Shocker: Governments Compete

Apple CEO, Tim Cook, wore a tie the other day for his Senate grilling about the taxes paid — or rather not paid – by his company. Following the lead of former Apple CEO, Steve Jobs, Cook prefers open neck shirts, fashionable in his home court – Silicon Valley — but not that day as this was a road game for him. Senators Carl Levin (D. MI) and John McCain (R. AZ) also wore ties, as these are part of the home uniform for the backyard rotisseries known as Senate hearings.

The Senate Permanent Subcommittee on Investigations wanted to “hear” about Apple’s use of an Irish subsidiary to avoid the payment of $9 billion in US taxes in 2012. “Hear” is not really the right word as there is very little hearing at a hearing. The witness is there – usually against his will and sometimes thanks to a subpoena – to serve as a prop for self-promoting elected officials.

To be clear, the hearing was not about tax evasion. Evasion happens when you break the law. The hearing was about tax avoidance. Avoidance happens when you comply with the law to your advantage. The former sends you to jail while the latter delights your shareholders.

Instead of all the pontificating about “fully contributing,” “Holy Grails of Tax Avoidance” and other sound bite magnets, the hearings might have done well to focus on the unpleasant truth (for governments but not for taxpayers) that governments compete.

Ireland ran its country into the mother of all ditches during the financial crisis. Few did worse though Iceland comes to mind. Now it needs to rebuild its economy by attracting job-creating companies. Since it received no tax revenue from most multinationals, there would be no cost to Ireland if it created a favorable tax environment for them in exchange for some number of jobs.

The Irish plan relied (as to American companies) on the widely criticized US corporate tax code that combines extremely high marginal rates with a swarm of subterfuges to get around paying them. This is not new news and our Congress has allegedly been working on the problem for some years now. In theory, lowering the rates and getting rid of the loopholes would solve the American revenue-loss problem, perhaps at minimal cost if the rates were wisely chosen. It might even cause repatriation of overseas money for job-creating investment.

Imagine a simple corporate tax law with marginal rates that were consistent with those in other countries. There would be little incentive to game the system and, apart from legions of lawyers and accountants, who game the system for a living, and a few thousand Irish Apple employees, who might be working elsewhere or not at all, where are the losers in that trade?

The hidden losers are the ones conducting the hearings. Our imaginary simple corporate tax code has a fatal flaw. There are no loopholes to sell for campaign contributions.

In essence, the desire for campaign contributions leads to a desire for loopholes to sell, which leads to the need for high rates if any money is to be raised at all, which leads clever Irish politicians who have their backs to the wall to create a few thousand Irish jobs at no cost to themselves.

We might learn something at Congressional hearings if the home court advantage were diminished only slightly. Divide them in halves like football or basketball.

In the first half, the elected officials would sit at the dais wagging their fingers at the unwilling witnesses below, just as we do now.

In the second half, the roles would be reversed and Tim Cook would sit at the dais and grill Carl Levin and John McCain about the rightness or wrongness of complying with the very laws they and their colleagues had sold to the highest bidders.

Meanwhile, chalk up a win for Ireland.

5 Responses to “Shocker: Governments Compete”

stan hatch, May 31, 2013 at 8:47 pm said:

I believe lowering US Corporate tax rates would stimulate our economy.

Currently companies sell each other tax credits, which is why GE pays little or no tax despite being very profitable. Corporations set up subsidiaries overseas that take title to goods in name only, making them appear they were shipped from these locations. Other corporations set up expensive patents overseas that charge for goods shipped into the US. All of this is done to shift income outside the US and avoid the US tax rates. The effect is that it keeps the US corporations’ money overseas and also many of the corporations’ jobs overseas.

Personal income tax also needs simplification. I think everyone agrees on that, except the tax preparers who make money doing them. Simplification means almost everyone will sacrifice some special benefit, although many will not see what they receive as a special benefit. One such special benefit is the mortgage interest deduction. That will be hard since the real estate lobby is extremely powerful and includes construction, financers and brokers.

Currently lower income “taxpayers” receive refunds up to $5000 for refundable credits even though they had no withholding, or if they did, on top of those withholdings. The credits are because 1) we believe they are socially good, such as for child support or 2) to encourage them to work. Inspector General reports have shown that the IRS is allowing these refunds although they could be easily targeted, and that 25% of these claims are in error.

Maybe these credits are not such a good thing from a tax agency standpoint. Collecting them back, once out the door, is very expensive at best, impossible at worst. Enforcement through audits is almost prohibitively expensive. It is a very expensive program that the public pays for.

From a non tax standpoint, I have to wonder whether those credits are achieving what was intended. Perhaps it would be better if that money were paid to employers to hire those recipients. If we have learned something lately, it might be that the IRS does not always do things evenhandedly.

I fully expect those on Medicare will have to pay more for medical services as the government pays less to Medicare ($500 billion?) and more to the exchanges. That is a form of paying more taxes, because Medicare will cover less and Medicare is a tax. So expect taxes to go up personally. We should resist raising corporate taxes however.

One method of lowering the tax rate for general corporations (which all the big ones are) would be to tax some portion of their earning the same way Sub S corps do. Shareholders of general corps now pay tax twice, once when the corporation earns the tax and a second time when the corporation earnings are distributed. Many in the general public do not care about that. However most pensions are paid from investments and those investments do rely on dividends. This is one suggestion. Many others should be considered.

Finally the IRS has to become more accountable to the public and more reasonable in its audits. That means rewriting many of the regulations, which the IRS treats as law instead of as guidelines. I think the news recently has shown the necessity for this.

Not a bad idea of letting those testifying before Congress having a chance to ask the legislators questions, but as anyone who has ever been called into his bosses office “for a talk” knows, it doesn’t always work that way. Most of us fear more than anything that we will be called in “for a talk” with the IRS.

Reply

Helen, May 31, 2013 at 8:48 pm said:

Very clear… one of your best ever.

Well done.

Helen

Reply

Guy Cipriano, May 31, 2013 at 8:50 pm said:

There is an estimated $1.7 trillion in cash on US corporate balance sheets , offshore.If that money were brought back to the USA and put to work productively the nation would benefit. Sen. Levin doesn’t quite seem to grasp that concept.

Reply

Jonathan, May 31, 2013 at 8:50 pm said:

The thought of Cook as grill master and Levin over the coals – delicious…

Reply

Leave a Reply to Helen Cancel reply

Your email address will not be published.