Suggested Answers to the Short Quiz

Suggested Answers to the Short Quiz

Postby johnkarls » Wed Sep 20, 2017 1:46 pm

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Suggested Answers to the Short Quiz


A. Introduction

Question A-1

Is our focus book (“A Fine Mess”) a good primer for understanding the basics of taxation?

Answer A-1

Yes.

Question A-2

However, does our focus book focus on “the trees” at the expense of “the forest” -- the really-important policy questions which are ignored?

Answer A-2

Yes, our focus book ignores the really-important policy questions.



B. Value-Added Taxes (VAT’s)

Question B-1

Does Chapter 12 (pp. 227-248) focus on Value-Added Taxes (VAT’s)?

Answer B-1

Yes.

Question B-2

Does Chapter 12 provide a decent explanation of the basics of VAT’s?

Answer B-2

Yes.

Question B-3

However, does Chapter 12 fail to explain that VAT’s act as import tariffs and export subsidies?

Answer B-3

Yes, Chapter 12 does fail to explain that VAT’s act as import tariffs and export subsidies.

Question B-4

And does Chapter 12 fail to explain that the International Monetary Fund (IMF) has for many decades coached developing and transition countries to convert their turnover taxes, manufacturer’s tax, retail sales tax, and other indirect taxes to VAT's?

Answer B-4

Yes, Chapter 12 fails to explain what the IMF has been doing for many decades.

Question B-5

In other words, does Chapter 12 fail to explain that the IMF coaches the rest of the world to PROTECT THEIR WORKERS while The American Establishment (which we have always defined as the billionaires who, since 1992, have “owned” virtually all of the pols of both political parties, who “own” many (if not most) members of The Mainstream Media, and who “own” many members of academia) have refused, as part of their “War on American Workers,” to permit the U.S. to protect American workers with a VAT!!!???

Answer B-5

Yes, Chapter 12 fails to explain that the IMF coaches the rest of the world TO PROTECT THEIR WORKERS while The American Establishment refused, as part of their “War on American Workers,” to permit the U.S. to protect American workers with a VAT.


[Questions B-3 through B-5 were addressed in a 11/29/2016 topic proposal that expired because it failed to receive any votes for the next 6 meetings. Indeed, Questions B-4 and B-5 are effectively quoting from the proposal’s description of “Value Added Tax: A Comparative Approach (Cambridge Tax Law Series)” (Cambridge University Press - 2/2/2015 - 570 pages).]

[The 11/29/2016 topic proposal will be posted separately with this Short Quiz in the Participants’ Comments Section of http://www.ReadingLibererally-SaltLake.org for our 10/4/2017 meeting.]



C. Supposedly “Off Shore” Corporate Funds About To Cause Another Economic Meltdown

Question C-1

Does our author “Drink the Kool Aid” that the 2008 Economic Meltdown was NOT caused by the so-called “American Jobs Creation Act of 2004” which permitted $4 TRillion -$5 TRillion of earnings that had piled up in TAX-HAVEN SUBSIDIARIES and represented the profits FROM EXPORTING AMERICAN JOBS, to be repatriated as dividends to the U.S. BASED MULTINATIONAL COMPANIES (MNC’S) THAT HAD EXPORTED AMERICAN JOBS at a special one-time 5.25% corporate income tax rate (vs. the normal 35%)???

Answer C-1

Yes, our author has, in various places in his book, drunk that “Kool Aid”!!!

Question C-2

Had those supposedly “off shore” funds been long-since loaned by the US MNC’S THAT HAD EXPORTED AMERICAN JOBS to the CHUMP AMERICAN COMPANIES THAT HAD NOT EXPORTED AMERICAN JOBS???

Answer C-2

Of course!!!

Under the U.S. tax law, tax-haven funds cannot be loaned to (or otherwise benefit) the U.S. parent or any related corporations so, as a practical matter, they had to be invested in U.S. Treasuries or loaned to unrelated companies.

And as we so often verified from their annual SEC Form 10-K’s and other sources, the US MNC’s that Exported American Jobs did NOT stuff the money into mattresses located in the tax havens!!!

And since the quantities involved exceeded the size of large banks, they “cut out the middle men” and made their loans directly.

Indeed, as we so often marveled, Microsoft alone had more than $1 TRillion in tax-haven funds which, according to the financial press, had long since caused stock analysts to value Microsoft stock AS A BANK rather than a software company!!!

Of course, the best return on those funds (taking into account safety) was to loan them to the CHUMP AMERICAN COMPANIES THAT HAD NOT EXPORTED AMERICAN JOBS!!!

Question C-3

Accordingly, did the so-called “American Jobs Creation Act of 2004” force the CHUMP AMERICAN COMPANIES THAT HAD NOT EXPORTED AMERICAN JOBS to REDUCE AMERICAN PAYROLL AND CAPITAL EXPENDITURES 2005-2007 by $4 TRillion - $5 TRillion so that they could repay the US MNC’S THAT HAD EXPORTED AMERICAN JOBS???

Answer C-3

Yes.

Technically, the American Jobs Creation Act of 2004 appeared to require this to be done within 12 months.

But MNC’s are NOT stupid, so they decided NOT to involve bankruptcy courts but instead dictated stiff terms that required the CHUMP COMPANIES to “cut to the bone” (and even “into the bone”) payroll and capital expenditures so that the MNC’s would be repaid quickly, typically within 3 years.

Like almost any legal provision, the 12-month rule was NOT an obstacle because any MNC worth its salt would simply have its lead bank make a loan to the tax-haven sub(s) equal to the 2006 & 2007 amounts and an off-setting loan from the U.S. Parent following its wire-transfer receipt of those funds from its tax-haven sub(s) as a dividend.

[The three “wire transfers” pursuant to which the “cash” wound up in its original starting point in the lead bank were a “big nothing” (except for the accounting entries on the balance sheets of the tax haven sub and its parent MNC) even in yesterday’s financial world.]

The rest is history.

Congress was in such a panic that only days after the House of Representatives re-convened in January 2008, it passed the Economic Stimulus Act of 2008 providing most taxpayers with immediate $300 rebates ($600 for most married couples) and investment incentives for businesses. It passed the Senate a week later and was signed into law on 2/13/2008. [Probably setting a record for least time for enacting a bill.]

Question C-4

Did the US MNC’S THAT HAD EXPORTED AMERICAN JOBS use virtually all of the $4 TRillion - $5 TRillion to re-purchase their own corporate stock???

Answer C-4

Of course!!!

The American Jobs Creation (sic) Act required the dividends from the tax-haven subsidiaries to be invested in American payroll or capital expenditures.

This, of course, did not produce an increase in American payroll or capital expenditures because the dividends were “traced to” or “matched with” the normal level payroll and capital expenditures that the US MNC’s had. And the normal cash flow that would normally have funded the normal level of payroll and capital expenditures was now “freed up” on a tracing/matching basis to redeem stock of the US MNC’s.

Since most stock is held by institutional investors which have restrictions (either legal or practical) on how they can invest their funds, virtually all of the funds they received from stock redemptions were re-invested in stock.

Which, of course, meant that the total value of corporate stock was temporarily bloated by $4 TRillion - $5 TRillion.

But that quickly disappeared as the stock market tanked during the Economic Meltdown.

So ironically, the $4 TRillion - $5 TRillion of earnings from Exporting American Jobs was transformed into an increase of $4 TRillion - $5 TRillion in the value of corporate stock -- WHICH PROMPTLY WENT UP IN SMOKE!!!

Question C-5

Did the Federal Reserve exhibit a complete lack of understanding of what was happening as it lamented throughout the meltdown that the CHUMP AMERICAN COMPANIES THAT HAD NOT EXPORTED AMERICAN JOBS were in desperate need of loans which they could not obtain???

Answer C-5

Yes.

It doesn’t require a very sophisticated Google search to unearth all of The Fed’s laments, accompanied by their lack of understanding about the cause of the conditions that they were lamenting!!!

Question C-6

Since the American economy at the time had a Gross Domestic Product (GDP) of only approx. $15 TRillion, is it any surprise that if Congress was going to require the CHUMP AMERICAN COMPANIES THAT HAD NOT EXPORTED AMERICAN JOBS to reduce their payroll by more than 10% (i.e., by $4.5 TRillion over 2005-2007) there would be an economic meltdown???

Answer C-6

Not to anyone who has passed a basic course in high school arithmetic!!!

Question C-7

And should anyone be surprised that if Congress was going to require the CHUMP AMERICAN COMPANIES to throw 10% of the American workforce out of work, there would be an economic meltdown WHETHER OR NOT THERE HAD EVER BEEN A SUB-PRIME MORTGAGE???

Answer C-7

Of course not!!!

If Congress is going to require 10% of the American workforce to be terminated, then of course every one of the homes owned by the terminated workers was going to be foreclosed in short order even if every one of their mortgages had required a 20% down payment (and other “plain vanilla” terms)!!!

And because there would be nobody to purchase those homes since the American workforce had shrunk by 10%, then of course the real estate market was going to collapse!!!

Question C-8

In other words, doesn’t this batch of Kool Aid comprise nothing more than a successful attempt by the Pols (and their Praetorian Guard, the Mainstream Media) to pretend that Congress was not THE BASIC CAUSE of the 2008 Economic Meltdown?

Answer C-8

What do you think???

Let’s discuss!!! [If anyone has forgotten what we concluded many times in the past!!!]

Question C-9

Just like crab grass, has another $4 TRillion - $5 TRillion of profits FROM EXPORTING AMERICAN JOBS piled up in the tax-haven subsidiaries of the US MNC’S THAT HAVE EXPORTED AMERICAN JOBS???

Answer C-9

Of course!!!

Question C-10

And just like the situation before the so-called “American Jobs Creation Act of 2004,” has the $4 TRillion - $5 TRillion been long-since loaned to the CHUMP AMERICAN COMPANIES THAT HAD NOT EXPORTED AMERICAN JOBS???

Answer C-10

What do you think??? Let’s discuss!!!

Question C-11

Therefore, just like 2008, are we poised to suffer another Economic Meltdown as the CHUMP AMERICAN COMPANIES THAT HAD NOT EXPORTED AMERICAN JOBS are forced to throw American workers out of their jobs so that they can repay what they owe the tax-haven subsidiaries of the US MNC’S THAT HAVE EXPORTED AMERICAN JOBS???

Answer C-11

What do you think??? Let’s discuss!!!

Question C-12

Did we mount Six-Degrees-Of-Separation E-mail campaigns on this problem following our meetings of 11/14/2012 and 5/11/2011???

Answer C-12

Yes.

Question C-13

Is the “last clear chance” (a legal concept that blames an accident 100% on the negligent party that had the “last clear chance” to avoid the accident) to avoid the Great Economic Meltdown of 2018-20?? possessed by the Federal Reserve, each of whose Regional Banks has authority to make emergency loans to businesses in its area???

Answer C-13

Yes.

Question C-14

Since our “Cassandra” warnings on this problem have been ignored, had Yours Truly been intending when the Tax Reform Act clears Congress to write Certified Mail – Return Receipt letters to each of the Presidents of the Regional Federal Reserve Banks to explain the problem and put them on notice that the Great Economic Meltdown of 2018-20?? will be their fault under the Doctrine of Last Clear Chance???

Answer C-14

Yes.

Question C-15

Would the Regional Federal Reserve Banks’ acquisition of $4 TRillion - $5 TRillion of indebtedness of the CHUMP AMERICAN COMPANIES THAT HAVE NOT EXPORTED AMERICAN JOBS constitute a de facto expansion of the monetary supply???

Answer C-15

Yes.

Question C-16

Would that de facto expansion of the monetary supply have to be countered by The Fed’s Open Market Committee which regulates such things as short-term interest rates???

Answer C-16

Presumably.

Question C-17

Since the Federal Debt already exceeds annual GDP, so that any increase in the interest rates paid by the U.S. Government would quickly mean that all of its tax revenues are consumed by interest payments WITH NOTHING LEFT FOR SUCH THINGS AS DEFENSE, are we headed for a catastrophe???

Answer C-17

What do you think??? Let’s discuss!!!

Question C-18

In other words, hasn’t the Fed been forced, for quite some time, to KEEP AMERICAN EMPLOYMENT LOW (!!!) so that it doesn’t have to raise interest rates significantly (they peaked at more than 20% under Jimmy Carter) which would bankrupt the U.S. Government???

Answer C-18

What do you think??? Let’s discuss!!!



D. Does Our Author “Drink The Kool Aid” on Zillions of Other Topics??? For example --

Question

D-1. The Kool Aid that income/wealth disparity is caused by a failure to tax the rich, rather than caused predominantly by The Establishment’s War on American Workers which includes Exporting American Jobs???

Answer

What do you think??? Let’s discuss!!!

Question

D-2. The Kool Aid that income tax rates affect American employment???

Answer

What do you think??? Let’s discuss!!!

Question

D-2-a. In other words, that The Establishment’s Export of American Jobs will not stop until American wages have been reduced to third-world levels???

Answer

What do you think??? Let’s discuss!!!

Question

D-2-b. And our author’s apparent “love affair” with Flat Taxes (Chapter 6, pp. 93-114, reinforced by Chapter 4’s (pp. 49-70) worshipful treatment of Broad-Based Low-Rate (BBLR) taxes) which predominated in Eastern Europe for a while immediately following the collapse of the Old Soviet Union and were mistakenly credited with producing explosive growth rates??? Rather than the fact that Eastern Europe had incredibly low wage levels (COMPARABLE TO THIRD-WORLD LEVELS) which made them a magnet for capital investment from Western Europe and from The American Establishment?

Answer

What do you think??? Let’s discuss!!!

Question

D-3. The Kool Aid that the size of the Internal Revenue Code can be substantially reduced by simply eliminating various deductions/credits and only taxing U.S.-source income??? After all, regardless of however much rates might be reduced, doesn’t the Internal Revenue Code still have to retain all of the zillions of provisions that determine whether income is U.S. source??? And all of the zillions of provisions about how various entities (corporations, partnerships, trusts, etc.) are distinguished from each other and taxed differently??? And all of the zillions about how financial instruments (debt vs. equity, lease vs. ownership, etc., etc.) are categorized and taxed differently???

Answer

What do you think??? Let’s discuss!!!



E. Miscellaneous

Question E-1

Does our author ignore one of the most important issues with current Tax Reform – whether there will be “Static Scoring” or “Dynamic” Scoring??? In other words, will “Tax Reform” be “paid for” or will it “break the bank” accompanied by the argument that it will produce growth which will mean increased future tax revenues about which it is hoped that anybody concerned with the national debt, will believe that the increased revenues will be sufficient to “pay for” the tax reform???

Answer E-1

Yes, our author ignores this important issue.

Question E-2

Is our author correct that Apple Inc. (with collaboration from Price Waterhouse Coopers) and Caterpillar Tractor have engaged in tax fraud???

Answer E-2

Yours Truly has no reason to dispute our author.

Question E-3

Is our author correct that so-called “corporate inversions” (moving the headquarters of U.S. companies to tax havens) are effective???

Answer E-3

Yes and no.

Simply having a small foreign corporation (whether pre-existing as in the aborted acquisition of Pfizer by Allergan, or a small foreign corporation formed for the purpose of buying the U.S. target corporation using the old LBO blueprints) buy an American corporation still requires the resulting organization to go through a lot of grotesque gyrations to get the value out from under the U.S. company without triggering U.S. taxation.

And much of that removal would probably be described by our author as tax fraud if he had gotten into that much detail.

Question E-4

Does our author describe the “standard structure” for EXPORTING AMERICAN JOBS which we have discussed so often over the years and pursuant to which a U.S.-Based Multi-National Company (MNC) has a tax-haven subsidiary (typically a “Non-Resident Singapore Company”) contract with an independently-owned company that the MNC has established (and, typically, financed) in China or other low-wage country to manufacture the MNC’s products to the MNC’s specifications using the MNC’s technology and “know how” UNDER THE SUPERVISION OF THE EMPLOYEES OF THE TAX-HAVEN SUBSIDIARY???

Answer E-4

Yes.

Question E-5

Unlike the Apple Inc. structure addressed by Question E-2, does the “standard structure” described in Question E-4 capture in the tax-haven subsidiary virtually all of the MNC’s profit ON U.S. SALES as well as Non-U.S. Sales???

Answer E-5

Yes.

Before continuing, please read Q&A E-6 about the tax integrity of the “standard structure” involving ancient oil-industry history involving “swing refineries.”

Q&A E-6 talked about “swing refineries” in the Persian Gulf that ran on natural gas that would otherwise be flared and were located where tax exemptions were available or could be negotiated. And where the “swing refineries” could serve temporary needs in East Africa and Asia.

Historically, every major oil company had zillions of refineries in the U.S. close to the markets each of those refineries served.

HOWEVER, just like the P.G. and East Africa/Asia, each major oil company typically had a monster-size “swing refinery” that served temporary needs in its various U.S. markets.

And those “swing refineries” are ALL located in the Caribbean so that the distance travelled by huge crude oil tankers to the Caribbean could be maximized and the distance travelled by small refined-product tankers could be minimized.

And, of course, those “swing refineries” were all located in countries where a tax exemption was available or could be negotiated.

It, of course, was mere “child’s play” to have the refinery owned by a non-U.S. company and the entity that dealt directly with the “swing refinery” sub to, itself, be a non-U.S. sub.

So naturally, the “standard structure” for EXPORTING AMERICAN JOBS with respect to goods that would be manufactured in low-wage countries such as China, would apply to goods destined for the U.S. market as well as goods destined for non-U.S. markets.

Question E-6

And unlike the Apple Inc. structure which our author thinks comprises tax fraud, is the “standard structure” rock solid in terms of qualifying for deferral of the U.S. income tax on tax-haven income until it is distributed (or deemed distributed) as a dividend to the MNC under the “substantial transformation” rule???

Answer E-6

Yes.

Primarily because, like “carried interests” which enable every hedge-fund manager (and every properly-advised Hollywood movie star) to pay capital gains rates on their compensation, the “standard structure” described in Question E-4 comes from time-tested tax principles applied to oil industry practices THAT PRE-DATED THE 1913 INVENTION OF AMERICAN INCOME TAXES.

Digressing momentarily, the ancient oil industry “carried interest” involved one party that owned an undeveloped oil property that was so far down its priority list that it would not get drilled unless another, more desperate, party offered to drill the property in exchange for a percentage ownership of the property. The original owner of the entire property was the “carried party.” And the drilling party was viewed by the U.S. tax authorities as earning the percentage ownership NOT as immediately-taxable compensation for a drilling service, BUT RATHER as a CONTRIBUTION to the combined capital of the enterprise comprising a CAPITAL ASSET.

[NB: that the U.S. tax authorities could have taxed up front as ordinary income the value of the percentage ownership obtained for the drilling service.]

[NB: that, as previously mentioned, earning an interest by drilling was a common feature of the oil patch long before the 1913 invention of American income taxes.]

Back to the Question E-4 “standard structure.”

Virtually all large oil companies since time immemorial have had “swing refineries.”

For example, years ago most of East Africa and Asia was supplied with crude oil from the Persian Gulf.

And yes, it was much more economic to transport crude oil in large tankers, than refined products separately in small tankers.

HOWEVER, the refineries in the various marketing areas throughout East Africa and Asia might NOT match the profile of local demand for particular products from year to year.

So it made sense for large oil companies to have “swing refineries” back in the P.G. which could run on natural gas that would otherwise have to be flared (it is only relatively recently that natural gas can be liquefied and transported in refrigerated tankers for any distance).

And, more importantly, “swing refineries” for which an exemption from income taxes was either available or could be negotiated.

Of course, the oil industry put its “swing refineries” in tax-haven subsidiaries and had inserted into the U.S. tax law more than half-a-century ago an exemption from immediate taxation of the tax-haven income because of the “substantial transformation” involved in refining crude oil into products such as AvJet (aka kerosene), gasoline, lubes, greases, etc.

[Based on the argument that if there was a “substantial transformation” of goods, then putting income into a tax haven was not simply a “paper transaction.”]

Since the oil company might deal with its “swing refinery” subsidiary on the basis of a refining fee or, alternatively, on the basis of selling the crude oil to the sub and buying back the refined products, the “substantial transformation” exception applied to BOTH the “swing refinery” sub and the sub that was dealing with the “swing refinery.”

On the theory, in the case of the sub that was dealing with the “swing refinery,” that it should make no difference whether the “substantial transformation” was being accomplished by hiring a third party to make the “substantial transformation” or by hiring your own employees to make “the substantial transformation.”

However, the existence of “swing refineries” pre-dated the 1913 invention of American income taxes.

And the favorable “substantial transformation” treatment of “swing refineries” was established more than 50 years ago (if not as early as 1913 – I haven’t bothered to “chase that rabbit” of when Subpart F of the Internal Revenue Code was invented and when the “substantial transformation” rule was promulgated, but it was long before I graduated from law school in 1967).

So, of course, just like it was mere “child’s play” to adapt the “ancient oil patch history” of “carried interests” to provide capital gains treatment for hedge fund managers and for the compensation of properly-advised Hollywood movie stars, it was mere “child’s play” to adapt the “ancient oil patch history” of “swing refineries” to provide tax-free tax-haven treatment for the EARNINGS FROM EXPORTING AMERICAN JOBS.

BTW, when Yours Truly chaired the American Bar Association’s International Tax Committee 1994-1996 (comprising the nation’s top 300 international tax attorneys with 22 working subcommittees), he was fond of pointing out (particularly in White Papers submitted to Congress) that European-based MNC’s EXPORTING EUROPEAN JOBS TO LOW-WAGE COUNTRIES SUCH AS CHINA could, unlike their American competitors, repatriate their earnings from exporting European jobs IMMEDIATELY rather than suffering the inconvenience of constipating their tax-haven subsidiaries until Congress enacts one-off tax reductions such as the one that precipitated the 2008 Economic Meltdown and as the one that is being considered by Congress currently.

Question E-7

Why doesn’t our author recognize that combatting The Establishment’s Export of American Jobs can be accomplished by “the stroke of a pen” -- Renewing 1968 Executive Order 11387 to halt the Export of American Capital???

Answer E-7

God only knows!!!

He could offer the really-lame excuse that capital-export prohibitions are NOT tax provisions.

Which, of course, is wrong both theoretically and practically.

Theoretically because a prohibition is a 100% tax.

And practically, because the capital-export returns, though submitted to the Department of Commerce rather than the IRS, were generated by the Tax Departments of the Big-8 CPA firms (yes, there were 8 back in those days).

Or our author could simply be forthright and admit that, as set forth in Section A above, he was merely trying to provide a basic primer on tax principles, while ignoring the really-important policy questions involved in taxation.
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