Leaky Tax Code

It’s all legal, but it is grossly unfair. The United States may have one of the nominally highest corporate tax rates in the world (35.3%), but U.S. multinationals almost never pay remotely that rate… if they pay anything at all. The can create “inversions,” whereby the purchase a smaller company in a foreign state with lower taxes and move their domicile to the lower-rate country.

Or they may employ the technique that keeps Apple flush with cash by moving all their patents, trademarks and copyrights off-shore (Ireland) to a controlled but separate entity. That Irish entity does lots of back-office work, but essentially, Apple has negotiated a tiny tax rate with Ireland in exchange for moving those intellectual property assets and creating a small local bureaucracy (jobs). Thus every time Apple sells one of their products to a consumer in the U.S., they have to pay a royalty to that Irish entity, and the accumulation of those royalties creates massive revenues to Apple’s Irish company… taxed at that miniscule Irish tax rate. But those royalties are a deduction against Apple’s U.S. corporate taxes, so they pay virtually no U.S. taxes!

It gets worse. As Apple matured, it moved from being a growth company that didn’t have to pay dividends to a stable dividend-paying company. But to repatriate all those accumulated earnings held in Ireland back to the U.S. to pay those dividends would trigger that very high U.S. tax rate… a fate to be avoided. So Apple figured out if they borrowed money in the U.S. secured against the Irish cash accumulation, not only could they avoid paying taxes when they used the borrowings to pay their shareholders but they could deduct the interest against their U.S. taxes. Apple does nothing illegal, and they’d be fools if they didn’t take advantage of these giant loopholes. But why do we even allow such loopholes to exist?

The above are merely two examples of dozens of configurations that major U.S. corporations employ to drop their average taxes to around a third or less of the maximum rate (according to Fortune Magazine, the biggest average around 12.6%)… with some of the biggest companies in the U.S. paying nothing at all. Republicans have fought off tax reform that would make these companies pay taxes to the country that made them rich: the United States. Even when the offer is to reduce the tax rate or allow a lower rate on a one-time basis to allow these companies to repatriate off-shore funds, the GOP-dominated House of Representatives (where all tax and appropriation bills originate) pulls a full body block and stops the effort dead in its tracks. High paper rates with no real payment obligations behind them.

To appreciate the toxicity of the situation, Fortune.com (November 19^th) reviewed seven major U.S. companies who paid their CEOs more in compensation than they paid federal corporate tax. “These seven firms reported more than $74 billion in profits last year and received a combined total of $1.9 billion in refunds from the Internal Revenue Service, according to a study, giving them an effective tax rate of negative 2.5%.

“The findings are part of a report from the Center for Effective Government and the Institute for Policy Studies… The average compensation paid to CEOs that the study singles out has climbed to almost $32 million from $16.7 million in 2010.” Here we go:

1. Boeing had pre-tax income of $5.95 billion, and CEO James McNerney received  total pay of $23.3 million.
The U.S. corporate income tax total? A refund of $82 million

2. Ford Motors reported pre-tax income of $6.52 billion, while CEO Alan Mulally got total pay of $23.2 million.
The U.S. corporate income tax total? A refund of $19 million.

3. Chevron generated pre-tax income of $4.67 billion, but CEO John Watson received total pay of $20.2 million.
Their U.S. corporate income tax total? $15 million.

4. Citigroup showed pre-tax income of $6.4 billion, and CEO Michael Corbat pulled down total pay of $17.6 million.
The U.S. corporate income tax total? A refund of $260 million

5. Verizon produced pre-tax income of $28.83 billion, while CEO Lowell McAdam took out total pay of $15.8 million.
Their U.S. corporate income tax total? A refund of $197 million.

6. JPMorgan Chase filed pre-tax income of $17.23 billion, and CEO Jamie Dimon took home total pay of$11.8 million.
The U.S. corporate income tax total? A refund of $1.3 billion.

7. General Motors showed pre-tax income of $4.88 billion, just as CEO Daniel Ackerson’s total pay was $9.1 million.
GM’s U.S. corporate income tax total? A refund of $34 million.

Makes you feel warm and fuzzy inside doesn’t it?

I’m Peter Dekom, and at what point does shame enter into the Congressional equation over a system of fair taxation?