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One Step Forward on Tax Havens, a Few Steps Back?

One of the hits from my middle-school years was Paula Abdul's "Opposites Attract," which features a rapping rat and the following chorus:

I take-2 steps forwardPa0006_89-2841tnt
I take-2 steps back
We come together
Cuz opposites attract

I recalled this wise and pithy Abdul lyric yesterday when the Obama administration made its announcement on international taxation reform. Arguably, the toothiest part of the proposal is the following:

Reforming Deferral Rules to Curb A Tax Advantage for Investing and Reinvesting Overseas: Currently, businesses that invest overseas can take immediate deductions on their U.S. tax returns for expenses supporting their overseas investments but nevertheless "defer" paying U.S. taxes on the profits they make from those investments. As a result, U.S. taxpayer dollars are used to provide a significant tax advantage to companies who invest overseas relative to those who invest and create jobs at home. The Obama Administration would reform the rules surrounding deferral so that – with the exception of research and experimentation expenses – companies cannot receive deductions on their U.S. tax returns supporting their offshore investments until they pay taxes on their offshore profits. This provision would take effect in 2011, raising $60.1 billion from 2011 to 2019.

That's the laudable step forward, but there's a few steps back, or at least sideways.

As tax guru Richard Murphy argues, the latest Obama announcement is not an end to deferral and it's a far cry from the Stop Tax Havens Abuse Act, which Obama co-sponsored as a senator. That legislation would have actually imposed sanctions on countries and financial institutions that do not cooperate with the fight against tax evasion. That's the policy problem, but, again, as Murphy notes, there's a political problem as well. Namely, big corporations are going to fight any change to the gravy train they're currently riding. If you don't fight for an end to deferral now, it will be harder to accomplish later on. So why not finish the job, if you know you're going to face such a massive pushback?

And, as we've pointed out, there's still an additional problem, which is that certain parts of Team Obama seem to be eager to push Bush's NAFTA-style trade deal with Panama, one of the world's top tax-haven countries. Not only does the FTA not require an end to these banking secrecy practices, but it would actually empower tax evaders with rights to challenge U.S. anti-tax haven initiatives in foreign tribunals for taxpayer-funded compensation.

So, on the one hand, Obama and Geithner deserve some props for doing anything that would risk so much corporate anger. On the other hand, the administration needs to ensure that the policies that corporations like AIG and Citigroup are pushing it to push on the one hand (i.e. corporate trade deals) do not actually undermine the core aspects of the administration's post 100 days agenda (i.e. tax haven crackdown.) Abdulian harmony can be easily ensured by renegotiating the Panama trade deal to remove the harmful investment provisions, so that trade can be expanded in a fair way.

(Confused about Panama, the trade deal, or tax havens? Check out our latest report for the full scoop.)

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