Wednesday, April 15, 2009

Tax Havens

So, turns out corporations manage to get out of $100 billion in taxes annually by using offshore tax havens.

Now, the government is in tremendous debt, runs a large deficit and needs to increase revenue, cut costs or both. Given this, it is possible that the loopholes should be closed with no other changes, end of story.

However, as with everything tax-related, changes in tax law affect other things. It's a safe bet that the companies with offshore tax havens plan for offshore tax havens when setting wages and announcing profits, etc. Thus, closing the tax loopholes actually just represents raising taxes on the corporations who use those loopholes.

This may or may not be a good thing - increasing corporate taxes decreases production and increases unemployment, which can result in lower government revenues and lower long term standard of living for everyone. It's unclear exactly where the US stands in terms of corporate taxes.

The likelihood is that the average size of the companies who use offshore tax havens are larger than the average corporation in America. I don't know whether it's better to stimulate large businesses (with lots of workers) or small businesses (probably more innovative) - I lean towards stimulating small businesses - but an alternative may be to close the tax loopholes and cut the tax rate on all businesses/small businesses/large businesses by a certain amount. This way, you reduce the inefficiencies introduced by forcing companies to spend to hide things offshore, and you don't raise corporate taxes/you raise them less than by the amount you close in loopholes. You also stimulate different areas of the economy, if that's important.

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