Apple: Bad Model for “Tax Reform.” California, New Tax Thinkers, Chart a Better Way

Roger Hickey

In testimony last week Apple CEO Timothy Cook proudly described the ingenious ways in which Apple tax attorneys have gamed the U.S. tax system to make sure their company pays a whole lot less in taxes to the U.S.A. – their supposed “home country” – than U.S. users of their products or tax writers in Congress might have expected. Apple’s tax wizards have created whole new stateless corporate entities, into which they have transferred many of the intellectual assets of their high tech consumer products company. Thus, their profit-producing crown jewels are not subject to taxes in any country. And, Cook hastened to proclaim, it is all completely legal under U.S. law.

But Cook also laid out a plan for “reform” of corporate taxes that, if passed, would make it easier for other corporations to follow Apple’s lead, by:

  • Lowering the tax rate that all big corporations pay for the roads, schools, research and development, and other government investments that have made their economic success in the U.S. possible;
  • Instituting a tax holiday during which these companies would pay even lower tax rates on profits held overseas when they decide to bring those profits into the U.S.;
  • Adopting a new “territorial” tax system, permanently excluding from U.S. taxes any profits a company claims were made in some other country – whether it has paid taxes to that other country or not.

The Apple agenda for corporate tax reform is not different from most of the organized groupings of corporate CEOs and their lobbyists who, having survived a small increase in their individual tax rates after the 2012 election, are getting ready to engineer a windfall of tax savings through the process of political payoffs and organized greed they will call corporate tax “reform.”

The wealthy corporate barons who are pushing for these tax giveaways to corporate America are the very same ones who have been lecturing Americans about the need to reduce the federal deficit and debt. Their greed seems to make them immune to all shame or charges of hypocrisy. A prime example: the “Fix the Debt” group of more than 80 corporate executives – led by hedge fund mega-billionaire Peter G. Peterson and deficit scolds Erskine Bowles and Alan Simpson, whose official anti-deficit agenda is full of austerity and budget cuts for regular people – are pushing at the same time for a switch to a territorial system under which corporate foreign earnings would be permanently exempted (instead of being taxed when they are returned to America). Just how reducing corporate taxes would help fix the debt is as hard for them to explain. A new report from CAF and IPS also finds that almost all their companies pay their top executives mega-millions, while writing most of it of as a tax deduction.

Defeat the corporate plans to “reform” corporate taxes.

A political mobilization by citizens is clearly necessary to prevent politicians in the Senate and House from embracing the corporate version of corporate tax reform. And coalitions like Americans for Tax Fairness are gearing up to make sure that the only kind of corporate tax reform that passes is the kind that produces more – not less – tax revenue for both deficit reduction and for the public investment we all need for job growth and corporations need to be successful in America. And groups like the Tax Justice Network-U.S.A and their Financial Accountability and Corporate Transparency (FACT) Campaign are leading efforts to get governments to track the corporate money hidden all over the world and make tax rules more fair and transparent – starting with Michigan Sen. Carl Levin’s Stop Tax Haven Abuse Act.

A Better Way to Tax All Multinationals Who Make Profits in America

Our system for taxing corporate profits is obsolete. It harkens back to a time when even the biggest U.S. companies actually were U.S. companies. Today, as we saw in Timothy Cook’s testimony, even our national champions, like Apple, are no more American than Toyota or LG (which sells TVs for a giant South Korean chaebol business conglomerate). And these stateless multinationals can use the magic of transfer pricing to fool tax authorities in any one country into believing that most of their profits were made in another.

In a very important article in The Washington Post’s Wonkblog May 23, reporter Jia Lynn Yang summarized the thinking of a new group of tax thinkers and the successful tax experience of states like California that have tried a whole new approach. She wrote:

The U.S. corporate tax system is needlessly complex, dysfunctional and needs to be fixed. Could there be an elegant solution right under our noses?

[A] number of states have come up with a simple way to calculate what firms owe them in taxes: If a company sells its product or services in a given state, it pays a tax proportionate to the sales in that state.

Here’s how it would work. Let’s say a company earns 20 percent of its sales in California. The company would pay 20 percent of its worldwide sales to California at the state’s corporate tax rate. No need to worry about where the firm has offices or where its employees work — and no chance of the firms shifting their income to other states using elaborate, hard-to-trace methods.

Just last year, the state of California passed just such a law moving to a sales-based corporate tax system. Bill Parks, a retired finance professor, recently wrote an op-ed in USA Today proposing that the entire country move to a similar approach.

“Adopting California’s sales-based corporate tax system would simplify the tax code and level the playing field,” he wrote. “Under sales-based apportionment, it is conceivable that a medium-size corporation could file its report on a single sheet of paper attached to its annual Form 10-K filed with the SEC without needing the help of a tax attorney.”

In 2007, Kim Clausing, a professor of economics at Reed College, and Reuven Avi-Yonah, a professor at the University of Michigan Law School, produced a paper proposing the U.S. corporate tax system adopt the states’ model.

Such a solution, they wrote, would reflect the globalized way that companies actually do business now. Rather than figure out the location of a company’s production – which can get complicated when an iPhone is designed in Cupertino and manufactured in China – the taxes would be based on where customers are located.

“Absent tax incentives to shift income away from the United States, U.S. corporate tax revenues would likely increase significantly,” they wrote. And, Clausing and Avi-Yonah wrote, the tax rate could be cut “substantially.”

Reporter Yang notes that, “The United States, with its army of consumers, would certainly stand to gain.” But the other winners would be U.S. workers. This new tax system would provide companies absolutely no tax incentive to move production to lower-tax countries. And with the costs of transportation and wages going up around the world, U.S. and non-U.S. companies would likely accelerate the trend toward manufacturing (and hiring) where they sell. And small businesses, now at a disadvantage against big companies able to hide profits all over the world, would be back on a level playing field.

Clearly, the corporate “tax reform” agenda needs to be stopped because it would take us in the wrong direction, reducing revenues America needs and encouraging (with their territorial plan) offshoring of jobs and profits. But perhaps a more important reason to stop the multinational corporate tax agenda is to make it easier to establish a new simpler corporate tax system pioneered, like so many innovative American policy ideas, in California.

Don’t let bad ideas get in the way of an idea whose time is coming.

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