New Tax Could Threaten Millions Of Jobs

The tax system in the United States is low enough for corporations that it has stayed the hotspot for innovation and commerce in an increasingly global market.

However, commentators see many parts of it as completely out of date.

And some see the new attempts to rectify it as a step backward.

New tax measures

The policy is essentially an effort to curb cross-border mergers.

Many problems with tax regimes now lie in the fact that companies and capital are far less constrained by national borders than they used to be.

Firms can do business in one, accounting in another, have their head office somewhere else, and have a holding company in yet another place; all creating a myriad of channels through which the tax bill can be lessened.

Taking advantage of low taxes is the new craze, as the general, worldwide rate has fallen significantly, as shown in the following graph:

One analyst has compared the US tax system to an old floppy drive in the face of 4G tablets offered by other countries.

Perhaps the time taken to get new legislation through the Senate is partly to blame.

The United States is a more conservative country than many of its counterparts in the developed world, and its hugely complex governmental process ensures delay for many bills which could be passed rapidly in other governmental systems.

The measures are amendments to IRS tax code section 385, and some believe that all it will do is:

• Make the United States a less favorable place to set up commercially
• Negatively affect the livelihoods of US workers
• Raise the cost of capital
• Give more power unnecessarily to the IRS

The nuts and bolts of it are that the government wants to be able to convert a firm’s related-party debt in business transactions into equity.

This would increase taxes and thus costs to businesses in the United States economy.

The problem especially lies in that it would apply to all companies, not just those seeking cross-border mergers, but those working only internally and those also looking to invest capital or cash in the United States market.

What it means is that if managers and employers wish to use the revenue for purposes such as paying for dividends to shareholders, rather than religiously adhere to paying off their current loan, the IRS would be able to reclassify this outstanding debt as equity.

This would thus work to increase the tax burden on employers, as more equity means more taxes paid.

It could be explained using following analogy:

Say a homebuyer relies on a mortgage to finance their aspirations for the future.

With the capability to deduct interest owed on the loan making the purchase feasible, the new rules throw a spanner in the works in this regard.

They would mean that had she decided not only to pay the loan but spend money on gifts for kids or a house renovation; the IRS could declare that as punishment for spending money not only on the loan, the interest on it will no longer be deductible.

Say hello to a lot more taxes.

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Business community reaction

It comes as no surprise that much of the business community is opposed to this new proposed amendment.

Companies are like families.

If they are squeezed too hard, they crumble under the financial pressure, and the fallout ripples widely: emotional and social for the family, economic in the case of the company.

To comply with the new rules, many companies will have to spend valuable resources on these additional taxes and unnecessary compliance costs that would be better spent hiring new workers or innovating their business.

Manufacturers are especially concerned.

Integral to the US economy and providing a blue-collar lifeline for workers who might not have been able to get a degree, this industry is one that needs to be protected in a world where there is a race to the bottom, and big corporations move production to low-cost surplus-labor developing economies.

And when manufacturers speak of the job losses and investment lost to countries with more rational tax regimes, the IRS and policymakers should listen.

Hundreds of thousands, or even millions perhaps, of high-quality manufacturing industry jobs could go over time should these rules be implemented.

Can we afford such a measure?

The motives for this amendment are honorable, as corporate tax avoidance is a plague that needs to be vanquished from the US economy.

It siphons billions of dollars out of the economy and reduces parity in society, as the little guy pays his fair share while the big players get away with it.

This is a risky move to tackle it, however.

The costs could be huge.

Uncertainty in an already fragile economy, demotivation for employers and entrepreneurs to invest and expand operations.

By increasing the cost of capital, the ability of the US economy to attract the world’s best and brightest will be hurt.

Millions of dollars could go elsewhere.

They are already doing so anyway, but to amplify this trend would be dangerous.

Serious precaution must be taken.

This graph shows some rough correlation between tax and investment:

No one should try and make life more burdensome for businesses.

The rules are somewhat vague and have an effective date gone by, April this year.

Normally legislation has a period where companies can prepare for it, which makes much more sense.

The rush to implement is quite bizarre, considering they are some of the biggest changes in over 20 years and rewrite hundreds of books of case law and tax rules.

Perhaps fear of a radical new power structure in place later this year is spurring the hurry to make the changes.

The economy needs a boost, and these sorts of measures need to be thought about much longer than they are.

Obama should set in and take action against the treasury’s efforts to do too much too fast.

Though some think, the changes could run into legislative opposition.

There is even some talk of the new rules being unconstitutional.

Hopefully Obama steps in and prevents it going through, in order for a more thought out and modernizing way is theorized to stop tax avoidance.

This probably isn’t it.