Off shore tax loop holes being closed : )

Hello everyone! I hope that each of you had a wonderful weekend. Here in Santa Fe it rained, a rare thing here in the high desert.

Today’s post is about that President of ours’, Barack Obama’s, plan to close offshore tax avoidance loop holes. I am absolutely delighted to see this happening and wow, is Barack a brave man! The practice that is going to be shut down has led to an estimated $700 billion of tax avoidance on the part of U.S. corporations. In short what the companies do is to create offshore entities where earnings are sloughed off to. Because the earnings are in low-taxation countries they avoid paying taxes. Additionally, U.S. corporations have also used these entities to avoid paying taxes to foreign governments.

So what is the logic behind paying less in taxes? The logic is that businesses are more competitive if they have reduced expenses. Less expense equates with more profit. More profit equals more capital to invest back into the business and more jobs and more earnings for capital owners (i.e. shareholders). And on and on. Additionally, lower taxes are thought to lower capital costs overall, including debt capital. Why would this be so? It boils down to supply and demand. The more plentiful is capital, because taxes are lower and profits are higher, the lower the demand for capital. The lower the demand for capital the cheaper it is. All of this makes sense, right?

I do not disagree with the above argument. No, instead I think it is important to consider the name of an old James Brown song, yes really. The song is entitled: “I’m paying taxes, what am I buying?” U.S. corporations are huge beneficiaries of government investments made with taxes. Yes there is pork in the Federal budget. But what corporation would locate and operate here without a strong military to maintain the sanctity of the very earth that the corporations operate on? [By some counts 98% of the budget is spent on the military!] What corporation would operate here without an excellent infrastructure, in terms of highways, electric grids, etc? What corporation would operate here without an excellent and educated human resources base being in place? What corporation would operate here if the laws of the land were not properly enforced? I could go on and on and on.

You see, U.S. corporations pay hardly any taxes (this is a dirty little secret that Congress doesn’t want you to know), yet they are gigantic beneficiaries of tax spending. Ironically, many business executives are Republicans and they always complain about taxes – yet the wealthy overwhelmingly benefit from the things I named above and to a much greater degree than do the poor. Need I even mention the government bailout currently taking place? Corporations want the government to be out of their business until their choices go horribly awry, then all of a sudden Uncle Sam and Aunt Samantha look like the sweetest most wonderful and generous relatives. Puhleeeeease!

Thus, I am all for Obama making sure that corporations pay their fair share in taxes. Capital costs may even fall. How is that so? A fiscally solvent, more credit-worthy Federal government has lower borrowing costs. And the interest rate on the debt of the U.S. government is the worldwide standard and base interest rate that determines all of the others. If these costs are lowered then everyone’s borrowing costs, including your’s and mine, with also go down. Yes, interest rates are already low. But a solvent U.S. government will result in a permanently lower cost of borrowing and a permanently lower cost of capital for all types of capital (including equity). The long-term economic benefits of that are worth fighting for because cheaper capital means that it is easier to launch new and great business ideas. Amen!

Have a wonderful Monday!

Jason