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Wanting a Cookie

One thing that you get used to after living in Washington for a while are the tight controls on messaging and information.

Corporate types didn't get the memo.

First there was this article from the NYT over the weekend:

The Obama administration has riled corporate America by cracking down on secretive offshore tax havens. But now a big onshore refuge — Delaware — is drawing scrutiny, too...

Defenders of the arrangement — corporate executives, tax lawyers and, unsurprisingly, Delaware officials — rebuff such criticism. Mailbox subsidiaries like the ones along North Orange Street do nothing to minimize companies’ federal tax bills, they say. Corporations must still pay Uncle Sam. Moreover, these people say, many companies are drawn to Delaware for its business-friendly laws and courts, not to save on taxes.

That is certainly the view at 1209 North Orange Street, a nondescript low-slung building at the corner of West 13th Street. This address serves as a tax minimizer for dozens of brand-name companies, among them Dillard’s, the department store chain based in Little Rock, Ark., and Kentucky Fried Chicken, which is part of Yum Brands of Louisville, Ky. All of them, and nearly two-thirds of the Fortune 500, have tax-exempt subsidiaries at this address to reduce their state tax bills.

I love this: they openly admit that Delaware helps corporations avoid state tax bills "but they still have to pay their federal bill"! As the comedian Chris Rock might say, "What do you want, a cookie?! You're not supposed to dodge your federal taxes!"

And their line about Delaware having other charming features besides the massive tax-dodging opportunities is rich too, and recalls some of what we detailed in our report on Panama's tax haven practices. (Check out the appendix, where we show Panamanian officials bragging that tax evasion isn't the only reason corporations set up shop there.)

Speaking of Panama, "La Estrella," one of Panama's leading papers, has been running a series on the country's tax-haven practices. Here are some of the juicy translated tidbits from the source:

"We are not a tax haven," says Moises Cohen, president of the Panamanian Banking Association says in his offices... In the street, without anger, more out of resignation, the cabdriver Gilberto Francisco Ortega declares, "He who has money can come to Panama and do with it as he will."

The dominant system in Panama grants significant benefits to the corporations established here. All you need to create one is an agent on the ground, generally from one of the large law firms. But these vehicles are a dead letter without the other element of the system: the banking policy, constituted in 1970 that gives, among other benefits, anonymous numbered accounts...

For the lawyer Sidney Sitton, specialist in the creation of corporations, this creates the ideal system for criminals... "Despite the dozens of public and private corruption scandals Panama has witnessed over the years, no one has ever investigated even a single bank, nor have they ever ordered the lifting of bank secrecy," says Sitton...

Moises Cohen views the situation radically differently from Sitton: he is convinced that what has allowed his country to become a financial center is the creativity to attract investment to the country. "If they take that away, Panama is done with. We have a strategic location and a tax system with obvious benefits, but that's it," he says...

[The national banking regulator] draws its budget from fees it charges the banks it supervises... and the laws that regulate banking activities are made and implemented by this regulator and do not go through the legislative branch...

[The Panamanian banking associations] have faith that, in the end, the international community will understand that, just as Panama is a transit hub for the region, the veil of impunity that appears to favor illicit businesses also generates income for other countries.

Yeah, l'm sure Citigroup and AIG are getting a lot of income from Panama's lax policies - and, news flash - that's why all this hay is being made. Here's some other juice:

  • This Cohen fellow seems like a real charmer. In this extended interview, he has such brilliant quips (that recall the Delaware apologetics from above) as: [when trying to explain why a Colombian criminal was able to launder money in Panama] "If people have a legitimate front operation, it's much harder to notice that they may have illicit operations [behind this]." Or, when asked why Panama doesn't charge taxes on multinationals (despite having some of the highest child malnutrition rates in the region]: "Panama doesn't need those taxes... Our economy is very different from others. It would be like telling China they should pay their workers more. Everyone acts in accord with their own economic situation." Yeah, no one would be so crazy as to insist that China close its sweatshops, and certainly not workers... oh, wait.
  • Like we hear of a lot in this country (like from Bill Clinton) whenever there is a corporate crisis, it is blamed (like by this Panamanian official) on a few bad apples. The official can't even answer whether any banks have ever been investigated in Panama. And this article profiles some of the very bad apples - and there have been many. Like the Colombian Nelson Urrego Cardenas, "who is known as the man who made cocaine fall from the sky, and who created 17 foundations that allowed me to even buy an island."
  • This article reports that from May 2008 to May 2009 alone, 13,729 new corporations were registered in Panama, and that, on average, 100 are registered every day.

So, in short, the Panamanian banking sector and government - and let's not forget to mention the bailed out banks and drug dealers that enable the system to function - wants a cookie. But they certainly don't want to regulate.

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As a progressive *and* a Delaware lawyer, I feel I should add my two cents. Delaware does have an excellent judicial system when it comes to corporate governance -- the Court of Chancery is rivaled only by the best federal appellate courts in the business-savvy and capability of its judges -- and boasts a much more efficient dispute resolution process. This is why that companies choose Delaware as opposed to other low-corporate-tax states. (Of course, the fact that the state law bars the Court from assigning personal liability to directors and officers unless they exhibit what amounts to criminal behavior is a great inducement, too--but that's a whole different subject).

on a somewhat unrelated note, Delaware is a very *small* state, and its tax income already mostly depends on corporate tax. It has, after all, no sales tax with which to raise revenue. Certainly Delaware, like any state, could use more revenue to help its failing schools--but I don't know that raising the corporate tax rate to do so would have that much of an impact on corporate balance sheets.

One of my greatest frustrations is that while progressives generally have the right idea -- and the moral high ground -- their occasional failure to address all the facts on the ground tends to alienate the moderates. When we complain that US multinationals are evading taxes,and the other side (correctly) observes that they already pay more federal tax than any other country's multinationals (except for maybe those from Japan) and we roll our eyes and snicker in response--well, that doesn't get us very far. I would rather see a discussion, for example, of why the higher corporate tax rate doesn't make US companies uncompetitive. *That* would nail the tail on the donkey.

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