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Home Publications Blogs Beat the Press The "Enormous" Cost of Corporate Inversions: Really Big Numbers at the Washington Post

The "Enormous" Cost of Corporate Inversions: Really Big Numbers at the Washington Post

Wednesday, 06 August 2014 04:14

In an article on corporate inversions (relocating their official headquarters to another country) the Washington Post told readers:

"the potential costs to the U.S. treasury are enormous. One measure, by the congressional Joint Committee on Taxation (JCT), suggests that the nation stands to lose nearly $20 billion in tax revenue over the next decade. Former JCT director Edward Kleinbard said he thinks the potential loss is much higher."

For those wondering how big a deal $20 billion over the next decade is, the Congressional Budget Office (CBO) projects total revenue over this period of $40.6 trillion, which means that the JCT estimate would imply a lose of revenue of 0.05 percent. To make another comparison, Medicare spending has been coming in far lower than projected in recent years. The most recent projections for net spending in 2015 is $524 billion. By comparison, in 2008 CBO projected that we would spend $609 billion in 2015, implying a saving of $85 billion in 2015 alone. Carrying through the differences in projected growth rates in the most recent projections with the growth rate projected in 2008, the savings from lower Medicare spending would exceed $1 trillion, making them more than 50 times "enormous."

This does not mean that the Congress and the president should not try to stop a practice that serves no economic purpose and will needlessly cost the government a substantial amount of revenue. It is also important to note that this gaming of the tax code imposes real costs on the economy. There are financial firms that will earn lots of money from this sort of financial engineering. The resources used by these firms (e.g. the labor of the accountants and lawyers engineering the switch) could instead be used productively. In effect. some people are getting very rich being paid to dig holes and fill them up again, in other words, doing work of no economic value.

This is a problem with all economic transactions that become profitable wholly or partly because of quirks in the tax code. For example, much of the wealth of private equity fund managers can be attributed to their exploitation of the deduction for interest payments. This deduction effectively subsidizes heavy corporate leverage, which is undesirable from an economic standpoint since it increases the risk of bankruptcy.

The economic waste associated with tax loopholes, which almost always makes the rich richer, is at least as important a reason to be concerned about corporate tax loopholes as the lost revenue to the government.

Comments (3)Add Comment
Tax Loss Versus Economic Waste: Exactly Wrong or Approximately Right
written by Last Mover, August 06, 2014 7:23
The economic waste associated with tax loopholes, which almost always makes the rich richer, is at least as important a reason to be concerned about corporate tax loopholes as the lost revenue to the government.

True, but the two are rarely correctly separated in MSM. Yet the difference between the two is fundamental, one the opportunity to be a "maker", the other reduced to a "taker" of redistribution from the makers by way of taxation.

The practice of avoiding taxes is a proud traditional mainstay of the political right, especially among "makers" who add no economic value. It squares with privatized gains to increase "efficiency" as they socialize losses - including through avoided taxes as well as sheer market power in the private sector specifically designed to wipe out effective competition.

Compared to lost tax revenue, the obvious waste created by these "makers" has no quantified counterpart to measure easily and report. The counterfactual is more difficult to construct in terms of "effective market forces" that could have weeded out wasteful makers, replaced with truly efficient ones.

The sock puppets just don't have time to deal with the counterfactual of economic waste compared to that for tax revenue loss. For them it's far easier to be exactly wrong than approximately right, since they don't have to talk about market power and failed markets in general that act to kill economic opportunity in the cradle for the middle and lower class.
A way to help correct innumeracy...
written by Mark Brucker, August 07, 2014 9:14
I think that at one time in Britain what in the US is called a billion was stated as a thousand-million. I think this way of speaking would help people to better comprehend the difference between 10 to the 6th and 10 to the 9th!
written by Mark Brucker, August 07, 2014 9:19
Interesting further info on British usage:
How many is a billion?

In British English, a billion used to be equivalent to a million million (i.e. 1,000,000,000,000), while in American English it has always equated to a thousand million (i.e. 1,000,000,000). British English has now adopted the American figure, though, so that a billion equals a thousand million in both varieties of English.

The same sort of change has taken place with the meaning of trillion. In British English, a trillion used to mean a million million million (i.e. 1,000,000,000,000,000,000). Nowadays, it's generally held to be equivalent to a million million (1,000,000,000,000), as it is in American English.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.