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September 04, 2014

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Part of the problem, not all of it but part, is that the US treats the entire profits of any US company as taxable by the US at US rates. (OK, it's more complicated than that. But that approach is why inversion is worthwhile at all.) From what I hear, we are essentially unique in this -- American exceptionalism strikes again!

We likewise are essentially alone in charging our citizens US income taxes even if they live and work elsewhere in the world. I can see taxing ex-pats something; but given that they are making no use of US infrastructure, and minimal use of US government services, taxing them at the full rate seems over the top.

If we got past that one issue, a noticable part of the inversion problem would go away.

But better still, we could go from an imcome/profits tax to a value added tax. That not only is fairer to the companies, it also removes the perverse incentive to do things just so as to evade taxes.

I rather doubt that these minor considerations will actually lead to a change in the US tax system any time soon. Maybe if we see Google, JPM Chase, IBM, John Deere, etc. all doing inverstions -- say half of the Fortune 50 -- it will finally concentrate minds in Congress. But somehow I doubt that anything short of a catastrophe will convince our politicians to do more than orate on the subject.

We likewise are essentially alone in charging our citizens US income taxes even if they live and work elsewhere in the world. I can see taxing ex-pats something; but given that they are making no use of US infrastructure, and minimal use of US government services, taxing them at the full rate seems over the top.

Unfortunately, the general pattern is reactive, so the increased tax scrutiny is resulting in more and more US citizens renouncing their citizenship, which results in this. Despite the fact that, as the first link points out

It’s rare that an American living abroad would actually have to pay anything to the U.S. Internal Revenue Service, said Fortin.

The FBAR filing is what is driving this and this article discusses the penalties that often fall more heavily on the people who actually have less. More stories here

LJ, thanks for the correction. (I realize that, located as you are, you know about this first hand.)

Actually, it was less a correction and more of a slight revision. Yes, the US is one of the few nations that taxes its citizens overseas (that is why in the UK, it is called the Department of INLAND revenue), but almost everyone who doesn't have a battery of accountants and huge holdings pays more in taxes in the country they live in now which offset their taxes, but we still have to file the paperwork which is really onerous and incredibly complicated if you have any assets back in the US, regardless of them being taxed or not.

wj - as noted in #3, the US could lower its rate and shift to a territorial system, but it's not at all clear that would stop the wave of inversions. At most, it would slow them down a bit. There would still be an incentive to invert and then erode the U.S. tax base via related party interest payments and royalties to subsidiaries in tax havens or countries with a lower marginal tax rate.

It’s rare that an American living abroad would actually have to pay anything to the U.S. Internal Revenue Service, said Fortin.

What's interesting about this is the reason for not actually paying anything to the U.S. - which is that foreign income tax rates on individuals, as opposed to corporations, tend to be higher than in the US, as the article notes. These taxes can be credited against your U.S. income tax liability, wiping it out. Those countries also typically have a VAT.

A tax on revenues derived from U.S. sources, possibly enacted as an alternative minimum tax, might be a good idea. Keep our current tax of 35% (roughly) of profits, but not less than (say) 10% of revenues from U.S. customers.

If this needs a solution, I'm not sure what it is.

I'd be interested in Jay's proposal...think of it as a VAT on sales, but I am no tax expert, just an intolerant asshole liberal/socialist.

Posted by: Ugh: "wj - as noted in #3, the US could lower its rate and shift to a territorial system, but it's not at all clear that would stop the wave of inversions. At most, it would slow them down a bit. There would still be an incentive to invert and then erode the U.S. tax base via related party interest payments and royalties to subsidiaries in tax havens or countries with a lower marginal tax rate."

IIRC, before the last wave of corporate tax cuts, the corporations said that they'd create more jobs and bring cash back in and etc.

They didn't.

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