Topic: Tax and Budget Policy

The Realities of Government Infrastructure

By
Chris Edwards

Politicians and liberal economists get misty-eyed when thinking about grand infrastructure projects. But recent stories in the Washington Post about D.C.-area projects illustrate the realities of government capital investments.

Arlington County recently spent $1 million for a single bus stop, and the structure doesn’t even shelter passengers from wind or rain. The stop is one of 24 along a planned streetcar route, which is a mode of transportation that makes no sense in this area. (I understand that the streetcar dream of local politicians is currently on hold in the face of strong citizen opposition). Why is Arlington wasting so much money on these bus stops? Probably because 80 percent of the costs are being paid by state and federal taxpayers, not local taxpayers.

The Washington Airports Authority has been in the news for mismanagement, overspending, and corruption. The Washington Post has a story today about corruption in contracting by the agency and the complete failure of senior executives to do anything about it. Why the corruption and mismanagement? Because the Authority is a government agency, and worse, it has a monopoly over D.C.-area airports. Airports should be privatized in order to introduce competition, improve service, end corruption, and reduce costs.

The Washington Post has also done an excellent job covering the Silver Spring Transit Center fiasco. The estimated cost of this grandiose bus/train station has more than quadrupled over time to $120 million. It’s a classic government cost overrun story involving mismanagement, design screw-ups, and contractor failures. A key cause of the problems seems to have been that so many different government agencies were involved that no one had the responsibility or incentive to make needed hard decisions to ensure quality and control costs. Today, fingers of blame are pointing in every direction, and the costs will rise even further as major engineering defects are fixed.  

The grandness of political visions for infrastructure run far ahead of the government’s ability to actually implement projects in an efficient manner. There are types of infrastructure that governments must fund. But more infrastructure should be opened up for private funding, ownership, and control. Private businesses make mistakes, but when they are spending their own money they have strong incentives to control costs, eliminate corruption, and complete quality projects on time—incentives that simply don’t exist in the government sector.

Topics: 
Energy and Environment, Tax and Budget Policy

Public School Spending. “Officials” vs. “Some Critics”

By
Andrew J. Coulson

The Wall Street Journal reports today that according to the latest Bureau of the Census figures there was a 0.4% drop in nominal U.S. public school operating spending from 2010 to 2011. The story then makes this unobjectionable factual observation:

Education officials say decreased spending will make it more difficult to prepare U.S. students for an increasingly competitive global marketplace. Some critics argue that public education costs are skyrocketing while academic achievement has not kept pace. They want the system overhauled before more money is spent.

What the story does not provide readers is any measure of student achievement that would allow them to determine who is right. Let’s see if we can help out. Below is an updated version of a chart some of you will already be familiar with. It shows the performance over time of U.S. 17-year-olds on the “Long Term Trends” testing program of the National Assessment of Educational Progress. The spending line corresponds to the trend in the total cost of a complete K-through-12 public school education (i.e., what it cost to send a high-school graduate all the way through public school). For good measure, it shows how the number of public school employees has roughly doubled since 1970–from about 3.3 to about 6.4 million people. 

So, who seems to be right: “Education officials” or “some critics”?

Incidentally, the WSJ only gives the partial “operating” figures for per-pupil spending. Actual total per pupil spending in 2010, adjusted to today’s dollars, was $13,871. That was down from the all-time inflation-adjusted high of $14,090 in the previous year. Still, $346,767 per class of 25 kids doesn’t seem too shabby.

Topics: 
Education and Child Policy, Government and Politics, Tax and Budget Policy

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

By
Daniel J. Ikenson

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.

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Topics: 
Government and Politics, Tax and Budget Policy, Trade and Immigration

Apple Defends Itself against Tax-Hungry Senators

By
Chris Edwards

A Senate Subcommittee chaired by Senator Carl Levin heard from three panels of witnesses today on Apple Inc.’s corporate tax payments.

Democratic senators and some news stories are making it sound like some vast tax cheating has been going on, but that’s not what the hearing actually revealed. My sense in listening for four hours is that Apple pretty well does what many or most U.S. multinationals do to legally minimize their tax payments on foreign income. No one at the hearing said the company is doing anything illegal.

The basic story seems to be that Apple uses a holding company to gather all the after-tax profits from its sales outside of the Americas. Those sales may or may not be subject to tax in the countries where they occur, but that first layer of tax is up to those particular countries. The holding company is apparently not taxed as an entity in any country, but Apple says that its investment earnings are taxed in the U.S. to the Apple parent company.

The purpose of Apple’s corporate structure that the senators focused on seems to be to avoid double-taxation of its foreign earnings. That goal makes sense because the U.S. is one of few major countries left that does not have a territorial corporate tax system. Essentially, Apple and many other companies are trying to create a home-made territorial tax system so that they can remain competitive in foreign markets. Thus, they are doing the job that Congress should have done in reforming the U.S. international tax system.

Note that Apple holds such a big pile of cash abroad in a holding company mainly because the U.S. applies such a high corporate tax rate to profit repatriation. A major goal of tax reform is to slash America’s absurdly high corporate tax rate so that companies can bring home their piles of foreign cash and invest it here. With such a reform, the issue of whether or not investment earnings of foreign holding companies were taxed would become far less important.

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Topics: 
International Economics and Development, 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

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