Fixing Corporate Taxes

On Tuesday, Apple’s CEO Tim Cook did the best he could in defending his company’s artful use of offshore subsidiaries, mostly in Ireland, to reduce its taxes. “We pay all the tax we owe,” he said, “every dollar.”

“Complicated and pernicious,” said Arizona Republican Sen. John McCain in describing Apple’s tax tactics.

“You shifted the Golden Goose to Ireland,” charged Michigan Democrat Carl Levin, the chairman of the Senate committee holding the hearings.

In all, claimed Levin, Apple avoided $9 billion in U.S. income tax in 2012, or $25 million a day, through its use of sophisticated corporate structures that rendered several Apple subsidiaries “stateless”—meaning they paid no taxes to any country.

Cook and the senators did seem to agree on one thing, though: Apple broke no laws. It merely played off the Irish tax system, with its very low rates, against the U.S.’s, with its top rate of 35 percent. (Apple, by the way, says its effective rate on U.S. earnings last year was 30.5 percent.)

To me, what Tuesday’s hearings make clear is not that multinationals are traitorous (to use an admittedly strong word), or that low-tax countries like Ireland don’t play fair, but that the global corporate tax system, and especially America’s, needs reform. Fast. As the Financial Times wrote Tuesday, “An overcomplicated US tax code has allowed the principle of no double taxation to denigrate into one of double no taxation.”

Tim Cook himself said Apple would willingly pay more in U.S. tax if the system were simpler, less riddled with business tax breaks and preference items, and treated foreign-source income more equitably.

Said the Financial Times: “Apple may have pushed avoidance to the limits. But if the US wants to stem the rising tide of profits shifted overseas, the first step should be to close loopholes in its system that encourage such behavior. Its voice in the global tax debate will be stronger – and its system fairer.”

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