Tax Break

Essential reading: HP loses Dutch tax shelter case, popular deductions on the block, and more

May 15, 2012

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

* HP loses $190 million tax case against IRS. Lynnley Browning – Reuters. Hewlett-Packard Co on Monday lost a battle with the U.S. Internal Revenue Service for more than $190 million in tax refunds tied to a Dutch tax shelter designed by the derivatives arm of American International Group. The ruling turns a spotlight on an aggressive tax-cutting strategy created last decade by AIG Financial Products and bankrolled by several European banks. The strategy involved trading derivatives with the aim of generating capital losses and foreign tax credits for large corporations, like HP, which then used them to try to lower their U.S. tax bills. Link

* In Republicans’ push for tax overhaul, popular deductions on the block. Donna Smith – Reuters. Republicans have not touched hundreds of tax breaks in tax laws, fearing that doing so could be called a tax hike. That could be changing. They’re not advertising it, but Republicans in Congress, along with a few Democrats, are exploring the idea of limiting or ending some of Americans’ most sacred tax breaks. They include deductions on contributions to 401(k) retirement accounts and possibly those on home mortgage interest, each of which save millions of Americans thousands of dollars each year. Link

* Brown warns Californians: Taxes or cuts. Jim Carlton – The Wall Street Journal. California Gov. Jerry Brown laid out a revised budget plan that relies on deeper spending cuts and higher taxes to bridge a projected state deficit that has widened to $15.7 billion from $9.2 billion since January. The Democratic governor said Monday he had no choice but to cut even deeper into social services to help close a budget gap that has shot up due to lower-than-expected tax revenue and delays and court-ordered impediments to spending cuts. Brown proposes to nearly double spending cuts to $8.3 billion for fiscal year 2012-13 from a January estimate that $4.2 billion of reductions were needed. Link

* Hollande faces budget shortfall test. Hugh Carnegy – The Financial Times. There will be none of the “bling-bling” that accompanied Nicolas Sarkozy’s entry to the Elysée palace five years ago when François Hollande is inaugurated as France’s new president on Tuesday. To finance his campaign promises — estimated at 20 billon euros over five years — and to cut the deficit, Hollande has laid out a raft of new tax measures. These include repealing a range of tax breaks for companies and households, raising corporation tax on big companies to 35 percent from 30 percent, a surtax on banks and an increase in wealth taxes, inheritance tax, capital gains taxes and income taxes — including a marginal rate of 75 percent on incomes above 1 million euros. Link

* California ugly. The Wall Street Journal editorial. It looks as if that Facebook IPO may not be enough to save California’s fiscal crisis after all. Facebook co-founder Eduardo Saverin has renounced his U.S. citizenship to move to Singapore, which has no capital gains tax. And now we learn the Golden State’s budget deficit will come in at $16 billion, up from a merely awful $9.2 billion estimate in January. California Controller John Chiang reported last week that April tax collections were a gigantic 20.2 percent, or $2.44 billion, below 2012-13 budget projections. You have to admire Mr. Chiang’s capacity for understatement as he noted that “revenues disappointed.” Yes, and J.P. Morgan’s whale trade was a $2 billion rounding error. Link

* Saying no to state bailouts. Kevin Brady and Jim DeMint – The Wall Street Journal opinion. States that have followed Europe’s economic policy model of unbridled spending are getting Europe’s economic results: low growth and looming fiscal catastrophe. Higher taxes called for by California Gov. Jerry Brown to help pay for an “unexpected” 74 percent increase in the state’s budget shortfall this year, and Illinois’s recent income tax hikes of 67 percent on individuals and 30 percent on businesses, have done and will do nothing to stem the flood of people and businesses out of those states. It is becoming clear that the only way to force recalcitrant states to put fiscal reform on the table is for Congress to take state bailouts off of it. Link

* Jerry Brown vs. Chris Christie. William McGurn – The Wall Street Journal opinion. On the “millionaire’s” tax, Jerry Brown says that California desperately needs to approve one if the state is to recover. The one on California’s November ballot kicks in at income of $250,000 and would raise the top rate to 13.3 percent from 10.3 percent on incomes above $1 million. Again in sharp contrast, when New Jersey Democrats attempted to embarrass Chris Christie by sending a millionaire’s tax to his desk, he called their bluff and promptly vetoed it. Link

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