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Quit Biting on Apple: Congress’s Misplaced Outrage over Corporate Taxes

by | May 21st, 2013 | 01:51 pm
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Senators are chomping down hard on Apple’s tax returns, trying to paint the company as Peck’s Bad Boy of corporate taxation. The lawmakers’ appetite has been whetted by a congressional investigation showing that the company avoided billions in taxes by setting up a complex web of global subsidiaries, some of them with no employees but run out of its headquarters in California. Senate hearings should thus be a learning exercise, both for the Congress and for the American public.

But these hearings are in danger of teaching exactly the wrong lesson.

The right lesson is not that Apple is getting away with tax murder by paying little or no tax on income earned abroad. The right lesson is that the US corporate tax system is badly broken and inflicts great harm on the US economy, while collecting less revenue than it could.

For starters, the combined US federal and state statutory corporate tax rate, at 39 percent, is 11 percentage points higher than the average for countries that compete in the global marketplace. No wonder US-based multinationals seek relief by reporting income in tax-friendly jurisdictions, not only Ireland and Singapore, but also Canada, Sweden, and many others.

The story gets worse. Nearly all other countries tax their multinationals on income earned at home but lightly or not at all on income earned abroad. This practice, known as a “territorial tax system,” is the norm today. The United States taxes its multinationals on their worldwide income, whether earned at home or abroad, but provides so many loopholes that few multinationals end up paying much of a tax on income earned overseas. Despite the loopholes, the US law embodies a huge and hurtful difference when compared with laws of other advanced countries.

Indeed, the US worldwide system is so riddled with exceptions that it practically invites companies to exploit them. If they didn’t, they would be so badly disadvantaged in the global marketplace that America could say goodbye to its industrial giants. Saddled with punitive tax burdens, they simply could not compete with multinationals based abroad. Numerous studies have demonstrated conclusively that US multinationals with extensive operations overseas also generate enormous numbers of jobs in the United States. Thus if they could not set up overseas operations in low-tax countries, the United States would actually lose exports, jobs, investment, and R&D (research and development). Over many decades, after predictable election-year rhetoric directed at supposedly “unpatriotic” multinationals, each successive Congress has relearned these hard facts, and has refused to turn the dream of a worldwide system into a living nightmare.

Ironically, one thing the US worldwide system does very well—at great cost to the Treasury—is to keep US multinationals from repatriating their income earned abroad, now totaling some $1.7 trillion. Apple’s recent issuance of debt to fund the buyback of shares—at the same time it has tens of billions stashed abroad—illustrated the foolishness of a tax system that wants to collect 35 percent when earnings abroad are repatriated. What corporate CEO is going to repatriate income just so that more than a third of it will be lost in taxes?

Scolding Apple and closing “loopholes” so that the US corporate tax system turns into a nightmare for multinationals—devastating the US economy in its wake—is not the right lesson from the Apple disclosures. We have proposed  that instead, the Congress should slash the US corporate tax rate to 25 percent, and enact a territorial system for active business income earned abroad with a 5 percent rate on repatriated income.

These actions would not only tell the world that the United States is a great place to do business; they would also deliver higher revenues to the Treasury.