Unintended consequences. Photo credit: David King on Flickr

Unintended consequences have probably plagued every tax law since the beginning of time.  As described previously with regard to import tariffs on Ford vans, wily taxpayers can and will find ways to pay lower taxes by exploiting loopholes unwittingly created by legislators when they are crafting the laws and trying to pander to lobbyists and constituencies along the way.  In Saturday’s Wall Street Journal (which I happened to have time to actually read — something that is in short supply these days) there were two pieces in the same section that highlighted the nature of unintended consequences.

The first of these is a piece on US companies that are flush with cash on paper, resorting to borrowing funds to avoid repatriating income back into the United States that was earned elsewhere.  So instead of being able to create jobs and innovations at home, the unintended consequence is that the money is being reserved to spend (now or later) overseas.

Politicians have been carping about the more than $2 trillion in cash sitting idle in corporate coffers even as unemployment remains high. But much of that cash isn’t in the U.S.; it is abroad. And it isn’t likely to come back home unless U.S. tax laws change.

U.S. companies are taxed at up to 35% when they bring home the earnings generated through the operations of their overseas subsidiaries. They get a credit for any taxes paid to foreign governments—but, since the corporate-tax rate in the U.S. is one of the world’s highest, most companies are in no rush to bring the money back onshore. By keeping those earnings abroad, U.S. companies can indefinitely defer their day of reckoning with the IRS.

That can put firms in the peculiar position of having tons of cash offshore that they might need but can’t use at home without taking a tax hit.

The U.S. is the only major country that taxes foreign earnings of its own companies this way. American investors may not come out ahead either. In a 2007 survey of executives at more than 400 companies, Massachusetts Institute of Technology economist Michelle Hanlon found that the desire to avoid the repatriation tax led to a variety of distortions, most of which end up making companies less efficient.

Particularly noteworthy is that the United States is the only major country with these kinds of regulations.  That creates an unequal playing field and may result in more jobs being off-shored in the future.  Read more at:

The Intelligent Investor: Why Investors Can’t Get More Cash Out of U.S. Companies. Jason Zweig. Wall Street Journal. (Eastern edition). New York, N.Y.: Feb 19, 2011. pg. B.1

The second article is a unique take on the “marriage penalty” that hits joint filers with higher income taxes than if they had remained single.  This one focuses on same-sex couples that have a recognized union according to state law but that is not recognized (because no same-sex union is) at the state level.

U.S. tax and property laws are so complex that unintended consequences are common. Here is one: Thanks to a 1996 federal law aimed at preserving traditional marriage, thousands of same-sex couples in California, Nevada, and Washington state could get big tax bonuses on their federal returns starting this year.

The bonuses are off-limits to heterosexual married couples—a sharp reminder of the “marriage penalty” that often dings two-earner couples.

The three states also now apply community-property laws to registered domestic partners. So the Internal Revenue Service—which must follow state property laws—has ruled that these couples should figure their total community income and split it down the middle, starting in 2010.

That is where the benefit comes in. Although domestic partners must divide their income equally, the federal Defense of Marriage Act prevents the IRS from treating these couples as married joint filers. So for 2010 and after, each partner will claim half the community income but still file as single or head of household.

The result, in many cases, is a federal tax savings because a couple will avoid the marriage penalty that often raises taxes for two-earner heterosexual married couples.

“We’re speaking in hushed tones about this benefit, trying not to call attention to it,” says Chris Kollaja, a CPA with A.L. Nella & Co. in San Francisco.

WEEKEND INVESTOR — Wealth Manager — Tax Report: Same-Sex Couples And The Marriage Penalty. Laura Saunders. Wall Street Journal. (Eastern edition). New York, N.Y.: Feb 19, 2011. pg. B.9