Congress must enact tax reform without territorial taxation

By Philip G. Cohen, professor, Pace University's Lubin School of Business, New York City - 04/18/13 04:20 PM ET

What does Loophole Expansion have to do with Tax Reform???Many companies are seeking to lower the federal tax rate that publicly-traded and other “C” corporations pay on taxable income. This is in line with a broad consensus that U.S. corporate (and perhaps individual) tax rates should be lowered, with the revenue lost from this effort made up for by limiting or eliminating certain exemptions and deductions, which is often referred to as broadening the base.??

Some of this effort has been characterized as loophole closing. While not a popular view among the U.S. corporate tax community, some have argued that loophole closing should also be used to raise additional revenue to pay-down deficits and stimulate job creation in the U.S. ??

Under the current U.S. tax structure, income not sourced or connected with the United States, and earned by foreign subsidiaries, will generally not be subject to U.S. taxation until if and when the earnings are distributed back to the United States. Many, if not most U.S. based multinationals, refrain from distributing overseas income to the United States unless most if not all the tax on the dividend is offset with foreign tax credits. Thus earnings from foreign subsidiaries operating in zero or low-taxed countries are generally kept offshore. This is referred to as the lockout effect and in some cases results in the income never being subject to U.S. or foreign tax.??

There is an exception to deferral for certain types of income and activities. When this exception applies, there is immediate U.S. taxation. The latter treatment is generally reserved for passive income, highly mobile activities, as well as investment of earnings in United States property, including most loans to related U.S. companies. If anything, over the last 10-15 years, Subpart F, the part of the Internal Revenue Code that provides for immediate U.S. taxation of certain offshore earnings, has been weakened with provisions enacted including “look-thru” and the “active financing” exception coupled with the wide utilization of foreign entities that are disregarded for U.S. tax purposes. Even aside from the foregoing, there are many other techniques available under current law, like short-term loans, to legally avoid Subpart F’s impact.??

Many U.S. based multinationals are concentrating their lobbying efforts to using tax reform to implement territorial taxation. Moving toward territorial taxation has a plethora of advocates. Even the National Commission on Fiscal Responsibility and Reform, the so-called Simpson-Bowles Commission, whose mission was deficit reduction supported territorial taxation and Erskine Bowles and Alan Simpson continue to do so. Chairman Camp of the House Ways and Means Committee is also a proponent of territorial taxation albeit with some limits. One argument for territorial taxation is that companies based outside the U.S. generally do not face worldwide taxation on active income, putting companies incorporated in the U.S. at a competitive disadvantage with their foreign-based rivals. The second argument for territorial taxation is that it will eliminate the lockout effect of having hundreds of billions of dollars of earnings trapped offshore.??

What does loophole expansion have to do with either tax reform or deficit reduction? There is an existing loophole for offshore earnings. The Internal Revenue Code today taxes income earned by a foreign subsidiary differently than if earned in the U.S. because taxation of the former is generally deferred. Hundreds of billions of dollars of profits are being shifted from the United States tax base, to abroad, where it’s deferred until if and when repatriated. It is difficult for the IRS to police this area.??

A territorial tax system would serve to encourage the shifting of activities offshore, and, with it, taxable profits and jobs. Congress attempted to address the lockout effect in 2004, with the enactment of Internal Revenue Code section 965 which permitted for a limited time, U.S. based multinationals to repatriate billions of dollars kept in foreign subsidiaries at a tax rate of 5.25 percent compared to the general corporate tax rate of 35 percent. This provision, which was part of The American Jobs Creation Act of 2004, was also heavily lobbied for by many of the same companies behind the push for territorial taxation. It didn’t create many U.S. jobs if you don’t include K Street lobbyists.

??Charlie Wilson, who headed General Motors, and became secretary of Defense under President Eisenhower has been misquoted as testifying that “what’s good for General Motors is good for the country.” There is no doubt that expanding the deferral loophole to full-blown adoption of territorial taxation would benefit many U.S. based multinationals. There are well-funded efforts to influence lawmakers of both parties in this effort.??

Congress and the administration however have a fiduciary obligation to look beyond whether such tax reform would benefit these companies and inquire how such a migration would impact jobs in the United States and the U.S. tax base. Is widening the barnyard door even further good for America? I submit that under such criteria the case for expanding the deferral loophole is dubious.??

Philip G. Cohen is a tax professor at Pace University Lubin School of Business and a retired Vice President-Tax & General Tax Counsel for Unilever United States, Inc. The opinion expressed here is his personal views.

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What The American Left Would Look Like Without The Two-Party System

The radical British filmmaker Ken Loach has called for the creation of a new political party ideologically to the left of the current Labour Party and more in line with what he and his co-authors see as Labour’s true socialist roots.  Building on the themes of his new documentary about the creation of the modern British welfare state after WWII, The Spirit of ’45, Loach and his colleagues argue that a new party is necessary to fully reject the austerity policies of the Tories and to avoid the fecklessness of Labour in challenging this consensus.

The likelihood of this new party (a) taking off and being successful and (b) being politically attractive to enough voters seems low, given that the “first past the post” system for U.K. parliamentary elections ensures a small, leftish party will lack real power.  Putting the wisdom of this venture aside, it does raise an interesting question about the stability and attractiveness of the major political parties going forward.

In the U.S., our electoral system forces people to choose between two parties that many voters clearly do not like.   What might the American left look if we had a proportional system similar to much of continental Europe?   There’s no way to tell for certain, but based on attitudes and groupings it’s quite possible to see the current Democratic coalition fracturing into three parts – not unlike the breakdown of greens, social democrats, and liberals in Europe.

The biggest part of this center-left coalition would emerge from the traditional base of the Democratic Party represented by labor, African Americans, Latinos, women, and the many constituent groups that have built up around the party over the decades.  Ideologically, this remaining Democratic Party would be all over the map as it is today, basically pursuing center-left policies and values that fit the needs of the component parts.  A second more-ideologically left party (call it a revamped Green Party) composed of environmentalists, progressives, and other social movement types would likely emerge to advocate more forcefully for social justice, civil rights, anti-poverty efforts, sustainability and climate change reduction, steeper progressive taxation, and greater public investment.    A third, even smaller component of centrist types (call it the Moderate Party) would also likely emerge to scoop up the remnants of anti-deficit, pro-business, and socially moderate-to-conservative Democrats.

Assuming that the right would also splinter into three components — a hard core libertarian element, a mainstream GOP arm, and a group of socially conservative, Tea Party-types — one could see how a “grand coalition” of center left and center right parties might coalesce under this electoral scenario to advance the “radical centrism” that many of today’s elites advocate.

As it stands, the American left has figured out how to coexist fairly peacefully within one party, thus keeping our politics more progressive than they might be otherwise under a proportional system.  Given the dim long term prospects of the GOP at the national level, don’t be surprised if we start hearing more mainstream conservatives supporting a move towards a more proportional voting system in the U.S.

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Queen ‘Fights’ For Gay Rights Without Mentioning Them

Headlines this weekend praised The Queen for promoting gay rights in a new Commonwealth Charter, which includes this commitment to civil rights:

We are implacably opposed to all forms of  discrimination, whether rooted  in gender, race, colour, creed, political belief or other grounds.

The “other grounds” is meant to refer to sexuality, but was kept ambiguous because some of the commonwealth countries still have strict laws against homosexuality. Her live speech will add that rights must “include everyone,” apparently another nod at gay rights.

Though the public display of her signing and live speech is notable, British LGBT groups are not impressed by the allusion. Prominent activist Peter Tatchell had higher expectations:

TATCHELL: In her 61 years on the throne, the Queen has never publicly uttered the words lesbian or gay. She is a patron of hundreds of charities but none of them are gay ones. Never once has she visited or supported a gay charity. In truth, the Commonwealth Charter does not include any specific rejection of discrimination based on sexual orientation. This was vetoed by the homophobic majority of member states. [...]

While I doubt that Elizabeth II is a raging homophobe, she certainly doesn’t appear to be gay-friendly. Not once during her reign has she publicly acknowledged the existence of the LGBT community… Astonishingly, since she became Queen in 1952, the words ‘gay’ and ‘lesbian’ have never publicly passed her lips. There is no record of her ever speaking them. Even when she announced government plans for gay law reform in her Queen’s Speeches, she did not use the words lesbian or gay. Apparently, mentioning LGBT people is beneath the dignity of the monarch.

The Guardian’s Patrick Strudwick similarly notes that “to refrain from specification is to collude with silence, the Grand Pause that keeps lesbians and gay men invisible, suffocating in marriages of inconvenience or trapped in police cells.”

The charter is a worthwhile commitment to civil rights in commonwealth countries and also includes support for gender equality and women’s empowerment. Still, claims that The Queen is suddenly “fighting” for gay rights seems to be quite the overstatement.

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Medicare’s Projected Spending Has Dropped $500 Billion Without Lawmakers Cutting A Dime

Medicare will spend $511 billion less between now and 2020 than was predicted two and a half years ago, according to the latest number crunching by the Center On Budget and Policy Priorities. More importantly, this drop occurred completely separate from any changes in government policy — rather, it resulted from an overall slowdown in the growth of health care costs.

The last time the Congress and the President actually altered Medicare policy in order to bring down the program’s spending was when they passed health reform in March of 2010. By comparing the Congressional Budget Office’s projections from August of that year with their projections from earlier this month, and by leaving out the the SGR cuts and the Medicare cuts in sequestration, the CBPP was able to isolate how much Medicare’s spending is anticipated to drop due purely to changes in the health care markets. And the drop is considerably larger than the proactive cuts in Medicare spending the Simpson-Bowles plan was calling for back in December of 2010:

According to the CBO itself, its projections for Medicare and Medicaid spending between now and 2022 dropped 3.5 percent since its previous projection in August of 2012.

Spending on Medicare and Medicaid is the main driver of the country’s long-term debt problem. But because the programs buy health care, larger economic forces in the health care market that drive up costs also drive up their spending, regardless of any specific policy enacted by lawmakers. Conversely, if health costs begin to slow, that will bring spending down — and there’s evidence that’s exactly what’s happened over the last few years.

Between 2009 and 2011, all spending in the health care system, both public and private, grew at 3.9 percent — the lowest annual rates we’ve seen in 52 years. 2012 looks like it will turn out to be similarly sluggish. Some of this is certainly due to the recession and ongoing depression. But an increasing number of economists and experts are convinced a big piece of the slowdown is also a more permanent restructuring of the way health care markets buy, sell, and deliver care.

No small part of that change may be due, in turn, to the passage of Obamacare, which put in place a host of new incentives and reforms to move health care delivery in a more efficient direction. And if Obamacare’s reforms continue pushing the health care system to adapt, then the United State’s fiscal future could continue to improve without lawmakers having to cut a dime.

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Controversial Cybersecurity Bill Reintroduced Without Changes

Less than twenty-four hours after President Obama announced an executive order aimed at strengthening the cybersecurity of critical infrastructure and called for congressional action on cybersecurity in his State of the Union Address, Congressman Mike Rogers (R-MI) and Congressman Dutch Ruppersberger (D-MD) reintroduced the controversial Cyber Intelligence Sharing and Protection Act (CISPA) to the House.

CISPA caused widespread outcries from privacy and civil liberties advocates when it was considered in 2012 due to provisions that would in effect allow intelligence agencies a backdoor into the personal information of most Americans by allowing companies to share information about activities on their network with very little oversight. The version of the bill introduced for the 113th Congress is unchanged from the amended version from the 112th session, which President Obama threatened to veto. Indeed, press materials from the House Intelligence Committee say “the bill that was introduced today is identical to the ‘Cyber Intelligence Sharing and Protection Act’ (H.R. 3523) that passed the House by a strong bipartisan vote of 248-168 in April 2012.”

Online privacy advocates began organizing a response based on rumors of its revival earlier in the month, with Fight for the Future launching the site Cispaisback.com and Gregory T. Nojeim, Director of the Project on Freedom, Security & Technology at the Center for Democracy & Technology telling ThinkProgress “CISPA is deeply flawed” and recommending Members “seriously consider” if they wanted to re-open the debate over the bill.

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School choice: 49 million students still without options

By Robert Enlow, president and CEO, Friedman Foundation for Educational Choice - 01/23/13 11:00 AM ET

Heidi and Frank Green used to worry about their daughters while they were at school. The Clarksville, Indiana couple was concerned about bullying, cursing, large class sizes, a revolving teaching staff, and a general lack of attention for students.

Thankfully, the Greens say their lives have changed for the better as daughters Gillian and Emma are now eager to attend school. Today they are getting quality instruction at their new Catholic school thanks to a voucher program adopted in Indiana two years ago.

“School choice should be everywhere,” said Mrs. Green. “Parents should be able to decide what’s best for their kids.

Gillian and Emma are among the 255,000 students nationwide who attend a private school of their family’s choice using vouchers or tax-credit scholarships. Another 2.3 million students utilize public charter schools as their preferred option.

But there are still almost 49 million public school students throughout the country who do not have such freedom. They must attend their neighborhood public school regardless of its safety, quality, class sizes, teaching staff, or other issues outside their parents’ control. But such restriction doesn’t have to be the case.

Sunday marks the beginning of the third annual National School Choice Week, which runs through Feb. 2. There will be 3,000 events across 50 states including rallies and forums where parents will ask lawmakers for more choices for their kids.

National School Choice Week highlights the private, charter, online and home school education options available to families and those stuck with a school assigned to them by their address. Parents can choose public or private colleges for their children using many federal and state aid programs. They should be able to do the same with K-12 schools.

After major school choice victories last fall in which Washington voters agreed to allow charter schools to open in the state and Georgia voters agreed to an easier path to create more charters, a host of other states will consider additional school choice measures in 2013. Among the highlights:

•    Tennessee’s governor will include a school voucher program in his legislative package.
•    The Texas legislature will consider a program in which taxpayers would receive tax credits for donations they make to nonprofits that provide private school scholarships for low-income students.
•    Mississippi’s governor proposed a private school choice program for students in underperforming public schools.
•    North Carolina’s lawmakers will review proposals for opportunity scholarships and quite possibly education savings accounts, a new type of private school choice available only in Arizona.
•    Alaska lawmakers will vote on a school voucher plan for all students statewide regardless of their family income.
•    Indiana’s new governor has proposed expanding its voucher program to increase scholarship amounts and student eligibility.
•    Maine lawmakers will hear a proposal from their governor to give children school vouchers.

Nobel laureate economist Milton Friedman, the father of the school choice concept, believed that offering parents education options other than their neighborhood school would not only be good for children but would improve education. Studies show school choice is helping children in their new schools and those who don’t participate – something vitally important when so many children don’t get a quality education.

The Center for Labor Market Studies at Northeastern University found that high school dropouts are more dependent on government assistance such as food stamps, housing assistance, and Medicaid. They are also more likely to be in jail or prison, another cost to federal, state, and local taxpayers. And unemployment rates are highest among dropouts, according to the study.

If our society is to address its burgeoning debt problem and give young people a chance to become successful, offering parents an opportunity to access high-quality schools is a path to prosperity for themselves, their children, and society.

In several states, policymakers are ensuring more students have access to the schools, public or private, that work best for them. National School Choice Week is the time to shine a spotlight on those leaders and anyone else working to make sure every family is free to choose in education.

Enlow is president and CEO of the Friedman Foundation for Educational Choice, the legacy foundation of Nobel laureate Milton Friedman and his wife Rose.

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'Taxation Without Representation' plates on Obama motorcade

President Obama’s motorcade sported “Taxation Without Representation” license plates for the first time on Saturday.

As part of the National Day of Service kicking of a weekend of inaugural events, the president has traveled to the Burrville Elementary School in Northeast Washington to participate in a City Year service project. Three vans in Obama’s motorcade were outfitted with the unique D.C. license plates as the president traveled to the school, according to a White House pool reporter.

The reporter said other vehicles in the motorcade had Maryland, Virginia or U.S. government plates.

The White House decision earlier this week to use the license plates was considered a victory for D.C. statehood advocates. Obama had avoided using the plates during his first term as president.

“President Obama has lived in the District now for four years, and has seen first-hand how patently unfair it is for working families in D.C. to work hard, raise children and pay taxes, without having a vote in Congress,” the White House said in a statement earlier this week.

Del. Eleanor Holmes Norton (D) is the District’s sole representative on Capitol Hill. Norton is a “non-voting” member who can only vote on legislation during committee hearings.

--This report was originally posted at 1:22 p.m. and last updated at 1:37 p.m.

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Supreme Court Reconsiders Allowing Judges To Increase Sentences Without Jury Approval

Among the major contributors to the U.S. incarceration epidemic are harsh schemes for sentencing, and some of the most disproportionate sentences come about as a result of statutorily mandated minimum sentences.

Just last week, a former medical marijuana distributor who declined to plead guilty was sentenced to a ten-year minimum prison sentence by a federal judge who said, “the court’s hands are tied.”

But for some defendants, being sentenced to the mandatory minimum prison term for the crime of which they are convicted is just the tip of the iceberg. Judges may also use their discretion to add additional time up to a maximum allowable sentence. A case before the U.S. Supreme Court today considers the scope of that discretion when judges decide unilaterally that the defendant committed acts other than that for which they were convicted.

Allen Alleyne was convicted for robbing a convenience store owner as he drove to make a bank deposit. The jury found Alleyne guilty of both having committed the robbery, and having used or carried a firearm. They acquitted him, however, of brandishing a firearm during the crime.

Nonetheless, in sentencing Alleyne, the judge independently found that Alleyne should have known his accomplice would brandish a firearm during the robbery – a finding that added two additional years to Alleyne’s  sentence above the mandatory minimum of five years. Unlike a jury, which is tasked with finding guilt “beyond a reasonable doubt,” the judge made this finding under the much lower standard of “preponderance of the evidence.”

It is easy to view Alleyne and his accomplice as serious criminals who may very well deserve to serve either a five or a seven-year sentence. But allowing a judge the discretion impinges on a criminal defendant’s constitutional right to a trial by jury. The U.S. Supreme Court has already ruled that a judge cannot use this discretion to increase a defendant’s sentence above the maximum allowable sentence. And a similar rationale prompted a controversial but landscape-changing decision to limit the enforceability of federal sentencing guidelines.

Although the severity of statutory sentencing schemes has led to grossly unjust results, particularly in drug crimes, their purpose was and is to limit the variability and bias that can be introduced by any given judge in imposing a criminal sentence. Letting judges make factual determinations that are the purview of the jury undermines this goal – and allows for the sorts of even longer prison terms that have contributed to our ever-bloated prison population.

Somewhat surprisingly, the U.S. Supreme Court agreed to hear this case on the argument that an earlier high court decision on just this issue was wrongly decided. With four new justices since the 2002 decision and Justice Stephen Breyer on the fence, the Supreme Court now has a second chance to get it right.

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The FY 13 NDAA Keeps Terrorists Off U.S. Soil without Compromising Civil Liberties

Guest post from Rep. Louie Gohmert, Rep. Jeff Landry, and Rep. Scott Rigell

This week, the House will fulfill our most important constitutional duty by debating the FY 13 National Defense Authorization Act (NDAA). In accordance with the framer’s intent, this act is the primary check that Congress can apply to the Executive Branch on defense and national security policy.

Last year, constitutional conservatives raised the alarm bell about some provisions in the FY 12 NDAA; provisions that many were concerned would grant President Obama far reaching powers to detain American citizens without trial. The bill ultimately passed, but has become the subject of countless town hall meetings, tweets, and Facebook posts in the months since.

The debate has become so heated that many believe that the NDAA is a bill that deals strictly with detaining terrorists. It is much more than that. Aside from dictating how the military can handle any al Qaeda terrorists they capture, the FY13 NDAA deals with the full scope of national security issues. There is much in it, from a rejection of the Obama administration’s effort to raise health care fees on military retirees; to making sure the President doesn’t trade our missile defenses away to the Russians, that Conservatives can be proud of.

The real question before us is how to adjust the language from last year that has made so many so uncomfortable while still ensuring that we can fight and win the War on Terror. The base bill has already made important steps in the right direction. It includes the Rigell / Landry reassertion of the Writ of Habeas Corpus. This language firmly states that the 2001 Authorization for the Use of Military Force (AUMF) and the FY 12 NDAA detainee provisions do not allow for the detention of any person in the United States without the right of redress. Under this provision, all Americans have access to the Writ of Habeas Corpus.

The underlying language is being further strengthened by the Gohmert / Landry / Rigell Amendment which further states that no citizens’s constitutional rights will be denied in an Article III court pursuant to the AUMF. The best way to protect our rights is to put simple and clear language in the NDAA that lays those rights out. Between the new language in the base bill and our amendment, we are confident we have done that.

Rep. Adam Smith (D-MA) and Rep. Justin Amash (R-MI) have a competing amendment that simply goes too far. Their bill extends constitutional protections beyond U.S. citizens to any terrorist who is captured in the United States. We share the concerns of legal experts who worry that by granting terrorists greater rights if they are captured in America than if they are captured overseas, we are actually giving terrorists a profound incentive to attack us here at home. The Smith/Amash amendment grants foreign terrorists or foreign soldiers rights our own military do not have in court under the Constitutional Uniform Code of Military Justice.

Our approach is the better alternative. It protects our constitutional rights, but does not extend them to the very men who have been fighting for a decade to tear that great document down.

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