Topic: Tax and Budget Policy

Four Reasons to Applaud Apple’s Tax Planning

By
Daniel J. Mitchell

The Senate is holding a Kangaroo Court designed to smear Apple for not voluntarily coughing up more tax revenue than the company actually owes.

Here are four things you need to know.

Apple is fully complying with the tax law. There is no suggestion that Apple has done anything illegal. The company is being berated by politicians for simply obeying the law that politicians have enacted. What’s really happening, of course, is that the politicians are conducting a show trial in hopes of creating an environment more conducive to tax increases on multinational companies (this is in addition to the OECD effort to impose higher tax burdens on multinational firms).

It is better for Apple to retain its profits than it is for politicians to grab the money. If Harry Reid, Barack Obama, and the rest of the crowd in Washington are able to use this fake issue as an excuse to raise taxes, the only thing that changes is that the tax system becomes more onerous and politicians have more money to spend. Neither of those results are good for growth, particularly compared to the potential benefits of leaving the money in the productive sector of the economy.

Apple shouldn’t pay any tax to the IRS on any of its foreign-source income. A few years ago, Google was criticized for paying “only” 2.4 percent tax on its foreign-source income, but I explained that was 2.4 percentage points too high. Likewise, when Apple earns money overseas, that should not trigger any tax liability to the IRS since the income already is subject to all applicable foreign taxes (much as, say, Toyota pays tax to the IRS on its US-source income). Good tax policy is based on the common-sense notion of “territorial taxation,” which means governments only tax income and activity within their national borders. Unfortunately, the American tax system is partially based on the anti-competitive policy of “worldwide taxation,” which means the IRS gets to tax income that is earned – and already subject to tax – in other nations. Fortunately, we have a policy called “deferral,” which allows companies to postpone this second layer of tax.

If Apple is trying to characterize US-source income into foreign-source income, that’s because the US corporate tax system is anti-competitive. Multinational companies often are accused of “abusing” transfer-pricing rules on intra-company transactions to inappropriately turn US-source income into foreign-source income. To the extent this happens (and always with IRS approval), it is because the American corporate tax rate is now the highest in the developed world (and the second highest in the entire world), so companies naturally would prefer to reduce their tax burdens by declaring income elsewhere. So the only pro-growth solution is lowering the corporate tax rate.

It’s worth noting, by the way, that the Tax Foundation recently estimated that the revenue-maximizing corporate tax rate is 14 percent.

So if the anti-Apple lynch mob actually wants more revenue, they should learn a Laffer Curve lesson and slash the corporate tax rate.*

*I want to maximize growth, not maximize revenue.

Topics: 
Tax and Budget Policy

The Progressives’ Lynchpin: The IRS

By
Roger Pilon

Peter Beinart has a piece at the Daily Beast today – “Don’t Throw the IRS Under the Bus” – that has to be read to be believed. Drawing from a similar page-one story in yesterday’s New York Times, it’s one long apology for the IRS, an effort to explain away the scandal now before the nation as the product of a single, hopelessly overburdened “backwater” IRS unit.

Along the way, Beinart flags the usual suspects, especially the Supreme Court for its Citizens United decision. But his main aim is to encourage the president and his allies to hold firm:

if Obama and his fellow Democrats don’t rebut that narrative and defend the IRS, they’ll be surrendering crucial ground in the battle that has roiled American politics since the financial crisis: the battle over whether Washington regulates too much or too little.

Granting that the situation at the moment is a mess, Beinart avers that “it was a mess born less of overregulation than underregulation.” Indeed,

A right-wing Supreme Court has made it virtually impossible to regulate money in elections. And now Republicans are casting the Tea Party—a movement founded in part by robber barons like the Koch Brothers—as the victim of a mythic, all-powerful IRS in order to further neuter an actually existing IRS that is already too weak to make the rich pay their taxes or respect the rules of democratic fair play. With any luck, the GOP will render it unable to help competently implement Obamacare as well.

One only hopes. But it’s Beinart’s conclusion that brings it all home:

It might seem shrewd for Obama to sit out the IRS scandal while he focuses on bigger fights. But this scandal is about government’s capacity to make private wealth serve the public interest, and for a progressive president, there’s no bigger fight than that.

He’s got that right: for a progressive president, there is indeed no bigger fight than that. But focus on what that says. For the progressive, government’s purpose is “to make private wealth serve the public interest.” Make no mistake, “private wealth” means “private people,” people who must be made to serve not their own but “the public interest” – and not by acts that enrich the lives of others through voluntary association, but through forced association, as with Obamacare, designed by those very progressives.

That is the Obama vision. The president himself made it clear a fortnight ago in his Ohio State commencement address, telling the graduates that “this country cannot accomplish great things if we pursue nothing greater than our own individual ambition.” People must be “harnessed” – his word – and what better agency to do it than the IRS.

Topics: 
Government and Politics, Tax and Budget Policy

Supreme Court Strikes Another Blow against IRS

By
Ilya Shapiro

As if the IRS weren’t reeling enough already, today the unanimous Supreme Court dealt the beleaguered agency another blow, unanimously ruling that companies who paid a British “windfall tax” could get credit for that payment against their U.S. tax liabilities. This should’ve been a simple case, and the federal tax court got it right – the tax code credits foreign income taxes – but the court of appeals found a convoluted way to rule for the IRS.

As Cato’s brief explained, however, taxpayers have the right to be free from double taxation and here the IRS improperly disregarded the substance of the windfall tax. A foreign tax’s form or label can’t mask its substantive character for legal purposes. American businesses operating overseas should be able to rely on a stable, substantive application of U.S. tax law instead of arbitrary interpretations and constructions manipulated to generate payments to the IRS.

The Supreme Court had to invoke and explain complicated equations to reach its decision – I’ve never seen so much math in an opinion – but this ruling ultimately boils down to the longstanding doctrine regarding how to evaluate a tax: (1) A tax’s “predominant character,” or the normal manner in which it applies, controls what kind of tax it is for other legal purposes; and (2) foreign tax creditability depends not on the way a foreign government characterizes its tax but on is economic effect – whether the tax, if enacted in the United States, would be an income tax or something else.

That’s the big takeaway here: The specific since-repealed UK tax at issue in PPL Corp. v. Commissioner of Internal Revenue isn’t likely to come up again, but the IRS is on notice that it doesn’t have discretion to err in favor of the Treasury whenever it feels like it. The tax code provides rules –albeit often overly complicated ones – that courts will enforce.

Topics: 
Law and Civil Liberties, Tax and Budget Policy

IRS Abuses Past and Present

By
Chris Edwards

The stories coming out about IRS abuses of nonprofit groups are appalling. We will likely find out that arrogant and biased officials are to blame, as well as members of Congress who pushed them to be especially aggressive on conservative groups.

Past IRS abuses have stemmed from foul play by both politicians and bureaucrats. As Gene Healy mentions, numerous presidents have used the IRS as a political weapon. As for the bureaucrats, investigations during the 1990s revealed how IRS enforcement had run amok, with abusive tactics being used against small businesses and other taxpayers.

Some of the hearings were hair-raising, and the abuses led Congress to pass the IRS Restructuring and Reform Act of 1998. Useful links to hearing documents are here and here including Senator Roth describing the agency as having an “awesome power.” Washington Post coverage is here, including a story about how even President Clinton was “outraged” by the revelations of IRS abuse.

Going back further, this 1997 book by Shelley Davis describes some of the historical misdeeds and corruption of the IRS. This book review gives an overview of her investigations.

In recent years, efforts to close the “tax gap” have included proposals to augment the power of the IRS and increase the intrusiveness and compliance burden of tax rules. Yet Congress keeps raising tax rates and making the code more complex, which increases incentives for taxpayers to avoid taxes while reducing their ability to comply. Regarding the latest scandal—note that getting tax-exempt status is so valuable because the tax rates are so darn high.

This article by Bill Beach frames the tax gap issue: Congress can reduce the gap by either giving the IRS more police power or by reforms to cut rates and simplify the code. Hopefully the latest IRS scandal convinces Congress that the agency already has too much power. Thus the way to give Americans more freedom from the tax police and to also boost the economy is to scrap the current tax code in favor of a low-rate consumption-based system.

Topics: 
Government and Politics, Law and Civil Liberties, Tax and Budget Policy

OECD Study Admits Income Taxes Penalize Growth, Acknowledges that Tax Competition Restrains Excessive Government

By
Daniel J. Mitchell

I have to start this post with a big caveat.

I’m not a fan of the Paris-based Organization for Economic Cooperation and Development. The international bureaucracy is infamous for using American tax dollars to promote a statist economic agenda. Most recently, it launched a new scheme to raise the tax burden on multinational companies, which is really just a backdoor way of saying that the OECD (and the high-tax nations that it represents) wants higher taxes on workers, consumers, and shareholders. But the OECD’s anti-market agenda goes much deeper.

Now that there’s no ambiguity about my overall position, I can admit that the OECD isn’t always on the wrong side. Much of the bad policy comes from its committee system, which brings together bureaucrats from member nations.

The OECD also has an economics department, and they sometimes produce good work. Most recently, they produced a report on the Swiss tax system that contains some very sound analysis, including a rejection of Obama-style class warfare and a call to lower income tax burdens.

Shifting the taxation of income to the taxation of consumption may be beneficial for boosting economic activity (Johansson et al., 2008 provide evidence across OECD economies). These benefits may be bigger if personal income taxes are lowered rather than social security contributions, because personal income tax also discourages entrepreneurial activity and investment more broadly.

I somewhat disagree with the assertion that payroll taxes do more damage than VAT taxes. They both drive a wedge between pre-tax income and post-tax consumption. But the point about income taxes is right on the mark.

Read the rest of this post »

Topics: 
Government and Politics, International Economics and Development, Tax and Budget Policy

IRS’s Soaring Budget and Refundable Tax Credits

By
Tad DeHaven

Chris Edwards showed that the Internal Revenue Service’s budget has been soaring and the main culprit is refundable tax credits. The magnitude of refundable tax cuts is obfuscated in the IRS’s budget because only the refunded portion of the credit shows up as an outlay —the rest is recorded as a reduction in revenues. 

The Congressional Budget Office released a handy report on refundable tax credits in January. The following table from the report shows the entire magnitude of the tax credit, separating between the refunded portion (outlays) and the reduction in revenues:

 

As Chris noted, the figure has dropped in recent years with the expiration of temporary “stimulus” tax credits. However, the upward trajectory is projected to resume due to refundable tax credits in the Affordable Care Act (a.k.a, Obamacare).   

Topics: 
Tax and Budget Policy

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