First a quote from ZH: http://www.zerohedge.com/article/over-past-4-years-news-corp-generated-1…
Over The Past 4 Years News Corp Generated $10.4 Billion In Profits And Received $4.8 Billion In “Taxes” From The IRS
How does Murdoch make money off the tax system? There are three basic elements, disclosure statements show.
One is the aggressive use of intra-company transactions that globally allocate costs to locations that impose taxes –
and profits to areas where profits can be earned tax-free.
For that Murdoch can thank laws and treaties that treat multinational corporations much more generously than working stiffs, such as those who make up the audience for his New York Post and for his British tabloids with bare-breasted women. Working stiffs have their taxes taken out of their pay before they get it, while Murdoch gets to profit now and pay taxes by-and-by.
News Corp. has 152 subsidiaries in tax havens, including 62 in the British Virgin Islands and 33 in the Caymans. Among the hundred largest U.S. companies, only Citigroup and Morgan Stanley have more tax haven subsidiaries than News Corp., a 2009 U.S. Government Accountability Office study found
This further highlights why there’s something fundamentally wrong with our tax structures. Allowing funds to move freely between national fiscal barriers, and taxing only profits and actually indemnising refunds on alleged losses leads to this sort of abuse.
Offshoring: the real shadow banking, or profits are not made where you think they are, and nor are losses.
to paraphrase Treasure islands by Nicholas Shaxson: http://treasureislands.org/the-book/
The offshore business is at its heart about manipulating trails of money across borders.This practice is known as transfer pricing. To understand how it works consider bananas. The trade for each bundle transacted follows 2 distinct routes. The first is the physical, where a farmer in Honduras collects it, sells it to a packer, then to a broker and they finally end up in M&S in Britain. The second half of the trade, the money trail, is more convoluted.
It turns out the Honduran banana company has no assets and rents all its capital equipmentfrom its parent in the Cayman Islands, and the managerial exploitation costs are outrageous as is the rent at 10x its property value. This front is in turn managed by a fiduciary trust that also is the majority owner of the Panamaian broker, who incidentally also operates barely at black, due to mispriced cost of leasing to a Manxx registered fleet, insurance to Bermuda, supply-chain management in Jersey and and marketting in Ireland. Each of these is owned by another blind trust which is managed by financial holding company in Luxemburg, which incidentally owns the the banana’s retail brand company, say FairFruit Inc based in Delaware. At the end of the day, none of the subsidiaries paid any tax, some were evencompensated for costs and which of course were carried back up the chains as interest expense, and a massive profit, ‘de’-measurate’ with the sale of a bundle of bananas, was entered in a Swiss bank account destined to the beneficiaries of the trust managed by the Luxemburg holding.
First we consider that in modern fiscal theory we tax profits alone, while losses are credited. One of the keys here is understanding how both of these ideas are localised, ie within specific national jurisdictions, which the modern offshore multinational structure is designed to exploit. Some would say evade or bypass, but I use exploit because it actually leverages loss into gain. One fundamental problem is in identifying where the lion’s share of the profits are generated. Was it at production in Honduras? At the broker’s in Panama? In the FairFruit HQ in the US? Multinationals play with these numbers using the technique known as transfer pricing.
The corollary problem in offshoring is why are there losses at all if the banana retail nets a profit? Which is to say if that if the banana’s retail sale flow generates a net profit, is it fair to construct artificial localised losses in high-tax areas and deduct these from the loop, thus multiplying by far the amount of money from the actual sale? Now recall the credit is money, and income tax credit is money just the same. So compensating a local loss with tax break is in fact a public subsidy.
Where did the money come from to pay operating expense deductibles in the banana republics of Honduras, Panama, and the deregulated havens of Ireland, the Channel Islands and Britain? Why, from the poor taxpaying sucker, the underclass, who thus have subsidized enormous profits that far outstrip the global retail sale of the bananas. Modern multinational corporations, you see, are not in the business of selling products. In fact the banana bundle is only a pretext, the special purpose vehicle to fleece the public. (but hey, keep the retail sale proceeds as well). The offshored multinational claims your cake and eats it too, and then taxes you for the crumbs.
Follow the Money, or money supply, fractional reserve, and debt as money.
Recall that in fractional reserve banking, every new dollar represents an unrealised asset,which is another way of saying a debt. Yet fractional reserve means every asset is recirculated and reissued as we find new wants (often) and needs (rarely) to exploit from the transformation of those same resources. a forest can represent wood from trees, printing paper from wood, or rent from adventure tourism. An asset value thus represents a forward in time of projected exploitation value. But it’s still only the same forest.
Each asset or debt, creates new money in the form of profit or interest depending on which side of the asset you’re on. Now the thing about interest is that it compounds. So while the monetary and debt growth is exponential, equivalent to interest on the issued tier-1 capital, the underlying resources are constant at best (sustainable) or for mining and extraction: depleting, minus depreciation, spoilage, and waste. Recall there is a limit to production and transformation: thermodynamics say that every step introduces waste and loss, so the underlying resources are more than likely trending to depletion than sustainability. Sustainability is a difficult constant upward battle.
One resource however is guaranteed to be ever-present within the system, because it is the basis upon which the system is predicated. That resource is human agency, which means labour and invention. It is this process that drives innovation and what Karl Marx called creative destruction (contrary to popular creed, not Alan Greenspan). When an asset is realised, and the debt of the forest netted by the sale of the trees, the fairy of innovation then can come into action and reprocess, realign, and rerecycle, spent capital into new opportunities. Innovation then, is what drives interest, and its sister inflation.
a Conflict of Interest: pricing resource depletion, taxation, and the monetary base.
So what happens to the interest implied by the asset when I export the asset? that is the million-dollar question. I can sell the forest at spot value, but the interest and inflation implied from the asset assumes that it stays within national borders, thus allowing it to compound with the invisible hand of potential innovation further down the road. when I export either the lumber, or even its flip-side when I export the proceeds by offshoring profits to a foreign subsidiary, I deprive this local economy of the future realisations of innovation, either with the same lumber, or by depriving the fractional re-injection of the monies back into the economy through reinvestment.
This is the fundamental epiphany: that exports ultimately cost the economy, and short of depleting all resources to make up for it the only guaranteed dependable resource to cover it is human capital. every export is a burden on the system and on human labour. (to mirror the current ZH article, inflation is a result of the imbalance in fractional debt whose underlying assets were wrongfully inflated, mispriced, poached, or transfered out of the domestic economy).
So the question is, how can you be sure the price of an export makes up for the loss in capital and fractional interest thereof? Hopefully an export sale brings cash value that makes up for it. But what if I undersell at discount? Worse, if instead of selling the lumber, what if I loan it to a foreign subsidiary for nothing. I’ve still deprived the local economy of the lumber, but more importantly also of all the forward gains that creative destruction would imply had the lumber stayed home. What if instead I send machinery? What about sending labour? How about sending money in the form of an injection of capital when I invest abroad? Note that if my accounting-fu is strong, these acts of goodwill may be claimed as deductible expenses back home, so not only do I deprive the local economy of an fractional interest-making capital asset, and implied tax revenues for the commons, but I may also further penalise the commons by claiming a tax-credit paid by the public.
the Tragedy of the Commons, or a tax should definitely not encourage inefficiency
We have to get rid of this idea that we don’t tax foreign transfers and that we subsidize losses. That to me is the moral hazard of international corporate taxation. The old fiscal theory was intended to promote risky investment by choosing to tax only profits, but instead it’s turned into an orgy of abuse as profit and loss are terms subordinate to an entity’s fiscal jurisdiction. What we need to do is tax flows, specifically, flows that cost the commons missed opportunities.
Also, the antiquated fiscal notion of the commons deserving a proportional share of your profits, which as we see is circumvented anyway, to me screams of injustice to liberal and libertarian principles. You shouldn’t be charged more because you’re better at your business, in fact the opposite should happen: For an identical set of inputs, the more efficient company should keep the higher return, while the less profitable should be discouraged because it wasting an opportunity for the commons to make good on the asset, and hence the implied savings interest rate.
a Reverse tax, or don’t tell us how much you made, rather tell us how much you put in:
I think instead, we should tax investment, not profits. Recall that every dollar in the economy represents a forward on a real or imagined capital asset exploitation. Thus investing a dollar actually means you are consuming an underlying resource, ie chopping down a tree or hiring a brainy scientist’s grey matter. This is what we should be taxing, because its consumption is at the expense of its better use by another investor or even by the commons. The tree may prove more useful in its capacity to provide ecological services like erosion control, co2 sinkage, etc, while the scientist’s brain may have been more useful enlightening younger generations in public university. Thus we are taxing the opportunity cost of using or consuming a resource.
It’s then up to the corporation, which pays a fixed cost for this asset use or resource depletion, to be efficient and make good on their use. The more efficient, the more profit they walk away with, and justly so. The caveat, is that offshoring strategies, for example “investing” in a tax haven, hence moving those dollars away from the local economy, would tacitly imply denying the exploitable potential of assets back home, and thus should be taxed equally. That is you are free to move funds to any more profitable foreign nation, but pay the tax on those funds first.
a Diligent tax, or all stakeholders have an interest in tracking the capital – the rest is your business.
The good news is that this tax need not be excessive. Forget even notions of 25% capital gains. I think the only way to fairly price the opportunity cost is to charge the base risk-free interest rate. That’s right: good old LIBOR or whatever rate of return benchmark of choice for your country. This is actually a blessing in disguise. Instead of having to predict about how much profit you’ll make as a business and plan a taxpool ahead of time, you’ll know how much you owe from the get-go.
The other blessing in disguise is that all of a sudden the taxman aligns with shareholder due diligence instead of being at a polar opposite. All parties have an Interest to know where the money went. Imagine that, instead of the inefficiency of paranoid schemes to cook the costs and bake the books, companies can just pay down the meagre rate and get on with the business of making money. As much money as they can, and they can keep all of it, without having to tell any but their stakeholders. Unless they can’t beat the LIBOR beta, in which case they have no business being, well, in business.
A possible side effect of that is that this will discourage high-leveraged ventures that misprice risk in lieu of savings. This is a very good thing. Instead of the current inflated opaque and volatile system which returns a pittance and fleeces the small investors for all their skin, this should imply a return to quality. Remember when the savings interest rate was something around 5%?
Capital Controls, or how Keynes intended the original World Bank and IMF to operate
Keynes argued that there is natural conflict between democracy and traditional capitalism. In the face of a recession or depression, one would be tempted to lower interest rates to boost a recovery of local industry. International investors, however, would be tempted to seek areas of higher return. This apparent conflict is quelled if we choose to tax investment flows instead of profits, especially for developed countries undergoing a recession. In such a case the labour costs and thus inputs would be considerably lower, and a greater return on investment would be generated. Such a system would form its own elastic safety net.
To solve the frivolous volatilty of capital flight, it was envisaged that transfers of capital between individuals and corporations of different nations would be controlled. Did you know old passports had a “foreign exchange authorisation” section which entitled or forbade currency transfers? These original Bretton Woods provision are all eroded now. While I certainly believe in the economic virtue and morality of free capital movements, to borrow a GNU quote this is free as in free speech, not free as in free beer I think the circulation need to be fairly priced (ie taxed). There has to be skin in the game to discourage the inefficient offshore predation, speculation, and volatility.
I’m going to call it the Corporate & Commons Capital Preservation tax
(or CCCP tax – heehee), though it really has nothing to do with socialism let alone communism. Rather it’s a more sensible, efficient, purely marxist-capitalist, way to allocate risk and reward.