Today we reprint portions of a column from John Mauldin, How To Benefit From The Fiscal Cliff Pork Barrels
By John Mauldin | January 17, 2013
In all of the emotional wrangling over the Fiscal Cliff, politicians may posture in front of the microphones, but behind the scenes, they calmly go about their business of looking after those that are their supporters. What follows is a partial reprint of some of the pork barrel items included by politicians in the latest agreement, which supposedly was to deal with the fiscal cliff issue.
What might reduce the USA spending more than any other measure, is the elimination of riders and pork barrel items added to other bills that quietly get passed and ignored within the larger context of the emotional issue at hand.
Extracts from the Article
Once again Congress included all sorts of corporate pork worth billions of dollars for everything from NASCAR racetracks to Puerto Rican rum and other special-interest provisions.
According to the Congressional Joint Committee on Taxation, the cost of these additional tax breaks will cost US taxpayers more than $63 billion just in 2013 alone. Here are the main pork beneficiaries:
Pork Barrel #1: Tax Breaks for Offshore Loans
Section 322 of the bill provides an “Extension of the Active Financing Exception to Subpart F.” “Active financing” is a fancy phrase that allows manufacturers and banks to defer taxes when they engage in special types of financial transactions. In short, it rewards firms to loan money to foreigners instead of American companies.
For example, the active-financing exception permits big banks like Morgan Stanley to avoid the 35% corporate tax rate on interest income from money lent overseas. Multinational companies with financing arms, such as Ford and General Electric, will benefit from this exception to lower their tax bills.
The exception is worth a mountain of money to a handful of corporations. It even has its own lobbying coalition – the Active Finance Working Group – which serves as a prime example of how important the 20 or so companies that benefit from the exception consider it.
Pork Barrel #2: Tax Breaks for Offshore Jobs
The fiscal-cliff deal gives huge tax breaks to American companies that sell their products through overseas affiliates.
Called a “pass-through” exemption, this loophole allows American companies to set up a new corporation in a tax haven, like the Cayman Islands, and to sell that new offshore company its valuable patents owned by the US parent company.
The royalties on overseas licensing of that patent that are earned would then be subject tono taxes.
Pork Barrel #3: Luxury Condos for Wall Street
Section 328 of the bill extends tax-exempt financing for the “Liberty Zone,” the area around the former World Trade Center, for another year. This tax break is supposed to help fund reconstruction after 9/11, but some have found that the bonds have mostly helped finance new luxury apartments, not to mention the construction of Goldman Sachs’ new headquarters.
Pork Barrel #4: Boxcars of Free Railroad Money
Section 306 of the fiscal-cliff bill gives a juicy tax credit to railroad companies to provide maintenance on their own lines. This credit costs about $165 million per year and will survive another year.
Pork Barrel #5: Thank you, Hollywood
The fiscal-cliff bill renews “special expensing rules for certain film and television” productions.
Movies and television studios can deduct up to $15 million of their costs if more than three-fourths of a project’s production takes place in the United States. The incentive will cost an estimated $266 million in 2013.
Pork Barrel #6: Tax Breaks for Hedge funds and Private Equity
The mainstream media characterized Mitt Romney as an evil, job-killing private-equity pirate and loudly criticized the favorable tax treatment -called “carried interest” – that he enjoyed on his Bain Capital profits.
The bottom line is that hedge fund and private-equity moguls will continue to be taxed relatively lightly after the new fiscal cliff legislation.
The profits from investing other people’s money – AKA carried interest – will continue to be taxed as long-term capital gains for hedge fund and private-equity managers.
Pork Barrel #7: The Answer, My Friend, Is Blowing in the Wind
It is no secret that the Obama White House is very friendly toward the green-energy industry, so it should not surprise you to learn that there is a big tax credit for the wind power industry. The fiscal-cliff deal gives wind producers a 2.2-cent tax credit for every kilowatt hour they generate in their first 10 years of operation. In broad terms, this credit is worth about $1 million for every large wind turbine.
Those are just the most egregious pork recipients, but the list is a lot longer and includes:
- Mine rescue team training credit (Sec. 45N)
- Fifteen-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements (Sec. 168(e))
- Election to expense mine safety equipment (Sec. 179E)
- Temporary increase in limit on cover-over of rum excise taxes to Puerto Rico and the Virgin Islands (Sec. 7652(f)); and
- American Samoa economic development credit (Section 119 of the Tax Relief and Health Care Act of 2006, P.L. 109-432, as modified).
These giveaways of taxpayer money make my blood boil, as they should for you too. We’re at the endgame of the government’s wasteful spending, and they have yet to address it. Washington’s debts are going to explode and crush our government; they’re also going to distort the free markets for years to come.
I see nothing wrong with most of these projects and support them. Who isn’t for mine safety? And expensing of development costs makes sense. I am all for fixing railroad lines. But why on tax-payer money? Why isn’t my business given special tax treatment? Or yours? Aren’t the jobs I create valuable jobs? At what point do we stop subsidizing income for those who are politically connected, and leave the rest of us to catch as catch can ?
I am for getting rid of ALL so-called tax expenditures for business and dropping the corporate tax rate to 15% (or even 12.5% – let’s compete with Ireland.) But no deductions for anything. You make over $100,000, you pay 15%. And 10% on foreign income. Period. No exceptions. No “Double-Dutch” loopholes, no Irish jigs, no hiding income. And at 10% no one would. They would bring their money back to the US and are then more likely to invest it here. That would be worth hundreds of billions in tax revenues to the US over the next ten years, not to mention a boost to the economy. Just saying…
Thanks John. Appreciate your insight.
It does get a bit wearisome to hear the same malfeasance continuing year after year, and decade after decade. There are serious flaws in democracy and the ability of politicians to shout one slogan, and yet conduct themselves inappropriately, is one of the most serious flaws. I suppose that human nature being what it, we couldn’t expect more.
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