Tax Break

Essential reading: Private equity defends deductions, Brazil’s tax “lion,” and more

May 8, 2012

Welcome to the top tax and accounting headlines from Reuters and other sources.

* Private equity defends business-debt deductions. John McKinnon – The Wall Street Journal. A private-equity group will release a report on Tuesday that attacks one of the central tenets of many tax-overhaul plans in Washington – the idea of curbing deductibility of business debt. Limiting debt deductibility could raise the effective tax rate on new investment and could well stifle growth, said the Private Equity Growth Capital Council, a trade group. The group says that a limit on deductibility of interest expenses in exchange for a 1.5 percentage point reduction in the corporate rate, “would increase the marginal effective tax rate on new corporate investment from 31.0 percent to 33.1 percent. Link

* House bill shields defense from cuts. Janet Hook and Damian Paletta – The Wall Street Journal. House Republicans, seeking to prevent defense-spending cuts at the end of the year, advanced a plan that would instead reduce spending on health-care programs, food aid and other major domestic initiatives of the Obama administration. Democrats agree that the arbitrary cuts should be replaced with a more carefully calibrated budget agreement, but they want a mix of defense cuts, tax increases and domestic spending cuts. Many Republicans oppose any tax increases and want to avoid the $55 billion in scheduled defense cuts next year and partially replace them with cuts in domestic entitlement programs such as Medicaid. Link

* Brazil’s secret fiscal weapon: the tax “lion.” Alonso Soto – Reuters. In Brazil, groups of armed agents fly around the country by helicopter, pounding on doors and instilling fear in the hearts of those who break the law. They’re not the police – they’re from the tax agency. The Federal Revenue Service will be one of the most important keys to Brazil’s economic prospects in 2012. President Dilma Rousseff is counting on the agency’s tax-collecting prowess to help her government meet ambitious budget targets without smothering the country’s suddenly brittle economy. Link

* Could dividend tax policy knock 30 percent off stocks? It’s complicated. Jonathan Cheng – The Wall Street Journal. We haven’t seen much of a drop-off in investor interest in dividend payers, or stocks generally. There has already been an odd pick-up in stock prices after the weekend’s European elections. If anything, dividend payers have been surging lately, as part of an increasingly noticeable shift in weight towards safer, steadier dividend payers. Telecommunications stocks, a steady dividend-paying group, are among the day’s best performers and have been the strongest stocks so far this month, together with favorites consumer staples and utilities stocks. Link

* Tax planning: Global crackdown on avoidance forces wealthy to be transparent. Elaine Moore – The Financial Times. The UK government’s announcement this year that it would crack down on aggressive tax planning has prompted some of the country’s wealthiest individuals to reconsider their financial arrangements. The emphasis on closing tax loopholes has led to a rise in the number of clients who wish their affairs to be structured in a more transparent and holistic way. Authorities in Europe and the United States have also been taking increasingly tough stances on tax avoidance and financial secrecy over the past few years, forcing national and international investors to disclose more information. Link

* Of course 70 percent tax rates are counterproductive. Alan Reynolds – The Wall Street Journal. President Obama and others are demanding that we raise taxes on the “rich,” and two recent academic papers that have gotten a lot of attention claim to show that there will be no ill effects if we do. The first paper, by Peter Diamond of MIT and Emmanuel Saez of the University of California, Berkeley, appeared in the Journal of Economic Perspectives last August. The second, by Mr. Saez, along with Thomas Piketty of the Paris School of Economics and Stefanie Stantcheva of MIT, was published by the National Bureau of Economic Research three months later. Both suggested that federal tax revenues would not decline even if the rate on the top 1 percent of earners were raised to 73 percent to 83 percent. Link

* Will rich people desert the U.S. if their taxes are raised? In recent years, the number of Americans renouncing their citizenship has increased. According to the international tax lawyer, Andrew Mitchel, the number of Americans renouncing their citizenship rose to 1,781 in 2011 from 231 in 2008. Factors including climate, proximity to those in similar businesses and the availability of amenities like the arts and cuisine play a much larger role. Link

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