Read the story at Sixty Minutes. Note that what drives the seemingly bizarre behavior of corporations whose workers are primarily located in the US but who rent a conference room (!) or a mailbox in a building in a small town in Switzerland is the differential taxation of corporate profits in different jurisdictions. This is not an easy issue to resolve; according to the story, if the rules change to require decisionmaking in the country where filing takes place, the companies simply move their top execs to Geneva. When the stakes are high, for individuals or for corporations acting to maximize shareholder profits, there are great rewards to figuring out how to make the most of tax law – no matter how arcane – and the final decision may be simply to exit the original “home” jurisdiction (Tiebout’s theory).
It is not as simple as saying “corporations need to pay their fair share” – remember a corporation, though it may embody the fiction of a “legal” person, is still not a real one, and that all taxes are paid by individuals – be they shareholders in the form of reduced profits or owners in the form of reduced earnings or consumers in the form of higher prices. The question is how to design rules and incentives in such a way as to make it desirable for companies to keep their operations and their tax filing within our borders; and in a “globalized world” companies are more footloose than ever before, making this a difficult task.
You should definitely take a look at the provisions of the Tax Relief Act of 2010 to review how it may affect you – and in light of what you’ve learned this semester! Once again at the 11th hour, the threshold determining where the Alternative Minimum Tax calculation starts to bind is temporarily adjusted so that the proportion of households affected does not jump dramatically (see this CBO brief for background). A year-long payroll tax cut is included as well (see discussion from a personal finance perspective in NY Times) in this important legislation enacted just prior to the winter holiday break. Deductibility of state and local general sales tax in lieu of state and local income tax is also extended for itemizers – which benefits those of us who live in non-income tax states. In some sense, this could be viewed as a horizontal-equity enhancing provision since it treats households with similar incomes similarly regardless of whether their state of residence happens to choose to emphasize taxation on income or taxation on purchases. PS – you don’t necessarily have to have kept all your receipts to claim state sales tax on your Federal return; if you itemize you can choose to go by the standard amounts calculated by the IRS – consult the relevant IRS publications for more information.
See the text of the enrolled bill (PDF of public law not yet available but this is what the House and Senate passed).
This City Paper piece from November 21, 2010 is an excellent article on some of the fiscal and political issues surrounding consolidation of Nashville and Davidson County: of particular relevance for this course is the relationship between tax/service packages in the Urban Services District and General Services District.
Thanks Vickie for sharing this fascinating piece – quite timely – on the diversion of economic activity to the black market following a change in price signal due to a particular selective excise tax policy.
Underground cigarette market exploding in aftermath of tax hike – NYPOST.com
Read this article and pay attention to the particularly interesting aspects: (1) the alleged pressure on small operators to engage in this behavior because cigarettes are such an important (inelastically demanded) product that little corner stores rely on them to bring in custom for the more elastically demanded other goods they sell – so if your competition starts selling the untaxed close substitute of contraband cigarettes, you will be pressured to do so as well because otherwise not only do you lose the cigarette sales, you lose the profit on the other stuff people buy at the same time as they pick up their smokes; (2) one signal that this behavior was taking place was that the drop in legal cigarette sales was greater than that estimated based on the anticipated impact of the rise in price due to tax on smokers on the margin of quitting; (3) even though the quantity of legal cigarettes demanded (the tax base) has gone down due to the tax rise in price, the revenue derived from the tax instrument has gone up (because revenue is tax rate X base – if the rate is sufficiently high, even a smaller base could yield more revenue); (4) though not pointed out explicitly in the article, (3) above is not necessarily proof that this move is a net positive for budget balance: consider that the overall impact of the tax increase on revenues and expenditures would have to take into account the costs of increased enforcement and judiciary activity; the (delayed) net benefit of any quitters’ health improvement (complicated to estimate); etc. From a fiscal federalism aspect though, we can observe that some of the enforcement cost can be offloaded upward to another gov’t via the role of the Federal ATF…