The recent Xilinx case says:
“Purpose is paramount. The purpose of the regulations is parity between taxpayers in uncontrolled transactions and taxpayers in controlled transactions. The regulations are not to be construed to stultify that purpose. If the standard of arm’s length is trumped by 7(d)(1), the purpose of the statute is frustrated. If Xilinx cannot deduct all its stock option costs, Xilinx does not have tax parity with an independent taxpayer.” http://www.ca9.uscourts.gov/datastore/opinions/2010/03/22/06-74246.pdf
On the surface, parity between deals involving related parties and deals involving unrelated parties can be achieved by ignoring the relationship. That line of thinking would lead to the repeal the related party sales rules, because “If Dad cannot deduct his loss on the sale of closely held stock to Son, Dad does not have parity with an independent taxpayer.” But that repeal would not make sense. Neither does that Xilinx result.
Whatever the Government’s regulations or litigating position may say, a low-taxed subsidiary is not in the position of a contract manufacturer in a world full of contract manufacturers.
People know already how to fix the income tax. For instance, an unofficial list of loopholes and fixes appears at http://www.taxshelf.org/wiki/Main_Page. A broader list, a compilation of tax expenditures (not all of which need fixing) by the Joint Committee on Taxation of the U.S. Congress, appears at http://www.jct.gov/publications.html?func=select&id=5. There is plenty of tax learning to choose from if citizens want a better income tax.
A woman on Fox News used the term “VAT Tax” in the style of “IRA Account” and “ATM Machine.” At least the public is getting exposed to the idea.
A Value Added Tax avoids some problems of the income tax. For instance, the income tax often can’t locate the income of a cross-border corporation (multinational enterprise). That snipe hunt now requires folks to use the arm’s-length method of sourcing income. That method was a joke, the last time I looked, but this useful option shows up in The Shelf Project : “Tax the global income of all companies that do business in the United States on a consolidated basis with income allocated based upon sales, employment or other real world drivers, rather than relying upon transfer pricing regimes.” http://www.taxshelf.org/wiki/Stubs_for_Foreign.
If that option, a worldwide unitary income tax, makes sense but seems remote, a fallback is available: a Value Added Tax. A VAT seems a little like a worldwide unitary income tax that uses sales as the sole factor for income allocation.
The VAT uses sales as its base; single-factor sales unitary uses corporate income. Using income for a base may seem fairer, but giveaways decimate the income tax base. And multinationals’ income, if it can be found at all, is likely to be assigned to low-tax countries. Compared to income, sales are easy to find and measure.
The VAT lacks progressivity, but U.S. corporate tax rates are not steeply progressive.
The VAT uses sales as a base, so it loses whatever advantage comes from two traditional unitary factors, property and payroll. But those two factors may not be useful for unitary now. Payroll and property are the targets in a race to the bottom among jurisdictions like my State, North Carolina, that give tax breaks to companies that bring them in – or maintain them. Using them in the unitary method cuts against what jurisdictions want. Moreover, using a property factor requires people to find intangibles and measure them, which puts us back in the soup.
Arguments against a single-factor sales method appear at http://www.itepnet.org/pdf/pb11ssf.pdf.
A Value Added Tax can be regressive, so it needs to be combined with progressive measures.
The Federal income tax is supposed to be progressive, and often it is. But it has been often hijacked by the special interests to the point that it’s often palpably regressive. It treats income that hedge fund guys earn for the work of managing investments as low-taxed capital gain and not high-taxed ordinary income. The Senate can’t summon the will to call that income by its right name. http://www.newyorker.com/talk/financial/2010/03/15/100315ta_talk_surowiecki.
This issue is easy; see http://www.theconglomerate.org/2007/07/index.html. And the Government needs the money.
http://www.philly.com/inquirer/home_top_stories/20100304_Nutter_proposes_2-cent-per-ounce_sweet-drink_tax.html has this:
“Mayor Nutter [of Philadelphia] wants to treat the city’s weight and wallet problems in his 2010-11 budget with the same remedy: the nation’s highest tax on all sweetened beverages including soda, energy drinks, ice tea, even chocolate milk. . . .
“The tax rate would be 2 cents per ounce, 40 cents on a 20-ounce bottle of soda. The levy would cover fountain-drink syrups and powders, based on the number of liquid ounces they produce. Diet drinks without added sugar and baby formula would be excluded.
“City officials said they could raise $77 million a year.”
I’m quick to say let’s tax sodas. And donuts and candy bars. (A friend says I make Marie Antoinette look compassionate: “Don’t let them eat cake.”)
A soda tax would be regressive, but maybe not so regressive as the payroll tax.
Diet sodas are trickier. I have a hunch that it’s not nice to fool Mother Nature, and that diet sodas, like margarine with its transfats, will turn out to be bad for you. And “some studies suggest that drinking soda of any type leads to obesity and other health problems.” http://www.mayoclinic.com/health/diet-soda/AN01732
Setting up vending machines, some of which sell not just sweet and diet sodas but also water, to have two different prices, opponents will say, is just more than they can handle. Sometimes I can’t get my computer to work, but I don’t think that programming task is beyond corporate America.
But I’m nervous about caffeinated cola drinks and that Tea Party in Boston Harbour, as we might still spell it if the British hadn’t overtaxed. Was it just the high-handedness of the British, or was there some problem with folks needing caffeine?
Mr. Rangel is no paragon, and he should have acted and known better, but he was straight enough, when he became ranking Democrat and then Chairman of the Committee on Ways and Means, to keep at the top of the Committee staff two of the ablest and most dedicated public servants I knew when I worked on Capitol Hill, Janice Mays and John Buckley.