Hemorrhage of income to tax havens

An article behind the pay wall of Tax Notes this month explains how a little noticed technical provision in 1997, Code section 1297(d), allowed U.S. multinationals to keep over a Trillion Dollars (say $1,700,000,000,000) overseas untaxed.  It’s “Can a Piece of Paper Earn Billions?” by Charles I. Kingson.  The answer is yes.

There are several ways to stop these shenanigans, but Kingson (whose Columbia Law Review article, “The Coherence of International Taxation,” was handed to me on my first day on the job at Joint Tax in 1982)  points out that one simple way would be to repeal the 1997 change and thus reapply the Passive Foreign Investment Company rules to U.S. shareholders of Controlled Foreign Corporations.  Reinstating those rules would create a  fix that would apply only to foreign subsidiaries that are mainly passive.   Then those U.S. shareholders would have to pay an interest charge to make up for the deferral of tax.  Close enough.

Another questionable marijuana tax idea

$5 per package of rolling papers.  That’s the idea in a Maine bill.

With papers selling for $2 or $3 now, the responses are easy to predict:

— Smokers will use pipes.

— Consumers will buy papers in bulk out of state and share them with friends.

— Suppliers will sell enormous “packages” to dilute the burden of the tax.

Here is the entire bill:

SECTION 1. Chapter 64H of the General Laws, as appearing in the 2006 Official Edition, is hereby amended by inserting the following section.

Section 2B. In addition to the foregoing tax there is hereby established an additional tax of $5 on the sale of tobacco rolling papers per package.

+++++

That paper tax (thanks to Allen St. Pierre for telling me about it) is still a better idea than this one.  And at some low level, a paper tax might make sense as part of a network of taxes.  Maybe.  But not at $5 a pack.  And not without taxing pipes.  The tax rate would have to be low enough so that buying papers in New Hampshire is not worth the trouble.  Such a low rate would probably mean the tax is not worth the effort.

Price-based excises are rare

Go to new version with more examples published October 2013 here.

Examples of excise taxes based on percentage of price are hard to find.  Only five come to mind quickly:

1. The Confederate Civil War taxes, listed below.  The Union taxed liquor by potency – cents per proof gallon.[1]  I don’t say that the Union’s choice of tax base explains the victory, but I do suggest that the Confederacy’s choice of tax base illustrates how primitive that “nation” was;

2. Rental car and hotel room taxes – imposed on services, not goods (some folks might not consider that an excise, but it’s a higher than normal rate);

3. The 2.3 percent tax on medical devices in the Affordable Care Act — a tax that is barely hanging on in the face of repeal efforts.  That tax acted to take back benefits the ACA gave that folks thought were too generous — like applying the brake because you know you are pushing too hard on the accelerator but don’t know how to calibrate that pushing.

4.  Taxes on prostitution, like the 19-percent excise tax in Holland:  http://www.huffingtonpost.com/2011/01/12/dutch-prostitutes-taxes_n_807843.html

5.  Today’s marijuana taxes in Washington, Colorado, and California localities.

Maybe that’s because percentage-based excise taxes on goods are not a great idea.  I’m studying that issue.

Here’s a list of items the Confederates tried to tax at 25 percent:

Alabaster and spar ornaments; anchovies, sardines and all other fish preserved in oil.

Brandy and other spirits distilled from grain or other materials, not otherwise provided for; billiard and bagatelle tables, and all other tables or boards on which games are played.

Composition tops for tables, or other articles of furniture; confectionary, comfits, sweetmeats, or fruits preserved in sugar, molasses, brandy or other liquors; cordials, absynthe, arrack, curacoa, kirschenwesser, liquers, maraschino, ratafia, and other spirituous beverages of a similar character.

Glass, cut.

Manufacturers of cedar-wood, granadilla, ebony, mahogany, rosewood and satin-wood.

Scagliola tops, for tables or other articles of furniture; segars, snuff, paper segars, and all other manufactures of tobacco.

Wines–Burgundy, champagne, clarets, madeira, port, sherry, and all other wines or imitations of wines.

http://docsouth.unc.edu/imls/19conf/19conf.html (search for brandy).


[1] Tun Yuan Hu, The Liquor Tax in the United States, 1791-1947: A History of the Internal Revenue Taxes Imposed on Distilled Spirits by the Federal Government (New York: Columbia University, Graduate School of Business 1950), page 37.