Tax Break

John Fisher, international tax consultant

Archive for the tag “US tax”

Ain’t no Bonanza

JayLeno

Let’s face it. The bar was pretty low

Jay Leno once went walkabout in New York asking innocent passers-by if they could name a country beginning with the letter ‘U’. Apart from the usual camera induced deer-in-the-headlights non-responses, a few bright sparks came up with Uganda and Uruguay. At the close of the piece, as the camera faded out, Leno was heard asking: ‘Have you ever heard of the United States of America?’

Judging by the above experience, it can safely be assumed that, had Leno carried on to ask  the name of the alphabetically last of the 50 States, at least one person – having realized there was no State starting with Z – would have thought long and hard about Y and come up with Utah. Alternatively, still on Y, they might have gone for Wyoming. And Wyoming, dear readers,  is actually the correct answer.

the-virginian

Named ‘The Virginian’, filmed in California, and set in Wyoming. Only in America

Although there is a tendency to think of Wyoming as still set in the 19th century, with characters like Buffalo Bill, Wild Bill Hickock, Doc Holliday and Calamity Jane ambling around the state capital, Cheyenne, it was the birthplace – in 1977 – of one of the most important tax sanitizers in US history.

The Limited Liability Company (LLC) – a mongrel of the corporation and partnership with descriptive terminology all of its own – crawled along at cowboy pace until 1988 when the Internal Revenue Service issued a ruling that LLCs were transparent for tax purposes. At the speed of a Colt 45, American taxpayers could suddenly combine the limited liability of a corporation with the personal taxation of a partnership or sole trader. This was particularly important in America where, despite Reagan’s major tax reform two years earlier, there was no correlation between the tax paid by an individual (up to 28%), and that paid by a corporation (up to 34%) followed by 28% individual tax on a subsequent dividend (over 52% in total). Congress failed to recognize that inanimate companies – while being vehicles of tax liability – cannot pay tax. Unlike Shylock, if you prick them, they do not bleed. Human beings pay the tax – either through the higher prices suffered by the consumers, or the lower profits earned by the shareholders. There is little justification economically for wide differences in total rates.

privacy-data-ceo-jail-nakedsecurity

Companies don’t have anything to cuff, either

As it turned out, it took until 2018 for the tax rates to be aligned. In the meantime, the vast majority of American private businesses organized themselves as either sole-proprietorships (and partnerships) or – thanks to Wyoming’s pioneering spirit – the new fangled LLCs.

And, thereby, hangs a tale. It was all well and good that America – with the biggest economy in the world – knew how to treat her LLCs, but other countries struggled with defining their treatment under their own laws. They ended up one of the major ‘culprits’ in hybrid mismatch tax planning that was so fiercely attacked in the OECD’s BEPS initiative.

 

Put simply, tax transparent companies in Israel are a rare and specific phenomenon. On the principle that, if it walks like a duck and talks like a duck, it’s a duck, LLCs fit the bill as companies. Therefore, according to statute law, they are not transparent.  However, given the large exposure of Israelis to the American economy, ever since its big 2003 tax reform the Israeli Tax Authority has been finding accommodation for these hybrid beasts. As long ago as 2004 it produced a circular that reiterated the corporate nature of the LLC, but offered solutions to the availability of a foreign tax credit for US individual tax being paid (since the LLC is tax transparent in the US). If the LLC is deemed controlled and managed from Israel, despite being liable to Israeli corporate tax, a credit is given for the US individual tax on profits attributed to the US (up to the level of the corporate tax). Alternatively, the taxpayer can elect at first filing to be taxed on the profits in Israel at the member (Google translate: shareholder) level, with credit for the US taxes. Some have incorrectly interpreted that as complete transparency for the LLC. In fact the circular stresses that the LLC is a body of persons and, in practical terms, that means that losses of  one LLC cannot be offset against those of another. As LLCs are set up at the drop of a cowboy hat in the US, this represents a real problem for many Israeli investors. There are certain planning devices, but advisors have always been aware that the problem exists.

Remarkably, 15 years after the issuing of that circular, essentially an extra-statutory concession, some  jester with nothing  better to do recently inexplicably allowed – not for the first time – a no-hope case to be brought before the courts. The claimant had set off losses between LLCs – in defiance of the circular – basing his claim on (1) Israeli law determining that when a word is stated in the singular, it also means the plural, unless – inter alia – the context does not support that interpretation, and (2) an informal conversation with a senior tax officer who allegedly told him that the problem could have been solved if all the LLCs had been held under a single holding LLC.

הורד (2)

Why have they stopped us handing out the death penalty?

The judge swatted away the first argument – the context clearly didn’t support the multiple LLC claim. But, the second argument was even more off the wall. Whether or not the senior tax officer had been quoted correctly about forming a group of LLCs, THE CLAIMANT HAD NOT DONE SO. Robert Frost wrote a famous poem on the subject, ‘The Road Not Taken’

‘I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I—
I took the one less traveled by,
And that has made all the difference.’
His Honour politely demolished this argument, too. Had I been the judge, I would have been tempted to return to the cowboy country roots of the LLC and quote from Clint Eastwood’s 1976 Western, ‘The Outlaw Josey Wales’:
‘Don’t p**s down my back and tell me it’s raining.’

GILTI until proven simple

hqdefault

What a joke

Appearing on Johnny Carson’s Tonight show in 1975, the ex-governor of California quipped: ‘We live in the only country in the world where it takes more brains to figure out your income tax than it does to earn the income.’ A little over a decade later, the same gentleman put his pen where his mouth was, and signed into law the Tax Reform Act of 1986, ostensibly simplifying the US Tax Code.

Well, I have to admit that I didn’t take much interest in the Code before Reagan’s reform, but – if that was simplification – I dread to think what it was like in the good old days. Fast forward thirty-odd years and Donald Trump was playing the same game. Or was he?

As US taxpayers start to consider their first  filings under the latest reform, one example should show just how complex the damned thing is.

535157_1

He also borrowed the line

As of  2018 the US corporate tax system went over to a territorial basis. That broadly meant that dividends received from abroad by US corporations would be exempt from tax. Nothing is ever that simple. America had invented, back in 1962, the concept of Controlled Foreign Corporation  (today the internationally ubiquitous CFC) which essentially taxed passive and certain other profits parked in tax-advantaged jurisdictions on a current basis, irrespective of whether the income was repatriated. But, if they were to transition to a territorial basis, that wasn’t enough. To paraphrase Mr Carson: ‘Wheeeeeere’s Google/Amazon/Apple?’ What about active income being cleverly sheltered in the Islands and Irelands of the world? And so was born Global Intangible Low Taxed Income (GILTI). After certain adjustments, foreign income (‘intangible’ was evidently thrown in to make a good acronym) would be taxed at half the federal tax rate (10.5% in the New World Order) with a foreign tax credit for 80% of the foreign tax paid on the income. That meant that a foreign tax rate of over 13.125% cancelled out the US tax (which is the same effective rate on Foreign Derived Intangible Income – the export incentive offered to US corporations under the reform – meaning there is ostensibly no tax advantage to going through loops to carry on the business offshore).

So far – if a little complicated –  bearable. The fun starts, however, when considering the effect of GILTI on individual or transparent entities (LLCs, S Corps, Partnerships) investing directly in foreign companies. Once caught within the CFC rules, their position becomes untenable. As it seems right now, they get no 50% deduction for GILTI and no foreign tax credit. That means they have to pay up to 37% tax on the gross income abroad, in addition to the local tax paid.  Given that the foreign jurisdiction may impose withholding tax on distribution of an actual dividend (albeit that such tax may be credited – if there is other income – in a general basket separate from GILTI), and given the exposure to State taxes and Obamacare, it is time to consider buying a one-way ticket  up the Empire State Building.

Now, straight-thinking people  might have thought this was a mistake, calling for suitable regulations to correct the situation. Evidently not. In this (once again) newly simplified world of US tax the solution being screamed from the rooftops is for the individuals to make a S962 election for their income to be treated as corporate  for tax purposes. That way they (probably) become eligible for the foreign tax credit – although the 50% deduction still looks doubtful. Because they have elected to be treated as a corporation, there is tax to pay on the ‘dividend’ when received. This ‘might’ be eligible as a qualified dividend (23.8% tax) and there ‘may’ be a credit to be had on the foreign withholding tax. But, nobody seems very sure.

This is simplification?

amazing-spider-man-2-1

Don’t try this at home, kids. It’s just for movie stars

I recall an interview with the conservative intellectual guru William F Buckley Jr. on the night of Reagan’s 1980 victory. Asked why he wholeheartedly supported the former actor, he told a story (much as the newly elected president might). He had been one of a group, including Reagan,  attending a meeting in a room on a high floor of a luxury hotel. The door became jammed, and they couldn’t get out. Reagan proceeded to climb out of the window, feel his way  along the perilous ledge to the next room, where the window happened to be open, climb in and come around to open the door from the outside. To the genuinely brilliant Buckley, that showed decisiveness, and made Reagan eligible to rule the world. When I heard this, my immediate reaction was: ‘Wouldn’t it have been simpler to just call reception?’

Perhaps the Americans just have a different concept of  ‘simple’? After all, as George Bernard Shaw is reputed to have said: ‘The English and Americans are two peoples divided by a common language’.

Putting a Price on Morality

The only relationship between morality and tax?

The only relationship between morality and tax?

‘If you prick us, do we not bleed?’ Well, not if we are a company. This was the point on which I was reduced to a state of heckling at the Lisbon conference described in my previous post. A Breakout ‘Conversation’ – Breakout ‘Sessions’ are SO last decade –  on ‘Tax and Morality’ was irresistible. (Look, when you are choosing between ‘Documentation requirements under BEPS’ and ‘Tax and Morality’,  irresistible is a relative concept.)

That the first question was simply whether tax and morality went together like a horse and  carriage (not precisely those words, but definitely the idea) was unacceptable. Corporate Tax and Personal Tax, as conceded by the moderator in dealing with my outburst, needed to be treated separately, even if the ultimate conclusion might be ‘yes’. Companies are Children of a Lesser God (their shareholders), and it is nigh impossible to pin anything high and mighty on them.

To me, all this populist corporate morality  posturing over the last few years, embarrassingly sparked off by a British Parliamentary Committee chaired by the alleged beneficiary of a Liechtenstein trust, has been one long yawn of poppycock. The most convincing argument regarding Corporate Morality came from a British colleague and old friend, who managed to dredge up the Parliamentary Proceedings leading to the enactment of certain joint-stock companies in the 17th century, that included some kind of public purpose. (I have been unable to confirm this in independent research, but he is a good bloke, so he probably knows what he is talking about.)

On returning home, thanks to an obituary in The Economist, the issue of Morality and Personal Tax was placed into focus. Irwin Schiff, who died in a Federal Prison last month, was a self-styled libertarian who refused to pay Federal Tax in the United States and, often with time on his hands in various open facilities financed by the idiots who did pay their taxes, wrote several books on the subject.

What was remarkable, and so typical of the different approaches of Europeans and Americans to tax, was that his lifelong struggle had nothing whatsoever to do with morality. In America, to this very day, morality is to taxation what a bicycle is to a fish. You pay taxes because the law forces you to. If the law is an ass and doesn’t close a loophole that allows you not to pay tax, you are an ass if you pay. C’est tout.

The late (literally, and with his tax filings) Mr Schiff attacked the income tax on the basis of it being unconstitutional. Now, I admit to not understanding this (and, neither, it appears did various US judges over the years who sent him to cool off in correctional facilities). The income tax was never popular. It was instituted during the Civil War when, to get at citizens clearing off from the land of the free and the home of the brave, it wasn’t escaped by leaving the US – a price still being paid by US Citizens overseas , and currently copied only by that other regional superpower, Eritrea. It was removed in the 1870s and only made it big-time when Congress passed the 16th Amendment to the Constitution in 1913 (the wrangle in recent years over Obamacare revolved around whether the required federal payments by individuals fell within the Amendment).

I personally do believe (as discussed in a number of earlier posts) that there is a moral responsibility on individuals to pay personal tax. However, there is something simple and attractive about the American approach. We Europeans could not begin to understand Mr Schiff. He lived (when not incarcerated) in Nevada, who few would dub the moral capital of the world. He dressed like a second-hand car salesman and represented himself in court (presumably because no self-respecting lawyer thought he had a case – his arguments  drew heavily on ridiculous sophistry).

Promo or mugshot?

Promo or mugshot?

Schiff made a fortune with such Pythonesque titles as ‘The Biggest Con: How the Government is Fleecing You’ and ‘How Anyone Can Stop Paying Income Taxes’, but the bit I find hardest to comprehend could best be summed up in that wonderful exchange between the legendary Jack Benny and a thug: “Your money or your life?….Look bud, I said ‘Your money of your life’.” …”I’m thinking, I’m thinking!” Forget morality, it seems even freedom has a price in the land of the free.

 

 

Taking the mojo out of inversions

By now, everybody has heard of the aborted takeover of  British pharmaceutical firm AstraZeneca by US giant, Pfizer. The latest in a series of US corporate inversions, the new corporate structure was  to be headed by the smaller UK company, thus largely spiriting the merged group beyond the lascivious tentacles of the US Internal Revenue Service.

Fascinated by the subject, I trawled  the quality press and professional literature for relevant articles. As I will explain later, despite the extensive coverage of the topic, I was utterly frustrated by the universally poor standard of reporting. The experience brought back vivid memories of  my first fresh-off-the-production-line car.

Twenty-five years ago, I took delivery of a sparkling white  Austin Montego. To be precise, by that stage in Austin’s long and painful decline as part of the government-owned British Leyland, it was simply a Montego: an orphaned car, no make or mark  willing to admit parenthood.

The ultimate driving machine

The ultimate driving machine

I think I realized there was something wrong when I first clapped eyes on it. Arriving at the delivery point, and after completing the relevant paperwork, I was confronted with a neat row of identical vehicles. I noticed that one of the newborn had a white spot of paint disgracing the otherwise pure black bumper. I prayed but to no avail. That was my car. A black blob hurriedly splashed onto the offending area, the car was soon heading for home with yours truly at the wheel. By the time I reached our car park, the driver’s mirror had fallen off the windscreen. By the end of the 12 month guarantee period the car was on its fourth alternator. Driving the Montego made me imagine piloting a Spitfire in the Battle of Britain. Before the car was finally towed away for the last time from under our house some twelve years later, anything that was not bolted to the exterior had fallen off and the lining of the ceiling had sagged down as far as the dashboard, giving the impression that the car was a mobile bordello.

Some years later I saw a documentary about the, by then defunct,  factory where my car was built. A group of former production-line workers sat in the pub explaining how it all worked. It turned out that, if someone was sick, late for work or needed a pee, the production line did not stop. When it got to fitting their part, either one of the other workers  did a rush job or, if the part was not considered critical by the professors manning the production line, it would simply be omitted. This was related without humour or bitterness – just that confident matter-of-factness that is the mark of the unmitigated moron.

Which brings me to my point.

Financial journalist phoning in his copy

Financial journalist phoning in his copy

Every single article that I read about US corporate inversions (and there were many) had critical parts missing or not properly connected to each other, resulting in the whole being incomprehensible (even after trying to put the jig-saw puzzle of articles together with all the pieces laid out on my dining table).  Had the articles been my Montego, by the time I got home on that first day I would have been driving an engineless go-kart .

The thinking behind inversions is that, since US corporate tax is punitive and there are loads of  planning schemes on how not to pay tax on unremitted income from abroad – there is a clear advantage in a US group having its parent company in a convenient jurisdiction beyond the shores of the United States. Enter the corporate inversion which, once upon a time, enabled the shareholders to quite simply insert a foreign holding company between themselves and the US company.  Convenient locations were the usual suspects that had the common virtue of never having heard of income tax.  In 2004 the US authorities woke up and imposed anti-avoidance legislation that effectively ignored the inversion to the foreign jurisdiction if at least 20% of the ownership in the new parent did not pass to third parties. The exception to this rule was if there were substantial business activities in the foreign jurisdiction which led companies to start looking at slightly less sunny jurisdictions such as Switzerland and Ireland where tax could be magically reduced to manageable proportions.

With the recent wave of mergers of the Pfizer – AstraZeneca type (the UK is still a lot more favorable tax location than the US) which meet both the 20% rule and substantial business activity test, Congress is now considering upping the 20% to 50% and tightening up the substantial business activity rules. Loss of control is expected to be just a little too much for the average US multinational.

The problem with the available literature on the subject is that, while inversion transactions are presented (on an amalgamated basis) as dark acts of genius to escape the draconian levels of US tax while avoiding US CFC legislation  and enabling tax-free repatriation of cash, it is far from clear how any of this is to be achieved.

Firstly, the transfer of the US company under the new foreign parent appears to be a s367a transaction which only escapes tax if a Gain Recognition Agreement is achieved with the IRS (under the circumstances I don’t know if that is a slam dunk).  Next, if the US company wants to avoid CFC legislation  it needs to sell/dividend/transfer its foreign subsidiaries to the foreign parent – which would generally involve a lot of tax. As regards ‘repatriation’ of cash trapped abroad, unless the US company’s foreign subsidiaries are transferred to the foreign parent,  the profits still have to pass through the US company – incurring the same US tax as before the merger plus likely withholding tax to the foreign parent.

While some articles clearly state that the CFC problem would remain, others hint at the US company disappearing into the new foreign parent. One states that the main advantage is that the foreign parent could loan extensive amounts to the US company enabling US profits to be cut by half due to interest expenses. When it comes to repatriation, I found one truly beautiful and incomprehensible graphic that has the merger involving cash payments to the US company and subsequent loans from Barbados through the foreign parent to the US company. I discussed all this with two US international tax experts who sympathised and went off to lunch.

My take on all this is that inversions must be very complicated and financial journalists cannot afford to burn copy when they realize they are out of their depth.

Vorsprung durch technik. Almost

Vorsprung durch technik. Almost

I do wonder, however, whether with Congress hot on the tails of multinationals (Senators also presumably do not understand what is going on), the planning may be a little too clever for comfort. In that same documentary about British Leyland, there was a piece about the Triumph Stag. The Stag was a cabriolet designed in Italy, the contours of which were generally considered to be thirty years ahead of their time. It was a truly magnificent driving machine. While Triumph’s sister mark, Rover, fitted  Buick 3.6 litre engines in its top-of-the-range model, the executives at Triumph decided they could go one better. Triumph had a boring family saloon called the Dolomite that just happened to have a 1.8 litre engine. You guessed it. They took two Dolomite engines and fused them together. This explains why, throughout my youth, when traveling on motorways I would regularly see Stag owners lounging luxuriously in their Italian leather seats, waiting to be towed. There has to be a lesson there somewhere.

 

 

 

Tracking tax avoidance

"You drive"

“You drive”

” U.S. Lawmakers Slam Caterpillar Over Tax Avoidance”. That headline last month in one of our drab but professional  trade mags brought a sardonic smile to my face as I imagined a black-windowed Hummer careering around Capitol Hill jam-packed with Senators. At the vehicle’s wheel was Carl Levin who suddenly screamed “Ya-hoo” ,or whatever 80-year-old  Americans from Michigan scream when they are excited, as he pushed his foot to the floor so as not to miss the multipede innocently sauntering across Pennsylvania Avenue in search of a tax-free leaf.

Of course, if they had tried that schtick with the Caterpillar the lawmakers had in mind, what was left of the Hummer would have been humming sweet melodies while the occupants queued at St Peter’s Pearly Gates.

The April 1 hearing of the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations smacked of deja vu-vu-vu. Having belatedly discovered that half the American Economy has taken up skiing in Switzerland or boozing in Ireland, rather than dealing with the root of the problem, the Senate appears to be picking the multinationals off one by one to ‘out ‘ them – this time, Caterpillar.  The  heavy machinery group’s international tax planning looks pretty standard fare for US companies in the last twenty years (Switzerland, IP, Transfer Pricing – you can join the dots yourselves) and, although nobody would suggest comparison,  it is interesting to note that that very committee, in a former guise, was chaired in the early fifties by one Senator Joseph McCarthy of Wisconsin.

That committee has, however, come a long way since the Witch-hunts  and this was no blanket kick in the pants.

Regular readers will recall that, around 18 months ago,  the British Parliament held an auto-de-fe for Starbucks, Amazon and Google in which I do not recall hearing a single word of dissention as Margaret Hodge fanned the flames.

What interested me was how the members of the committee quoted in the article showed once again just how divided American politicians are on you-name-it-they’ll-argue-it.

Carl Levin (Democrat) implied that this sort of thing had to stop, John McCain (Republican – Sarah Palin’s side-kick) said that it was the law that needed changing, while Rand Paul (Tea) apologized for dragging the company’s representatives there in the first place.

On the other hand, at least nobody came out with the claim that Caterpillar is immoral, which has become the mantra of every self-respecting  European legislature, even the French one.

I found myself sympathising with all three senators – American companies paying minimal taxes has to stop, the law needs a radical overhaul and why drag busy people to Washington when they are only doing their job of maximizing profits for their shareholders?

2016?

2016?

Maybe there is hope for the American political system after all.

In Memoriam

There would be no problem if one of these boys delivered our newspapers

There would be no problem if one of these boys delivered our newspapers

Venturing downstairs at the crack of dawn every weekday morning, my first conscious daily act is to open the front door and hunt for the newspaper. Invariably within a five yard radius of the letter-box, it is pot luck if it is in pristine condition on the path, lying face-down in a puddle in the self-irrigating flower-bed, or sporting a black tyre-mark right across the front page.

Everybody has their set order for reading the newspaper and I am no exception  – after a cursory glance at the front page I spread-eagle the broadsheet over the kitchen table and go straight for the bottom of Page 2 – the Obituary. It is the same thing when the Economist arrives – only this time it is the back page (the whole delicious expanse of it).

The discerning Obituary buff will know that  obituaries do not come in a one size-fits all format. One day it can be a serial murderer, the next a long-forgotten statesman and the following day a combination of the two.  With  the Great Reaper inundated over the last few weeks with politicians leaving the world stage – Adolfo Suarez, the former prime minister of Spain (one of my 1970s heroes), Anthony Wedgwood Benn, an off-the-wall  British cabinet minister (one of my 1970s bogeymen) and Ahmed Tejan Kabbah, former president of Sierra Leone (nice to know Sierra Leone had a government), I was intrigued by a piece a few days ago devoted to Randolph W Thrower who died at the tidy age of  exactly 100. Mr Thrower’s main claim to fame was that, for a brief moment in history, he was IRS Commissioner.

Thrower was clearly a decent man. As a young lawyer in Georgia in the late 1930s he defended blacks facing the death penalty on trumped up charges. In a speech on legal ethics  towards the end of his life  he stated “Every lawyer in the South was not an Atticus Finch of “To Kill a Mocking Bird”, to refer to one blemish of the past”; but he clearly was, and the point was missed by every serially plagiarizing obituary I read.

The acceptable face of taxation

The acceptable face of taxation

In his short 18 month tenure as Commissioner he was instrumental in reforms that helped the black community and the poor. However, it was his ouster that won him his place in the New York Times death column.  Reminiscent of a recent witch-hunt of political not-for-profit organizations that cost the Acting Commissioner and other senior officials their jobs, Thrower was not comfortable with the pressure coming from the White House to investigate the tax affairs of journalists and politicians. Not being armed with the benefit of hindsight and sure the President would be disturbed by the actions of his staff, he decided to request a personal  meeting. Unfortunately for Thrower and – it would later transpire – the entire American people, the President at the time was  Richard M. Nixon, himself a lawyer born the same year as the Commissioner, who would not have wasted his valuable time defending innocent blacks in the 1930s when there was far too much work to be done preparing to lynch the entire country. Thrower never got the meeting, but he did receive a personal phone call from John D Ehrlichman firing him.

Those infamous White House Tapes record that, when they were looking for a successor to Thrower, Nixon demanded “I want to be sure he is a ruthless son of a bitch, that he will do what he is told, that every income tax return I want to see I see, and that he will go after our enemies and not go after our friends.” Now that is fighting talk (in fact the sort of talk you would expect from gentlemen managed by another very recent deceased – world famous boxing promoter Mickey Duff). King Richard Nixon  playing President Richard Plantagenet (try reading the Soliloquy – “Now is the winter of our discontent etc etc” imagining Nixon as Richard III –  it works). This was Machiavelli without, as Kennedy pointed out to Ted Sorensen on the night of the 1960 election, any Class.

Evidently, Thrower’s problems with the White House started in 1970 when they sent him G Gordon Liddy as candidate to head the Bureau of Alcohol, Tobacco and Firearms. “He was a gun nut,” Mr Thrower said. “They wanted me to put a gun nut in charge of guns.” In the event Liddy later had a celebrated short-lived career planning the Watergate break-in. No shots were fired.

Rehabilitation gone nuts. Look who got centre stage

Rehabilitation gone nuts. Look who got centre stage

If I am not mistaken, whilst in the country whose yoke the Americans shook off a couple of hundred years ago taxes are technically paid to the monarch, in America they belong to the people. Mr Nixon, who was busy at the time creating the Imperial Presidency, evidently lost sight of this, as – to a lesser extent – other executive officers (but perhaps not presidents) have done since. Nixon really did represent just about everything that could go wrong with democracy and it was a remarkable act of courage, tolerance and, perhaps, folly on the part of Bill Clinton to eulogize him at his funeral.

Reading Thrower’s obituaries, another line  from that late-life speech of his seemed appropriate. It was a quote from Robert Browning:”Ah, but a man’s reach should exceed his grasp, or what’s a heaven for.”  As for Nixon, back in 1968 when he was running for the Presidency, both  he and the utterly decent Hubert Humphrey made  compulsory appearances on the zany show of the day “Rowan and Martin’s Laugh-in” which launched the careers of, among others, a bikini-clad Goldie Hawn. After much debate among his advisers he performed Judy Carne’s weekly catch-phrase. Staring into the camera Tricky Dick exclaimed: “Sock it to me!” More’s the pity one of  Mickey Duff ‘s clients didn’t hear his request.

Rest in Peace, Randolph W. Thrower, a man of integrity. The Tax World is indebted to you.

A dope makes a hash of things

Not funny? Charlie Chaplin was a genuine fan

Not funny? Charlie Chaplin was a genuine fan

Depressingly, whenever I mention British Humour (sic) to an American  I receive the stock response: “Benny Hill!” I used to fight back, arguing that Hill’s humour was cheap smut eventually only permitted for export (to America), while true British Humour was a cerebral affair of the utmost sophistication. Balderdash!  I was kidding myself. Benny Hill was a late 20th century take on the Bedroom Farce genre that had been highly popular since late Victorian times and reached its zenith in the 1960s in the person of Brian Rix and his famously dropping trousers. One of the main ingredients of a Bedroom Farce is that the acting is frenetic with the audience  not given time to think; all laughter is on impulse, à la Benny Hill.

They are generally a lot worse

They are generally a lot worse

The one and only time I attended a Farce was at the impressionable age of 14,  in August 1972.  All I can remember is that “The Man Most Likely To..”  staged that summer season at the end of Bournemouth Pier, involved lots of slamming bedroom doors and Henry McGee, Benny Hill’s long-suffering straight man, displaying his naked derrière to a guffawing audience. On leaving the theatre, apart from a roaring trade in beach balls and rock candy, there was an ample selection of Robert McGill’s saucy postcards featuring cartoon depictions of leering men and buxom ladies from a bygone era – quintessentially British smut. (If you are ever looking for a sure way to get an Englishman to snigger, just say the word “Bottom” in a suggestive tone – disappointed punters guaranteed their money back).

While Lord Rix’s 90th birthday next week would be reason enough to bring Bedroom Farces and Benny Hill to mind, I admit that the recollection  had more to do with the antics of the current hapless occupant of the Élysée Palace. It is apparent that President Wheredidiputmyshoes  has – Ooh La La! – been banging rather too many bedroom doors in the course of his career, and has lately been having acute difficulty  deciding where to wake up. This moral confusion must surely be taking its toll on his already abysmal record in running the country. Take, for example, his New Year speech in which he had an epiphany and all of a sudden said that everyone was paying too much tax. A noble line for any sane Frenchman but, lest we forget, he is actively clobbering high income earners this year with a 75% marginal tax rate (albeit levied on employers) that was finally approved by the Constitutional Court as they kissed goodbye to 2013. This ordinary man  never actually married so, technically free to wander, does not appear to have any guiding star. If France is not careful, he could lead the entire nation into the River Seine (the Left Bank of which God is unlikely to split for those Gitanes-smoking Parisian intelligentsia).

"I said POT Shop!"

“I said POT Shop!”

Across the pond, the Americans are having their own problems with their moral compass. On January 1, Colorado became the first State to permit recreational marijuana. I don’t know whether  weed is a good thing or not (I do really, but I don’t want you to think that I am a narrow-minded tax accountant). What is clear , however,  is that this thing has not been thought through. Because growing, processing and selling pot are still Federal offences, and despite Washington stating that the Feds will hold off – if you are a Coloradoan wanting to feed your habit with a little sideline in cultivation, you will not be able to open a bank account due to federal money laundering rules. If you cannot open a bank account, you will have difficulty running a kosher business in the stuff – meaning that you are unlikely to pay tax. And while we are on the subject of tax, Big Brother has to decide where pot should be classified in the  excise tax hit parade. Does the fact that alcohol leads some people to kill while marijuana leads others to float, mean that it should be taxed more lightly than alcohol, which for some (like me) is a little hard to swallow? At present the state tax on cannabis is much higher than on alcohol. And what about when comparing a joint to a publicly ostracized cigarette?

When I read about Western Government decisions these days – from muted reactions to Syria and Iran to juvenile brawling on Capitol Hill – I  picture the entire Western World on its back  floating calmly down a river late at night, reefer in mouth and girl at each side, not quite managing to focus on the shining stars in the clear night sky and blissfully unaware of the waterfall ahead. There must be a moral in there somewhere, or maybe not.

Beating about the Bush tax cuts

Keep it simple

Keep it simple

I believe it was  John the Baptist  who coined the  phrase, “In the beginning  was the Word”. Whatever your creed, words have definitely had a pretty serious effect on the world from time immemorial. For me, the mere mention of the word “War”, in all its mono-syllabic, animal-like simplicity, is enough to strike fear into my cowardly heart. Some years ago, speaking at a conference about Investment in France –  in the presence of the French Ambassador and other dignitaries – I put paid to any ambitions I may have fostered to advise French nationals by telling an apocryphal Churchill story. Asked why he considered his 1940 speech, “We will fight them on the beaches….”   his most effective of the war, Churchill  is reputed to have explained that it was because, with one exception, his main vocabulary had been ancient Anglo-Saxon –  short and bold. That one exception – from Norman French – was “Surrender” . Nobody (and I mean,  n-o-b-o-d-y)  spoke to me at lunch.

It is interesting that two words uttered in an obscure speech nearly a year ago by an individual not normally known for his oratorical prowess,  managed to grip the entire American nation  in fear. While Joe  Public calmly went about his daily business ignoring the real nuclear threats coming out of Iran and North Korea, any mention of Ben Bernanke’s “Fiscal Cliff” would bring beads of sweat to his brow as he  imagined watching helplessly while his wife, children, home and SUV tipped over the edge of a mountain into the abyss.

As became apparent to all doubters last week, there never really was a Fiscal Cliff. The witching hour came and went on December 31 and it was only a full day later that the House of Representatives “pulled the country back from the brink” (spare me). It was a full day after THAT that President Obama, back at his “I’m as cool as a cucumber” vacation pad in Hawaii,  had it signed  into law by “autopen” with retroactive effect from the beginning of the year.  But we Old World people should remember that this is the land of Hanna Barbera where cartoon animals (an elephant and a donkey?) can go careering, horns locked, off a precipice and belatedly realizing their predicament, raise dust in the air as they do panic bicycle-riding motions with their feet regaining dry land. Ever the miserable rationalist, I prefer to think of  the blinded Duke of Gloucester in King Lear being deceived by his son into attempting suicide by jumping over a harmless bump, rather than the White Cliffs of Dover as he intended.

With the Fiscal Cliff  receding from view, we are being told that  all that happened was that “the can was kicked down the road”. Holdonasecond! Where did the  road come from? For the last year America has been hurtling towards a precipice across virgin green fields and rock formations, with the nation ending up dangling over the edge. Now, all of a sudden, there is a road. On the edge of a cliff?  No – there has simply been one of those sudden scene changes that typify Hollywood action movies and Washington speechwriters.

An open tin can with a dangerously serrated edge is now bumping down the stairs of the Capitol heading for the Mall, where it will roll happily along until it veers right two months from now at the Washington Monument and comes to rest on the White House lawn.  Then, with Washington required to negotiate deeply wounding spending cuts, the President and Congress will have to come up with something new and scary. How about  “The Great Mowing”? Frankly, they are more likely to go for something less consistent but more direct. “Washington Chainsaw Massacre”  is the sort of thing that should really give Ol’ Joe Public the willies.

If the branches of government still can’t find their common trunk, “the can will be kicked back  into the long grass” eventually reaching the end of the Mall at the foot of the Lincoln Memorial, where President, Senators and Representatives will be reminded that “Government is for the people”. If the greatest political speech in American history doesn’t do the trick, nothing will.

Tea Party Caucus

Tea Party Caucus

Meanwhile, the US is floating irreversibly up towards the “Debt Ceiling” – a rather gentle phrase that conjures up Nash terrace houses with high ceilings, Chippendale furniture and heavy scarlet curtains (not to mention scenes from Mary Poppins and Harry Potter). In reality, if the Tea Party Republicans lose all radio contact with Mission Control and vote not to increase the ceiling, that  really could plunge the entire planet into crisis overnight as the US starts to default on its liabilities.

On January 2, the Fiscal Cliff behind him and free to pursue the Republicans on the Debt Ceiling, President Obama released the safety catch on his mouth and turned it to semi-automatic: “We can’t not pay bills that we’ve already incurred”. Apart from being a candidate for unforgiveably worst line of 2013, it was a brilliantly awkward double negative that indiscriminately strafed  House Republicans. Unlike his predecessor, Obama normally manages to  place one word in front of another, and I am tempted to believe the sentence  construction was intentional.

Metaphor, idiom and daft constructs aside, it is  clear that both sides have got it wrong in this debate. Republican reluctance to raise more tax revenue in an acute deficit situation is barmy while Democrat insistence on raising tax rates only on the higher echelons (even before they agreed to a raised $400k threshold from the original $250k) will hardly scrape the protective coating off the deficit.

NASCAR got a tax break - increased depreciation. Understandable really

NASCAR got a tax break – increased depreciation. Understandable really

Meanwhile, there can be no way out of the current dire situation until President Obama decides which items of spending are really important to him and then takes an industrial lawn mower (or chainsaw) to the rest. The Republicans could well be right that – if they have no choice but to agree to higher taxation – rather than raise tax rates, Congress should do away with the countless deductions that render the headline tax rate irrelevant. Even the Act passed this week quietly included tax breaks thanks to all sorts of weird and wonderful lobbies. Essentially, the Internal Revenue Code needs to be thrown over a cliff.

The only serious question remaining is that of timing. Americans, having watched aghast at the austerity-induced implosion of the Euro zone, know that they need to balance the situation carefully. Paul Krugman, guru of the Neo-Keynesians, misses no opportunity to reject any quick fixes. But that does not imply  that there should not be a medium to long-term plan. Obama needs to show leadership – and leadership is not just fancy lines on the teleprompter. The recent election was totally negative as was the spat over the Fiscal Cliff. Time to think positive Mr Obama. “Yes, we can’t keep kicking the can down the road”.

One small step for Mitt

The Right Stuff

Neil Armstrong, who died last week, was one of my childhood heroes. It was not that I aspired to be an astronaut – I was a sedentary kid for whom “space” was what separated the sofa from the TV set – but  I knew how to recognize greatness when I saw it. There were  plenty of greats in the sixties – JFK, RFK, MLK , to acronymise but a few – each in his or her own way pushing the world’s envelope, inspiring an entire generation to reach for the stars.

Today, every time I lift my head from my office desk I look straight at a coffee mug I purchased  at Cape Canaveral several years ago. “Failure is not an option”, inscribed on both sides, was the motto of the Apollo 13 mission. The world held its collective breath for 4 days at the turn of that decade as technicians at Mission Control in Texas devised lowest-tech contraptions that they instructed the astronauts on the stricken craft to build  in the  vain hope of bringing them back safely to earth. Against all the odds, they succeeded. Heady times.

Of course there was plenty wrong with the sixties – the worst of all being that they were followed by the  seventies – but that generation always tried to go the extra mile and make a difference.

What do I know? Bob Kane seemed happy with Keaton and, after all, he was Batman’s creator

Before the obituaries to the modest Armstrong could disappear from the inside pages of the world’s newspapers, the headlines heralded the crowning of the pretender to the American throne, Mitt Romney and his valet, Paul Ryan. The contrast with the greats of the sixties could not be more striking. While the Romney and Ryan double act may have its moments of great theatre, this has to be the worst case of miscasting since cuddly Michael Keaton played Batman. The task of a US president is not to micro-manage USA Inc; it is to lead the nation and the  world, to inspire the generation to toil for a better future for all.

While Kennedy could capture the collective imagination with “I believe we should go to the moon” , Romney could have come up with “I believe we should go purchase 51% of the moon through a Martian SPV and a partial vendors’ loan, push down the debt and exit within 5 years”. While Reagan could bring down the Soviet Union with “Mr Gorbachev, tear down this wall”, Romney might have opted for “Mr Gorbachev, tear down this wall and let my firm put together a consortium to build a shopping centre and condominium complex”. And as for Boy Wonder Ryan, while Kennedy had JK Galbraith as his economic adviser and Reagan had Art Laffer, he has Atlas Shrugged, a work of fiction by Ayn Rand.

Paul Ryan’s vision of the White House circa 2050

This is an entirely Business/Economic ticket. While the GOP team may (or may not)  have some valid economic policies the job spec goes a bit further than that. Vision and national leadership are items that come to mind. Businessmen and Economists are not naturally cut out for these tasks. While Mr Ryan – who is, at least, consistent as opposed to his boss who is governed by ever-moving bottom lines – may have a point about the need to cut taxes for economic reasons, his violent aversion to “Big Government” is much more far-reaching. His desire to scale back government to the bare minimum precludes any administration from advancing the nation beyond narrow economic interests. Relief from poverty, foreign aid, sustainability and inspiring  national projects all require tax dollars.  You name it, it ain’t gonna be there. Ever.

No Mitt! You’re supposed to be going for the Washington job. It’s got a bigger upside.

Ronald Reagan and Margaret Thatcher were probably the most “free market” minded leaders in the last generation. Neither of them was economist or businessman. They both had visions for society – very positive visions at that – and both lead their nations well beyond the economic sphere – for better or for worse . Romney and Ryan, on the other hand, are one track. No inspiration. No hope. No government (or not much of it) and Every Man for Himself. A sad, sad state of affairs, especially as both men profess to being practicing Christians.

We were blessed a few days ago with a beautiful granddaughter. My prayer for her is that she grows up in a caring world that seeks to cure its imperfections and pushes its boundaries. Nothing suggests that Romney and Ryan are singing from the same hymn sheet.

Washington the dream factory

Who were Rodgers and Hammerstein trying to kid?

Last year, the Oscar for Best Actor was awarded to someone who feigned inability to speak coherently. This year, the same award went to someone who chose not to speak. The 2012 Academy Award for Best Supporting Actor went to that prize’s oldest recipient best known for playing a singing sailor whose most memorable line, nearly 50 years ago, was whistling his children to attention that they might greet the evergreen Julie Andrews who tried to con everyone into thinking she was a nun.

I think it was Founding Father Benjamin Franklin who adopted the ancient line “Speak little, do much” and Hollywood appears to finally have caught on. The candidates for US President, on the other hand, have clearly not taken a leaf out of Hollywood’s book and now, in the wake of that Muppet Show cast vying for the Republican Nomination whose “Pin The Tail on The Donkey” approach to corporate tax rates I dealt with in a previous post, President Obama has now weighed in with a load more useless verbage on the subject.

Measured by the higher level of  tax in his proposal – 28%, the relevant bits of the president’s Federal Budget Proposal for 2013 are, by definition, more responsible than those of his competitors. But, other than talking vaguely about a broadening of the tax base to cover the drop from 35% and ensure a fairer, leaner system, he was a bit short on the facts. He wants to close loopholes but, given that there are interest groups jealously guarding every one, he does not say which ones. He wants to encourage manufacturing with a 25% rate but does not note that some of the biggest loopholes are in that sector. He wants to encourage relocation of activities back to the US from abroad and proposes a minimum tax on overseas profits of which he provides no details.

Go on. Admit it. You thought the last President of Chile was a General.

Non Americans (that’s me, folks) find all this lack of detail strange. Among the 34 members of the OECD (the rich nations’ club) the only nation other than the United States to run a pure presidential system is Chile – the French have a hybrid approach that includes a prime minister who has the support of the National Assembly, and everybody else runs some form of parliamentary system.  As such, in countries that still call football football, when the Head of Government comes up with a budget there is usually a fighting chance that, at least most of it, will be passed since, overall, he has the confidence of the parliament. That is what we Old World people understand Heads of Governments are supposed to do. Otherwise we could employ a secretary to announce legislation and save a lot of time,money and teeth whitener.

Not in the US. When President Obama made his Budget proposal it was a request to Congress and there is not the faintest risk of it becoming law – in other words he could join the dream world of the irresponsible opposition even though he is the incumbent. Pure Hollywood.

There are, of course, certain anomolies in the US system. The president has to ask Congress to declare War which makes a lot of sense, considering the amount of expense and gore a silly mistake can cause. BUT, he does have the power to turn out the lights on all of us by messing around with those secret codes in the briefcase always carried by a military man at his side.

Her typing wasn't half bad either

On second thoughts, I think I will keep taking the US president seriously. As much as I value the professional abilities of my secretary, if she had her “finger on the button” I would be nervous every time she went for the remote control to adjust the airconditioning.

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