Sunday, May 12, 2013

Delaware = Cayman Islands North

If you every wonder about the power companies to "rig" the system in their favor, take a look a Delaware.  The state is know as Cayman Islands North. Delaware is a state that benefits from helping companies and individuals avoid state taxes. It also promotes business friendly, "light" regulation.  The state has been used by money-launders and arms smugglers.

Almost all of the financial activities in the state are linked to corporate tax reduction or tax avoidance. There was some back office check processing going on during the 90's and 00's but that has greatly diminished. About 50% of the fortune 500 are incorporated in Delaware. There is little real economic activity going on in Delaware outside of Dupont and Perdue Chickens. Delaware is little natural resources and remained a slave state until emancipation.

Instead what Delaware has done is exploit a loophole in the tax system allowing companies to "shop" for a state jurisdiction for tax purposes. For state tax purposes, companies recognize some their US profits in 0% tax Delaware regardless of where they are earned rather than in high tax NY state. Corporation use this tactic to reduce taxes on royalties and other payment that can be recognized in any jurisdiction.

Though it is small potatoes  Delaware has also benefited greatly from individuals avoiding local sales taxes.  People from Maryland, Pennsylvania and New Jersey drive to Delaware for consumer products like liquor, appliances, flat screen TVs and cars.  This damages state tax coffers resulting in higher taxes for everyone.

To it's credit, Delaware has set-up specialized courts, like the court of chancellory, to hear business cases.

The sad part is that Delaware is really usurped federal power.  And not in a good way like the Pennsylvania Department of Agriculture or California EPA's Air Resources Board. Delaware let corporations avoid taxes and robs other states revenues.

You can read more details in the NYT piece: "How Delaware thrives as a corporate tax haven."

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