Now that Apple’s shady-yet-legal scheme to funnel its income to low-tax Ireland is common knowledge, a question arises. Are its tactics connected to the concentration of massive wealth at the top of society while average Americans hang on by their fingernails financially?
Yes, very much so.
America’s corporate income tax, a key tool for taxing income derived from wealth, is failing us. That puts too much pressure on the incomes of American workers and leaves insufficient tax revenue to provide essential services, like quality public education, that equip ordinary Americans to succeed.
Apple’s shenanigans highlight the core problem: As our economy grows yet more global, large corporations can more easily avoid taxation. Why? Because a multinational corporation can’t be taxed on its worldwide income by every country in which it operates.
That’s why corporate income gets divided among multiple countries according to its source. Each country, at least in theory, taxes only the income of which it is the source.
But the rules get manipulated. Giant corporations hire clever tax lawyers, who devise complicated schemes to source — at least for accounting purposes — income in countries where it will be taxed at low rates. This is why Apple managed to shield about $75 billion of the profits it amassed between 2009 and 2012 in Ireland.
Technically, the federal government does tax corporations based in the United States on their worldwide income. But the IRS allows them to delay paying tax on foreign source profits as long as those profits remain abroad. In practice, U.S.-headquartered corporations avoid the tax on foreign profits by keeping them parked offshore indefinitely.
Could the government fix this problem by eliminating the tax deferral on foreign profits? Perhaps, but only for corporations based here. And, as former Obama adviser Steve Rattner notes, corporations already are choosing to be based elsewhere.
Thus, realistically, the nation’s corporate income tax can be imposed only on U.S.-source income. That means we need rules that can’t be gamed.
Devising a foolproof definition of what should legally constitute U.S.-source income would be like trying to nail Jell-O to a wall. Pricey tax lawyers invent tax avoidance schemes faster than the IRS can spot them.
So, how do we tax income from corporate wealth more reliably? Commentators Ezra Klein and Evan Soltas propose abandoning the corporate income tax and collecting more taxes on the dividends and capital gains of shareholders.
But how would that work? Most of our publicly traded stock now resides in tax-exempt entities such as Roth IRAs and pension plans. Citizens for Tax Justice found that two-thirds of dividends flow to tax-exempt entities. We really can’t tax shareholders on most of their holdings, as Klein and Soltas suggest. We’ve already promised most of the shareholders we wouldn’t.
Klein and others also suggest we replace the corporate income tax with a carbon tax that would curb global warming. But that would be giving up altogether on taxing income from corporate wealth, leaving us overly reliant on the taxes we impose on workers’ wages and consumer spending. It would make the rich richer and our extreme inequality even worse.
How else can we plug those loopholes?
Apple CEO Tim Cook says the government should lower the corporate tax rate and “simplify” things. He’s suggesting that the IRS tax corporations at the low rates other countries do, so corporations won’t shift so much income offshore. But other countries would just lower their rates further if Uncle Sam did that. The real problem here isn’t Apple. It’s the tax policies of other countries.
Here’s the bottom line: Apple has illuminated a global problem that requires a global solution.