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Center for Freedom and Prosperity's E-mail Update 1) Territorial Tax System for American Business 2) Beware of Doggett's Quasi-AMT for Foreign Companies Investing in America 3) Czech Republic Joins the Flat Tax Club 4) CF&P's The Market Center Blog 5) Dan Mitchell to Speak on Tax Competition and Financial Privacy in England and Romania 6) More Support for a Lower Corporate Tax Rate 7) New Study Explains Why Tax Competition is Good 8) Excellent New Study on European Tax Cartel 9) Citing Important Role of Tax Competition, Washington Examiner Says US Should Join Flat Tax Club
1) Territorial Tax System for American Business Since our last update, we have briefed more than 20 Capitol Hill offices on our key issues (link below for more information). We always discuss the benefits of Tax Competition and explain why the anti-competitive Levin/Dorgan/Doggett bills are misguided, but we also spend a few minutes explaining why a territorial tax system is needed to boost U.S. competitiveness (see excerpt and link below). [Excerpt from our fact sheet on Territorial Tax System for American Business:] America's system of taxing the worldwide income of U.S.-based companies needs reform. The current system, which taxes income corporations earn in other jurisdictions, makes it difficult for U.S. firms to compete in global markets by adding an extra layer of tax. Combined with America's high tax rate, worldwide taxation has even driven some U.S. companies to move their charters to jurisdictions with better tax law. Here are the key facts: … American companies not only pay tax to the IRS on income earned in the United States, but they also are liable for tax on income earned in other nations – even though that income already is subject to all applicable taxes in those other nations (much as foreign companies pay tax to the IRS on income earned in the United States). … The United States is one of a handful of nations that uses this system, known as worldwide (or sometimes known as global) taxation. … Territorial taxation is based on the common sense notion that governments should tax only the income earned inside their borders. Extra-territorial taxation is antithetical to free-market tax policies and inconsistent with all major tax reform plans. … This reform would dramatically boost the competitiveness of U.S. companies while fulfilling international trade obligations because many competitors are headquartered in nations with territorial tax systems. By boosting competitiveness, American exports will surge. [Link to full fact sheet below:] Link to fact sheet: CF&P Email Update, August 10, 2007
2) Beware of Doggett's Quasi-AMT for Foreign Companies Investing in America In a 231-191 vote earlier this year, the House passed H.R. 2419, a bill designed to provide billions of dollars in aid to farmers. To "pay for" a $4 billion increase in food-stamp and other income-redistribution programs, the bill includes a provision (H.R. 3160) sponsored by Rep. Lloyd Doggett (D-TX) that ostensibly would generate $7.5 billion in revenue over the next 10 years by increasing taxes on U.S. subsidiaries of foreign multinationals. Critics argue that the tax increase will discourage foreign investment in the United States and therefore hurt job creation. The Bush Administration has threatened a veto. [The following is CF&P's analysis of the provision:] The controversial tax provision is somewhat akin to the alternative minimum tax in that it seeks to impose the highest possible tax rate on foreign companies operating in the United States. But while the AMT forces taxpayers to calculate their tax bill using two methods and then pay the larger of the two amounts, the Doggett provision – for all intents and purposes – requires foreign companies active in the U.S. market to pay the highest possible tax rate on transactions involving two non-U.S. jurisdictions. For instance, if a foreign-owned firm with a subsidiary in the U.S. also has a subsidiary in a low-tax jurisdiction, the Doggett provision would require the U.S. subsidiary pay the higher of the withholding tax rates between the payment to the parent company and the payment to the subsidiary in the low-tax jurisdiction. The proposed tax hike on U.S. subsidiaries of foreign companies will have a negative effect on foreign investment in the United States—investment that has been a major impetus for economic growth and job creation. Moreover, the tax hike will likely invite countries to retaliate against the United States by raising taxes on U.S. companies operating oversees. As Treasury Secretary Paulson noted in a letter to lawmakers, the onerous tax proposal also threatens to override existing tax treaties, thereby making it more difficult to negotiate future tax treaties. The tax provision passed by the House is both anti-free trade and anti-tax competition. If enacted, it will undermine foreign investment in the United States, stifle job growth, and compromise America's treaty obligations. Link to Analysis on CF&P's web page: August 22, 2007, The Market Center Blog, Doggett Bill Will Hurt U.S. Competitiveness Full text of H.R. 2419: Treasury Secretary Paulson's letter in opposition to the tax provision of the Bill: http://www.ofii.org/docs/Paulson_Letter.pdf
3) Czech Republic Joins the Flat Tax Club. Cue up the unofficial theme song of the flat tax revolution (Another One Bites the Dust: http://www.youtube.com/watch?v=rNQRfBAzSzo). The Czech Republic is the 20th jurisdiction to adopt a low-rate flat tax. The Prague Monitor reports that the vote in the Chamber of Deputies clears the only real obstacle to a low-rate tax system. [The Prague Daily Monitor reports on the reform:] The cabinet's package of public-finance reforms passed the final vote in the Chamber of Deputies yesterday thanks to two unaffiliated opposition MPs who voted with the governing coalition. ... Starting next year, the legislation will gradually reduce corporate and personal-income taxes, cut social spending and introduce cash fees for health care. It still requires Senate approval and President Václav Klaus's signature, but no resistance is expected from either. …The reform package will gradually lower the corporate tax rate from today's 24 percent to 21 percent next year, 20 percent in 2009 and 19 percent in 2010. The existing progressive taxation of personal income at 12 to 32 percent will be replaced by a flat tax of 15 percent in 2008 and 12.5% in 2009. The personal income tax will be calculated from super-gross income, including social and health insurance contributions paid by the employee and the employer. This means effective taxation will be 23.1 percent of gross income in 2008 and 19.4 percent in 2009. August 23, 2007, Prague Monitor Note: The above information first appeared on our daily web log The Market Center Blog:
4) CF&P's The Market Center Blog Just is case you missed it… some interesting headlines from our daily blog. Link to CF&P's The Market Center Blog: August 24, 2007, The Market Center Blog, New Taxes on Private Equity Funds Will Backfire August 22, 2007, The Market Center Blog, Doggett Bill Will Hurt U.S. Competitiveness August 22, 2007, The Market Center Blog, Will Bulgaria and the Czech Republic Join the Flat Tax Club? August 21, 2007, The Market Center Blog, Government Helped Create Subprime Crisis...and More Government Can Make it Worse. August 17, 2007, The Market Center Blog, Treasury Secretary Rebuffs Calls for More Financial Market Regulation. August 14, 2007, The Market Center Blog, Out of the OECD Frying Pan, into the UN Fire. August 13, 2007, The Market Center Blog, European Elites Earn Scorn from The Economist.
5) Dan Mitchell to Speak on Tax Competition and Financial Privacy in England and Romania September 6: International Economic Crime Symposium, Cambridge, England: September 7: Offshore Investment Symposium, Oxford, England: September 13-16: European Resource Bank, Bucharest, Romania: Note: More information in future updates about events in Monaco and Belgium.
6) More Support for a Lower Corporate Tax Rate. Richard Rahn's commentary in the Washington Times and an editorial in Investor's Business Daily both explain the competitive benefit of a lower corporate tax rate. Excerpts from both articles below: [Richard Rahn's excerpt:] There has been much hew and cry about corporations moving out of the U.S., but what should be of even greater concern is that new companies increasingly are not incorporating or going
public here. The U.S. is losing global corporate market share because of both its higher tax burden and its excessive regulations (such as the Sarbanes-Oxley Act). European Union countries now have an average
corporate tax rate of less than 25 percent. Ireland is at 12½ percent, and some of the newer EU members have rates as low as 10 percent, while the U.S. corporate rate (federal and average state) is 39 percent.
...The bizarre result of the U.S. noncompetitive tax rate is that the government gets far less revenue than it would if it lowered the rate. ...despite this evidence of the harm caused by high U.S. corporate tax
rates, the reaction by many in Congress is to increase corporate taxes even more. [Investor's Business Daily Editorial:] Treasury Secretary Henry Paulson last month noted that "special corporate tax provisions narrow the corporate tax base by roughly 25%." It suggested that "if the tax base
were broadened by removing these special provisions, the top corporate tax rate of 35% could be reduced to 27%" with little if any change in revenue collections. ...the U.S. suffers from having the
second-highest corporate income tax rate, pegged at 39%, of all 30 nations in the Organization for Economic Cooperation and Development. Note: The above information first appeared on our daily web log The Market Center Blog:
7) New Study Explains Why Tax Competition is Good Below is the abstract for Dalibor Rohác's excellent study entitled "Evidence and Myths about Tax Competition." [Abstract:] "This paper examines various arguments addressed in favour and against tax competition. We pay attention to deӿnitional matters of tax rates and bases, review empirical evidence concerning development of corporate taxes in the EU and the OECD countries over last decades and investigate whether anything suggests that there has been interdependence in corporate tax rate setting across countries. Furthermore, we recapitulate efforts done both by the OECD and the EU to stop tax competition. Finally, we argue that tax competition is not harmful and that it emerges as a means of constraining governments to discipline." [Link to full paper below:] Number 2, 2006, New Perspectives on Political Economy, Volume 2, , pp. 86 – 115, by Dalibor Rohác, Evidence and Myths about Tax Competition
8) Excellent New Study on European Tax Cartel [Executive summary of the paper:]
July 2007, Institut Constant de Rebecque, The European Tax Cartel and Switzerland's Role
9) Citing Important Role of Tax Competition, Washington Examiner Says US Should Join Flat Tax Club [Excerpt from article below:] In fact, a flat tax rate has done so well in all the countries in which it‚s been adopted, Mitchell says, that they are now competing with each other to get the rates down even lower. But U.S. taxpayers are still stuck with a complicated, phone book sized-tax code that's biased against saving and investment, therefore ensuring less accumulation of the capital needed to finance economic growth and create new jobs. A flat tax proposed here in the 1990s by former House Majority Leader Dick Armey would have allowed families to file their tax returns on a single postcard, with the first $30,000 exempt from a 17 percent across-the-board tax on wages, salaries and pensions. The plan would have eliminated all the loopholes and exemptions that make tax lawyers rich. The flat tax revolution in Russia and elsewhere should be of major concern to Americans worried about losing jobs to outsourcing. The global flow of labor and capital will continue to reward countries that keep tax rates and government regulation low. Mitchell points out that the Paris-based Organization for Economic Cooperation and Development created a blacklist in 2000, threatening economic reprisals against low-tax countries that encouraged the flight of capital from high-tax nations. But with 12 countries going flat-tax since then — five this year alone — the OECD's bully tactics clearly haven't succeeded. (Link to full article below.) July 30, 2007, The Washington DC Examiner, Editorial, Time for U.S. to join the flat tax club
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