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Against Check the Box

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"Against Check the Box"

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I’ve heard that there’s some disappointment in the administration that they haven’t gotten the level of progressive love they feel they deserve for their ambitious proposals to curb abusive corporate tax loopholes. These are the kind of issues where, if it’s hashed out behind closed doors, the bad guys are destined to win. But if the fight turns public, the good guys will win. Pat Garofalo observes that congressional critics of the plans don’t have much to say for themselves, with Rep. Joe Crowley (D-NY) simply saying he’s “wary because the tax changes would hurt Citigroup Inc., his New York district’s largest private-sector employer.”

As far as bad reasons for doing something go, note that this one is unusually bad. The NY-7 isn’t like some huge swathe of Nebraska where people depend on in-district employment. It’s primarily composed of a residential section of Queens—itself a part of America’s densest city—and the vast majority of Crowley’s employed constituents will either commute to out-of-district jobs or else work in small neighborhood businesses.

But it’s worth taking a look at how absurd some of the abuses the administration is trying to curb are. Take, for example, the “check the box” rule. The Washington Post described this as “a Clinton-era rule known as ‘check the box,’ which permits firms to more easily transfer cash between countries.”

It’s important to note, however, that this isn’t a reversal of some deliberate Clinton administration strategy. Instead, what happened is that the Clinton administration promulgated a rule that was designed to simplify the classification of different kinds of subsidiaries. Within months of the rule coming out, the career civil servants in the Treasury Department noted that there was potentially a huge tax loophole here. The way it works is that a multinational company can set up two subsidiaries, one Acme Corp Cayman Islands and the other Acme Corp Germany. Then it sets up a Cayman Islands holding company, whose job is to own both subsidiaries. Then in order to make sure that the subsidiary located in high-tax Germany registers no profits, they have Acme Corp Germany take out high interest loans from Acme Corp Cayman Islands. This has the impact of ensuring that even though the business activity undertaken in Germany is generating all of the profits, they register as being untaxed Cayman Islands profits. Then you “check the box” and make the subsidiaries all disappear into the holding company.

That’s dumb. Which is why as soon as it was noted, an effort was put in place to change it. But a ferocious lobbying battle opened up, with the apologists for tax havens arguing that, basically, it was Germany’s ox that was getting gored here so Americans shouldn’t care. Over the years, however, that turns out to be wrong. The availability of this loophole is a significant incentive for companies to invest in their overseas subsidiaries and take advantage of the tax shell game. It’s a loophole that nobody ever intended to create, and that should be done away with forthwith. Eliminating may be bad for some firms who currently enjoy the loophole, but it’s not going to hurt overall employment levels for Joe Crowley’s constituents or for anyone else’s.

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