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A Case Study in Corruption May 12, 2009

Posted by Dwight Furrow in Current Events, Ethics, politics.
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The Obama administration is trying to close loopholes in the tax code that allow firms to avoid paying taxes.

According to a recent study by the Government Accountability Office,

72 percent of all foreign corporations and about 57 percent of U.S. companies doing business in the United States paid no federal income taxes for at least one year between 1998 and 2005.

Some of this is from operating losses but much of it is due to tax loopholes and tax credits.

The study showed about 28 percent of large foreign corporations, those with more than $250 million in assets, doing business in the United States paid no federal income taxes in 2005 despite $372 billion in gross receipts, the senators said. About 25 percent of the largest U.S. companies paid no federal income taxes in 2005 despite $1.1 trillion in gross sales that year, they said

One of those loopholes that Obama seeks to eliminate is the so-called “check-the-box” rule. It works as follows.

Under so-called “check the box” rules, companies can register their subsidiaries as separate units that aren’t subject to U.S. tax rules.

In one scenario, a U.S. company could use operations in the Virgin Islands to avoid paying taxes on investments in Sweden. The company does this by setting up three new corporations: a subsidiary in Sweden, a holding company in the Virgin Islands as well as another subsidiary owned by the holding company.

The Virgin Islands subsidiary makes a loan to the Sweden subsidiary for a new facility there. The interest on the loan would be income for the subsidiary in the Virgin Islands and a tax deduction for the Swedish subsidiary.

Many companies use such set ups to funnel income from high-tax Europe to no-tax Caribbean. While the company would pay taxes on the transaction if it occurred in the U.S., “check the box” rules allow the company to avoid paying taxes in both Sweden and the U.S.

One would think that ending this tax dodge would be a no-brainer, but the administration is getting pushback from business lobbyists and Congress, even from some Democrats. The reason is the usual obfuscation about costing American jobs.

Joseph Crowley, a Democrat on the tax-writing House Ways and Means Committee, said he doesn’t want any tax changes to “harm” Citigroup Inc., his New York district’s largest private-sector employer.

But as Matt Yglesias describes Crowley’s district:

The NY-7 isn’t like some huge swathe of Nebraska where people depend on in-district employment. It’s primarily composed of a residential section of Queens—itself a part of America’s densest city—and the vast majority of Crowley’s employed constituents will either commute to out-of-district jobs or else work in small neighborhood businesses.

So why would Crowley be reluctant to eliminate the tax dodge?

Did anyone guess “campaign donations”. And why is this not called bribery?

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