The anti-tax crowd has it both ways. But so do I.

Advocates of a territorial system for international tax — where the USA would not tax any foreign income of U.S. corporations — say we should adopt it because the other major industrialized countries have it.

When it comes to a Value Added Tax, the fact that every other major industrialized country has one DOES NOT MATTER to those folks.

They are as consistent in their antipathy to taxation as I am in my sympathy for it.

Do we have a duty to discourage self-destruction by our fellow citizens?

This argument says “No one does.”:

“While the sales tax rate in North Carolina is 5.75 percent (plus another 2 percent in most localities), movies and other entertainment, alcoholic beverages, tobacco products, hotel rooms, and rental cars are all taxed at higher rates.

“In a free society the purpose of a tax system is simply to raise money for the operations of government. It should not be used to punish activities that are disfavored by politicians or to reward activities that politicians consider virtuous. Indeed, principles of both justice and economic efficiency would suggest that the tax system should be neutral with respect to people’s freely made choices.”

http://www.carolinajournal.com/articles/display_story.html?id=5982

That hard right view is as purely materialistic, in its own way, as Marxism.  Some of the folks on the hard right are believing Christians.  Are they buying this view?

Meanwhile, equating the government with “politicians” may be accurate in a way, but the tone of this argument shows little faith in our republican form of government.

How To Battle Obesity Among Children

Tax candy.

That will slow down the adults who supply them.  Or at least make them think.

This is almost common knowledge:

“Rather than subsidizing the production of unhealthful foods, we should turn the tables and tax things like soda, French fries, doughnuts and hyperprocessed snacks. The resulting income should be earmarked for a program that encourages a sound diet for Americans by making healthy food more affordable and widely available.”

A comprehensive proposal involves a lot of line drawing.  Even a tax on candy makes you decide about Kit Kats and Twix:  candy or not?  Here’s a definition that says not:

“Candy means a preparation of sugar, honey or other natural or artificial sweeteners in combination with chocolate, fruit, nuts or other ingredients or flavorings in the form of bars, drops, or pieces. Candy shall not include any preparation containing flour and shall require no refrigeration.”

Click to access PC10011%20All%20Candy%20Rule%20Public%20Comments%20with%20Response.pdf

If that’s too complicated, we could just tax sugar.

Multinationals at the trough

The so-called repatriation tax holiday makes the tension between corporate power and the general interest crystal clear.

US multinationals are simply shifting profits offshore – and now they want to bring them back nearly tax-free.  It’s a travesty.  http://www.bloomberg.com/news/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-tax-loopholes.html.

The multinationals argue that getting this tax break will allow them to hire workers.  But this argument has three problems.  First, corporations have plenty of cash already.  Second, we tried this kind of amnesty before, in 2004’s Great American Jobs Act Tax Caper (see Charles I. Kingson’s article in the Tax Law Review) and they just distributed the cash to shareholders.  Third, if we let the multinationals get away with this money grab, they’ll be back again and again.  Plus all the conventional wisdom is that small companies are the ones that create the jobs.

If this is a done deal, Congress should at least (1) push to end future deferral of U.S. tax on foreign earnings to prevent future amnesties, (2) push for a repatriation rate of 20 percent or more, and (3) reject any face-saving tracing of funds: money is fungible, and tracing it is futile.

Somebody has got to pay for government.  Singling out huge multinationals for a tax break does not seem like a good idea right now.

 

Tax protesters — a more encouraging kind

Protesters drew attention at a rock concert recently.  Their complaint?  Rock stars who move to tax havens to avoid paying taxes.

“‘Tax(es) nestling in the band’s bank account should be helping to keep open the hospitals, schools and libraries that are closing all over Ireland,'” Art Uncut member Charlie Dewar said ahead of the protest.

“U2, [Ireland]’s most successful band, was heavily criticised in 2006 for moving its corporate base from Ireland to the Netherlands, where royalties on music incur virtually no tax.”

http://www.smh.com.au/entertainment/violence-erupts-as-u2-rocks-glastonbury-20110625-1gkbg.html#ixzz1QHiR2jEM

Nonviolent protests, I’m for.

What about corporations that shift income to tax havens?  Where, as Bob Dole once asked, is the outrage?

Extremes

Back in the 1980s President Reagan signed an income tax treaty with China in Beijing so as to prove his trip a success.  The treaty was a mess:  Treasury negotiators had orders to produce a treaty for him to sign, and they did — with huge giveaways to corporations that artificially routed transactions through China.  See http://ia600409.us.archive.org/16/items/preparedstatemen1185ogle/preparedstatemen1185ogle.pdf.

But signing does not a treaty make.  The Senate must approve it.  The most liberal Senator, Howard Metzenbaum of Ohio, put a hold on the treaty for allowing giveaways to multinational corporations;  the most conservative Senator, Jesse Helms of North Carolina, put a hold on it for being too lenient with Red China.  Those holds stopped the treaty in its tracks.  Treasury went back, renegotiated, and eliminated the loopholes.  Eventually, the repaired treaty came back to the Senate and sailed through.

Now the most liberal and the most conservative members of the U.S. House of Representatives join forces against the status quo.
Barney Frank and Ron Paul propose legalizing marijuana. http://ca.news.yahoo.com/lawmakers-introduce-bill-legalize-marijuana-225335489.html.  Time will tell how this turns out.

 

Foreign aid — to corporations

The American public views foreign aid as the kind of spending the Government should cut.  I’ll venture that few understand the aid that the Tax Code supplies for the foreign operations of U.S. companies.  This aid is exemplified by General Electric’s manipulation of the Code to use foreign operations to reduce its U.S. tax bill. It is explained in great detail in Edward D. Kleinbard’s “Stateless Income,” downloadable at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1791769.

Here’s the antipathy to foreign aid, from http://www.economist.com/blogs/democracyinamerica/2010/04/economistyougov_polling:

Corporate taxes aren’t so high

Folks like to point out that the USA has an unusually high corporate tax rate (35 percent).  But they don’t mention:

(1)  Some say our corporate taxes paid as a percentage of GDP are about average.  See http://www.oecd.org/dataoecd/48/27/41498733.pdf (Table B); that’s thanks to loopholes — or call them special rules.  Bruce Bartlett says ours are the lowest among developed countries.  http://economix.blogs.nytimes.com/2011/05/31/are-taxes-in-the-u-s-high-or-low/

(2) We don’t have a VAT.  All other developed countries do.

Keep the Liquor Monopoly

North Carolina Governor Bev Perdue has come out against selling the State liquor monopoly.  Good for her.  Selling income-producing assets to plug revenue holes looks shortsighted.  What’s next, selling Mount Mitchell State Park, http://www.ncparks.gov/Visit/parks/momi/main.php?  Jockey’s Ridge, http://www.jockeysridgestatepark.com/?  Hanging Rock, http://www.ncparks.gov/Visit/parks/haro/main.php?

Yes, we need to clean up the mess in the ABC system, but the free enterprise theoreticians who want private choice to rule supreme always and everywhere shouldn’t cause us to confuse the baby with the contents of the bathtub, be they water or gin.  The profit motive is a powerful force, and we the people have the power and the duty to channel it.  (That’s my opinion.) Continue reading “Keep the Liquor Monopoly”

A harsh view of our tax system

Lee Sheppard, one of America’s top tax journalists, writes:

Congress is completely corrupt, much as it was in the late 19th century, except that we have no Theodore Roosevelt to fight the corruption. The recent Supreme Court decision in Citizens United cements the obvious corporate control of the political process. It is ironic for the president to complain about it, when he, like his opponents, has been bought and paid for by the banks.

The corruption is not just financial but philosophical. The entire ruling class, regardless of party affiliation, has been persuaded to see the world through the eyes of the investor class. The shorthand for this is “free markets,” but markets are never really free, and investors prefer to have them rigged in their favor. And as the meltdown has shown, it is not true that what benefits the investor class benefits everyone else.

The investor class dislikes taxation of investment income or gains, inflation, regulation, and renegotiation of failed debts. The investor class likes deregulation, captive central bankers, and the unfettered flow of capital across national borders.

We are not talking about low taxes. We are talking about no taxation whatsoever, guaranteed by bilateral treaties and foolish practices like respect for paper corporations that allow income to be shifted wholesale to tax havens.

Excerpted from http://www.taxanalysts.com/www/40thpub.nsf/Web/06A5E6CBB0D33888852577FC00765F59?OpenDocument

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That may not be a mainstream view.  But here are some thoughts in reaction:

G.K. Chesterton said when people stop believing in God, the problem is not that we believe in nothing, it’s that we believe in anything.  Now we believe in something like free markets:  I might say instead the profit motive, because (despite what anyone says) we do regulate markets some, but many of us believe in the invisible hand (and want to harness it via incentives, public and corporate, or disincentives, like excise taxes).

As for treaties, some folks defend loopholes against overrides as if some question of national honor were involved — as if all Americans had a duty to sacrifice to show respect for and deserve respect from other countries.  Or something.  See N.Y. State Bar Ass’n Tax Section, “Comments on the Proposed Denial of Treaty Benefits for Certain Related-Party Deductible Payments” 10-11 (May 22, 2010),available at http://www.nysba.org/AM/Template.cfm?Section=Home&CONTENTID=38538&TEMPLATE=/CM/ContentDisplay.cfm.  That might be true if the loophole were bargained for or anticipated, but those aren’t the ones Congress overrides.

IRS verbiage

OK, this is nitpicking, but http://www.irs.gov/pub/irs-pdf/f1023.pdf has this:

User fee increases are effective for all applications postmarked after January 3, 2010.

1. $400 for organizations whose gross receipts do not exceed $10,000 or less annually over a 4-year period.

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They could have said

$400 for organizations whose gross receipts do not exceed $10,000 annually over a 4-year period.

or $400 for organizations whose gross receipts are $10,000 or less annually over a 4-year period.

A virtue of bureaucracy is (or was) to have enough eyes look at drafts to prevent this kind of redundancy.  My faith is the Service is still great enough that I think I may be missing something.

Ethanol as usual

It looks like the late 2010 tax bill will sacrifice revenue to benefit ethanol, which is environmentally unfriendly, http://www.edf.org/page.cfm?tagID=1550, and competes with food production.  If the bill is going to be porked up, Senator Grassley is going to help his people (what else could he do?).   Even as a Democrat, I have admired Senator Grassley as a serious public servant generally, though not for this log-rolling.

Potency as a Base for a Tax on Marijuana — BOE

(For a more comprehensive discussion of this issue, go to http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1741735.)

Excerpt of email from California BOE spokesperson Anita Gore to the author, October 12, 2010 8:24:16 PM (before the outcome of Proposition 19 was knowable):

Staff has discussed the possibility of using potency as a component of an excise tax scheme.  Right now it is an option to consider, and when and if marijuana is legalized, and the legislature moves to impose an excise tax, a potency based tax would be a viable option if the legislature chooses to go in that direction.

With properly crafted legislation and sufficient resources staff believes it is doable.

Staff agrees there are issues around testing and certification like those you raise that would need to be addressed to support a potency based tax.  The question that goes with that is compliance.  Legalization itself will move distribution from an underground economy to a regulated industry.  Will the industry buy into that level of regulation?  No one knows.

Associated revenue – no way to know.

Potency testing — mechanics

(For a more comprehensive discussion of this issue, go to http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1741735.)

“Steep Hill Lab in Oakland, http://steephilllab.com/, conducts potency testing on medical cannabis using a 2 gram sample that statistically represents up to two pounds of medical cannabis.  The two gram sample is selected from 5 to 15 sites from the bulk material which has been determined to be sufficient to accurately represent potency.  Comprehensive scientific analysis is conducted and a certificate of analysis is generated for potency as well as other important factors such as microbiological contamination and pesticide residue.”

That’s an excerpt from an email to me from Wilson Linker at Steep Hill Lab of December 5, 2010, 9:43:35 PM.  He was correcting a draft I had sent him.

The Lab charges $120 per sample for flowers and concentrates.  http://steephilllab.com/services/potency-analysis/ (last visited Dec. 6, 2010).

Video enforcement — and live feeds

I had stricken the following from a draft paper before seeing in Time magazine (November 11, 2010, at 36) that Colorado is planning video monitoring of marijuana grow sites:

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Whether governments or private parties cultivate and distribute marijuana, prevention of bootlegging involves keeping the substance from leaving the legal supply chain in the hands or orifices of workers.  Strict rules might help to prevent that kind of leakage.  Continue reading “Video enforcement — and live feeds”

Collection Point for Marijuana Tax — BOE

(For a more comprehensive discussion of this issue, go to http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1741735.)

At the end is an excerpt from an email of November 3, 2010, from Anita Gore, spokesperson at the California State Board Of Equalization, to me.  But first, here is what I was asking her about:  some draft language I sent her:

“For alcohol, fermentation takes place in bonded locations.  Tax is imposed as beverage alcohol as or before leaves its final bonded location.

“For tobacco, the choke point is found after the time when and distant from the place where the curing process makes green tobacco smokable.  Cured tobacco from tens of thousands of domestic farms travels untaxed to manufacturing plants where tax will be assessed.[1]

“For marijuana, Staff of the California Board of Equalization, which “typically recommends that excise taxes or fees be imposed as high in the distribution chain as possible,” advises against collecting from “the highest point in the distribution chain[,] . . . the grower[,] . . . [because], growers normally sell in bulk volume, which would not be conducive to a unit-based tax.”[2]  The Staff instead recommends collecting at the level of the distributor/processor, where repackaging would allow for the use of tax stamps.

“A more aggressive scheme for taxing marijuana would involve a limited number of farms or grow areas placed under security.  The government could monitor the process from seed (or clone) to cigarette, and assess tax when the product is packaged for sale.”

[1] Tax on imported tobacco is assessed at customs.  Meanwhile, “monitoring of raw leaf tobacco [to] . . . control the supply of raw leaf tobacco from grower to manufacturer” is nonetheless a part of a comprehensive excise system.  Brandy Brinson, “Regulating Security,” Tobacco Reporter Magazine (June 2006), available at http://www.tobaccoreporter.com/home.php?id=119&cid=4&article_id=798.

[2] BOE Analysis, supra note 152, at 8.
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Here is my question:

“What would prevent growers (in the system the Staff recommends) from diverting unprocessed marijuana into the black market before it gets to the distributor/processor?  That is, might not the alcohol model be more bullet-proof than the tobacco model?  If so, would practical considerations nonetheless tip the scales toward the tobacco model?”

This is her reply to me, on November 3, 2010:

“As you mention, Prop. 19 failed, so we will not be implementing any taxation program at this time for the manufacture and sale of marijuana.  Regarding any future attempts at legalization, there are too many unknowns to make any decisions at this time.

“However, generally speaking, growers would be licensed and inspected regularly.  By knowing the size of a grower’s crop, we know the approximate amount of product produced.  Just like alcohol, some product may go out the back door that the taxing agency is not aware of.  This can never be completely controlled.  There is no fool proof system to stop all evasion schemes.  But by using indicia, licensing all the levels including retailers, and doing regular inspections, the State of California can reduce the evasion level.”