It's time to give up on shaming big tech companies for their low tax rates
theatlantic.com
theatlantic.com
Most people believe that the State must collect some taxes from its subjects, but is this corporate income tax the best method? Increasing the cost of goods essentially taxes consumers in a regressive manner, irrespective of their ability to bear these increased costs. Lowering wages of company employees discourages work and lowers the income taxes collected by the government on these reduced wages. Finally, reducing the profits of shareholders reduces the taxes that would have been collected on dividends and capital gains when the shares are sold; more significantly, reducing the value of investing in companies discourages the creation of wealth and jobs for all of us by reducing the incentives to start and invest in companies.
If you think it is unethical to pay few taxes (and realize that for the reasons in the previous paragraph all other countries of the world tax their companies at lower rates than the USA), then you must believe that it is somehow more ethical to pay higher taxes (than is actually owed). If this is so, why aren't you sending in double what you owe in taxes? By your own statements aren't you acting unethically?
Corporate taxes decrease profits for shareholders, but do not decreas wages for employees. By definition, corporate taxes are taxes on profits, so employee wages have already been deducted from corporate revenues by the time the tax liability is determined.
Nobody is "hurt" collecting taxes. Taxes are simply a nonspecific bill from the government for a massive variety of services rendered directly or indirectly on behalf of the taxpayer.
Dividends and capital gains are taxed at lower rates than corporate tax rates. Thus, it is preferrable (from a revenue-generating viewpoint) to collect taxes from the corporation rather than from the dividend payments or the sale of stock. Even if the dividend preference expires, dividends will still be taxed at the individual's marginal rate, which is lower than the corporate income tax rate.
Taxes do not reduce the value of investing in companies. Under the time-value of money theory, if a tax can be deferred for 7-8 years, it is as if the tax was never owed. Thus, high taxes increase the value of investing in companies because the deferral opportunities of the corporate investment form offer greater "savings".
Finally, your last argument is logical nonsense. Paying less than the statutorilly declared tax rate is what people find unethical. Unethical does not mean "less ethical", it means "not ethical".
Given two companies, one that pays no taxes and another that pays 10% of profits in taxes, the former will have something between (a) cheaper access to capital (assuming equal expenditures), or, (b) more cash for R&D, employees, etc. (assuming equal returns). Saying that corporate tax rates have no effect on how much money a company has available to spend is absurd.
>Under the time-value of money theory, if a tax can be deferred for 7-8 years, it is as if the tax was never owed
Assuming AAPL is a AA credit (pessimistic) it would pay an 80 basis point spread for a 10-year borrowing [1]; with the 10-year Treasury at 190 [2] Apple's discount rate by these assumptions for 10 years is 2.7%. The present value of a $6B tax liability 10 years from now would thus be $4.6B, not zero.
[1] http://www.bondsonline.com/Todays_Market/Corporate_Bond_Spre...
[2] http://www.bondsonline.com/Todays_Market/Composite_Bond_Yiel...
Second, you misunderstand the time-value of money theory. The theory posits that the money saved in taxes, if actively invested back in the business or other investments, will result in sufficient income to completely offset the eventual tax payment when it comes due. Low interest rates may change the expected timeframe, but the theory assumes that the company will attempt to maximize the return on its investments.
Regarding the time value of money, if a firm defers $1 in taxes today for 8 years it would need to earn about a 9.1% annualised return on that dollar to have $2 at the end of those 8 years, $1 for the taxes deferred and $1 to keep so that it is as if "as if the tax was never owed". Given that the S&P 500 had an annual average return of 3.46% (1.42% annualised) over the past 10 years your assumption that a 7-8 year deferral even nearly wipes out taxes includes a substantial risk assumption. An American firm should expect to wait 26 years for its tax deferral to be wiped out by time if we use the US's average GDP growth rate since the 1970s of 2.7% [2]. Note: above I was doing the inverse of this, asking what the discount rate would have to be to discount $x in 10 years to almost zero today
[1] http://repec.iza.org/dp5293.pdf
[2] http://en.wikipedia.org/wiki/Economy_of_the_United_States
I may run a tiny LLC but I damn well try to get my tax burden down as low as possible too. I can't really fault the Apple's and Chevron's of the World for doing the same.
If we want substantive change in the tax system we should be shaming those in our Government who bend backwards to serve corporate interests.
You've got it wrong. There is no "game", there are only players. For YOU there are game rules. However, when you are as big as Microsoft or Google or Apple or Boeing, you spend millions (or tens of millions) to change the game rules in your favor.
If you're Chris Dodd, a former senator who was chairing the financial oversight committee at the time everything crashed and burned (how's that for track record?), you later head the MPAA and you can threaten - on live TV - to stop bribing politicians. Where's the referee who is supposed to enforce the game rules? Ergo, there are only players.
Not that hating them is going to help. But the blame rests squarely with the players, who get to redefine the game as they go.
How about ... spend less. Streamline that bloated money burning monstrosity called a government. "Who pays" is probably the last thing we should be talking about.
* Million dollar Vegas conferences? (Recent GSA scandal)
* Guantanamo Bay
* Unnecessary military bases all over the world
If you were to really spend time on such an exercise, it would be more useful to find the big items that can be reformed, not the minuscule ones that would take up a lot of mindshare but ultimately change nothing.
I've managed a big budget before. There are usually no more than a few items that account for most of the spending (in the US, these are probably defense, health, pensions and education), which you can usually cut 10% easily, and from that point on, the devil is in the details, both for the big items, and for the smaller level items.
And it always looks like there's nothing you can cut, and yet, there is always a lot you can cut, usually in the vicinity of 50%, if you have to, without endangering the viable status of the operation (although the stakeholders - employees / citizens / whatever - will find things are much less convenient than before).
Give me a proper OLAPpable database of government expenses (star scheme with properly categorized fact tables), and I'll show you where to cut. And no, it won't be popular or easy, but it's possible.
Right now, the US government spends ~60% more[0] than it collects in taxes (otherwise stated: taxes account for only ~70% of US government spending. For 2011, there's 2.4T in tax receipts, 1.3T in borrowing, 2012 is looking worse - http://www.usgovernmentspending.com/year_spending_2011USbn_1... ). Saying that you cannot reform down to 50% is equivalent to saying that the US cannot be run sustain-ably. I would guess that's not true -- it just cannot be sustained with the current entitlements and spending.
[0] Depending on how you look at it. This is using government's own numbers, which do not include e.g. backstops against otherwise bankrupt financial institutions like Freddie, Fannie. And it doesn't include IMHO proper treatment of social security. I estimate it actually spends 100% more than it collects.
Go read them. Military procurement in particular is an amazing one if you're looking for waste and corruption.
I'm not for big government. So, I wouldn't go department by department and audit to find fraud, waste, and abuse. I used to get paid to do that for the defense department. It's a complete waste of time and ultimately a paper drill.
But what I want is moot. What I don't understand is why many others sit idly by and argue who is going to contribute X%, when they should be more skeptical about where the money is going in the first place. Regardless of who's money it is.
If the government was run more like a business (which there's no reason why it couldn't be) we wouldn't be having this discussion.
But for starters, how about term limits and contractual accountability for the leaders? This say one thing do another without recourse is getting old.
Businesses don't have to deal with the Bill of Rights; the government does. Every exercise of government power must conform to the Bill of Rights and Constitutional prescriptions and proscriptions.
The current government could be run more like a business than it currently is, but there is no way under the Constitution that it could be run like a business.
However, I'd like to point out that term limits is making government less like a business. Imagine you told a CEO 'Well, you're here for 4, maybe 8 years, but no longer." Zuckerberg's term would be over in 2014, Jobs wouldn't have been able to return (or would have stopped in 2005 if you just want to count his return in 1997).
That's not to say that term limits are a bad idea (however, I'm unimpressed with their implementation in California), just that I don't think that people really feel comfortable with having a government, that can make it's own rules, run itself like a business.
I like the idea of term limits if only to help prevent corruption. But perhaps that solution is best left up to the contractual accountability. However, I do feel that complacency and the "good ole boys club" plays a negative role in the leadership, which limiting terms might help to prevent.
But not to stray too far away from my initial point, "like a business" merely means efficient. "Here's my money, please put it to good use" isn't something I think many people with the correct information feel is truly being honored. And why that isn't being discussed more is interesting to me.
It is crazy that the government runs myriad business and job subsidy programs while also tax penalizing the most successful, forward-looking companies.
I actually suggest you do something that ends double taxation and the capital gain tax tier:
http://en.wikipedia.org/wiki/Dividend_imputation
This is why:
>Elimination of Tax Incentives >It is also interesting to note that it was soon realised that the system eliminated to a considerable extent the effectiveness of tax incentives for corporations. If a corporation was given a tax break then its incomes thus released from taxation would not generate franking credits precisely because no tax was paid. In turn, this meant that the shareholders received fewer credits along with their dividends, meaning in turn that they had to pay more tax. The net result is that each tax break a corporation itself got was countered by a matching increase in the tax burden of shareholders, leaving shareholders in exactly the same position had no tax break been received by the corporation. Thus, to the extent that corporate directors acted so as to increase shareholder wealth, tax incentives would not influence corporate behaviour.
It's shaming them for legal, but unethical behavior.
There's a lot of behavior that falls into the area of "legal, but shitty." Large corporations gaming the system to avoid paying taxes falls into that.
Don't kid yourself that we can ever totally eliminate this kind of thing. It's a moving goalpost. You pass laws to stop one kind of thing, their highly paid attorneys and accountants will find something else. It's cheaper for them to pay smart people really well to find loopholes than it is for them to pay their legitimate tax rates.
If we all behaved the way corporations do -- sticking only to the letter of the law, and exploiting every other opportunity to better ourselves at the expense of everyone else around us -- the world would be a really awful place.
We have to point out this behavior and shame the corporations, because negative public opinion possibly affecting their bottom line is the only thing they will respond to.
*I believe value destruction is unethical, sourcing my sense of ethics from the perspective of global long-run production. A company moving assets from the inefficient US government to its private, profitable book is thus good to me. This isn't to start a philosophical flame war on this but to point out that you can't assume this behaviour automatically falls into the "legal, but shitty" area for everyone.
Some would argue that the government is the biggest waste of money there is. I'm not saying that's my belief, but let's entertain that thought for a minute. If you believe that the government wastes most, say 95%, of its money on stupid things that should never receive a dollar from anyone (like the war in Iraq, to pick a random one), and you believe that you personally can do more with that money in terms of "making the world a better place", then it follows that paying as little tax as possible is the ethical choice.
Let's take an example: Bill Gates. Bill Gates is currently the second richest man on earth, according to http://en.wikipedia.org/wiki/Forbes_list_of_billionaires . Did he use all those tax schemes on his way there? You bet your bottom dollar he did. Now he's using this money directly to solve problems like curing Africa of Malaria. Do you think he's using that money more efficiently than a government programme would? I'd bet on that too.
Would the world be better off if the US government had $20b more and Bill Gates had $20b less? I don't think so. I think Bill Gates can use the money much more intelligently than the US government ever could.
So, is it unethical to pour less money into the pointless furnace of wasteful government?
I'm not saying this point of view is the only point of view out there. But to declare tax avoidance outright "unethical" is a failure in perspective.
Funnily enough, most of the people who complain about "wasteful government spending" were the the loudest advocates of the Iraq war and the expanded modern security state. It turns out everything became way more wasteful and tyrannical on a single day in January 2009.
There's all sorts of unethical things you can do legally, and if you have a bunch of lobbyists working to change the law in your favor, there's even more.
My income has FICA and Medicare taken out of about 90% of the total, those taxes are capped. If I made more, I'd be paying less as a % of income for entitlements. My income is taxed at the personal income rate as opposed to the silly-low capital gains rate.
Our tax code taxes the poor almost nothing, and the rich at a smaller % of their incomes than the middle class. So the middle class is paying a huge % of the tax burden, relative to their incomes. Then someone goes "Hey, look, the poor pay almost nothing!" and people get mad about the injustice.
The rich do not get taxed at a smaller % of their incomes than the middle class. Tell your good friend Mr. Buffett he is welcome to send a big check to the treasury. They will accept it.
It's like voting for two lizards, one of which is the lesser evil. We change the outcome by voting for the lesser evil and trying to convince everyone that this lizard is the right choice. Of course, we didn't really do shit. The system remain unchanged and the evil lizards are still in control.
The problem of politics is not any one particular problem or any one particular candidate, but that the whole decision-making process is rotten.
If they paid their way then the overall tax rate would be lower for everyone, instead of just for the rich. The irony being they're the ones who need it the least.
So effectively Bill Gates made the decision to make everyone else pay more tax so that he could go and cure Malaria in Africa. Causing babies to die in America instead. His tax avoidance can be indirectly linked to other people's deaths. That wasn't his decision to make and was unethical.
It's stealing but in a weird way. And by people who don't actually need to steal but just do it because they can.
That is the truth in theory. In practice, the US federal government these days borrows 30% of the money it spends; the percentage has been growing through the years.
If they paid their fair share of taxes, then either (a) the government would borrow less -- or, more likely (b) the government would spend more (and the population in general you may or may not be the beneficiary).
The "if you pay less taxes I pay more taxes" only works in a closed system. IIRC, the last time the US wasn't, at the end of the day, a pure borrower is in the '70s.
edit: fixed 50% to 30%. There's an underlying philosophical discussion, but I'll just use the official government number.
[1]http://www.heritage.org/federalbudget/top10-percent-income-e...
The way the government can cut its debt is by cutting its spending - the biggest slice of which is the military.
It's not about what Gates personally gives or what Buffet might personally write a check for, if he feels he isn't paying enough. The discussion is about the hundreds of billions in aggregate that corporations and the wealthy are not paying.
And we certainly aren't seeing hundreds of billions in Gates-style charity from corporations and the other super-wealthy.
Consider also that Gates fabulous charity is still small compared to the aggregate donation of Americans. His charity is notable only for having come from a single person and for his ability to therefore set priorities directly. It's not remotely clear that aggregated wealth, even if it were to always result in Gates'-style donations, results in more net charity than if it were taxed, spent and thus diffused back into the economy where the rest of America might earn it and donate to charity in smaller individual amounts.
Government tax revenue, after all, does not get destroyed. It gets spent. Perhaps inefficiently, but spent nonetheless. And say what you will about cronyism, you'd quickly find yourself in the rhetorical weeds if you tried to argue that wealth generated off government inefficiency or misdirected priority is somehow tainted and thus can't be expected to produce charity from those who make their living from it. Not when a cursory glance over government revenue flows creates a list of the largest US government contractors and vendors that looks almost exactly like the list of corporations and wealthy individuals we're trying to excuse for their charity.
(Edit: cleaned up some phrasing)
If you assume your correct you can make anything sound reasonable. However, despite popular opinion the US government is reasonable efficient given it's size, it's the goals that are poorly thought out not it's methods. If you want to suggest otherwise you need to compare total income with total output and compare with more than just one rich dude while ignoring people who buy 80+ million dollar Yacht's and rarely use them.
Do you have a reference for that? Genuinely interested.
I've dealt only with a small part of the US and State government, and all of those were horrendously inefficient (e.g., refusing electronic filing of documents; turns out that I type it in on my computer, print it onto the pre-made form, send it by regular mail; someone at the other end manually types it all in. That happens with quite a few US government forms).
Social Security Administration overhead ~1% http://www.ssa.gov/oact/STATS/admin.html Compared to 401k http://www.perfectswindle.com/?p=109 vs ~20% of 401k payouts go to administrative overhead.
Medicare vs. Private insurance http://voices.washingtonpost.com/ezra-klein/2009/07/administ...
PS: You can argue that SS should include IRS overhead, but you need to reach into a lot of other government programs or argue they should run 401k style programs to close that gap. Medicare pays less in overhead and less for the actual procedures there is some arguments in relation to work done, but they are are not obviously worse.
Thanks. I don't agree it is a valid comparison (SSA puts all money in t-notes, 401k actually has (mostly useless, but non-zero cost) management) - but 1% is, in fact, efficient overhead in absolute terms. I'm impressed.
> Medicare vs. Private insurance http://voices.washingtonpost.com/ezra-klein/2009/07/administ....
> PS: Medicare pays less in overhead and less for the actual procedure.
Medicare decides how much they pay for most procedures, and the providers cannot refuse (and instead roll the cost onto less leveraged customers), so I'm not sure how can use that as a basis of comparison.
I can't find it now, but I recall a comparison to other systems (UK's NHS and other single payer systems) found that medicare was overall much less efficient (which is again, unfair - the NHS doesn't have to deal with private for-profit hospitals, medicare does).
Apple, Microsoft, and Google should pay their fair share. Unless I can claim all my income in Ireland, and store all my cash in Barbados, they shouldn't be able to do it either.
And is setting up 4 related corporations in 3 different international jurisdiction a "simple" thing?
Likewise, when a person devotes some small fraction of their resources to tax avoidance and a corporation devotes the same fraction, the corporation's results are going to be much more impressive and complex than the persons. But I'm not sure that's a reason to condemn the one and not the other.
And how successful are they, compared to corporations? The problem is that by lobbying clout making a difference, corporations are thousands of times more effective than the number of people they represent.
(And it's usually an accepted deduction for them, unlike most other groups)
> Likewise, when a person devotes some small fraction of their resources to tax avoidance and a corporation devotes the same fraction, the corporation's results are going to be much more impressive and complex than the persons. But I'm not sure that's a reason to condemn the one and not the other.
The answer you're going to get as a person if you do that (especially if you get creative with multinational tricks) is "I'm not sure I'll be able to defend that in court. And if I can't, you're going to jail". However, if you do it as a corporation, the worst you'd do is to pay back taxes (perhaps with some small penalty). Sarbanes Oxley theoretically makes the CEO personally liable, but I haven't heard of a case where one was prosecuted that wasn't downright fraud.
Do you know of any case in which a corporate executive faced personal liability for creative tax planning? I do know cases where persons creatively planning their own taxes faced such liability. And I think that makes it good enough reason to single out one and not the other.
"If we all behaved the way corporations do" doesn't really mean anything. Corporations are people. It would be much more accurate to say "If all people behaved like the people who work at Apple, the world would be a worse place," but I don't think that's defensible at all.
If it does become a social norm to obey the law you wish Congress passed, instead of the law they actually passed, you're subsidizing people who ignore this norm. I wouldn't want to live in a world where RIMM out-competes Apple because Apple scrupulously follows good, imaginary rules, and RIMM scrupulously follows actual rules instead. This would all be a lot less meaningful if the US had lower corporate tax rates, but ours are effectively the highest in the world. Since the corporate tax rate is also the subsidy for hiding a given amount of income, it's no wonder that we lead the world in tax avoidance, too.
They're just following the law. Beg off the companies, and change it.
The real problem here is twofold:
1. The tax system is too complicated and continues to get more complicated with special interest riders and so forth; and
2. Large companies are free to shop around for friendly tax jurisdictions. The natural endgame here is that you need to treat money going to friendly jurisdictions as avoiding income and tax it at source.
(2) is no doubt controversial but I see it as inevitable.
An example of (1) is the tax regulation surrounding the expatriation of technology, something legal and blessed by the IRS. It goes to Ireland and money gets funnelled there and then through the Netherlands. It's time to cut that shit out.
For individuals I really do think it's time for the flat tax. Call it 25% of what you earn above $20,000 with no deductions and be done with it.
(2). Worldwide, that is the standard tax practice. It is called "territorial taxation." Source-based taxation is the U.S. practice regarding foreign persons who are citizens of nations with which we have income tax treaties (for purposes of determining which country gets to tax them). The U.S. is an outlier in taxing worldwide income regardless of source. However, getting rid of the Irish structure would require (a) a change in other countries' tax policies or (b) a tax code even more complicated than the one we have right now.
Note that I mean "game the system" in the sense of gamifying the outcome. I do not mean game in the sense of "cheating."
How is taking deductions "gaming the system?" Why on earth would I not try to minimize my tax burden. The US government is not a charity, and it functions far worse than most charities do. If I'm just going to give money away, the government is not going to be my first choice for recipient.
As for "gaming the system." I mean that they are attempting to maximize their outcome by "playing" all of the rules available. (For example, by committing a holding foul to prevent a receiver from scoring a touchdown in college football.) Essentially, they have gamified the tax code. I do not intend a positive or negative inference.
Unfortunately, that complexity also applies to taxpayers who are not trying to game the system. And while they might only be, say, 5% of the population, they vastly outnumber the outlaws for which these regulations were made.
e.g., if you have control of any asset outside the US, you can spend weeks trying to satisfy the documentation and tax requirements, and still fail because they are ambiguously worded. And you are automatically assumed to be in the wrong and avoiding taxation, even if you overpaid. How is that for simple? That is regardless of any deduction you may or may not be able to take.
> However, getting rid of the Irish structure would require (a) a change in other countries' tax policies or (b) a tax code even more complicated than the one we have right now.
Neither is true. The tax code for persons already enforces that - no matter how many entities you have in the middle, if you are ultimately in control of a company or a bank account, you have to report it and pay taxes on the profits.
It just takes the addition of one clause "Company X pays US taxes on every cent it makes in itself or a company under its control (in proportion to said control, ultimately determined by agency). Violation of this is considered lying under oath w.r.t sarbanes oaxley reporting"
(or 10 in legalese, with this underlying meaning), and all of a sudden it becomes the company's issue to prove it is not in control if it doesn't want to pay taxes. Just like it is for your "real person" taxpayer.
Prior to this abuse, investing in foreign assets or using offshore bank accounts was siginificantly less complex.
While we could argue about the merits of FBAR in preventing said abuse (apparently, the IRS and treasury do not believe it is useful given the recent FATCA upgrade it got), I don't want to go there.
Your statement:
> (1) The tax system is very simple if you're not trying to game the system to minimize your tax burden.
Is demonstrably wrong. e.g. naturalized citizens who still have some assets in their country of origin (or even natural born citizens who inherit such assets), are subject to complicated tax filing whether or not they try to game the system or minimize their taxes.