On today's Planet Money:
-- Figuring a little cushion couldn't hurt, West Virginia's Centra Bank borrowed $15 million from the Troubled Asset Relief Program. Then CEO Douglas Leech decided TARP's restrictions weren't worth the hassle and moved to repay the money. Getting out cost the healthy bank $750,000, for complicated reasons. Now David Kestenbaum has the chance to live his radio dream: Stopping his NPR story midway so he can explain it for the rest of us.
-- When the Treasury announces the results of the banking stress tests this week, says Douglas Elliott of the Brookings Institute, we'll be looking at numbers based on a lot of information and a slew of judgment calls. Elliott, who's got a new paper out on the tests, says the real test for the economy isn't the toxic assets, but the growing defaults on far more ordinary loans.
-- It's tough out there for a clown. Mandy Dalton takes apart the business of buying $300 shoes for entertaining kids in the middle of a deep recession and a swine flu panic.
Bonus: The corporate tax loopholes President Obama wants to close.
Download the podcast; or subscribe. Intro music: Crystal Castles' "Untrust Us." Find us: Twitter/ Facebook/ Flickr
Marc Chandler, a currency strategist at Brown Brothers Harriman, sent over a primer on President Obama's announcement about a move to end overseas tax shelters for companies. Chandler says he's all for the plan.
The counter-argument, I'll just say, is that the economy depends on the free movement of capital and that companies are supposed to maximize profits, including by moving capital overseas and seeking every legitimate tax advantage.
Back to Chandler's primer, which is a touch technical but not frighteningly so. It starts with a "check the box" rule that took effect in 1997:
Initially adopted to reduce paperwork (and who is not in favor of that?), it allowed business to classify their corporate structure in the most tax efficient (minimization?) without triggering an IRS challenge. These rules, so the critics argue, were gamed and multinationals apparently created subsidiaries whose sole purpose was to shift profits to low tax countries. One the corporate assets were in in the low tax country, the multinational parent would borrow from the subsidiary. The interest payments were deductible from the US tax and tax fee in the tax-havens.
The Clinton Administration, which had initially adopted the rules, quickly realized their shortcomings and tried to rescind them, but ran into blow-back from companies and their legislative allies.
The other parts of Obama's proposals are reportedly modeled on proposals form the Chairman of the House Ways and Means Committee from 2007. These include a proposal to defer most expense deductions, including for interest paid, until the US tax is paid on the foreign income. Under current practices, a US company can deduct 35% of interest paid to a foreign-based subsidiary that owes little or no tax to its host country. Obama seeks to close this window for tax arbitrage, which in effect reduces the corporate tax burden at the expense of the US Treasury. The Obama Administration appears to be compromising here as some wanted an outright repeal of these rules.
Another part of Obama's plan addresses the foreign tax-credit rules. US rules gives companies a dollar tax credit for every dollar in foreign taxes it pays. US companies are projected to use this rule to "save" about $4.3 bln a year.
The key point regarding the Administration's plans is that they can still be rejected by a blue-ribbon panel appointed by Obama and led by Paul Volcker. Like other developments in the new Administration, panels and reviews are conducted, but the President is not waiting for them to conclude before moving ahead.
The Obama administration says shuttering the tax havens will generate something like $210 billion over 10 years. Chandler puts the number closer to $190 billion.
Copyright 2022 NPR. To see more, visit https://www.npr.org.