New York companies threatened for legally reducing taxes

Manhattan District Attorney Robert Morgenthau has threatened to prosecute corporations that reduce their New York taxes by relocating their legal residence to a foreign country. The message to New York-based company executives is clear: try to save taxes for shareholders by reincorporating abroad, you'll run the risk of going to jail. Critics are appalled.

  • Morganthau's actions criminalise a public policy debate that has gone on in Washington for months.

  • It makes a mockery of the long-standing, well-understood difference between legal tax avoidance and illegal tax evasion – a right conceded to taxpayers by a famous 1947 U.S. Supreme Court decision.

  • Critics contend that Morganthau seeks to blur that line by exploiting public disgust with big corporations post-Enron by attacking so-called corporate inversions as tax evasion.

  • But the fact – bolstered by the Court's decision – is that corporate inversions are not illegal or even immoral – the equivalent of an individual moving from high-tax Massachusetts to low-tax New Hampshire while continuing to work in Boston.

    So, analysts ask, what's in it for a corporation to be based in New York?

  • A New York corporation pays 7.5 percent of its profits to the state simply because it's incorporated there.

  • The same company would pay 5.5 percent in Florida – even if property, sales and personal income taxes would still be levied as appropriate.

  • The answer, Bartlett says, is that most companies get nothing from New York to justify paying it higher taxes.

    The real question is why a company is based in the U.S. at all, as compared with, say, Bermuda. In fact, the question isn't how to prevent corporate inversions, but why there aren't more of them.

    Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, June 12, 2002.

    For more on State Taxes

    FMF Policy Bulletin\18 June 2002

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