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What to do with Danaos? An Application of the Real Corporate Profits Tax

Write-Off: The Tax Blog

Danaos is a company that owns and leases large containerships. The giant kind of ship, like recently got wedged in the Suez Canal. But, this article is not about ship wedgies, but rather, what would happen with Danaos if we were to have a real corporate profits tax, as Elizabeth Warren proposed on the campaign trail, and, as she recently mentioned in a hearing last month. So, what are the issues with Danaos and the real corporate profits tax? Here are some examples:

  1. The RCPT taxes firms with over $100M in book income at a rate of 7%. The details on this tax are pretty scant, but, Danaos is an interesting case—it had $100,048,000 in pretax income in 2020. Like many firms, Danaos may well chose to alter its financial accounting choices to avoid this tax entirely. Prior research shows that when you tax book income, firms make income decreasing financial accounting choices.
  2. Danaos is a Greek company incorporated in the Marshall Islands, but, is listed on a U.S. stock exchange. What does the RCPT do with foreign firms? The tax appears to tax the worldwide income of U.S. public firms, but, what to do with foreign firms operating in the U.S. and listing in the U.S., or foreign firms not operating in the U.S. but listing in the U.S. These are tricky decisions, and, made incorrectly, would drive foreign filers from listing in the U.S. (and, in some cases, firms operating in the U.S. to stop operating in the U.S.).
  3. Danaos is physically headquartered in Greek, incorporated in the Marshall Islands, but, as a shipping company, as with all shipping companies, gets special tax treatment in the U.S. As Danaos notes, “Pursuant to the U.S. Internal Revenue Code (the “Code”), U.S.‑source income from the international operation of ships is generally exempt from U.S. tax.“ Whether that I good policy is beyond the scope of this post, but, it is the current law. If we decided to tax firms operating and listing in the U.S., what to do with big exceptions like this? The RCPT would be a huge reversal on that policy, and, would dramatically affect many shipping companies, including cruise lines, that are headquartered here.

These are three examples of issues with the Real Corporate Profits tax that suggest that a tax, even when advertised as very simple, can get complex and hairy pretty quickly. It is not that there might not be good answers to these questions, but, it is the fact that they would not create winner and losers, in some cases with extreme results.

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