ataxingmatter

Apple's Tax Rates--just what does Cook's "way I look at this" mean???

There's been a good bit in the news lately about the way multinational enterprises like Apple, Google, and many others especially in Big Pharm and Big IP actively reduce their US taxes through offshoring that is offshoring-on-paper-only to a large extent.  Apple does it by "selling" rights to its innovative IT developments to affiliated offshore entities (such as those in Ireland), and then claims that the profits from those US-based innovations are not US-income.  In Apple's case, the main holding company in Ireland is run by directors in California (except for one woman who actually resides in Ireland but doesn't attend many meetings--and most of those by phone) and isn't even treated as a resident in Ireland for Irish tax purposes.  See, e.g., How one Irish woman made $22bn for Apple in one year, The Guardian (May 29, 2013) [hat tip to Stevan].

That's a feat that shouldn't be achievable by any company but is a result of the lack of international harmonization in the way tax laws work and the failure of Congress to keep up with the innovations in tax law achieved by creative tax lawyers taking advantage of every discernible loophole or ambiguity.  It may be legal (under our foolhardy current law that fails to treat corporations organized OR MANAGED in the US as US companies) or it may not be, depending on how willing a court would be to apply the "sham" corporation doctrine to the case.  Either way, it doesn't sit very well that a company that benefited enormously from the way the US subsidizes the education (especially of the rich who pursue science careers) and research is so willing to show so little social responsibility.  Congress should likely act on that, and soon, so that US MNEs do not continue to siphon out US profits to nowhere.   

Even much of the ballyhoo about corporations that really "want" to repatriate their overseas profit but are "hindered" by the US taxes they would have to pay is ridiculous--they already keep most of those profits in the US in bank accounts and Treasuries, but don't claim them to be repatriated for their businesses.....

Victor Fleischer, a fellow tax prof, did a DealBook story on this last week that is worth noting.  Fleischer, Calculating Apple's True Tax Rate, New York Times, DealBook (June 4, 2013). 

As he says at the very beginning, it isn't easy to know what the actual tax amount paid (and hence tax rate) of big MNEs  is:  "it depends on what the meaning of 'pays' is."

Now, what you have to understand is that this comes in the context of Apple CEO Cook's testimony at congressional hearing as to that very piece of information.  “The way I look at this is that Apple pays 30.5 percent of its profits in taxes in the United States.”  Id. (emphasis added).  One has to wonder about that qualifier--"the way I look at this is", instead of a plain statement about Apple's payments of taxes to the United States Treasury.  For example, one wonders "which profits" Apple is using.  It all depends, doesn't it, on whether Cook is counting as US income everything that should be counted as US income?  In the case of many discussions of MNE tax liabilities, there is also a question of whether they are talking about taxes that the company has booked (as "deferred tax liabilities" that are someday, maybe, due and payable), though the Fleischer story says that was not the case with Cook's statement.  Often you have to also ask whether the tax rate calculated as "paid" to the United States is based on tax liabilities that are offset by foreign tax credits (and thus not actually paid to the United States)--which would ordinarily be the case with most MNEs.

As Bloomberg News highlighted recently, Mr. Cook’s calculation is based on a badly distorted measure of United States income. ...  Apple shifts substantial amounts of its economic profits from the United States to Ireland, where they are taxed at a rate close to zero. Those profits are then sheltered in Ireland and untaxed unless Apple decides to bring the cash back to the United States.

We can't easily figure out how much an MNE actually pays, because of a rather silly view that corporations merit having their tax returns kept fully confidential.  Looking through publicly disclosed information, including financial statements, sometimes is revealing, but only after hard work and not often with certainty about the conclusions, as Fleisher notes.  Felix Salmon of Reuters has suggested public companies should file their tax returns with their other information filed with the SEC.  Id. Instead, they currently file all kinds of statements prepared assiduously by lawyers to hide their tax avoidance strategies from the IRS and to hide their actual tax situation from everybody.  Obviously, they don't want to disclose their tax returns, but it is hard to see why that would be a bad thing to require.  We require open disclosure of Form 990 for 501(c)(3) organizations to justify their tax breaks, and MNEs get tax breaks of a much greater magnitude than most 501(c)(3)s.

Fleisher has a more modest proposal--require all public companies to disclose their "true US tax rate", defined as cash payments made to the U.S. Treasury divided by worldwide pre-tax income. If you calculate that rate over three years for Apple, it's a heck of a lot less than Cook says is "the way [he] look[s] at this"--only 8.2% ($5.3 billion paid to the U.S. Treasury from 2009-2011 OVER $65 billion worldwide pre-tax profits).  Id.

The point of the disclosure is to allow voters and policy makers an easy way to understand how well the tax system is working and what each corporation contributes to the public coffers. Id.

Related articles

Does Apple's Cook Cook the (U.S. tax) Books?

How Apple avoids US taxes with shell games

Calculating Apple's True U.S. Tax Rate

You: Apple chief calls for US corporate tax to be cut to single digits

Biggest Irish companies paid tax at eight times Apple's rate

Irish government writes to US senator over Apple's taxes

Apple Tax Rate Ignores Profit Shifting Offshore

Apple wants a tax cut as its reward for tax abuse

How Apple avoids US taxes with shell games

Tomorrow's Congressional hearing on the ability of major multinationals to shift profits offshore to avoid US tax (and everywhere-else tax) may finally get the attention of the American public onto a tax issue worth thinking about.

As today's New York Times makes clear, Apple has used sophisticated tax planning to shift its assets offshore, often to employee-less shells that are run from Apple's US headquarters.  See Nelson Schwartz, Apple avoided billions in US taxes, Congressional panel says, New York Times (May 20, 2013).

Even as Apple became the nation’s most profitable technology company, it avoided billions in taxes in the United States and around the world through a web of subsidiaries so complex it spanned continents and surprised experts, a Congressional investigation has found.

Some of these subsidiaries had no employees and were largely run by top officials from the company’s headquarters in Cupertino, Calif., according to Congressional investigators. But by officially locating them in places like Ireland, Apple was able to, in effect, make them stateless – exempt from taxes, record-keeping laws and the need for the subsidiaries to even file tax returns anywhere in the world.

***

Atop Apple’s offshore network is a subsidiary named Apple Operations International, which is incorporated in Ireland but keeps its bank accounts and records in the United States, and holds board meetings in California.

Because the United States bases residency on where companies are incorporated, while Ireland focuses on where they are managed and controlled, Apple Operations International was able to fall neatly between the cracks of the two countries’ jurisdiction.

Even John McCain seems to recognize that Apple's offshoring gimmicks stretch the notion of what should be acceptable: “Apple claims to be the largest U.S. corporate taxpayer, but by sheer size and scale, it is also among America’s largest tax avoiders.”  Id.  Apple's gimmicks take advantage of a tax system that does not adequately address the nature of intellectual property as the core of a company's profit-making business nor the nature of the economic sham of claiming to sell such property to affiliates at "arm's length prices", when the purported affiliates are nothing but names on a tiny office door and the purported arm's length price would never be accepted from a genuine unrelated party.  As Sen. Levin noted, Apple has succeeded in avoiding taxes "creat[ing] offshore entities holding tens of billions of dollars while claiming to be tax resident nowhere.”  Id.

Apple's CEO Cook is expected to claim that Apple doesn't use gimmicks.  Id.  Of course, like Clinton's equivocations, that all depends on your definition of a "gimmick."  When you create a vast community of subsidiaries with shell companies that exist to allow you to claim your profits are earned by employee-less companies that just happen to reside where there is no tax, that is using a gimmick, even if it is one that is perfectly legal under an outdated code that has been incessantly weakened by corporate lobbyists for the last three decades, at least. 

Cook is also expected to argue that the solution is just to hand over to the big MNEs what they want--tax-free repatriation of profits they have shifted offshore.  That's the same crazy idea that the Bush administration and Republicans in Congress promoted in 2004, one that essentially rewarded companies for engaging in gimmicks and encouraged even more companies to shift even more income offshore and hold it there even longer to avoid US taxes.  Congress would be foolish to reward poor social responsibility behavior with an even better tax outcome than that already generated by the poor social responsibility behavior!

The current transfer-pricing regime is not fitted for today's global commerce.  What Congress should consider doing is (1) eliminate offshore deferral altogether, and (2) apply a substance-over-form analysis to all transfers of intellectual property to offshore affiliates that would in most cases treat them as not occurring for tax purposes.   It could phase in the end of deferral by permitting companies to treat their current stash of offshore profits as being repatriated on a straight-line basis over five years, so they avoid a humongous one-time tax hit.  The legislation should also restrict the use of loss carryovers against such repatriated cash in much the way that loss carryovers are restricted after major acquisitions.

(And, by the way, that idea I had that I might make the iPhone my next smartphone?  I've just thrown that in the waste basket.  Rather not support a company that is so disloyal to the country that fostered the possibility of its existence and high profits.)

Related articles

Apple will claim it doesn't use overseas 'tax gimmicks'

Apple Avoiding Billions And Billions Of $ In Taxes

Apple Is Paying Almost No Taxes On The $102 Billion It Has Stashed Offshore: Report

Dell's Offshored Cash Hoard and Fair Taxes

 As most people who follow mergers, acquisitions and other mega transactions are likely aware, Michael Dell wants to take the company he founded private in a leveraged buyout.  LBOs, of course, use the company's own assets as collateral for debt to purchase the company--one of the types of financial alchemy that has contributed to the last thirty years of corporate consolidations and elite wealth accumulation, both of which are problematic for sustainable economies and sustainable democracies. 

Michael Dell has a particularly interesting "problem".  Like most high-technology companies, Dell has avoided a lot of US tax by offshoring  and claiming its profits in offshore tax havens rather than in the US.  So it has more than $14 billion of highly liquid assets in offshore affiliates and not here.  See Zahary Mider and Jesse Drucker, Dell Leveraged Buyout May Hinge on Cash Hoard Outside US, Bloomberg.com (Jan. 18, 2013).

We shouldn't allow that, but fixing it would require real corporate tax reform, not the stuff that commissions and Congress blather on about most of the time, like "lowering tax rates" and "simplifying the tax code", both of which are nonsensical when it comes to corporate multinationals who pay incredibly low effective tax rates already and who will use any "simplification" as just another inviation to exercise their sophisticated tax skills at manipulating the Code for their private tax advantage.  

Congress of course hasn't had the gumption to take on Big IT for years.  And under the Bush Administration, when Congress and the Treasury seemed to be motivated primarily by seeing how fast they could give away tax breaks to corporate business through the tax code, Congress enacted one of its most foolhardy tax expenditures that especially benefited corporations that had been "bad" tax citizens--the 2004 misnamed "American Jobs Creation Act" that allowed the bad companies that had offshored their profits to avoid tax  the indulgence of bringing those untaxed profits home at what amounted to no or negative tax rates--the so-called "repatriation holiday" provision.  As usual, the right-wing claimed that these corporate tax breaks would create jobs.  They didn't (as shown by Bush's dismal job creation record, even before the onset of the great Recession).  Instead, they were used for corporate stock buybacks and similar goodies for those investors who are mostly the wealthy upper-class who own most of the corporate assets.   So the repatriation tax holiday exemplified the problems of the corporatist agenda and the way it exacerbates inequality, a kind of class warfare in bits and increments. 

So we can expect a new onslaught of lobbying by companies like Dell for another extraordinarily wasteful "repatriation holiday."  The lobbyists will claim that such corporate tax cuts are essential if we want big companies to keep creating jobs.  But that's bunk.  The evidence is in from the last repatriation holidy--it lined the pockets of the rich, as most of these corporate tax breaks have done and did not create jobs.

Obama and the Democrats in Congress should resist.  Ordinary Americans should not  bear the burden of ordinary income rates when the wealthy are taxed at preferential capital gains rates.  And ordinary Americans surely shouldn't be called upon yet again to subsidize profit-making corporation's low-tax regimes through the cuts ordinary Americans will suffer to needed services. 

Related articles

Globalization, winners and losers, inequality, and the right tax policy (Part I of "Just What Tax Reform?")

Social Security/Medicare vs Corporate Welfare

Dell Is 'Hoisted on its Own Tax Petard' in Proposed LBO

Cayman Islands to Disclose Hidden Companies and Directors

Nobody In Congress Dares To Close The Trillion Dollar Loophole That Apple, Google And Microsoft Use To Reduce Taxes

Why we don't need corporate tax "overhaul": GOP poormouthing on behalf of rich corporate allies(Part I in a series)

These days, one hears a great deal from politicians on the right about how a corporate tax "overhaul" is needed because our taxes are "too complex" and/or "too anti-competitive" or because our tax rates are "too high".  The same GOP politicians who whine and whimper about how huge the deficit is, and accuse President Obama of driving our country to ruin with the deficit are willing to lower the tax burden paid by highly profitable corporations considerably (thus increasing the deficit and adding to regressivity of the tax system)--so long as they are appeasing their multinational constituency, the huge corporations who are the new providers of campaign funds and the new decisionmakers in elections--even though the corporate entities have no vote.  Claims of revenue neutrality are generally little more than PR cover for corporate giveaways.

Just a couple of examples from a recent Bloomberg piece:

• Republican Senator Robert Portman says he will unveil a new proposal soon that will cut taxes for multinational companies' repatriated offshore profits--i.e., a permanent tax holiday for multinationalsm as a first step towards a very MNE favorable move to a territorial tax system--that will remedy "an inefficient and complex maze of tax preferences".   See, e.g., Kathleen Hunter, Portman Corporate Tax Plan to Include Low Repatriation Rate, Bloomberg.com (Feb. 1, 2012).   Portman claims this huge tax cut for the high and mighty MNEs (and their managers/owners) is needed because they "pay[] a very steep tax bill if and when they choose to bring their money home."  Ludicrous.  There is a very generous foreign tax credit provision that allows many MNEs to reduce their taxes to near zero anyway.  Further, the deferral they are allowed on active business income gives them the time value of money benefit.  Most of what foreign corporations want to do is allow their taxes on non-US income to reduce their taxes on US income--which is a kind of subsidy for offshoring that costs US jobs.  And of course, as I've noted in earlier posts on tax holidays and proposals for a territorial system to replace a worldwide system, corporations hold more money overseas when they think there is a good chance that their buddies (or "bought pols"?) will give them the tax break they have been lobbying for--so these proposals encourage corporations to engage in the activity that these proposals say they are addressing, thus giving them more ammunition to get the change they want.  Portman, of course, says he wants to "streamline" the corporate tax and lower the rate to 25%.  We have a statutory rate of 35% now and most corporations that pay taxes (which are not by any means all of the corporations that make significant profits) pay less than 25%.  If we lower the statutory rate to 25%, it is quite likely that most corporations that actually end up paying taxes will be a smaller number than with the 35% rate and at a much lower rate--probably around 10-15% instead of 20-25%.  Of course, what the result will be--as it was in the 1986 tax reform that lowered rates for ordinary income and ended a number of problematic tax preferences such as the capital gains preferential rate--is that the lower rates will stay, and all of the loopy tax preferences (and more) will be reenacted within a couple of years under heavy lobbying for the same by the corporations that benefit from this round.
• Dave Camp, Michigan Republicans and Chair of the House Ways and Means Committee, wants to exempt 95% of overseas profits. 

Is there merit in this drumbeat of (lobbyist-induced) calls for "corporate tax overhaul legislation"?  The simple answer is no.

On Complexity:

Most complexity in the code is there for one of two reasons.

The most likely reason for complexity is the creation of tax preferences heavily lobbied for by corporate lobbyists.  One example is the so-called "domestic production activity deduction" that lowers the tax rate by 9% for most industries (even ones that don't really produce anything) and 6% for natural resource extractive industries.  There are tax breaks on top of tax breaks for the resource industries, of course, that get numerous special benefits throughout the Code, while joining in various coalitions that lobby AGAINST even extraordinarily modest support for green industries (such as reasonably low cost loans for solar power). 

The second main source of complexity is the clear need for specific anti-abuse provisions to undo the harm done when corporations use what can most charitably be called aggressive and inventive interpretations of Code provisions--often ones that are hyper-literal in nature (the kind of analysis that allowed the Bush Treasury to redefine what "exchange" means in the reorganization provisions in order to allow taxpayers to manipulate the allocation of consideration to create a hitherto unrecognizable tax loss in the reorg transaction) or turn the Code's clear textual provision on its head (look at the briefs for the defendant--or for that matter the lousy statutory interpretation in the district court opinions-- in the Black & Decker contingent liability shelter case, where Black & Decker argued for application of a provision in section 357(c) (which says explicitly that it applies only where paragraph one of that provision applies) in a context where paragraph one did not apply).  As a result of the contingent liability shelters, Congress added various Code provisions, including section 358(h) (having to do with the basis for corporate assets in transactions with significant liabilities) and section 357(d) (having to do with calculating the amount of liability assumed).

Complexity, in other words, is not an evil in itself.  Sophisticated taxpayers aren't harmed by complexity, and in fact complexity is needed to provide sufficient detail to prevent sophisticated taxpayers (with the help of their tax advisers) from cheating.  There is generally less complexity in provisions that are relevant for unsophisticated taxpayers, though it is more clearly an obstacle to good tax compliance behavior there.

On Competitiveness:

Competitiveness is used so frequently that it seems doubtful that anybody really knows what they mean by it.  If one company destroys a union and is able to pay their workers lower wages as a result, then a company that produces a similar product will claim that "competitiveness" requires that they be allowed to do the same.  Of course, another approach would be for the company that retains an active union, and continues to provide pension and health care benefits could lobby Congress to enact stronger laws protecting worker rights to pension and health care benefits.  In other words, competitiveness is consistently used as an argunent, when it comes to corporations, for taking away benefits to workers, communities, states and the nation for the benefit of the corporations.  Competitiveness could just as easily be used to argue for maintaining programs, procedures and benefits for workers, communities, states and the nation by considering what would be necessary to buttress the system that supports those benefit levels.  And in fact that view of competition--that we are competing globally to create both profitable companies AND a secure and well-paid workforce that can support a healthy economy that can in turn support a quality of life in all dimensions--would lead to different decisions not only about taxation but also about anti-trust, excise taxes, trade treaties, environmental protection, and many regulatory projects.

Furthermore, competitiveness is often used as an argument in the abstract when the main competitors are both US based companies.  There, the argument for reducing taxes to enhance competitiveness is at its weakest, but few competitiveness arguments reveal just how the competititon is playing out even on a globalized playing field.

On Rate Structures:

The 1986 tax reform act is a frequent reference these days when people talk about amending the Code generally and specifically about amending the corporate tax provisions.  But the context for that act's passage was quite different.  Individuals were taxed at rates that were reasonably progressive--with a top rate at 70% (though the brackets could probably have been better defined to differentiate among top income recipients).  Further, the 1954 Code had built up a plethora of tax preferences (especially useful to the rich) and the Congress had realized that the preferential capital gains rate was wreaking havoc on sensible provisions because of the arbitrage opportunities it created.  Thus, there was room for "base broadening"  (removing ill-advised preferences spread throughout the 1954 Code) as a means of paying for "rate lowering" (lowering the fairly high rates about half, without costing the fisc because of the higher amount of income on which those rates would be charged).

We are not in the same situation today.  We have very high deficits because of an economic crisis caused by two interwoven problems--(i) the lax regulatory oversight of 40 years of Reaganism, which permitted the financialization of the economy and led to excessive incomes for people at the top (managers and owners, hedge fund and equity fund managers, and speculators generally) and excessive debt for banks and especially people not at the top (because of their stagnant or reduced incomes in the face of growing costs, caused in part by the relaxation of regulations and anti-trust activity coupled with the anti-union attitudees and activity); and (ii) the success of a radical right-wing fringe in characterizing government and business as having adverse interests and progressive programs supporting social well being (from Social Security to Medicare to Medicaid to (modest) heatlh care reforms intended to reign in the cost of medical care to unemployment benefits to efforts to reign in contracts of adhesion in the consumer credit markets) as "unmerited" "entitlements or costly and anti-competitive regulation of businesses that counters the "free market" that will ensure "growth and jobs".  The result of the rhetoric is a citizenry that is ignorant of the actual income distribution, tax burdens, and impact of government spending on jobs and the health of the economy.  The result of the 40-year "reaganomics" effort from the right to cut regulations, cut taxes, privatize and militarize is that this is no context for rate reduction but in fact a context in which those who can afford to do so--for sure those individuals and households in the top two quintiles of the income distribution that comprise the upper middle class and the upper class and all profit-making corporations--should be paying taxes at HIGHER rates, not lower rates.

It should be noted that President Obama--who is at best a middle of the roader on tax issues--also is said to plan to propose an "overhaul of the U.S. corporate tax system" in connection with his budget plan for FY 2013 that involves lowering rates and base broadening.  See Steven Sloan, Obama said to propose corporate tax overhaul next month, Businessweek.com (Feb. 2, 2012).   Again--lowering the rate is a bad idea.  Lowering the rate without base broadening is a stupid idea.  But the kind of base broadening that is included, if such a proposal eventually passes, matters an awful lot.  The problem is that if Obama proposes such a reform, the GOP won't support it unless the "base broadening" is essentially inconsequential and can be undone easily later or affects only little guys and not the big-monied lobbyists.  Thus this looks like another of those initiatives from the White House that play into the right's agenda and do little to advance any progressive idea.

The right's smoke and mirrors scam about Social Security--it ain't broke (unless China is too)

We've noted in these postings the growing inequality between rich and the rest of us in America, and that is the appropriate backdrop against which to investigate further the right's smoke-and-mirrors scams about tax policy and earned benefits.  Let me remind you with Kevin Drum's Mother Jones article on The Price of Plutocracy: "For all practical purposes, every year about $700 billion in income is being sucked directly out of the hands of the poor and the middle class and shoveled into the hands of the rich." (That sentence is illustrated with a great chart, with data drawn from Joseph Hacker of Yale and Paul Pierson of Berkeley, the authors of Winner-Take-All Politics, a book I highly recommend.)

The national debate about deficits has been part of a relentless push by the right to reduce as much as possible the New Deal earned benefit programs of Social Security and Medicare. The right twists the facts to suit the arguments it wants to make.  Krugman hones in on this issue, noting Dean Baker's similar anger at the Washington Post's inconsistency in considering Social Security in a recent article by Post writer Lori Montgomery, who seems to be miming for the hard right, anti-New Deal crowd in Washington .  See Krugman, Social Security, Bait and Switch, a Continuing Series, New York Times (Oct. 30, 2011).

Social Security is a program that is part of the federal budget, but is by law supported by a dedicated source of revenue. This means that there are two ways to look at the program’s finances: in legal terms, or as part of the broader budget picture.

In legal terms, the program is funded not just by today’s payroll taxes, but by accumulated past surpluses — the trust fund. If there’s a year when payroll receipts fall short of benefits, but there are still trillions of dollars in the trust fund, what happens is, precisely, nothing — the program has the funds it needs to operate, without need for any Congressional action.

Alternatively, you can think about Social Security as just part of the federal budget. But in that case, it’s just part of the federal budget; it doesn’t have either surpluses or deficits, no more than the defense budget.

Both views are valid, depending on what questions you’re trying to answer.

What you can’t do is insist that the trust fund is meaningless, because SS is just part of the budget, then claim that some crisis arises when receipts fall short of payments, because SS is a standalone program.  Id. (emphasis added).

Further, the right refers to these programs as "entitlements", a term that is meant to dredge up resentments against those who have some rights to benefits from these programs.  The right uses "personal responsibility" and "entitlements" as though they refer to two non-intersecting worlds, whereas in fact the opposite is true.

Workers pay into Social Security to support current workers who paid into it in the past.  The trust fund was established, and amended with a good deal of actuarial research under Reagan in 1983, with the knowledge that the baby boom generation would be passing through and create a bulge of benefit needs and that US birth rates tended to be smaller now than they were a century ago.  In other words.  what is happening now in terms of the baby boomer population reaching retirement age and the decline in US birthrates was exactly the information on which the Social Security changes made in the 1980s were predicated.  Either we believe that these kinds of predictions are reasonable (in which case it is utterly silly to raise nightmare scenarioes about bankruptcy, because there is nothing of the sort) or we believe that it is impossible to predict for sure what will happen (in which case it is utterly silly to raise nightmare scenarios about Social Security bankruptcy, because GDP could grow just a little faster than predicted, easing all future problems, or boomer needs could grow just a little less than predicted, easing all future problems).  Either way, the crisis-bell ringing being done by the right as a way to attribute deficits to Social Security is a smoke and mirrors scam.

It is even more so since the Social Security trust fund is invested in US Treasuries and those Treasuries plus new tax funds coming in pay all the benefit costs.  Is the US going to default on Treasuries.  Well, if so, we have a bigger problem with Japan and China not liking that--not just the Social Security trust fund.  The hard right seems to think it is okay to play political games with US debt, but American citizens should be aware that this is what they are doing.

For a good overall exposition of these issues, see the article in  Salon by Gene Lyons, How the Rich Created the Social Security 'Crisis' (Nov. 3, 2011) (noting the "decades-long propaganda war against America’s most efficient, successful and popular social insurance program").

[T]his is the beneficiaries’ money, invested by the Social Security trustees in U.S. Treasury bonds drawn upon “the full faith and credit of the United States.” Far from being “meaningless IOUs” as right-wing cant has it, they represent the same legally binding promise between the U.S. government and its people that it makes with Wall Street banks and the Chinese government, which also hold Treasury Bonds.

A promise not very different, the Daily Howler’s Bob Somerby points out, from the one implicit in your bank statement or 401K (if you’re lucky enough to have one). Did you think the money was buried in earthen jars filled with gold bullion and precious stones?  Id. (emphasis added).

One might add that many of our multinational corporations that are currently lobbying heavily for yet another tax break in the form of a "repatriation holiday" for their offshored, untaxed profits actually have the substantial portion of those profits invested in those same U.S. Treasury notes.  So, as ataxingmatter has noted before, much of that money is already in the US and repatriation will generally not be of much benefit merely from bringing cash back to go through the US economy.  As the article notes, allowing repatriation would lead to corporations dumping about a trillion of US Treasuries on the market, and likely cause a rise in the interest rate the US government must pay to borrow.  Not a win-win situation.  IN fact, clearly a loss for the US government and the majority of US taxpayers, both in Treasury interest rates and in lost corporate tax revenues.

the right's smoke & mirrors scams about corporate tax "reform"

One could get a pretty gloomy picture of the state of Social Security, and the need to "reduce entitlements" while at the same time hearing about the (faked) urgency of cutting corporate taxes in order to give our US multinationals an edge in global competition, if you pay much attention to the GOP presidential candidates talk and listen to their echo chambers in the right-dominated GOP factions in the House and Senate and their marketers in the Koch etc. funded propaganda tanks like the misnamed "Americans for Prosperity" (should be "Americans for prosperity for the have-mores"). 

These same right-wing politicians and funders were gung-ho for two budget-busting manuveurs under George W. Bush--outrageous tax cuts of primary benefit to the rich (such as the gradual reduction of the estate tax to its one-year repeal in 2010 and its rebirth in 2011 at an absurdly low rate with an equally absurdly high exemption amount) and outrageous spending for more and more militarization of the US society (wars of choice in Iraq and Afghanistan, where hundreds of thousands have died but little in the way of lasting peace has been gained, and a gigantic "homeland security" apparatus that has eroded the civil rights of US citizens, including allowing one to be targeted and assassinated on solely the say-so of the executive branch without any of the due process protections supposedly guaranteed by our pre-Bush constitution).  Cheney of course famously quipped that deficits don't matter any more, when he was helping to push the $1.3 trillion 2001 tax cut that would give him and George W. huge tax cuts in the tens of thousands for 2001 alone.  Then there was the 2003 tax cuts aimed especially at relieving the have-mores of taxes on the money their money earned (cutting dividend rates on corporate stock to the same low rates as net capital gains) and the 2004 tax cuts aimed especially at giving multinational corporations the many tax breaks they'd been lobbying for avidly for the last two decades, along with a "repatriation holiday" that allowed the ones who'd worked most assiduously to avoid paying US taxes on their profits from intangible intellectual property rights to spend the money on outsize managerial compensation and shareholder stock buybacks while firing regular employees with very little or even no tax consequences.

Now, the right wants to repeat all of that.

Dave Camp, minion of multinational corporations, is crafting a give-it-all-away package of so-called corporate tax reform that may cut back on loopholes but in the process will lower rates and allow multinationals to offshore money-making enterprises, with the results that even fewer multinationals will actually pay any federal corporate income taxes. (The text of Camp's release about his corporate tax "reform" proposal is appended at the end of this posting).  Camp calls for a 25% rate and a territorial tax system that would cut corporate tax revenues even further.  The Joint Tax Committee has noted that cutting all the loopholes in a base-broadening attempt would allow lowering the corporate tax rate only to 28%.  See Wall Street Journal report on the JTC report.

 All of this is rationalized by the right as necessary to help US multinationals "compete" on the global stage. 

You'd think that US corporations were slaving away under incredibly heavy US federal income tax burdens, but there's no truth to that at all.  Most of the griping about the corporate tax talks solely about federal statutory rates and not about either the effective tax rates (what corporations actually pay) or about the lack of most of the other kinds of corporate taxes paid by corporations housed in other developed nations (much higher Value-Added Taxes and excise and transfer taxes). 

 In fact, most US multinational corporations are not heavily taxed at all, and most of the smaller US corporations zero out their profits with shareholder "salaries" (deductible) and other often easily manipulated expenses (personal expenses of 'family farmers' whose homes and cars and everything else are "owned" by the family farm corporation, etc.).  Citizens for Tax Justice has for several years looked at publicly reporting US corporations' fiscal statements on taxes and profits to tell the real story about profitabilty and taxes.  It's not the story the Chamber, the National Association of Manufacturers, or the anti-tax, anti-government funded groups or the Koch brothers want known.  But it's the facts.  CTJ's most recent study makes clear that US multinationals have no trouble competing due to taxes.  See the report: Corporate Taxpayers and Corporate Tax Dodgers, 2008-2010. 

As Andrew Leonard reports today, the study shows that 37 of the country's largest corporations paid zero taxes in 2010.

In 2010, Verizon reported an annual profit of nearly $12 billion. The statutory federal corporate income tax rate is 35 percent, so theoretically, Verizon should have owed the IRS around $4.2 billlion. Instead, according to figures compiled by the Center for Tax Justice, the company actually boasted a negative tax liability of $703 million. Verizon ended up making even more money after it calculated its taxes.

Verizon is hardly alone, and isn’t even close to being the worst offender. Perhaps most famously, General Electric raked in $10.5 billion in profit in 2010, yet ended up reporting $4.7 billion worth of negative taxes. The worst offender in 2010, as measured by its overall negative tax rate, was Pepco, the electricity utility that serves Washington, D.C. Pepco reported profits of $882 million in 2010, and negative taxes of $508 million — a negative tax rate of 57.6 percent.

Andrew Leonard, America's Corporate Tax Obscenity, Salon (Nov. 3, 2011).  Four industries--finance, utilities, oil/gas/natural resources and IT-- reap huge windfalls from the current corporate tax code.  Those windfalls that aren't likely to be eliminated in any "reform" that passes the right-wing Congress--just look at the current lobbying for maintaining the "active financing" exception for banks' passive income, an exception that allows banks to defer taxation on their passive earnings, unlike most other industries. 

There's no way that a territorial tax system (that allows US corporations to continue moving active businesses offshore tax free and moving patents and other rights off shore to ensure that the income from the rights aren't taxed in the US) combined with incredibly low rates will raise an appropriate amount of income from corporations.  It is a giveaway to the corporations that think they have now bought Congress. At the same time, as the CTJ report authors note, most of these reform schemes actually will allow corporations to move even more jobs and businesses offshore.  If we really wanted to enact good corporate tax reform, we'd remove the loopholes favoring big industries like Big Oil, get rid of the accelerated depreciation allowances that let companies expense long-term investments, require an "exit tax" of ordinary income on all appreciated assets and untaxed earnings whenever a corporation restructures itself into a foreign company or moves its active business assets abroad, and otherwise tighten up the corporate tax rules to ensure that corporations pay a fair share in taxes.

 It is up to the people to show that they haven't loss the power to take control in our democracy, but given the lack of understanding of tax and fiscal issues in this country, and the deep pockets of corporations to fund the Chamber and other group's misleading information and distortion of facts on these issues, it is questionable whether US democracy can save itself.

Appendix:  Camp release about proposal for corporate tax "reform"

Today, Ways and Means Committee Chairman Dave Camp (R-MI) unveiled an international tax reform discussion draft as part of the Committee's broader effort on comprehensive tax reform that would lower top tax rates for both individuals and employers to 25 percent. In addition to rate cuts, the plan would transition the United States from a worldwide system of taxation to a territorial system - a move virtually every one of America's global competitors has already made.

Camp unveiled the draft legislative language with a specific request - that employers, academics, practitioners and workers provide comment and add their voices to the legislative process.

Commenting on the release of the proposal as a part of his overall approach to comprehensive tax reform, Camp stated, "Instead of having laws on the books that encourage hiring U.S. workers, our outdated international tax system encourages employers to keep profits and jobs outside of America. If we are serious about creating a climate for job creation, now is the time to adopt tax policies that empower American companies to become more competitive and make the United States a more attractive place to invest and create the jobs this country needs."

The Ways and Means discussion draft would:

- Reduce the corporate tax rate to 25 percent - bringing it in line with the average of countries in the Organization for Economic Cooperation and Development (OECD). The Committee continues to examine base broadening measures that will replace the revenue foregone by reducing the corporate tax rate, so these measures are reserved in the discussion draft for future release.

- Shift from a worldwide system of taxation to a territorial-based system. The new plan:

* Exempts 95 percent of overseas earnings from U.S. taxation when profits are brought back to the United States from a foreign subsidiary.

* Includes anti-abuse rules to ensure companies do not avoid paying their fair share of U.S. taxes.

* Frees up existing overseas earnings to be reinvested in America after they are taxed at a low rate in line with current repatriation proposals.

* Makes American companies more competitive on the global stage with little or no impact on the federal deficit.

In advocating the need for international tax reform, Camp cited several reasons why current U.S. tax policies are putting American employers and workers at a competitive disadvantage:

- America will soon have the highest corporate tax rates in the industrialized world: Only Japan has a higher corporate tax rate than America, which has a combined federal-state rate of 39.2 percent - and Japan has already indicated its intent to lower its rate.

- Our "worldwide" system of taxation is a remnant from the Cold War: While it has been 25 years since Congress reformed the tax code, it has been almost 50 years since it undertook a bottom-up review of our international tax laws. In other words, our international tax rules were written when the United States accounted for 50 percent of the global economy and had no serious competition from others.

- American employers face double taxation compared to their foreign competitors: As a result of our "worldwide" system of taxation, when U.S.-based companies try to bring profits back home, they must pay U.S. taxes on top of the tax they already pay in the foreign market U.S. tax laws encourage investing in a foreign country instead of bringing profits back home: Because U.S.-based employers face additional taxes if they bring their overseas earnings back to invest in the United States, it is cheaper for these companies to reinvest profits overseas instead of creating jobs here.

- America is losing ground: In 1960, U.S.-headquartered companies comprised 17 of the world's largest 20 companies - that's 85 percent. By 2010, just six - or a mere 30 percent - U.S.-headquartered companies ranked among the top 20.

- Our foreign competitors are actively reforming their tax laws: Other countries are actively reforming their international tax codes - giving employers lower rates and moving towards a territorial tax system. Countries like the United Kingdom, Canada, and Germany, have recently lowered their tax rates to spur job creation and economic growth. Yet, America is sitting on the sidelines doing nothing. The United States cannot sit back and watch jobs go overseas because the tax code provides such perverse incentives.

Google, Repatriation and Advanced Pricing Agreements: US, and France, looking into offshoring

Bloomberg reports today that the IRS is auditing Google's offshoring of profits.  See Drucker, IRS Auditing How Google Shifted Profits Offshore to Avoid Taxes, Bloomberg.com (Oct. 13, 2011).

"The agency is bringing more than typical scrutiny to how the company valued software rights and other intellectual property it licensed abroad, said the person, who requested anonymity because the audit isn’t public. The IRS has requested information from Google about its offshore deals after three acquisitions, including its $1.65 billion purchase of YouTube, the person said. The transfer overseas of these kinds of rights rights has enabled Google to attribute earnings to foreign units that pay lower taxes .

***

Google, owner of the world’s most popular search engine, has cut its worldwide tax bill by about $1 billion a year using a pair of strategies called the “Double Irish” and “Dutch Sandwich,” which move profits through units in Ireland, the Netherlands and Bermuda. Google reported an effective tax rate of 18.8 percent in the second quarter, less than half the average combined U.S. and state statutory rate of 39.2 percent. " Id.

After being alerted to Google's use of income shifting through media attention to the issue, France is also reviewing Google's income shifting between its French and Irish subsidiaries, according to the Bloomberg article.

This audit, however, takes place against the backdrop of a 2003 "advance pricing agreement"--essentially, a contract between a taxpayer and the IRS that "settles" the tax treatment of a transaction that the taxpayer expects to undertake. 

The IRS has already approved a major part of Google’s strategy. In 2006, the agency signed off on a 2003 intracompany transaction that moved foreign rights to its search technology to an Irish subsidiary managed in Bermuda called Google Ireland Holdings. That deal -- known as a “buy in” in tax parlance -- meant subsequent profit overseas based on those copyrights has been attributed to foreign subsidiaries rather than to Google in the U.S. where the technology was developed.  The IRS approval came in an accord known as an advance pricing agreement. Id.

In my view, advance pricing agreements --a recent introduction in the 'tax compliance' toolkit--are problematic in a democratic tax system.  Only taxpayers with considerable dollars at stake can engage in the process, which allows them to "fix" in advance what their tax obligations are regarding particular business plans.  The potential for agency capture, always present, is enhanced in this setting.  Tax administrators are less adept at foreseeing likely ancillary consequences of a particular decision than the taxpayer itself and, worse, they may be "captured" by their proximity to the taxpayer and lack expertise or in-depth understanding of the issues sufficient to challenge the taxpayer's assumptions.  The decision made ahead of time is likely based on sketchier information than an after-the-fact audit.  Further, those negotiating such agreements may be less inclined to take an strong position vis a vis the taxpayer than those involved in enforcement and litigation decisions later in time would be.  While changes in administration likely affect the government's commitment to, and interest in, both enforcement decisions and advanced pricing agreement decisions, one would expect that an administration that had made a point of being "business-friendly"  would be more likely to enter into taxpayer-favorable advanced pricing agreements whereas one that had a more guarded view of business might be more interested in strong enforcement.

It's worth noting that the big IT and pharmaceutical companies that find it easiest to shift income offshore due to their intellectual property patents are also the ones pushing hardest for a so-called "repatriation tax holiday" on those offshore earnings.  They've kept billions offshore and now want to be able to dole it out in executive bonuses and shareholder buybacks little tax.  They often have the profits go to offshore tax haven countries, so this is income that has very little foreign tax paid on it either.  As I've noted in earlier posts on repatriation (check the category index or just scroll back over the last few months), executives bonuses due to lower tax bills just adds to the outsize compensation those executives receive, while shareholder buybacks just diversifies their portfolios with little likelihood of expansionary impact on the US economy (especially if the diversification results in purchases of emerging market instruments instead of domestic ones).

More on Repatriation--WIN America corporatist lobbying group's strike back on Heritage

In a recent posting, I commented further on the lack of arguments supporting the corporatist lobbying drive for another "repatriation tax holiday" for multinational corporations that have stashed more than a trillion abroad (often through gimmicky transfers of intangible property such as rights to patents developed in the United States).  See  Repatriation Holiday Lobbying--Money Speaks (Oct. 3, 2011).

The reasons are manifold.  Corporations today are not cash-strapped--they've got lots of cash in the US too.   And even if they need cash that is currently offshore, they can borrow against that cash at exceptionally low rates today. So they aren't investing in expansion that would create new jobs for lack of cash--they are not investing in expansion for lack of customers.  The middle class is collapsing, after four decades of reaganomics have steadily worked to erode unions and the empowerment they offer workers, leaving worker wages in decline while their bosses roll into the ranks of the superrich on their newfound ability to take an undue share of the companies' productivity gains.  Even when money is actually brought back (rather than already resting in US bank accounts), it is most likely to be used to pay even higher performance bonuses to top managers and to pay for dividends and share buybacks for shareholders.  And those shareholders are most likely merely to use it to make new secondary market share purchases--resulting merely in a net change in their portfolios--not direct funding of new enterprises.  Much of those secondary market investments are likely to be in emerging markets rather than in the United States. 

Most telling is that the very fact of one tax holiday means that corporations will inevitably plan for and conduct business assuming future tax holidays.  It is ikely that planning for this current lobbying effort began on the day Congress passed the 2004 Jobs Act!  What that means is that the tax holiday itself encourages even more of the very offshoring activity it claims to be amerliorating.  Corporations will use gimmicks to move and stash away even more money offshore to avoid even more current taxes, in the hopes that there will be a further tax holiday that will allow almost zero taxation on those repatriated profits.  That certainly happened after 2004--the companies that had been good citizens and had regularly repatriated cash found themselves losers compared to the bad citizens that had used offshoring to avoid taxation.  More of the good citizens then became bad citizens, and the amount of offshore cash has grown much faster since the 2004 repatriation holiday than before.

And our experience with repatriation tax holidays was a telling one.  Corporate lobbyists worked hard to get the misnamed 2004 "American Jobs Act" passed with a very low tax rate for repatriated funds.  Yet it resulted in very little job creation. 

(This is not surprising, since (i) corporate tax cuts don't create jobs; consumer demand does and (ii) Congress didn't put any real teeth in the job creation end of the legislation, such as demanding that any corporation repatriating cash and expecting the low rate establish that it had created substantial new jobs with the repatriated funds that were not on the planning board at the time repatriation was first introduced or when it was passed and that those jobs were permanent full-time domestic jobs.) 

In fact, a new study by the Institute of Policy Studies addresses what it calls the "dangerous myth" that "corporate tax cuts create jobs" and the "disastrous results" of the 2004 tax holiday.  It reminds us that a government report found that 12 of the top repatriators brought home $100 billion (a third of the total repatriated under the earlier provision) and yet laid off 67,000 workers in the two years after the windfall.  Further, the 2004 holiday allowed 843 companies to use $312 billion in repatriated funds while avoiding $92 billion in taxes.  The worse factoid of all is the one that shows that U.S. taxpayers  "provided a huge subsidy to corporations that destroyed jobs":  58 corporations that accounted for about 70% of the repatriated funds  cut almost 600,000 jobs.  Report at 6-7.  See America Loses: Corporations that Take 'Tax Holidays' Slash Jobs, Institute for Policy Studies (Oct. 3, 2011) (summary, with link to full report). 

The report is clear in its description of the way US corporations shift profits overseas and then lobby for even lower taxes.

Drug companies — and many other companies as well, especially in the technology sector — don’t just make profits overseas. They shift  profits overseas. The process has become lucratively routine. One example:  A U.S.-based corporation begins the process by having a foreign subsidiary register its patents in countries like Luxembourg that do not tax income from intellectual property. The subsidiary then charges its U.S counterpart a high price for use of the patents. These high royalty fees, coupled with the costs of research, marketing, and management, allow the U.S. operation to report to the IRS an artificially small profit — or even no profit at all. With no appreciable profit to report, the U.S. operation has no appreciable corporate income tax to pay. The company’s actual profits sit undisturbed with the overseas subsidiary.  Report at 11.

The report also scorns the lobbying efforts of WIN America, which has spent more than $50 million lobbying for the tax break, which would cost the fisc around $80 billion in lost revenues.  Report at 9-11.   WIN America--a coalition of 18 publicly traded corporations and 24 trade associations, including the U.S. Chamber of Commerce--has "hired 42 former congressional staffers who worked for the House Ways and Means Commitee or the Senate Finance Commmittee".  Report at 9.  It goes on to rep9ort on the way individual members of the coalition have lobbied for the tax break (e.g., Pfizer's sponsoring a favorable section on 60 Minutes) and cut jobs (e.g., Duke Energy's cutting 10,000 jobs, probably as a result of its 2006 merger with Cinergy in the U.S., contributing to the North Carolina Democratic Party and then, shortly after getting support for repatriation from the Democratic governor of North Carolina and its Democratic Senator Kay Hagan).

For other commentary, see also John Carney, Corporate Tax Holidays Might Not Create Jobs, CNBC (Oct 4, 2011) (commenting on the IPS report as well as the Heritage Foundation report discussed below).

The WIN America coalition was undoubtedly taken by surprise when the right-leaning Heritage Foundation came out with its own report, a "backgrounder" on taxes that condemns the repatriation tax holiday idea as not doing much to create jobs: J.D. Foster & Curtis Dubay, Would Another Repatriation Tax Holiday Create Jobs? (Oct. 4, 2011).    The Heritage Foundation report acknowledges that "if another repatriation tax holiday were enacted, one should expect a similar result as last time: specifically, a surge in repatriations and little appreciable increase in domestic investment or job creation."  And it cites the reasons one would expect--today's multinationals that have money to repatriate are not cash-strapped:  any investments that they need to make for business expansion purposes (that would create new jobs) they can do readily without needing a repatriation tax holiday to grease the skids.

By the way, the Heritage Foundation is resisting repatriation because it wants the big prize--an overall cut in the corporate tax rate and a shift from our current system of taxing worldwide income (after tax credits for taxes paid elsewhere) to a territorial system--and it doesn't think repatriation will be treated as a step in that direction.  Those Heritage-supported tax policies would result in even more offshoring and even less corporate tax contribution to the fisc, which is already terribly low at around 2-3% of GDP.

For additional commentary, see Heritage Foundation Reverses Position on Repatriation Tax Holiday, Huffington Post (Oct. 4, 2011) (

Not surprisingly, the WIN America coalition struck back today, with a press release attacking its ordinary ally for not supporting the repatriation tax holiday drive: Fact Check: Heritage's Flawed Study Ignores Their Previous Support for Repatriation (Oct. 4, 2011).  The coalition has three arguments: (1) Heritage said something different back in December 2010, (2) other studies say repatriation will create millions of jobs, (3) the 2004 Jobs Act really did work in spite of what these other studies claim because the firms themselves say they created jobs, and (4) lots of people support repatriation.  None of these arguments hold water.

The coalition first complains that a December 2010 Heritage study concluded that repatriation would "provide additional liquidity" that would increase shareholder wealth allowing them to make "new investments" and would permit the firms to finance current operations, reducing their need to borrow working capital.  Let's parse this out.  The  primary reason that doesn't make sense today (if it ever did, which is dubious) is, as the Heritage Foundation's current report points out, that US firms are not cash strapped.  They don't need more liquidity to be able to make investments or finance their current operations.  They probably don't even want to reduce loans that are at historically low interest rates any more than they are doing.  And shareholders' "new investments", as noted above, are just a move from one portfolio investment to another--they are not investments that encourage entrepreneurs or go to the working capital of companies but just a result of secondary market purchases.  Very little of that does much for the US economy or anything for creating new U.S. jobs.

WIN America counters that the August 2011 study done for the U.S. Chamber of Commerce by Douglas Holtz-Eakin, The Need for Pro-Growth Corporate Tax Reform, claims that a repatriation tax holiday will "speed the pace of economic recovery, increasing GDP by roughly $360 billion and creating approximately 2.9 million jobs" because repatriation tax holidays are "a private-sector approach to stimulus."  That's quite simply balderdash.  These same kinds of pie-in-the-sky claims were made about the disastrous 2004 repatriation tax holiday, and they were proven wrong then.  They are based on the same bad economics now, the economics that says that "the high U.S. [corporate tax] rate harms economic growth, the amount and quality of U.S. investment, and the wages of U.S. workers."  That claim is simply unsupported--the U.S. is a tax haven, a reasonable amount of taxes will never discourage a business from expanding its business when it thinks that expansion is going to be profitable and it has the money to do it.  It is in fact this same school of economic thought that has given us the Laffer curve, the "rational man" calculations, and the rest of the Hocus-Pocus economics enterprise that treats rigidly unrealistic assumptions as God's Truth to justify an ever-increasing share of corporate profits going to managers rather than workers. 

WIN America then argues that 23% of the 2004 repatriated funds went to job creation and should be considered a great benefit to the economy.  That number is derived from a survey of tax executives--essentially self reporting on the result of the company-favorable tax repatriation holiday, so it is not only a very low return on the high tax cost of the repatriation tax holiday, but also one that must be evaluated with some acknowledgement of the fungibility of money and the ability of firms to claim that job creation and investment that they would have done anyway was done "because of" the repatriated funds.

WIN America concludes with quotes from lots of people (probably written by WIN America or one of its army of lobbyists, don't ya think?).  These quotes just repeat the desired sound bites -- "bringing the money home" will "create jobs and re-invest in America" (GOP representative Gregory Meeks, Sept. 9, 2011); "let's bring those dollars back"... and "companies outght to put it into workforce training or they ought to put it into research and development" (GOP Ohio Gov. John Kasich, Sept. 14, 2011).  And so on.