October 8, 2014 – Arsenal For Democracy 102

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Topics: Colorado history curriculum fight, new rules on corporate tax avoidance via inversion (offshore reincorporation), Turkey’s role in Syria. People: Bill, Nate. Produced: October 5th, 2014.

Discussion Points:

– How one Colorado county school board is trying to erase and control US history
– Will the new Treasury Department rules stop corporate offshore reincorporation and inversion that avoid taxes?
– What should Turkey’s role in Syria be? Is Turkey abusing its alliances?

Episode 102 (52 min)
AFD 102

Related links
Segment 1

The Colorado Independent: State Board of Ed member: ‘U.S. ended slavery voluntarily’
The Colorado Independent: JeffCo students walk out, join in battle over proposed curriculum reform
The Colorado Independent: The kids are all right: Students are the story in JeffCo curriculum clash
Al Jazeera America: Colorado students vow civil disobedience over curriculum ‘censorship’

Segment 2

AFD: Treasury Dept. acts to discourage tax avoidance mergers
The Globalist: Pfizer: Tax Havens or Bust!

Segment 3

AFD: Joe Biden made to apologize for publicly saying fact about Turkey
AFD: ISIS still moving faster than coalition forces on Kobani; will Turkey Enter?
Wikipedia: Tomb of Suleyman Shah

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Treasury Dept acts to discourage tax avoidance mergers

Fantastic. The Treasury Department last month began establishing rules to make it significantly harder for U.S. companies to re-locate offshore for tax purposes by taking over foreign companies and registering out-of-country under the smaller entity with access to tax havens or lower corporate taxes. Earlier this year, both on this site and in The Globalist, I criticized Pfizer’s efforts to initiate a tax avoidance merger like that.

This practice, known as an “inversion” (or sometimes “offshore reincorporation”), had rapidly accelerated recently, to the point where the overall number of all such mergers ever attempted by American companies doubled in the past two or so years. While the new rules are just a small step forward — the much bigger problem of European-controlled tax havens, allowing such mergers to make sense in the first place, remains unchanged — it’s a step much more in the right direction than the constant Republican calls to slash corporate taxes to compete with the tax havens, when sensible reforms and regulations are really what’s needed.

There was also another sign that this Treasury Department action was having the intended deterrence effect. A bunch of companies who were in talks or seen as potentially likely to pursue such mergers took a pummeling in the stock market on September 23rd in response to these regulations being announced the day before, since the companies were less likely to make gains than expected.

That’s well deserved punishment, in my opinion, and more still needs to be done. As I argued in my oped in The Globalist in May of this year:

As a matter of fact, U.S. corporations — as profitable as they are — have taken their home nation for a nearly tax free ride for too long. The U.S. tradition of the rule of law that allowed business to flourish cannot be permitted to devolve into a “rule of loopholes” system that just barely stays inside the lines.

Tax avoidance is a cancer on democratic societies. It both undermines confidence in the fairness of the taxation system and erodes the government’s ability to invest in infrastructure and provides services. In the end, that reduces any government’s credibility with its people.

Without the U.S. government’s help, big American corporations would never have been so successful in the first place. We cannot let them get away with chipping away at the country’s tax base even further.

And the corporations should tread lightly for their own good. If such mergers as the one Pfizer proposes are the future of globalization, the American people will continue to feel very abused. Such schemes may eventually produce a backlash strong enough to erase any of the positives.

 
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Wealthy populism and the real history of the Boston Tea Party

In light of our recent articles on European populism and comparing anti-democratic mass demonstrations in Thailand to the U.S. tea party movement, I was thinking about the latter group once again. I was also double-checking the history of the East India Company for research and stumbled into the realization that the “tea party” part of the name might be more accurate than previously believed.

The common version of the story is that it was a protest against high taxes from Britain — on tea among other things — without representation in parliament. Obviously, this would not be an accurate analogue to anything in the modern United States because the people protesting are represented in the elected legislative body of the national government.

There’s also usually a claim that the colonists were being “forced” by the government to purchase tea from a monopoly. And maybe you could make a case that government policies today are creating de facto monopolies for certain companies (like internet service providers) — mostly through lax regulation. But they generally haven’t been protesting that angle. It’s always been about the original “Taxed Enough Already” (TEA) claim.

So back to the history: in fact, the inciting factor provoking the riot was not some act of increased “taxation without representation” but actually that the British government lowered the tax burden, by allowing the EIC to import tea directly into cities like Boston, without going through British home customs first. Yes the government was still making the EIC the monopoly licensed tea importer, but middle-class colonists had been blatantly ignoring that restriction anyway, in light of the previously high prices on taxed tea imports. Instead, they had been illegally buying tax-exempt tea from Dutch wholesalers brought in by American smugglers.

Those smugglers had become very wealthy, especially in Boston. The problem was that their business only survived by virtue of multiply-taxed East India Company tea being way more expensive than the competing non-British tea. People weren’t buying Dutch tea as a political statement (before the Boston Tea Party), but to get a deal. As soon as EIC became the cheapest tea in the game (not through unfair subsidies, just tax cuts!), everyone was more than willing to purchase legal British tea (including customs duties). And the wealthy business interests running the illegal tea were not happy with being priced out of the market.

Thus, the original Boston Tea Party is less a cry of freedom and more a story of a bunch of rich guys rallying a populist mob to halt the enforcement of government regulation on their illegal business activities and to protest the cutting of taxes that affected average people because tax-avoiding smuggling was how they had become rich. All they had to do was drop some vague buzzwords like “liberty” and rights” to make the case that the money consumers were spending on tea should be going into their own pockets instead of into the royal treasury (which was paying for all the colonial defenses, the debt from the French & Indian War, etc).

So to recap, this current conservative populist “movement” named itself after a protest against policies that benefited common people but negatively impacted wealthy business interests led by flagrant tax evaders. That seems pretty apt actually.

It’s too bad that wealthy interests are so often and so easily able to rabble-rouse disaffected and struggling middle class people to rally against their own interests on behalf of the rich.

Flag of the British East India Company, 1707-1801.

Flag of the British East India Company, 1707-1801.

Pfizer: Screw America, we want tax havens!

I just read NYT DealBook’s new article from Monday on the awful attempted Pfizer takeover of AstraZeneca: “Pfizer Proposes a Marriage With AstraZeneca, Easing Taxes in a Move to Britain”

On Monday, Pfizer proposed a $99 billion acquisition of its British rival AstraZeneca that would allow it to reincorporate in Britain. Doing so would allow Pfizer to escape the United States corporate tax rate and tap into a mountain of cash trapped overseas, saving it billions of dollars each year and making the company more competitive with other global drug makers.

A deal — which would be the biggest in the drug industry in more than a decade — may ultimately not be done. AstraZeneca said on Monday that it had rebuffed Pfizer, after first turning down the company in January.

 
This is disgusting. Pfizer, founded in the United States in 1849, is trying to buy one of its biggest global rivals, solely so it can reincorporate in the United Kingdom… with its half a dozen or so offshore tax evasion center crown dependencies and British Overseas Territories. Excuse me, I should say tax “avoidance,” because it’s not evasion if it’s legal.

(And while they’re at it, they would probably jack up global drug prices further through anti-competitive price-fixing by forming a cartel with AstraZeneca.)

5000-dollar-bill-madison-200Predictably, Congressional Republicans are already telling everyone that the problem is U.S. corporate tax rates aren’t low enough, when in reality, we’re trying to compete with literal tropical islands for tax evaders that are nominally outside of UK control. That’s a losing battle. We need to put pressure on the UK to stop stealing revenue from the rest of the developed world, not lower our already low effective corporate tax rate.

According to The Globalist Research Center and TaxFoundation.org:

In terms of the effective corporate tax rate, the United States is actually below the average of the big industrial countries, at about 26%, [while] the [advanced economies] OECD’s 2012 GDP-weighted average was 32%.

 
And here’s an eye-popping fact from DealBook:

At least 50 American companies have completed mergers that allowed them to reincorporate in another country, and nearly half of those deals have taken place in the last two years.

 
Put another way, that’s almost 25 tax avoidance deals in the past two years. Again, that says little about the U.S. corporate tax structure which hasn’t really changed much — and certainly not adversely to corporate America under a Republican House Majority — and everything about the total lack of civic pride our country’s corporations have right now, even though their revenues to the government are what helped build the country into such a good corporate environment for so long.

We definitely do need tax reform in some respects, but mainly to reduce tax avoidance and loopholes, unnecessary corporate tax credits and subsidies, and code inconsistency that arbitrarily allows some industries pay less than others. What we don’t need to do is to chop our tax code down to stay competitive with Guernsey, Jersey, the Isle of Man, Gibraltar, the Cayman Islands, and the British Virgin Islands.

Slovakia: You get a car, you get a car, everybody pays their taxes.

Gotta love clever governance solutions. Slovakia is trying to fight business tax cheats who are pocketing value-added (sales) taxes, which hurts both consumers/manufacturers and the government. The country came very close to requiring a bailout last year because its economy and debt situation was such a mess. So their revenue loss solution was to host a lottery with huge prizes, from almost $14k cash to a new car and more. The only thing you had to do to enter was upload receipts for things you had purchased with VATs on them (almost everything).

The government then checks to see if the business paid up the tax listed on the receipt (and the buyer can report fake tax numbers, too). The consumer is entered to win either way. You can enter over and over by uploading lots of receipts — which is why nearly half a million people have uploaded 60 million receipts since the program began last year.

Tax collection began to increase early in 2013 and rose more sharply after the lottery began. Officials say they collected about $512 million more in 2013 than in 2012. How much of that is a result of the lottery may never be clear.

But Mr. Kazimir said that it was surely a big factor, and that it had cost only about $276,000 to get the lottery going. He said the new influx of complaints had already proved that it was not just small businesses that were cheating: Chain stores have also been caught giving fake receipts.

 
It’s been so successful that Portugal just launched its own lottery this past week.

The lottery project has drawn criticism from some Portuguese opposition politicians who say it is a capitalist tool to turn citizens into tax inspectors.

 
Hell yes it is… and there is nothing wrong with that. Tax evasion is a cancer on democratic societies because it both undermines confidence in the fairness of the taxation system and erodes the government’s ability to invest in infrastructure and provides services, which reduces its credibility. And it’s even worse when that evasion is on value-added taxes that consumers and manufacturers have already had to pay up front, without the government seeing a dime. It’s essentially theft from the people, really.

Arming ordinary citizens with the power to help enforce tax compliance strengthens democracy and governance. Doing it in such a light-handed way is brilliant and virtually painless. The only people who lose are those who are already breaking the law and stealing revenue.

You get a car, you get a car, everybody pays their taxes.
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Are state tax caps unconstitutional?

flag-of-coloradoIn a push-back against the tyranny of conservative tax caps that prevent some state and local tax increases except by referendum, activists and some legislators in Colorado are trying to persuade the courts to hear a case that says these restrictions are Federally unconstitutional.

Why? Because of the U.S. Constitution’s slightly vague requirement that state governments be “republican” in nature (i.e. ruled by representatives instead of the people directly) and that the Federal government must ensure compliance:

Article 4. Section 4. The United States shall guarantee to every State in this Union a Republican Form of Government…

 
This clause has generally only come up as a formality when Congress has to admit a new state to the union. In the past, the Federal courts have refused to hear cases on this issue of what is or isn’t a “republican” form of government in the states, since most of the disputes are openly political fights between rival state camps rather than legitimate constitutional cases.

But they seem to have taken an interest over the extreme case where Colorado legislators have been legally powerless to raise any taxes whatsoever without the consent of a popular referendum, for over two decades.

Unlike California where many — but not all — taxes end up going to ballot, or other states where legislators can only raise taxes by a certain fixed percentage every year without a ballot question, Colorado’s constitution completely removes that power from its legislature — and even the local governments — and hands it over to the voters.

…no unit of government, from the legislature to local boards, can raise taxes or approve a new tax without a vote of the people. In addition, if existing taxes bring in revenue greater than “inflation plus the percentage change in state population” for the year previous, that “surplus” must be refunded to the taxpayers. In short, TABOR froze state government in its existing shape as of 1992, and left the legislature to flounder helplessly.

  Read more

Op-Ed: The Problem With Billionaires

My latest op-ed from The Globalist:

In the 1980s, the supply-siders became ascendant in Washington D.C., preaching voodoo economics as “the way, the truth and the life.” Their central claim was that rich people create jobs, while high taxes on the rich leave them with less money to create jobs. Therefore tax cuts for the rich equal job growth.

In reality, this hasn’t borne out. Neither the macroeconomic data nor academic studies have shown much evidence of a direct correlation between rich people having more money and using it to create jobs.

Instead, they mostly just use it to speculate, because it’s essentially extra wealth well above and beyond any other spending or genuine investments they could possibly conceive of.

Read the full op-ed here.