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.

About Mark Thoma 243 Articles

Affiliation: University of Oregon

Mark Thoma is a member of the Economics Department at the University of Oregon. He joined the UO faculty in 1987 and served as head of the Economics Department for five years. His research examines the effects that changes in monetary policy have on inflation, output, unemployment, interest rates and other macroeconomic variables with a focus on asymmetries in the response of these variables to policy changes, and on changes in the relationship between policy and the economy over time. He has also conducted research in other areas such as the relationship between the political party in power, and macroeconomic outcomes and using macroeconomic tools to predict transportation flows. He received his doctorate from Washington State University.

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