Tax Simplification

President Obama announced recently that he was closing down a loophole for American corporations who use offshore tax havens to escape some $190 billion in taxes.

Nice political rhetoric. "Loophole?" No one favors a loophole. And the close conjunction of "corporations" and "offshore" resonates with the same negative implication as "corporations" and "outsourcing jobs overseas," even though the two situations are vastly different in intent and effect. Also "offshore tax havens" carries just the right hint of money laundering, you know, like drug lords and gangsters are want to do.

But what exactly is this "foreign tax haven loophole"? In general, many other countries, like France, do not tax income of local companies arising from operations outside of their territorial jurisdiction. This is what’s known as a “Territorial” theory of taxation, and it is to be contrasted with a “Nationality” theory which would tax a local company’s income arising anywhere in the world. America’s current system follows the Terrritorial theory, but in a typically Byzantine way: it taxes corporate income world-wide with one hand and then exempts foreign derived income with the other. Net result: American corporations pay taxes only on their U.S. operations, like their French counterparts.

“Offshore tax havens,” then, are simply foreign countries in which American corporations operate and derive income. Under a “Territorial” theory of taxation, the exemption of this off-shore income is not a loophole but the very essence of a system which does not tax foreign profits.

Let it be said that if President Obama and Congress want to change the current “Territorial” system to a “Nationality” system of taxation, they would not be doing anything incoherent or crazy. They would simply be choosing one among many different possible systems of taxation.

Of course, to do so would further hamper the international competitiveness of U.S. companies, harming not only company profitability but also the employees and shareholders whose jobs and investments depend on the stability and growth of those profits. And therein lies the problem with President Obama’s approach to this issue. He is intentionally employing demagoguery in order to obscure the real issues involved so as to preempt a proper public debate.

I think that in any such debate the public would opt for preserving the jobs of American workers and the investments of American citizens, both of which amount to much more money than the relatively paltry $190 billion the government wants to collect. However, these are complicated times and the voters might very well side with Mr. Obama in this matter.

But President Obama is not interested in a public debate that he only might win. He wants to win, pure and simple. And the worst result of winning in this way would not be the harm inflicted on American companies, jobs and investments, but the further erosion of this experiment in democracy entrusted to us by the blood and sweat of our forebears.