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What’s the Argument FOR Tax Havens?

Grand Cayman; via Flickr

Question: I understand that President Obama is going after the use of offshore tax havens by U.S. corporations. My gut feeling is that he’s right to do this, but I’ve never really heard both sides of the argument. Is there a good reason why corporations should be able to avoid paying taxes by renting a mailbox in the Cayman Islands?

Paul Solman: First off, Dave, the main thrust of Obama’s proposal is to prevent U.S. firms from writing off their foreign expenses — on a factory in low-tax Ireland, say — while never paying taxes on its profits, by reinvesting them in the Emerald Isle. Ireland’s corporate tax rate is 12 percent; the U.S., as high as 39 percent.

The arguments against THIS aspect of the Obama proposal is that it will make U.S. firms less competitive against their foreign rivals and/or that it will prompt U.S. firms to quit the country entirely. There are further wrinkles but, trust me, elaborating on them would create forehead wrinkles for both of us.

As for the mailbox “inversion” problem of re-incorporating in the Caymans, Barbados et al. (or just STARTING a business in such low- or non-corporate tax Edens), the argument against was made to me forcefully a few years ago by the CEO of Stanleyworks in Connecticut, John Trani, who was threatening to reincorporate there — what’s called a corporate INVERSION.

“It costs us 70 cents to make a hinge in New Britain,” Trani said. “Competition has driven it down to 35, and all retailers are buying this stuff from the competitors. So, here we are, we’re losing money, hemorrhaging money. Our choice is two-fold: evaporate and go out of the business, or emigrate, move it outside where it’s supposed to be so it can be competitive.” Thereby keeping SOME work in America, Trani said — marketing jobs, for example — rather than none.