shop in a tax haven?

[Ugh]

I'm wondering why, if ExxonMobil is really trying hard to avoid taxation, they don't simply set up shop in a tax haven?

There's no oil there?

Plus, what they label as foreign income taxes are, for the most part, I believe, production based taxes leveled on a per-barrel basis or maybe based on the price of a barrel by the Gulf states (or likely wherever they pump oil), and thus hard to avoid if you're in the oil pumping business. Could be wrong about that though (they may be lumped in with "other taxes and duties").

Exxon does pay quite a bit of sales based taxes both in and outside of the U.S., which are hard to avoid if you're in the oil/gas selling business.

[Hogan]

There's no oil there?

ExxonMobil is operating at a level where it's unnecessary for the finance capital and the productive capital to occupy adjacent spaces.

I suspect that having your corporate HQ at least nominally in the United States provides some lobbying advantages that would be lost if they moved to the Cayman Islands or Sealand or the Duchy of Grand Fenwick. As long as they can help write US tax laws, their tax bill won't be too onerous.

[Slartibartfast]

They're (legally, presumably) not paying US taxes

That's the part I was asking for evidence on. But Ugh has come through.

As I noted, the original article has been reworded in a way that amounts to an almost-but-not-quite retraction of their original wording, which made me interested in what the real truth was/is.

Plus, what they label as foreign income taxes are, for the most part, I believe, production based taxes leveled on a per-barrel basis

That's more or less what I suspected.

It appears they've cunningly taken losses in the one of the very tax jurisdictions that might be most favorable to them.

[Tony P.]

I have a question for our conservative friends:

What royalties ought we (the American people) charge an oil company (like Exxon) that wishes to drill for oil on publicly-owned tracts (e.g. off-shore)?

By "royalties" I mean specifically a fraction of the world price of crude for every barrel actually extracted. A 100% royalty (based on the proposition that it's OUR oil under there) would give Exxon no incentive to drill: Exxon could just buy the oil elsewhere for that price. A 0% royalty (based on the proposition that "we" are best served by The Free Market) would give Exxon lots of incentive to drill: Exxon risks money up front, but keeps all the profit. Somewhere in between would seem appropriate.

I know my question is tangential to the tax discussion. And I don't mean to restrict it to just Exxon. As a business proposition, I assume we can all agree that the same royalty would apply whether it's Exxon or Saudi Aramco or some wildcat operation headed by George W. Bush and chartered in the Caymans. I'm just looking for a ballpark number between 0 and 100.

--TP

[elm]

The academic studies on elasticity of gasoline price are somewhat interesting, for anyone who would care to look into it. To summarize and (over) simplify, it seems that it's generally agreed that in the short term, gasoline has a low price-demand elasticity (~0.2) and in the longer term a higher elasticity (~0.7).

That makes a certain amount of sense when one considers that gasoline use is heavily influenced by the neighborhood you live in, the car you own, and your workplace. Most people change jobs, homes, and vehicles relatively infrequently, so a person may not have much flexibility in these things.

In my situation, I found the high gas prices of a couple of years ago to be a major hardship. Sure, in principle, I could have adapted. Perhaps I could have driven the Hummer for my 200 mile commute rather than the helicopter, I could have told the kids to drive a single Escalade to school rather than driving separately, I could have shut my car's engine off at night, or I could have bought several days worth of groceries at once. But does anyone want to live like that? Do I look like some kind of hippie?

What's next, is the government going to try to force me to close my windows in the winter?

[TheRadicalModerate]

TP--

I assume that you know that the current oil and gas system isn't based on royalties; it's based on leases, which are sold by a not-very-competitive bidding process. (Reform of this process would be an excellent idea, and we'd all love to see the plan. The problem seems to be that the market is very thin.) Presumably, if you made the bidding process more transparent, the lease would go for something approaching its fair-market value, which ought to balance the interests of the lessee with the lessor's (the government's) need to pull in revenue.

As for royalties, I don't think that's exactly the right word. What you're looking at is a good old fashioned tax. Nothing wrong with such a tax--in fact, a carbon production tax makes a lot more sense than this idiotic cap-and-trade thing, which is merely an invitation to figure out how best to game the system.

But, as with everything else we've discussed in this thread, these companies aren't stupid. If they can't make money off of a particular combination of lease+tax, or if they can make more money somewhere else, then they merely take their bat and go home, home being Nigeria or Iraq or Indonesia or Azerbaijan some place where they can get a better deal for the oil they extract.

Jesurgislac--

You are correct that Exxon is a US company. But in reality it's also a holding company for a whole bunch of foreign-held assets, which makes it de facto a multi-national corporation. The most important thing about this is that it allows it (or any other multi-national) to move its underlying assets to wherever it's going to get the best return for the tax rate it's paying. If you're arguing that Exxon can be extorted into paying more than the going rate in taxes simply because it's incorporated in the US, well, that's just crazy talk.

Ugh--

Why would they decide to start paying taxes to the U.S. treasury because the marginal rate was lowered from 35% to, say, 25%? Why wouldn't they just stick with 0%?

Well, they're not paying 0%, are they? As you pointed out, their 10K shows them paying a pretty hefty portion of their total income in taxes. If they could dump all of that income into one of the more egregious tax havens, I'm sure that they'd be paying much, much, much less than that.

So the issue isn't that Exxon wants to avoid taxes in the US; it's that it can get a better deal elsewhere. That deal is clearly not 0%, but it's a lot less than what the US is charging. I'd think that there would be lots of advantages in recognizing revenue in the US: You've got dramatically simplified accounting, much better asset liquidity, and balance-sheet transparency that ought to translate into a nice little bump in your equity prices. So I don't think that the US has to offer the best deal in the world, but it has to do better than it's doing right now.

Eric--

But I do know that European countries and other jurisdiction manage to collect corporate tax at a higher effective rate than the US. How do they do that?

By offering statutory rates that are much lower than the US, which incents US companies to work hard to recognize revenue under foreign tax regimes, rather than the much-higher US regime. This is pretty easy to game out: If your rates are markedly higher than your competitors, then you don't lose just some of the revenue, you lose it all. If your rates are markedly lower, then you probably get all the revenue recognized here at home, but you might not generate optimal revenue. Golly, it sounds a little bit like that drivel that that Laffer fellow was spouting, doesn't it? Meanwhile: Tax rate=35%, revenue=$0. Can you do worse than that with a lower tax rate?

[Brett Bellmore]

"Meanwhile: Tax rate=35%, revenue=$0. Can you do worse than that with a lower tax rate?"

You probably can, if you're figuring that a big part of the point of taxation is to take money away from people/companies that have a lot of it, and not just to raise revenue. Which isn't, regrettably, that uncommon an attitude around here.

[Jesurgislac]

You probably can, if you're figuring that a big part of the point of taxation is to take money away from people/companies that have a lot of it

Yes indeed, why would any rational government want to raise revenue by taxing people who can afford to pay a lot of tax while still living very well?

Brett's comments may remind us that while conservatives in general only want to roll back the state of the world to the 1920s, the hard-line Birther-teabaggers want to roll back all the way to the 18th century...

[Brett Bellmore]

LOL! Just the person I meant, right on cue...

[russell]

if you're figuring that a big part of the point of taxation is to take money away from people/companies that have a lot of it, and not just to raise revenue.

I'm not sure there are that many people here to think the purpose of taxation is to level the distribution of income. I'm not sure there are that many people anywhere in this country who think that. I certainly don't.

There are two basic arguments for taxing wealthy people at a higher rate than less wealthy people.

1. A tax dollar paid by a relatively poor person is a dollar that is likely not spent on something necessary. A tax dollar paid by a relatively wealthy person is a dollar likely not spent on an inessential luxury good. Net/net, progressive tax rates cause less overall pain. That's Adam Smith's argument. It's a simple pragmatic and moral calculus.

2. We need the money, and wealthy people have it. In historical terms, they've had a very good ride for the last 15 or 20 years, and to some degree that's been at the expense of the rest of the population. Time to readjust the balance. That's my argument.

Virtually everybody pays taxes. By "virtually", I mean the number of people who pay no taxes at all is vanishingly small.

The number of people whose overall tax burden is negative -- i.e., folks who get more than they pay in -- is pretty small.

Who are those folks? It's retired folks getting SS and Medicare, folks on Medicaid, and really really poor people.

Folks on SS and Medicare have generally been paying into those systems over the course of their whole working lives. Hard to say if, by the time they die, their lifetime tax to benefit ratio is positive or negative, but at a minimum they made their contribution while they were working.

The other folks -- folks on Medicaid, and folks who are very poor -- just need the help. There are always folks like that, there always will be, and any decent society with the means to do so takes care of them. We have the means.

The US is not a redistributionist regime, and other than a vanishingly small number of actual doctrinaire leftists, nobody is looking to make it into one. And when I say "vanishingly small number", I mean there are probably more people in the Flat Earth Society than there are real ideological leftists in the US.

[Ugh]

TheRadicalModerate: So the issue isn't that Exxon wants to avoid taxes in the US; it's that it can get a better deal elsewhere. That deal is clearly not 0%, but it's a lot less than what the US is charging.

The US charges 35%, ~40% if you count state taxes. Exxon paid an effective income tax rate, according to their 10k, of 47%, so, apparently, the US does offer a better deal, yet they paid essentially no income taxes in the US in 2009. Curious.

[Slartibartfast]

it's that it can get a better deal elsewhere

47% is a better deal?

I think Ugh has got it pretty much right: there are some unavoidable tax expenses that Exxon is liable for abroad, and there are some semi-avoidable ones domestically. Exxon has paid some of its income tax domestically over the last few years (close to $4 billion on $10.2b of US income in 2008, and $5b on $13.7b of US income in 2007), so I have no problem believing that 2010 will also see Exxon paying some US income taxes.

It should be noted that Exxon's revenue is WAY down this year; I have no idea whether that happened to the rest of Big Oil, but it's way down. Not feeling sorry for them; just noting the facts. Exxon didn't pay any taxes in the US last year largely because corporate expenses outweighed revenues in the US. Their story is that because interest rates are down, interest income is also down. Whether that's the truth is another matter.

Also noteworthy is their income tax rates, as computed by them, have edged steadily upward over the last few years. They're paying a lower tax rate here in the States, so it makes absolutely no sense for them to shift their tax burden overseas.

[Eric Martin]

By offering statutory rates that are much lower than the US, which incents US companies to work hard to recognize revenue under foreign tax regimes, rather than the much-higher US regime. This is pretty easy to game out: If your rates are markedly higher than your competitors, then you don't lose just some of the revenue, you lose it all. If your rates are markedly lower, then you probably get all the revenue recognized here at home, but you might not generate optimal revenue. Golly, it sounds a little bit like that drivel that that Laffer fellow was spouting, doesn't it? Meanwhile: Tax rate=35%, revenue=$0. Can you do worse than that with a lower tax rate?

You're missing the point. The point is that individual companies in those countries pay a higher effective rate than individual companies in our country - despite the lower statutory rate.

That is, a company earning $1 million in America pays a lower effective tax than a country earning $1 million in a European country with a lower statutory rate.

It's not Laffer at all, it's about the number and quality of loopholes afforded to US corporations. So even though our statutory rate is higher, the effective rate paid is lower.

Eliminate loopholes - as Obama proposed doing - get more revenue.

Heck, I'd even be in favor of lowering the statutory rate and eliminating loopholes.

But trying to compete with the Caymans? Come on, we would lose revenue at that point.

Even for golly gee Laffer there is a point of diminishing returns.

[Marty]

"So even though our statutory rate is higher, the effective rate paid is lower."

You keep saying this, but in the CBO study the only Eurpean country with a higher effective rate was Greece, a fine example. Then Canada.

We aren't competing with the Caymans, they are the tax shelter from everywhere, and less effective all the time. We are competing with Europe and Asia and South America, and it is more expensive to do busines here than any of those places.

[Ugh]

It should be noted that Exxon's revenue is WAY down this year; I have no idea whether that happened to the rest of Big Oil, but it's way down. Not feeling sorry for them; just noting the facts...Their story is that because interest rates are down, interest income is also down. Whether that's the truth is another matter.

They said that was due to a fall in interest income? I haven't gone back to their 10k but my recollection from reading it yesterday was that interest income was less than a rounding error when compared to their revenue from sales in the US last year (in fact, interest income might have been zero). Not questioning you Slarti, just that it strikes me as a questionable assertion by management.

[Slartibartfast]

Look for this bit:

Corporate and financing expenses of $1,917 million in 2009 increased $627 million, primarily due to lower interest income.

[Eric Martin]

You keep saying this, but in the CBO study the only Eurpean country with a higher effective rate was Greece, a fine example. Then Canada.

Marty, I don't see that in the CBO study. Do you have a page cite and an excerpt? What I see are things like deductions for machinery and debt and equity investments, etc. Stuff like this:

Some of the countries whose statutory tax rates were among the highest also had some of the largest tax depreciation deductions for machinery. For example, the United States and Italy, which had top statutory corporate
tax rates that were some of the highest among the 19 countries, each allowed depreciation deductions for machinery that were some of the most generous. Ireland, which had the lowest top statutory tax rate, was among the countries with the least generous depreciation deductions. Overall, according to the data, countries with higher statutory tax rates tend to have larger tax depreciation
allowances (see Figure 2-8 on page 29). Notwithstanding, depreciation deductions vary widely, regardless of the level of the statutory tax rate. Such variation indicates
the need, when measuring effective marginal tax rates, to combine depreciation deductions and statutory rates.14

[Eric Martin]

Keep in mind, also, as the CBO report points out, the US applies a 0% percent statutory rate to certain types of corporations (LLC's for example) that are not permitted in many other jurisdicions.

[Eric Martin]

RadicalModerate:

Just to add re: Laffer, the funny thing is, countries with higher statutory rates have higher revenues from corporations. The opposite of Laffer.

see here

[Slartibartfast]

The interesting thing about that picture is there isn't a data point out past 36%. Attempting to extrapolate linearly past there is kind of silly, I think.

As is the suggestion that the Laffer Curve re-intersects the abscissa somewhere in the 30-35% zone. People talk about Laffer like there's One True Curve that exists, if only we could find it. I think that's a rather self-servingly, here's-a-fragment-of-The-One-True-Cross hopeful assumption, myself.

[elm]

Martin Gardner had written a nice article on the Laffer curve some time ago. It's clear that many other variables affect tax revenue beyond the statutory rate and that an Econ. 101 model can't possibly hope to capture the thing.

Currently, the more-representative neo-Laffer curve shows the most promise for determining the details of the relationship between tax rates and tax revenue.

[Marty]

"Keep in mind, also, as the CBO report points out, the US applies a 0% percent statutory rate to certain types of corporations (LLC's for example) that are not permitted in many other jurisdicions."

Eric, when I get a few more minutes I'll get the page for the graph I think is relevant.

Here it just needs to be added that the 0% rate is because all of the income is taxed to the owners at individual rates.

[TheRadicalModerate]

Ugh, Slartibart--

Surely neither of you is suggesting that, even though Exxon can get a lower rate in the US, they're electing not to just to screw with us, right? So (and I freely admit that I haven't gone plowing through the 10K--this is a lunch-hour exercise today) here are some possible reasons:

1) They've got a lot of US employees, for whom they pay FICA and Medicare taxes. That might kick the overall taxation rate up by 2-3%--certainly not the full 7.65% (i.e. US labor expenses are obviously not Exxon's only COGS).

2) They're paying local taxes (i.e. taxes to entities other than national governments) in various places in the world.

3) They're accounting for mineral extraction leases and royalties as taxation.

4) They're being forced to recognize revenues in a few places in the world that have very high tax rates. (No clue whether this is the case or not...)

It would be interesting to know exactly what the reason is. Bottom line, though: Exxon has hired enough smart accountants to guarantee that it's minimizing its overall tax burden.

[Eric Martin]

Here it just needs to be added that the 0% rate is because all of the income is taxed to the owners at individual rates.

Right. As opposed to a corporate level tax, and then a tax to the owners at individual rates on the money they get in the form of dividends and salary, as with C corps.

An LLC is taxed like a partnership, with the limited liability of a corporation.

[TheRadicalModerate]

Eric--

You're missing the point. The point is that individual companies in those countries pay a higher effective rate than individual companies in our country - despite the lower statutory rate.

That is, a company earning $1 million in America pays a lower effective tax than a country earning $1 million in a European country with a lower statutory rate.

The problem we're having here is the idea of "a company earning in America". Earning how? By repatriating overseas earnings, or by recognizing revenue from goods and services sold in America?

It's not Laffer at all, it's about the number and quality of loopholes afforded to US corporations. So even though our statutory rate is higher, the effective rate paid is lower.

Eliminate loopholes - as Obama proposed doing - get more revenue.

Heck, I'd even be in favor of lowering the statutory rate and eliminating loopholes.

I think we're in rough agreement here, but the biggest "loophole", I'm guessing, is the foreign tax credit. That credit exists because very few companies would put up with repatriating foreign earnings if they had to pay taxes on them twice. If you eliminate this--or sufficiently reduce it--I'm pretty sure that the net effect won't be more revenues. Instead, you'll see lots of corporations re-chartering outside the US and re-issuing stock on foreign stock exchanges.

But trying to compete with the Caymans? Come on, we would lose revenue at that point.

First of all, if Ugh is right, it's pretty obvious that Exxon isn't recognizing a whole bunch of revenues in tax havens, given their international level of taxation. But, iff it turns out that the US is losing lots of revenue to tax havens (and I don't have an informed opinion on this), then it would interesting to figure out ways to defeat this.

I assume that the way you use a tax haven is to recognize the revenue under the haven's jurisdiction. So, say that Exxon is earning a bazillion bucks a year by selling oil to the US as a Cayman Islands-chartered corporation. There's very little downside to slapping a whopping big tariff on Cayman-imported products to a) compensate for the revenue loss and b) to punish the Caymans for acting as a tax haven. (Note that navigating our treaty and WTO obligations to implementing this strategy is far from a slam-dunk.)

The important thing to note is that a true tax haven is typically some tiny little country that can live handsomely by sponging off of a tiny amount of revenue from a handful of large companies. If you've got a large, functional state (coincidentally one with whom you'd incur significant deadweight losses if you didn't practice free trade) but it's got a lower effective tax rate, you've got to compete with them straight-up.

[Ugh]

TheRadicalModerate -

they do pay a bunch of other taxes, as I note upthread, including sales taxes in the US. I also note that they might have paid no US income taxes in 2009 because of the foreign tax credit. And as Slarti noted they did pay several billion $ in US federal income taxes in 2007 and 2008.

They're being forced to recognize revenues in a few places in the world that have very high tax rates. (No clue whether this is the case or not...)

My guess is that this is correct as I believe the Gulf States deal with Exxon is (a) you will pay us for the right to extract Oil from our country; (b) you will also pay us a per-barrel extracted tax; (c) you will also pay us income tax and the full statutory rate; and (d) if you do not do (a), (b), and (c) we will cancel your concession. Whereas, in the US, I'm guessing Exxon owns most of the oil fields from which it extracts oil and doesn't have to worry about being prevented from extracting oil by the government.

[Slartibartfast]

Surely neither of you is suggesting that, even though Exxon can get a lower rate in the US, they're electing not to just to screw with us, right?

Surely this one of us is not; I'd thought I'd made it clear that my opinion is nearly the opposite of that. If I said anything that made you suspect otherwise, please point it out and I'll be happy to elaborate. I'd request that you reread my comments in that light, and reconsider.

I deliberately did not go into other forms of taxation that Exxon is subject to because we're talking income tax. If you expand the scope to include sales tax, consider that sales taxes collected at the point of sale and payable to the taxing authority by the corporation is included as both revenue and expense, so those will cancel out with (at least part of) sales taxes paid. SS collected is a different expense, and isn't (I believe) considered to be a tax on the corporation, but more of a payroll-related expense.

[Ugh]

But, iff it turns out that the US is losing lots of revenue to tax havens (and I don't have an informed opinion on this)

Well the US (and many other countries) is losing a lot of revenue to tax havens.

To take a simplified* example, US PharmaCo spends three years on Drug X, developing it, getting it approved by the FDA and, most important for tax purposes, patenting it. This costs PharmaCo $3 billion, all of which it can deduct currently. US PharmaCo then transfers the patent on Drug X to Taxhaven PharmaCo, an affiliate of US PharmaCo located in Taxhaven that has a corporate income tax rate of zero.

Taxhaven PharmaCo then licenses the right to produce Drug X back to US PharmaCo equal to 90% of the sales price of Drug X. US PharmaCo proceeds, over the next 15 years, to sell millions of pills of Drug X for $100 each. But instead of earning $100 on each sale, US PharmaCo earns only $10 because it deducts the $90 royalty fee it pays to Taxhaven PharmaCo, and only pays $3.50 in US taxes on each sale. Yet, Worldwide PharmaCo has earned $96.50 after taxes, which it gets to report on its earnings. And note that to the extent Taxhaven PharmaCo can license the right to sell Drug X in other countries, that's even more money sucked offshore (i.e., the royalties paid in those other countries are not paid to US PharmaCo, the company that developed the drug).

So, you have (a) deductions taken up front that reduce US taxes combined with (b) income earned from the very activity for which the deductions were taken being diverted offshore and not subject to US tax.

To give you a sense of the numbers involved in the Pharma industry alone (not to mention any other industry that relies on intellectual property, like software), in the past couple years there have been at least two companies that have settled with the IRS for multiple $billion (yes, with a "b"), each. What's more, they were happy to do so because the settlement was less than what they had put up a reserve for on their balance sheet, such that they could release the reserve and get an earnings boost from the settlement.

How to combat this? Well, one way would be just to subject to current US tax the income of any US owned subsidiary incorporated in a tax haven. I think that would about do it but I could be wrong.

*I've skipped a bunch of steps and other things that occur, but this is the gist of how this is done.

[Tony P.]

TheRadicalModerate said:
I assume that you know that the current oil and gas system isn't based on royalties; it's based on leases, which are sold by a not-very-competitive bidding process. (Reform of this process would be an excellent idea, and we'd all love to see the plan. The problem seems to be that the market is very thin.)

First, I note that this was in response to a question I posed to "our conservative friends":)

Second, I do know that our current system is based on leases -- just like the original concessions in Saudi Arabia and Iran were, way back when. But it has been many decades since most nations wised up and went with royalties instead.

Third, I'm glad to hear TheRadicalModerate support reform -- of the "process" if not the "system". I suppose the distinction means TheRadicalModerate is not too hot on the idea of royalties on off-shore oil in the future. So I assume, provisionally, that TRM's answer to my question is "0%".

If owned a tract of land in West Texas, under which there might be some oil, I'd have at least two choices: 1)lease my land, for a guaranteed rent, to an oil company that gets to keep any oil it finds; or 2)hire an oil company to drill on my land, on a fee-for-service basis, and I get to keep the oil. Surely no conservative -- let alone a radical moderate -- would argue that I don't have the right to do the latter. As a practical matter, I might choose a middle option: the oil company doesn't pay me rent, I don't pay the oil company to drill, but we split any oil actually extracted. As a further practical matter, we don't physically split the oil, we split the market price of the oil. That is, we strike a royalty deal. The main feature of the deal is a number between 0 and 100%.

If I have the right to strike such a deal on land that I own, then surely We The People have the right to strike such a deal on land (on or off shore) that we own. So I ask again, with respect to the tracts Obama has opened for drilling, what percentage royalty should we demand?

Incidentally, if OilCo. pays me, a private landowner, a percentage royalty per-barrel, it seems ridiculous to call that a "tax". I think it would be equally ridiculous to call such a royalty a "tax" when it is paid to a sovereign land-owner like the royal family of Saudi Arabia or the people of the United States. But I recognize that the tax code may take a different view of what's ridiculous.

--TP

[TheRadicalModerate]

TP--

I'd be OK cutting over to a royalty scheme instead of (but not necessarily in addition to) a leasing scheme. But remember that the lease occurs before the extraction company knows whether the lease will be productive (i.e. whether there's any oil or gas underneath it).

Granted, the risk to the lessee is lower than it used to be, just because there's a lot more known about the geology of various places than there used to be. Presumably, that should raise the prices of the lease, given a sufficiently open market.

With proper transparency, there should be very little difference between a lease and a royalty. The trick, as with all negotiations, is to set the price so that there's some kind of a win-win situation. Offshore drilling's a lot more expensive than onshore drilling, and you can turn a marginally productive lease into an unproductive one pretty quickly if you price it wrong--either through direct lease costs or through royalties.

[TheRadicalModerate]

Ugh--

How to combat this? Well, one way would be just to subject to current US tax the income of any US owned subsidiary incorporated in a tax haven. I think that would about do it but I could be wrong.

Thanks for the description of the process. I hadn't thought about products with high IP content--good point.

Question: Isn't it the case that the company can only repatriate the earnings by recognizing them as income? There was a provision in the 2005 jobs creation act that provided for a one-time reduced rate for repatriation, so I assume that the tax law has some more stringent provision for ordinary repatriated earnings.

The money's not much good just sitting there in the tax haven if it can't be used for R&D (especially for pharma companies) or as dividends. So I'm wondering if this is as much of a problem as you think.

The problem with your proposal to directly tax revenues recognized in someplace defined as a "tax haven" is that it's ultimately going to put pressure on multi-nationals to re-charter somewhere else. That's something to be avoided if at all possible. Ideally, it wouldn't make much difference, but I suspect that corporate headquarters is the place where R&D hires get placed and where the corporate culture interacts with the national culture. Total and Exxon may both be multi-nationals, but there are few people who would confuse which one of them was French and which one was American.

[Ugh]

Question: Isn't it the case that the company can only repatriate the earnings by recognizing them as income?

That is the basic rule, yes. Companies do their best to repatriate without recognizing income in various ways. For example, Schering Plough just lost a big case on repatriation that involved selling one a leg of an interest rate swap to its foreign subsidiary for cash.

The money's not much good just sitting there in the tax haven if it can't be used for R&D (especially for pharma companies) or as dividends. So I'm wondering if this is as much of a problem as you think.

I'm not aware if it's such a huge problem currently as perhaps the IRS has cut it off at the pass, but it certainly has been historically, as evidenced by the IRS settlements I mentioned. Also note that, to the extent that PharmaCo is foreign headquartered, but does the bulk of its research in the US, it doesn't have to worry about the repatriation problem.

The problem with your proposal to directly tax revenues recognized in someplace defined as a "tax haven" is that it's ultimately going to put pressure on multi-nationals to re-charter somewhere else.

That has been a historic problem that Congress seems to have dealt with fairly well, at least with respect to currently existing US companies. There will always be an incentive to, e.g., headquarter a new startup company in the Caymans, even though most/all of its operations are in Silicon Valley, but in my (very limited) experience in dealing with startups the basic view is that they are desparate for cash and thus do not feel like spending the extra money to have the parent company set up in the Caymans, rather than Cali/Delaware, even though, if the company is ultimately successful they could save a ton of US taxes in the future (not to mention such companies are generally operating at a loss and so are not worried about their tax situation). So, there will always be US headquartered companies. Even those companies that managed to expatriate before Congress intervened are still "US companies" in all but a formal sense.