Tag: tax

Senators Levin and McCain: Two Peas All Up in our iPods

Earlier this year, Senator Carl Levin (D-MI) announced that he will be retiring after many, many, many decades of lawmaking when his term expires in January 2015. But he doesn’t intend to make for the exits without sealing his legacy of disdain for America’s wealth creators. After holding hearings last September to shed light on the “loopholes and gimmicks” employed by U.S. multinational companies to avoid paying their “fair share” of taxes, Levin resumed his inquisition today by holding a hearing intended to publically shame one of America’s most successful and most bountiful companies:

Apple sought the Holy Grail of tax avoidance. It has created offshore entities holding tens of billions of dollars, while claiming to be tax resident nowhere. We intend to highlight that gimmick and other Apple offshore tax avoidance tactics so that American working families who pay their share of taxes understand how offshore tax loopholes raise their tax burden, add to the federal deficit and ought to be closed.

Man, the spite in those words is palpable.

At the outset, it is important to note that no illegalities have been alleged, nor have any likely been committed. Like most other U.S.-based multinational corporations, who face tax rates of 35 percent on profits repatriated from abroad, Apple has tax avoidance specialists on its payroll to figure out the most effective ways to minimize their tax burden. They’d be sued for corporate malfeasance by their shareholders if they didn’t.

Unlike foreign-based multinationals whose governments don’t tax their profits earned abroad (or do so very lightly), U.S multinationals are subject to double taxation—first in the foreign countries where they operate at local tax rates and then by the IRS, at up to 35 percent, when profits are brought home. Well guess what? That system discourages profit repatriation, depriving the economy of working capital, and it encourages elaborate, legal tax avoidance schemes.

Oddly, Senator Levin’s problem is not with these perverse incentives, but with the act of following them. Thank you, sir, may I have another! But even worse, Senator John McCain (R-AZ) acknowledges the faults and disincentives of the system, but still casts the blame on those following Congress’s incentive structure:

I have long advocated for modernizing our broken and uncompetitive tax code, but that cannot and must not be an excuse for turning a blind eye to the highly questionable tax strategies that corporations like Apple use to avoid paying taxes in America. The proper place for the bulk of Apple’s creative energy ought to go into its innovative products and services, not in its tax department.

A company that found remarkable success by harnessing American ingenuity and the opportunities afforded by the U.S. economy should not be shifting its profits overseas to avoid the payment of U.S. tax, purposefully depriving the American people of revenue. It is important to understand Apple’s byzantine tax structure so that we can effectively close the loopholes utilized by many U.S. multinational companies, particularly in this era of sequestration.

Apple’s byzantine tax structure?

Should Apple be blamed for optimizing according to the legal incentives created by the likes of Senators Levin and McCain? Rather, the public would be better served if Senators Levin and McCain were hauled before a public panel to explain why the tax system they helped create and have failed to reform penalizes U.S. companies, and discourages domestic reinvestment.

Washington’s Disdain for Wealth Creators Is a Big Part of the Problem

Like too many other long-reigning fixtures on Capitol Hill, Senator Carl Levin (D-MI) doesn’t appreciate the magnitude of the challenge to the authority he presumes to hold over America’s job and wealth creators. Or maybe he does, and frustration over that fact explains why he besmirches companies like Apple, Google, Microsoft, and Hewlett-Packard.

Levin presided over a Senate hearing last week devoted to examining the “loopholes and gimmicks” used by these multinational companies to avoid paying taxes – and to branding them dirty tax scofflaws. Well here’s a news flash for the senator: incentives matter.

The byzantine U.S. tax code, which Senator Levin – over his 33-year tenure in the U.S. Senate (one-third of a century!) – no doubt had a hand or two in shaping, includes the highest corporate income tax rate among all of the world’s industrialized countries and the unusual requirement that profits earned abroad by U.S. multinationals are subject to U.S. taxation upon repatriation. No other major economy does that. Who in their right minds would not expect those incentives to encourage moving production off shore and keeping profits there?

Minimizing exposure to taxes – like avoiding an oncoming truck – is a natural reaction to tax policy. Entire software and accounting industries exist to serve that specific objective. Unless they are illegal (and that is not what Levin asserts directly), the tax minimization programs employed at Apple, Google, Microsoft, and Hewlett-Packard are legitimate responses to the tax policies implemented and foreshadowed by this and previous congresses. If Levin is concerned about diminishing federal tax collections from corporations (which, of course, reduces his power), the solution is to change the incentives – to change the convoluted artifice of backroom politics that is our present tax code.

Combine the current tax incentive structure with stifling, redundant environmental, financial, and health and safety regulations, an out-of-control tort system that often starts with a presumption of corporate malfeasance, exploding health care costs, and costly worker’s compensation rules, and it becomes apparent why more and more businesses would consider moving operations abroad – permanently. Thanks to the progressive trends of globalization, liberalization, transportation, and communication, societies’ producers are no longer quite as captive to confiscatory or otherwise suffocating domestic policies. They have choices.

Of course many choose to stay, and for good reason. We are fortunate to have the institutions, the rule of law, deep and diversified capital markets, excellent research universities, a highly-skilled workforce, cultural diversity, and a society that not only tolerates but encourages dissent, and the world’s largest consumer market – still. Success is more likely to be achieved in an environment with those advantages. They are the ingredients of our ingenuity, our innovativeness, our willingness to take risks as entrepreneurs, and our economic success. This is why companies like Microsoft, Apple, Google, and Hewlett-Packard are born in the United States.

But those advantages are eroding.

While U.S. policymakers browbeat U.S. companies and threaten them with sanctions for “shipping jobs overseas” or “hiding profits abroad” or some other manifestation of what politicians like to call corporate greed, characterizing them as a scourge to be contained and controlled, other governments are hungry for the benefits those companies can provide their people. Some of those governments seem to recognize that the world’s wealth and jobs creators have choices about where they produce, sell, and conduct research and development. And some are acting to attract U.S. businesses with incentives that become less necessary every time a politician vents his spleen about evil corporations. Not only should our wealth creators be treated with greater respect from Washington, but we are kidding ourselves if we think our policies don’t need to keep up. As I wrote in a December 2009 Cato paper:

Governments are competing for investment and talent, which both tend to flow to jurisdictions where the rule of law is clear and abided; where there is greater certainty to the business and political climate; where the specter of asset expropriation is negligible; where physical and administrative infrastructure is in good shape; where the local work force is productive; where there are limited physical, political, and administrative friction.

This global competition in policy is a positive development. But U.S. policymakers cannot take for granted that traditional U.S. strengths will be enough.  We have to compete and earn our share with good policies. The decisions made now with respect to policies on immigration, education, energy, trade, entitlements, taxes, and the role of government in managing the economy will determine the health, competitiveness, and relative significance of the U.S. economy in the decades ahead.

Since another hearing devoted to thanking these companies for their contriubtions to the U.S. economy is unlikely, perhaps Senator Levin should at least consider the perils of chasing away these golden geese.

Updated Cato Budget Plan

Over at Downsizing the Federal Government, Chris Edwards has released an updated version of his “Plan to Cut Spending and Balance the Federal Budget.” The plan proposes spending cuts of more than $1 trillion annually by 2021, which would balance the budget without resorting to damaging tax increases. Federal spending would be reduced to 18 percent of gross domestic product by 2021 under the plan, which compares to President Obama’s projected spending that year of 24.2 percent of GDP.

Some key points:

  • No sacred cows are spared. Defense, domestic, and so-called entitlement programs are all cut.
  • The plan recognizes that the scope of federal activities must be curtailed. It would begin the reversal of decades of federal expansion into hundreds of areas that should be left to state and local governments, businesses, charities, and individuals.
  • Instead of viewing federal spending cuts as a necessary evil, the plan recognizes that the cuts would shift resources from often mismanaged and damaging government programs to the more productive private sector, thus increasing overall GDP.
  • The plan doesn’t achieve budget balance by increasing taxes. Under current tax policy, federal revenues as a share of GDP will gradually return to levels considered normal in recent decades. It is federal spending that has reached abnormally high levels. It must be reduced in order to get the government’s spiraling debt under control.

Forget Freedom. The UK Poll Is All About ‘Fairness’

Britain may have given the world freedom as we understand it (see The Liberty of Ancients Compared with that of Moderns by Benjamin Constant), but you would not know it from the last prime ministerial debate that took place last Thursday. The candidates (Conservative David Cameron, Labour’s Gordon Brown and Liberal Democrat Nick Clegg) used the word “freedom” only 2 times. They said the word “free” 5 times, but all in the context of the supposedly “free” goodies, which they promised to lavish on the electorate. Words “responsible” and “responsibility” fared somewhat better (4 times). But the winning words were “fair” and “fairness” that were mentioned 22 times – almost always in connection with taxing the rich. Here is a typical example:

Brown: “But I come back to the central question about fairness that has been raised by our questioner. How can David [Cameron] possibly justify an inheritance tax cut for millionaires at a time when he wants to cut Child Tax Credits? Let’s be honest. The inheritance tax threshold for couples is £650,000, if your house is worth less than that you pay no inheritance tax. What David [Cameron] is doing is giving 3,000 people, the richest people in the country, he’s going to give them £200,000 each a year. That is simply unfair.”

It was Gordon Brown, the current Prime Minister, who increased the top rate of income tax to 50%. Neither Clegg nor the supposedly business-friendly Cameron have proposed to cut that rate. Indeed, “fairness” in British politics seems to amount to little more than taxing the most productive members of society “until the pipes squeak.” Those words were uttered by Denis Healy who was the Chancellor of the Exchequer in the 1970s. It was under his leadership that the UK ran out of money and had to borrow billions from the IMF. It turns out that when you tax the rich too much, they will work less or leave for a more hospitable jurisdiction. Margaret Thatcher and Ronald Reagan understood it. Messrs Cameron, Clegg and Brown do not.



Play Ball! But Not With Taxpayer Money

As we enjoy the opening week of the new baseball season, we should reflect on the dastardly organization that spends too much money and raises the price of baseball for everyone.

No, it’s not the New York Yankees: it’s the United States government.

You see, as discussed in this recent New York Times op-ed, the price of baseball has increased all across the Major Leagues because of the tax write-off (read: subsidy) that businesses get to treat clients and employees to ball games:

There are many reasons for the price explosion, but a critical factor has been the ability of businesses to write off tickets as entertainment expenses — essentially a huge, and wholly unnecessary, government subsidy.

These deductions have led to higher ticket prices in two ways. On the demand side, they have fueled competition for scarce seats, with business taxpayers bidding in part with dollars they save through the deductions.

While baseball parks built in the 1960s and before held as many as 56,000 seats, the modern trend is toward smaller-capacity parks, with a higher percentage of total space dedicated to skyboxes. The new Yankee Stadium, the only major-league park built since 2000 with more than 44,000 seats, has 3,000 fewer seats than its 1923 predecessor but almost three times as many skybox suites.

Of course, libertarians support low general taxes for a variety of reasons, but targeted tax breaks for luxury items pad the pockets of billionaire sports team owners, give a discount to companies showing off their “generosity” to clients, and generally distort the economy, all at a cost to taxpayers (including those who aren’t even baseball fans).

Boo! America’s national pastime of baseball should not be corrupted by national and state governments’ parochial pastime of corporate welfare.

For more in-depth analysis on the business of sports, read anything by Andrew Zimbalist or Home Team by my former professor Michael Danielson.  (Danielson taught a great class on the political economy of sports; my classmates who thought it would be a gut were in for a rude awakening.)

H/T: Above the Law

Six Reasons to Downsize the Federal Government

1. Additional federal spending transfers resources from the more productive private sector to the less productive public sector of the economy. The bulk of federal spending goes toward subsidies and benefit payments, which generally do not enhance economic productivity. With lower productivity, average American incomes will fall.

2. As federal spending rises, it creates pressure to raise taxes now and in the future. Higher taxes reduce incentives for productive activities such as working, saving, investing, and starting businesses. Higher taxes also increase incentives to engage in unproductive activities such as tax avoidance.

3. Much federal spending is wasteful and many federal programs are mismanaged. Cost overruns, fraud and abuse, and other bureaucratic failures are endemic in many agencies. It’s true that failures also occur in the private sector, but they are weeded out by competition, bankruptcy, and other market forces. We need to similarly weed out government failures.

4. Federal programs often benefit special interest groups while harming the broader interests of the general public. How is that possible in a democracy? The answer is that logrolling or horse-trading in Congress allows programs to be enacted even though they are only favored by minorities of legislators and voters. One solution is to impose a legal or constitutional cap on the overall federal budget to force politicians to make spending trade-offs.

5. Many federal programs cause active damage to society, in addition to the damage caused by the higher taxes needed to fund them. Programs usually distort markets and they sometimes cause social and environmental damage. Some examples are housing subsidies that helped to cause the financial crises, welfare programs that have created dependency, and farm subsidies that have harmed the environment.

6. The expansion of the federal government in recent decades runs counter to the American tradition of federalism. Federal functions should be “few and defined” in James Madison’s words, with most government activities left to the states. The explosion in federal aid to the states since the 1960s has strangled diversity and innovation in state governments because aid has been accompanied by a mass of one-size-fits-all regulations.

For more, see DownsizingGovernment.org.

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