We’ll get to tax inversions in a minute, but let’s talk about how the IRS and the Treasury are pursuing every possible manner of tax collection.
The Guardian ran a story on Wednesday entitled “Banks tell US customers they won’t work with Americans.” Banks are doing this because of the FATCA, Foreign Accounts Taxation Compliance Act, which requires that every foreign bank report every single US customer to the IRS or the IRS will withhold 30% of the banks’ US income as penalty. So, the Congress just made any bank on foreign soil the IRS’ extended policeman. A Canadian pointed out that the US government was demanding from her bank information which, under Canadian law, the bank couldn’t hold. So, the bank cited regulatory issues and closed her account. This is happening across all of the G7, including Switzerland. If you’re a US citizen, you will have a problem with banking in other countries. Problems for American citizens bank abroad isn’t new.
Remember in 2009 – during Obama’s first term – the end of secret Swiss bank accounts? This was when UBS paid seven hundred eighty million dollars as settlement. The allegations were that UBS was complicit, or voluntarily helped, in their US customers evading taxes. Trouble with those allegations was – Swiss laws makes it illegal for the banks to know anything about their customer’s accounts beyond a signature and a balance, should the customer so choose. The allegations were thus to the legal level of your mom’s so fat comedy, but UBS is a business. They made a business decision that the time and energy, not to mention the bad press that Obama and Congress could bring to bear, spent fighting the atrocious allegations would cost them more than $780m dollars.
Now, back in April of this year, The Economist ran an article, The Criminalization of American Business. In the article, they pointed out how “big business” was the scapegoat for all manner of ills. They make the point that the Department of Justice, under Eric Holder, has extorted more than one hundred billion dollars from companies this year. This is fantastic for the US Treasury, but it is dismal for the rule of law and downright embarrassing for Holder because the public never even finds out the facts which lead to the allegations. Holder and Obama present a fait accompli of “Here, we found a hundred billion dollars” but the truth is they got it by devious means of backroom dealing and secrecy. This will work in the short term, Obama’s administration is running less of a deficit than before, but in the long term, you just continually raise frictional costs and systematic risk – which depresses innovation and entrepreneurship.
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Now, tax inversions are merely the next step in this pattern. Congress, who has the sole authority to set tax policy, says they’re legal. But, this week the Treasury Secretary promised he would issue rules that closed this “loophole” of the US tax code.
The first problem with this is that the Executive is usurping Congress. Second, Whether this is a loophole is inutile, to me, because this is simply the newest tactic of Congress and the Executive whipping their whipping boy, businessmen. Also, this isn’t a sector of the economy inverting themselves; this is less than a baker’s dozen of companies inverting themselves. I remember Warren Buffet saying he wouldn’t’ve backed the Walgreens inversion if it was purely for the tax benefits. But, this misses the point – businesses create value for shareholders. Taxes aren’t a moral choice, there’s no ethical value to be gained by paying a 35% fee to bring your cash home, but there is sure as horns on a bull a 35% charge to doing business in the US, unless there’s a carveout.
Whipping up political cover before the midterms is all well and good, for the average citizen, until they whip their boys too hard. The EU is teetering on recession, even Germany has slowed down remarkably and is facing huge headwinds in it’s bid to convert their energy source to renewables once they ended nuclear power. China has even started a monetary easing program, in the midst of the biggest political shift in a quarter century.
Really though, the DNC is seemingly out of ideas and is showing themselves as “aw hell, we can’t get wronged for hating on business, right?!” Yes, yes you can. You’re the party leading the free world, the free world expects and demands better. You’re not fixing the system; you’re gaining political profit from manipulating the system.
This is normal course for politicians. I admit it. But we can all admit that normal course for politicians has the effect of taking a big steaming shit on our long term interests.