The Tax Preference Economy

Here’s an email from a reader on Google’s ($GOOG) tax strategy.

GOOG may not be betting on lower actual corporate tax rates. Like a lot of sophisticated U.S. companies that defer taxes by parking profits overseas, they may be waiting for the government to allow yet another “tax amnesty” repatriation scheme. That’s legislation that provides companies with a temporary period in which to repatriate assets while incurring lower taxes than they otherwise would. This has happened before, and there’s currently some lukewarm lobbying to make it happen again.

Tax deferral for profits held overseas is – for better or worse – most likely a HUGE part of why many major companies have been accumulating tons of cash on their balance sheets.

Tax preferences like this are lurking behind just about every weird financial distortion in the U.S. economy. Tax preferences for employer-provided healthcare. Tax preferences for interest on home mortgage indebtedness. Tax preferences for corporate debt over equity (that one’s debatable). Eventually, the muni market may be severely dislocated by the fact that municipal debt is overwhelmingly funded by a single class of investor: high-income individuals who justifiably wish to escape some income taxation on interest from municipal bonds. I haven’t seen anything particularly strange created by tax preferences for individual long-term cap gains over short-term cap gains, but I wouldn’t be surprised if it’s in there somewhere.

Posted by on May 18th, 2011 at 10:54 am


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