Taxation with Too Much Representation

“In 2011, U.S. corporations paid a 12.1 percent effective corporate income tax rate, a 40-year low. The statutory corporate tax rate is 35 percent, but companies drive their rates fare lower due to the proliferation of loopholes and deductions and the growing use of offshore tax havens.

“This isn’t a new problem, as Goldman Sachs’ David Kostin shows. In fact, corporations have been paying below the statutory rate for 45 years (the [above] chart uses 39 percent due to its inclusion of state corporate taxes): For the last 45 years, the median S&P 500 firm has paid an effective tax rate averaging more than 5 percentage points below the statutory rate. Despite statutory rates hovering near 39% for the last 25 years, effective tax rates have been gradually decreasing (see Exhibit 2 [above]). At 30%, the current S&P 500 median effective tax rate is almost 10 percentage points below the statutory level, and close to the global statutory average.” ThinkProgress.org, February 6^th. In 2012, according to the Wall Street Journal, the top ten U.S. corporations paid an average 9% U.S. tax.

Of course, U.S. companies need to get credit for the taxes they pay to foreign countries in connection with their overseas operations, but for the most part leaving money generated overseas is just “good tax planning.” At a time when the United States needs that money, U.S. companies, ranging from General Electric to Apple, are figuring out precisely how not to pay such taxes. And although the United States has one of the highest corporate tax rates in world, the loopholes make it one of the lowest effective rate in the developed world.

So let’s look at the problems faced by one U.S. company, electronics hardware/software giant Apple, where the long term growth orientation (no dividends to date) has slowed, putting a downward pressure on the stock. So the company is yielding to shareholder pressure to justify a higher share price by beginning to pay significant dividends (the preliminary proposed number is $45 billion), particularly because of the estimated $102 billion of Apple’s cash and investments (about 70% of the company’s total) currently sitting idly overseas and free, so far, from the U.S. taxman. If Apple were to move that money into the United States to meet their shareholders’ demands, they would have to pay a huge tax bill on that capital repatriation. Perhaps $33 billion or more. And while there is a pile of cash in the U.S. – around $43 billion or so – with a likelihood of a like sum in available free cash flow, to meet shareholder expectations, Apple would seem to need to import that overseas cash, pay the relevant taxes, and then release the much-desired dividends to its shareholders.

But wait! Why pay those U.S. taxes when you can borrow the money you need to top off the necessary dividend expectations (above the cash available in the U.S.), deduct the interest on those borrowings against whatever U.S. taxes you do pay, and keep all that luscious cash offshore and away from the IRS? Hmmm. Good idea perfectly legal under U.S. law. So Apple is floating a $17 billion bond (its way of borrowing and the biggest such offering in history) at a favorable interest rate to accomplish just such a strategy. Ooooh! And our tax laws allow such machinations? Yep! And there is strong Congressional force to keep it that way!

So if Apple keeps that money overseas, and you can make this statement for lots of major U.S. companies as well, they can hire foreign workers to generate their products and services, avoid U.S. taxes, and generate lots of profits from such efforts? Even though we have a pretty nasty unemployment picture here in the United States? Yep, and it’s all perfectly legal. Makes you feel all warm and fuzzy inside, doesn’t it?

I’m Peter Dekom, and you really don’t have to wonder why the rich just keep getting rich with their own set of rules, tax realities and loopholes not available to those of us who work for a living.