Closing the Tax Haven Loophole: Rhetoric Vs. Reality

Imagine if you were an American. Imagine further if you decided to buy a condo in Spain. Imagine that you moved your money into a Spanish bank. Imagine you got a loan from a Spanish bank. Imagine, you received rent and made and kept all income in Spain. Imagine you sold that property and kept your profits in the bank while you looked for another property to buy there. Now, imagine if the U.S. federal government wanted to tax on all the money you made. That thought experiment is how ludicrous President Obama's war on tax havens is.

President Obama announced Monday a plan to prevent U.S. companies using offshore banks to deferr tax payments, saying that the effort to "shelter" money creates an unfair advantage to U.S. companies and amounts to evasion.

The president also called for more transparency in bank accounts held by Americans in tax havens such as the Cayman Islands.

"The way to make American businesses competitive is not to let some citizens and businesses dodge their responsibility, while ordinary Americans pick up the slack. Unfortunately, that's exactly what we're doing," Obama said.

"If financial institutions won't cooperate with us, we will assume that they are sheltering money in tax havens and act accordingly," he continued.

Here's what President Obama is saying. If you're a business, and your business has a subsidiary that only does business overseas. Then, that subsidiary keeps all its money overseas. He believes the U.S. government has a right to tax any and all profits with U.S. tax rates even though that money never enters the U.S. Furthermore, he demonizes all these companies by claiming they are using tax shelters.

In fact, by tax shelters, what President Obama really means is keeping money in places where their tax burden isn't nearly as onerous as it is here and not moving it into the country so that it is affected by our tax rates. What the president is attempting to do is this. He wants to take foreign subsidiaries of companies like Google. Those subsidiaries have their entire operation overseas. Furthermore, they keep all their money overseas. Yet, he wants to apply U.S. tax rates on any profits they make on these foreign subsidiaries even though neither any money or any of their operations ever touched the U.S. It's the equivalent of charging U.S. capital gains tax on the profit from the Spanish condo.

Just think about what all of this means. Our corporate tax rate is the second highest in the Western world besides Japan. As such, many, many multi nationals do everything they can to avoid paying these taxes. Rather than controlling the tax rates to attract more business activity, the president wants to criminalize what any astute business person would do when faced with an onerous tax.

If the president were to try and tax the scenario I created, he would be roundly criticized as tyrannical and violating sovereignty. That's because such a scenario would involve a sympathetic individual investor. Since he is going after multinationals, much easier to demonize, he is hailed in some circles as populist.