Allow me to point and link you to two pieces in Sunday's NYT. I don't have time to give them the treatment they deserve -- off to CA for the Milken Institute Global Conference where I'll be debating tax reform and the role of budget deficits so more to come on those issues.
The first article is about all the machinations Apple goes through to cut its tax bill (their effective rate is under 10 percent, according to the piece). This is a well-known story -- journalists Jesse Drucker and David Cay Johnston have also done yeomen's work in this space as well. But the NYT piece added an important dimension by discussing some of the granular costs of the revenue losses to localities in Apple's backyard.
A mile and a half from Apple's Cupertino headquarters is De Anza College, a community college that Steve Wozniak, one of Apple's founders, attended from 1969 to 1974. Because of California's state budget crisis, De Anza has cut more than a thousand courses and 8 percent of its faculty since 2008.
Now, De Anza faces a budget gap so large that it is confronting a "death spiral," the school's president, Brian Murphy, wrote to the faculty in January. Apple, of course, is not responsible for the state's financial shortfall, which has numerous causes. But the company's tax policies are seen by officials like Mr. Murphy as symptomatic of why the crisis exists.
"I just don't understand it," he said in an interview. "I'll bet every person at Apple has a connection to De Anza. Their kids swim in our pool. Their cousins take classes here. They drive past it every day, for Pete's sake.
"But then they do everything they can to pay as few taxes as possible."
Something very absurd -- though not illegal -- is going on here but we knew that already. The fact that U.S. foreign profits held in Bermuda and the Cayman Islands amount to between 550 and 650 percent of those countries GDP is a pretty strong hint that something's awry, as is the "double Irish with a Dutch sandwich" move decribed in the piece (it's just a very effective way to shelter profits earned in higher tax countries by assigning them to low-tax havens).
So here's my thinking on this. If Apple's doing anything wrong here, it's not their tax-sheltering tactics. That's no more despicable then me buying my socks at Target instead of Nordstrom. They need to compete and to avoid providing their competitors with any advantages.
There are, instead, two other problems, the first of which is the most important.
First, our system of taxation -- corporate or otherwise -- raises far too little revenue to sustain America. We can't sustain our infrastructure, invest in either public goods -- most importantly education -- or the innovation that was an essential ingredient in the fertile ground in which the Apple tree grew. We cannot till such soil on the revenue we're collecting today, especially from such highly profitable firms as Apple. If we don't turn this around, I'm quite certain that the number of Apples in our future will continue to dwindle.
The second problem is the resources companies like Apple and GE and all the other multinationals plough into these double Dutch sandwiches -- the millions they spend on the billions they save (GE apparently has about 1,000 tax lawyers working on this stuff). Obviously, it's money well spent from their perspective but that's not the case from the broader perspective of society.
What's the solution? I'd start by ending the ability to defer taxes on profits earned abroad, a minimum tax on overseas profits, and closing the loopholes that make it cheaper to build a factory in Guangdong than in Ohio. Basically, the goal should not be to make it more expensive to invest abroad -- it should be to level the playing field, i.e., end the loopholes that make it cheaper to invest elsewhere.
Until then, Apple should be a better corporate citizen and do more to voluntarily support the schools in its backyard (and I'd argue that America is its backyard).
The second piece provides some potentially good news about how health care spending is growing more slowly in recent years. Are we starting to bend the cost curve?
You can't overestimate how important that is, given the fact that for all the nonsense about how spending on welfare and foreign aid is busting the budget -- not even close -- the true path to fiscal sustainability cannot be achieved without slowing the growth of spending on health care.
I was talking to a friend last week who mucks around deeply in this stuff -- visiting health IT companies, e.g. -- and he assured me that the Affordable Care Act is already playing a role incentivizing producers and providers to do more to contain costs. Let's just hope Justice Kennedy is listening.
But I think the article may be down-weighting the impact of the recession. It's in there, but the experts quoted argue that it's not the main factor. I hope that's right, but I'm worried that what we're really seeing is less cost savings and more cost shifting. That is, our delivery system has clearly been shifting more costs onto health consumers. The recession hits, incomes fall sharply, and people simply can't afford to get the health care they need and/or want.
I get that skin-in-the-game is a critically important component of market economics. I just can't accept that health care is a normal good to which this standard ought to be fully applied.
This post originally appeared at Jared Bernstein's On The Economy blog.
Follow Jared Bernstein on Twitter: www.twitter.com/@econjared
Doug Kendall: The Tea Party vs. the Constitution: ObamaCare Edition
Heather A. Lowe and Clark Gascoigne: Tax Dodging Jeopardizes Society at Home and Abroad
The solution is this option not even considered by any one.
How about “deficit funding” to support all infrastructure because a monetarily sovereign govt is not limited to spend only what it collects and all deficits become private sector wealth? See
http://my.firedoglake.com/pshakkottai/2012/04/20/misunderstood-deficits/
Taxes do not exist in a vacuum.
Taking a major manufacturing business overseas has greater costs than remaining in the U.S. domestic market already, regardless of whatever taxes we're talking about, and can be made more so with other policies (some of which would also have the benefit of wrecking our wonderful "free trade" agreements).
Assuming that eliminating loopholes without reforming the base federal corporate tax structure (which is not what Bernstein is referring to alone) will result in economic disaster is either naive, myopic, or purposely dishonest.
We collect more than adequate taxes to pay for public goods like security,infrastructure and education which are necessary to the success of companies like Apple. We need to rethink the rest.
Lower the rates, close the loopholes, simplify the tax code. If you do that smartly you can actually raise revenues to the Treasury AND lower everyones OVERALL tax bill by reducing compliance costs. Its not magic, its just simple math. Adding MORE laws/regulations to the tax code is NOT the answer (i.e. your proposal to dis-incentivize foreign investment by US companies). GE does not employ those people because its "in vogue", they do so because the government incentivizes them to employ those 1000 lawyers to reduce their tax bill. Its cheaper to employ those thousands of people than it is to merely pay the taxes. Change the equation.
But it would put a LOT of Tax Lawyers, CPAs, and businesses involved in the preparation of taxes, out of business. If your in that category, my apologies, you don't add anything to the economy and your "industry" has to go.
Of course, the government will spend as much money as you give it. Will this money be spent in useful ways?
The author says that the government should "invest in ... the innovation that was an essential ingredient in the fertile ground in which the Apple tree grew." Government had nothing to do with Apple's success. Apple is the epitome of a company driven by innovative individuals, succeeding in a free market economy. Meanwhile, the government invests tax dollars in innovative black holes like Solyndra.
The second problem with trying to force successful companies to pay more taxes is that the companies will simply avoid them in other ways. In the final instance, they will avoid taxes by leaving the US altogether. In the modern, networked world, there is no particular reason a company has to retain its headquarters in any particular country. The US itself is competing with other countries in the global marketplace. The US once provided lean government, good schools and low taxes; a business-friendly environment. Today, the US (and particularly California) provides bloated government, bad schools and high taxes. The consequences are only beginning to be felt.
"What's the solution? I'd start by ending the ability to defer taxes on profits earned abroad, a minimum tax on overseas profits, and closing the loopholes that make it cheaper to build a factory in Guangdong than in Ohio. Basically, the goal should not be to make it more expensive to invest abroad -- it should be to level the playing field, i.e., end the loopholes that make it cheaper to invest elsewhere."
This isn't leveling the field, it is gaming it. Increasing the very thing that drives companies out of doing business here isn't a very smart strategy.
I make widgets at $5 a pop. You increase my costs and my company folds as it can no longer compete. Where is the benefit here?
Bernstein is simply suggesting that there should not be any tax benefit to building a plant in Guangzhou versus building the same plant in Ohio. It's pretty hard to argue with that if you want to build the American economy.
"What's the solution? I'd start by ending the ability to defer taxes on profits earned abroad, a minimum tax on overseas profits, and closing the loopholes that make it cheaper to build a factory in Guangdong than in Ohio. Basically, the goal should not be to make it more expensive to invest abroad -- it should be to level the playing field, i.e., end the loopholes that make it cheaper to invest elsewhere."
So you want us to pay $1,500 for an Ipad because it must be supported by union wages, higher taxes and more regulations? Brilliant. First, you aren't leveling the playing field, you are gaming it. Second, you will drive these companies out of business because they won't be able to compete.
Maybe we should close the loophole that allows you to buy a product on Amazon or Walmart and force you to spend far more money at a boutique store. After all, you are doing a tremendous disservice to those underpaid slaves working for those companies, right?
On the other hand Apple is a global company so it shouldn't have to pay US taxes on all its profits. However it should pay taxes where it does business, not in the Cayman islands or other tax shelters.
But since you brought it up, a study showed that making iPads in the US would add less than $100 to the cost. Some of that offset by lower shipping costs, and Apple could still it at the current price point and make money. Less money, but make money nonetheless.
So let's not fret too much about these companies.
In the case of Apple, of course they can take whatever tax advantage they can. But the mild reforms you suggest that would so sanely balance Apple's actions and the system have no chance. The right wing with the support of the corporate media has convinced so many people that greed and self interest is in all ways above common good. The concepts like government balancing selfishness by evening up the tax burden or providing services like care for the sick are of no value. That philosophy causes them to block any change for good. it also seems to have allowed the greed heads to almost literally walk into government and corrupt it almost totally.
If you ever want to see the right wing attitudes, look at the responses posted to any article Robert Reich writes for Huffpo - so much right wing venom, all cliches with no facts. But they sure can deify their interpretations of the Constitution.
There is no need to throw out the baby with the bath water by switching to a territorial tax system (favored by Mr. Romney) or imposing a partial deferral with minimum US tax (favored by Mr. Obama).
Consider business tax reform along the lines of an 8% income tax and 4% Value Added Tax. The US would have the lowest business tax rates of any developed country and there would be no need for a tax deferral. Apart from "tax haven" countries, US foreign subsidiary corporations will have paid foreign income taxes of 8% (or more) and, with standard credits; all profits could be brought back to the US tax free. [In the case of a tax haven with little no income tax there would be a tax of no more than 8% (not unlike the tax amnesty that has been suggested)].
The 35% corporate tax rate is the problem and it should not be fixed with an anti-business elimination of deferral or walk around to a territorial tax system (even if favored by Mr. Romney for ill-considered reasons of foreign investment and a tepid view of a VAT [favored by Mr. Ryan]). A switch to a territorial tax system would also open a Pandora's Box of unwanted multinational tax evasion at the expense of US jobs.
Eugene Patrick Devany, JD, MPA
www.TaxNetWealth.com
Health care is different. No insurance is easy to sell...it is more fun to buy things than to buy a protection from an uncertain event. Who ever says I would rather increase my health coverage than buy that dress or set of big wheels? It is also an inexhaustible good...you can only eat so much (although we all over do it a bit on occasion) but a person can consume millions in healthcare. So some mechanism must be in place to regulate it. Either by the consumer or someone else.
That is, I believe, amply demonstrated by the actions of Apple and GE.
Such companies use their status as American to extract privileges and access to our market - yet, inexplicably, do not exhibit behaviors that demonstrate any moral or ethical obligation to support the communities in which their employees work.
Since corporate executives, quite clearly, do not exhibit any social responsibility, it would seem that governments must do that for them - or deny them access to American markets and support.