Tax Increases and Revenue: Curbing Offshore Tax Havens

One of the arguments you hear against tax increases at the upper end of the income distribution is that this group will simply find a way to avoid the taxes, legally or illegally, and therefore the revenue collected as a result of the tax increase will fall far short of what is predicted. The "tax cuts increase revenue" crowd will even argue that a tax increase can decrease revenues for this reason.

I always thought the problem was simply the will to enforce the tax increases, i.e. to take the time and effort to close whatever loopholes exist that allow this tax avoidance behavior to be rewarded, and to crack down on illegal behavior. The excuse that it's too hard, they'll just outsmart us, so why try at all always seemed like an unsatisfactory answer to me.

So it's nice to see the administration moving to make tax avoidance more difficult for both individuals and corporations, and to see efforts to broaden the tax base. This will complement their plan to raise taxes on the upper end of the income distribution. I don't know if they will be successful in the end, whether the will to clamp down on evasion and illegal activity and to broaden the base can withstand the intense pressure and resistance that is sure to come, but, unlike the previous administration, at least they are trying:

Obama Calls for New Curbs on Offshore Tax Havens, NY Times: President Obama presented a far-reaching set of proposals on Monday that are aimed at the tax benefits enjoyed by companies and wealthy individuals harboring cash in offshore accounts.

These steps, he said, would be the first in a much broader effort to fix a “broken tax system.” ... His remarks echoed the sentiment he voiced again and again during the presidential campaign, when he pledged to crack down on "illegal overseas tax evasion."

The proposed tax overhaul, which will be fully unveiled later this week..., could help raise $210 billion in revenues over 10 years...

While most Americans paid their fair share of taxes, Mr. Obama said, “there are others who are shirking theirs, and many are aided and abetted by a broken tax system.” Multinationals, he said, paid an average tax rate of just 2 percent on their foreign revenues. And some wealthy individuals hid their fortunes in foreign tax havens.

The president thus set up a frontal clash with big business over the tax advantages enjoyed by companies with extensive overseas operations. ... The president hopes to remove the competitive advantage for companies that invest and create jobs overseas, working to replace their tax advantages with incentives to produce jobs in the United States. ...

But several large businesses have opposed the proposal. About 200 companies and trade associations, including Microsoft, General Electric and the United States Chamber of Commerce, signed a letter stating that the proposed tax changes would put them at a disadvantage with their rivals. ...

Many of the tax proposals will require Congressional approval and, if passed, none would take force before 2011.

It's a start, but more is needed.

There should not be a tax advantage to moving jobs offshore, but I'm not a big fan of using tax incentives to induce firms to create jobs here either. That can quickly turn into a downward protectionist spiral as other countries follow suit. To me, this is a matter of equity. Wealth should not allow individuals or corporations to escape paying their assigned share of the tax burden.

Update: Robert Reich:

Why Obama is Taking on Corporate Tax Havens, by Robert Reich: Why, one may ask, is Obama taking on yet another huge fight by taking aim at foreign tax havens? Yes, it's unfair that multinationals pay an average tax rate of only 2 percent on their foreign revenues, and it's unfair that some wealthy Americans are avoiding taxes altogether by parking their fortunes abroad. But, hey, these have been true for decades. So why take them on now, when the President is also taking on universal health insurance and global warming, and trying to get the economy going again?

The White House says that some jobs go abroad because American companies are lured there by tax loopholes... True. But a crackdown on tax havens might also cost American jobs if companies decided that a higher tax burden here required them to cut payrolls in order to stay competitive or to simply leave the United States altogether.

Another possible explanation is that it was a campaign promise. ... But this can't be it, either. He criticized several other things as well -- such as the North American Free Trade Agreement -- which he now seems comfortable with.

So again: why this, and why now?

Two reasons, both strategic. The President needs the cooperation of many big corporations if he's going to get universal health insurance enacted... Many of these companies would benefit from lower health costs but they're reluctant to take on Big Pharma, big health insurance companies, and major health providers, all of whom are dead set against a ... government health plan. How does it help for him to take on corporate tax havens? Because the President needs as many bargaining chips with the rest of corporate America as possible. The proposed crackdown on foreign tax avoidance is one such chip. He might be willing to take it off the table if big corporations lend him active support on health insurance.

The second reason has to do with revenues. Originally the White House had planned to pay for universal health insurance by limiting tax deductions for wealthier Americans. But the Democratic leadership nixed that source. The rich Americans who take the deductions ... had enough political leverage to make it a non-starter. That means the White House has to find other sources of money. ...

The Administration figures it could raise over $100 billion over ten years by preventing companies from taking immediate deductions for overseas expenses... It could raise another $95 billion by making it harder for individuals to hide their income in offshore accounts, and harder for companies to shift income ... to ... the lowest-tax jurisdiction.

The White House is preparing to release a more detailed budget blueprint later this week. That blueprint has to contain some credible ways to pay for universal health insurance. Otherwise the measure could become vulnerable to deficit hawks who, like vultures over road kill, continue to circle ominously.