Lifting the lid on Delaware — corporate America’s tax haven

Most Americans know two things about the US state of Delaware. It’s the home of President Joe Biden and the government has something to do with how business is run.

But as Hal Weitzman points out in his entertaining exploration of its history, What’s the matter with Delaware?, those who live outside America’s first state (to ratify the Constitution) often believe its laws have nothing to do with them. Reading this book will abuse them. The state — a tax-sheltered, legal home to more than a million companies — not only in the U.S., but around the world encourages entrepreneurs to draw a veil around their operations.

A former Financial Times journalist, Weitzman takes a dry topic and brings it to life. Early on, he reveals the frustrations of former US Treasury and Secret Service officer John Cassara. For years he struggled to explain to foreign law enforcement colleagues why he could access so little information about Delaware-registered corporations. In fact, the United States was the first country to criminalize money laundering in 1986.

Not that Delaware has done anything illegal. It is backed by the US Constitution, which gave states the power to charter corporations. Others, such as Nevada and Texas, also compete in this field, but Delaware had the first-mover advantage by using a low-fee, high-volume business model.

Also Read :  Democratic Senator Warnock holds early lead in Georgia runoff

With more than 2,000 books listed on Amazon Delaware history, this should make unpleasant reading for its state leaders. Weitzman devotes a fair share to state history, perhaps a bit too much.

On the cover of 'The Trouble with Delaware'

Two background chapters in the middle of the book provide context for its cooperative form of governance, largely between business and state government, known as the Delaware Way. They include disturbing reports of communal riots and killings. But neighboring Civil War Union states with unpleasant pasts like Maryland have similar stories. Instead, view this book as a business case study of the “Delaware Loophole,” which legally enables companies to pay very low taxes in this tiny state, reducing taxable income in their home states.

State corporate tax as a share of total revenue has declined since 1980, halving from roughly 2.5 percent. Delaware alone generated just $245 million in corporate income tax in 2020. What really pays the bills is the franchise tax, a flat fee (usually $300) for registering a corporation. That fee brought in $1.6 billion that year.

Also Read :  Live updates: Shooter on loose after deadly mass shooting near LA

Tax experts will know all about Delaware. Other ways that Delaware raises money are sometimes less understood. The section on unclaimed property may surprise readers. As one example, any retailer that has incorporated gift card business in Delaware has unspent balances on these cards. If the card has an expiration date, Delaware has the right to claim that money, which creates a nice little state windfall.

Escheatment, as it is known, generated $444mn in 2020, Delaware’s third largest source of funding. Understandably, the loss of tax revenue to Delaware ranks with some companies and states.

The government takes into account that many of its customers may end up registering elsewhere if they become unhappy. After acquiring New Jersey, an early leader in corporate registration, in 1913, Delaware fought newcomers for years. An efficient, low-cost registration system has been developed.

Also Read :  Igiede Earns AVCA All-America Honors

Delaware’s efficiency of registration follows from the fact that it requires little or no identification to incorporate any enterprise or partnership – much less than receiving a parcel from the Royal Mail in the UK.

An important source of ancillary revenue for Wilmington, Delaware’s capital, is through its legal system. Bankruptcy rounds out the life cycle of Delaware company registrations and mergers. The state leads the way in bankruptcy law, not to mention Delaware’s own lawyers, ensuring that a large number of out-of-town lawyers and journalists bring money to the capital’s hotels and restaurants.

Weitzman ties it all together in an easy-going style with good anecdotes that leaven the narrative. He pulls no punches about Biden’s long ties to the Delaware corporate machine, asking awkward questions of a liberal leader of the Democratic Party loathed by America’s right.

What’s the matter with Delaware? How the First State favored the rich, powerful and criminals – and how is it costing us? all By Hal Weitzman Princeton, $27.95/£22, 296 pages

Alan Livsey is the FT’s Lex Research Editor.


Leave a Reply

Your email address will not be published.

Related Articles

Back to top button