It's time to give up on shaming big tech companies for their low tax rates

http://www.theatlantic.com/business/archive/2012/04/are-apples-tax-games-bad-for-america/256519/

by waxymonkeyfrog • 14 years ago

11 64 14 years ago

ebbv• 14 years ago

It's not shaming them for their tax rates -- we should shame Congress for not raising taxes, if we all agree taxes should be higher on large corporations.

It's shaming them for legal, but unethical behavior.

There's a lot of behavior that falls into the area of "legal, but shitty." Large corporations gaming the system to avoid paying taxes falls into that.

Don't kid yourself that we can ever totally eliminate this kind of thing. It's a moving goalpost. You pass laws to stop one kind of thing, their highly paid attorneys and accountants will find something else. It's cheaper for them to pay smart people really well to find loopholes than it is for them to pay their legitimate tax rates.

If we all behaved the way corporations do -- sticking only to the letter of the law, and exploiting every other opportunity to better ourselves at the expense of everyone else around us -- the world would be a really awful place.

We have to point out this behavior and shame the corporations, because negative public opinion possibly affecting their bottom line is the only thing they will respond to.

JumpCrisscross3• 14 years ago

The article's gist is that there is the "right"* thing to do and the pragmatic thing, something I've seen discussed on HN before [1]. The pragmatic thing is recognising that there's juicier fruit on lower branches, i.e. personal income and consumption, in terms of cost of securing the tax income and risk of adverse effects/the taxee wiggling out.

*I believe value destruction is unethical, sourcing my sense of ethics from the perspective of global long-run production. A company moving assets from the inefficient US government to its private, profitable book is thus good to me. This isn't to start a philosophical flame war on this but to point out that you can't assume this behaviour automatically falls into the "legal, but shitty" area for everyone.

[1] http://www.marco.org/2012/02/25/right-vs-pragmatic

swombat2• 14 years ago

Is exploiting tax loopholes really unethical?

Some would argue that the government is the biggest waste of money there is. I'm not saying that's my belief, but let's entertain that thought for a minute. If you believe that the government wastes most, say 95%, of its money on stupid things that should never receive a dollar from anyone (like the war in Iraq, to pick a random one), and you believe that you personally can do more with that money in terms of "making the world a better place", then it follows that paying as little tax as possible is the ethical choice.

Let's take an example: Bill Gates. Bill Gates is currently the second richest man on earth, according to http://en.wikipedia.org/wiki/Forbes_list_of_billionaires . Did he use all those tax schemes on his way there? You bet your bottom dollar he did. Now he's using this money directly to solve problems like curing Africa of Malaria. Do you think he's using that money more efficiently than a government programme would? I'd bet on that too.

Would the world be better off if the US government had $20b more and Bill Gates had $20b less? I don't think so. I think Bill Gates can use the money much more intelligently than the US government ever could.

So, is it unethical to pour less money into the pointless furnace of wasteful government?

I'm not saying this point of view is the only point of view out there. But to declare tax avoidance outright "unethical" is a failure in perspective.

bicknergseng• 14 years ago

Fabulous argument for benevolent dictatorships.

jbooth6• 14 years ago

It's unethical because we're all on the hook for the money the government spends. That's the social contract. If you think the war in Iraq was a big waste of money (as I do), then great, lobby against that. But once the decision's made, we're all on the hook for the money and wiggling out is akin to welching on a bet or defaulting on a loan when you have the money to pay.

Funnily enough, most of the people who complain about "wasteful government spending" were the the loudest advocates of the Iraq war and the expanded modern security state. It turns out everything became way more wasteful and tyrannical on a single day in January 2009.

mattmanser• 14 years ago

Unfortunately you've missed the point of why it is unethical, everyone else has to pay more to support your avoidance instead.

If they paid their way then the overall tax rate would be lower for everyone, instead of just for the rich. The irony being they're the ones who need it the least.

So effectively Bill Gates made the decision to make everyone else pay more tax so that he could go and cure Malaria in Africa. Causing babies to die in America instead. His tax avoidance can be indirectly linked to other people's deaths. That wasn't his decision to make and was unethical.

It's stealing but in a weird way. And by people who don't actually need to steal but just do it because they can.

roc• 14 years ago

> "Would the world be better off if the US government had $20b more and Bill Gates had $20b less?"

It's not about what Gates personally gives or what Buffet might personally write a check for, if he feels he isn't paying enough. The discussion is about the hundreds of billions in aggregate that corporations and the wealthy are not paying.

And we certainly aren't seeing hundreds of billions in Gates-style charity from corporations and the other super-wealthy.

Consider also that Gates fabulous charity is still small compared to the aggregate donation of Americans. His charity is notable only for having come from a single person and for his ability to therefore set priorities directly. It's not remotely clear that aggregated wealth, even if it were to always result in Gates'-style donations, results in more net charity than if it were taxed, spent and thus diffused back into the economy where the rest of America might earn it and donate to charity in smaller individual amounts.

Government tax revenue, after all, does not get destroyed. It gets spent. Perhaps inefficiently, but spent nonetheless. And say what you will about cronyism, you'd quickly find yourself in the rhetorical weeds if you tried to argue that wealth generated off government inefficiency or misdirected priority is somehow tainted and thus can't be expected to produce charity from those who make their living from it. Not when a cursory glance over government revenue flows creates a list of the largest US government contractors and vendors that looks almost exactly like the list of corporations and wealthy individuals we're trying to excuse for their charity.

(Edit: cleaned up some phrasing)

Retric2• 14 years ago

Suppose 95% of what the Bill Gates foundation does is pure waste, should we raise taxes so his money is better spent?

If you assume your correct you can make anything sound reasonable. However, despite popular opinion the US government is reasonable efficient given it's size, it's the goals that are poorly thought out not it's methods. If you want to suggest otherwise you need to compare total income with total output and compare with more than just one rich dude while ignoring people who buy 80+ million dollar Yacht's and rarely use them.

SpiderX• 14 years ago

I think the fact is that we are in debt so far that we can barely afford to pay the interest payments. Now, there are two ways out of it. We can pay our debts, or we can dissolve the government, in which case, our debtors will hold the american people (and not the government) responsible. If you want to see what mountains of debt will do to a country, just look at Haiti. http://en.wikipedia.org/wiki/External_debt_of_Haiti

Apple, Microsoft, and Google should pay their fair share. Unless I can claim all my income in Ireland, and store all my cash in Barbados, they shouldn't be able to do it either.

Symmetry4• 14 years ago

I'm not sure you're right to single out corporations here. It seems like all the Real People I know who are aware of simple things they could do to pay less in taxes end up doing them as well.

jbooth6• 14 years ago

Difference being that Real People can't spend 10 million setting up foreign subsidiaries in order to avoid taxation on a billion in income. Different math comes into play when you can fill an office building with lawyers for your tax policy.

beagle39• 14 years ago

and, in addition to what jbooth wrote above - these corporations lobby for the laws to be changed in their favor. How many Real People do you know who have done that?

And is setting up 4 related corporations in 3 different international jurisdiction a "simple" thing?

byrneseyeview• 14 years ago

I don't understand why you'd trust a corporation more than Congress when it comes to how the tax code should work. If we all pay what we think we should owe, rather than what the rules tell us we actually owe, that would lead to chaos.

"If we all behaved the way corporations do" doesn't really mean anything. Corporations are people. It would be much more accurate to say "If all people behaved like the people who work at Apple, the world would be a worse place," but I don't think that's defensible at all.

If it does become a social norm to obey the law you wish Congress passed, instead of the law they actually passed, you're subsidizing people who ignore this norm. I wouldn't want to live in a world where RIMM out-competes Apple because Apple scrupulously follows good, imaginary rules, and RIMM scrupulously follows actual rules instead. This would all be a lot less meaningful if the US had lower corporate tax rates, but ours are effectively the highest in the world. Since the corporate tax rate is also the subsidy for hiding a given amount of income, it's no wonder that we lead the world in tax avoidance, too.

olalonde3• 14 years ago

It really isn't that clear. A lot of people regard taxes as unethical.

gte910h3• 14 years ago

That's full of crap. What they'll respond to is changing the law!

They're just following the law. Beg off the companies, and change it.

jemka4• 14 years ago

Shaming big public companies brings more attention to the discussion, which is a good thing, but I've always felt the entire focus was misdirected.

How about ... spend less. Streamline that bloated money burning monstrosity called a government. "Who pays" is probably the last thing we should be talking about.

archgoon2• 14 years ago

What do you feel should be cut in government? Where do you feel that money is being misappropriated?

Karunamon• 14 years ago

Off the top of my head:

    * Million dollar Vegas conferences? (Recent GSA scandal)
    * Guantanamo Bay
    * Unnecessary military bases all over the world

Give me a day and access to the books for any branch of government and I would bet my life savings on being able to find hundreds of thousands of wasted dollars, if not millions.

jemka4• 14 years ago

>What do you feel should be cut in government? Where do you feel that money is being misappropriated?

I'm not for big government. So, I wouldn't go department by department and audit to find fraud, waste, and abuse. I used to get paid to do that for the defense department. It's a complete waste of time and ultimately a paper drill.

But what I want is moot. What I don't understand is why many others sit idly by and argue who is going to contribute X%, when they should be more skeptical about where the money is going in the first place. Regardless of who's money it is.

If the government was run more like a business (which there's no reason why it couldn't be) we wouldn't be having this discussion.

But for starters, how about term limits and contractual accountability for the leaders? This say one thing do another without recourse is getting old.

zerostar07• 14 years ago

It's time there is an honest discussion internationally about the biggest shame of western capitalism, tax shelters. It's not just big tech, it's everywhere. What benefit does the world earn from this global sneaking around?

gte910h3• 14 years ago

It's not actually everywhere. Countries with imputation based dividend laws have seen strong reductions in corporate tax avoidance.

mikeryan• 14 years ago

Honestly I'd love to hate Big Corp for doing this. But this really is one of those "Don't Hate The Player - Hate the Game" kind of scenarios.

I may run a tiny LLC but I damn well try to get my tax burden down as low as possible too. I can't really fault the Apple's and Chevron's of the World for doing the same.

If we want substantive change in the tax system we should be shaming those in our Government who bend backwards to serve corporate interests.

beagle39• 14 years ago

> But this really is one of those "Don't Hate The Player - Hate the Game" kind of scenarios.

You've got it wrong. There is no "game", there are only players. For YOU there are game rules. However, when you are as big as Microsoft or Google or Apple or Boeing, you spend millions (or tens of millions) to change the game rules in your favor.

If you're Chris Dodd, a former senator who was chairing the financial oversight committee at the time everything crashed and burned (how's that for track record?), you later head the MPAA and you can threaten - on live TV - to stop bribing politicians. Where's the referee who is supposed to enforce the game rules? Ergo, there are only players.

Not that hating them is going to help. But the blame rests squarely with the players, who get to redefine the game as they go.

toddasmith• 14 years ago

How is it unethical for companies to legally pay low taxes? First, realize that a company's tax isn't money growing on trees. Companies pay these taxes by decreasing profits for shareholders, decreasing wages for employees, or increasing the prices of goods and services to consumers (and usually all three). Someone is hurt by collecting these taxes. The idea that government can then go on to spend this money in a way that is more beneficial to society than the cost imposed underlies the assumption that it somehow a good idea to take from some to benefit others.

Most people believe that the State must collect some taxes from its subjects, but is this corporate income tax the best method? Increasing the cost of goods essentially taxes consumers in a regressive manner, irrespective of their ability to bear these increased costs. Lowering wages of company employees discourages work and lowers the income taxes collected by the government on these reduced wages. Finally, reducing the profits of shareholders reduces the taxes that would have been collected on dividends and capital gains when the shares are sold; more significantly, reducing the value of investing in companies discourages the creation of wealth and jobs for all of us by reducing the incentives to start and invest in companies.

If you think it is unethical to pay few taxes (and realize that for the reasons in the previous paragraph all other countries of the world tax their companies at lower rates than the USA), then you must believe that it is somehow more ethical to pay higher taxes (than is actually owed). If this is so, why aren't you sending in double what you owe in taxes? By your own statements aren't you acting unethically?

rprasad7• 14 years ago

Money does not grow on trees; it does however grow in cotton plantations.

Corporate taxes decrease profits for shareholders, but do not decreas wages for employees. By definition, corporate taxes are taxes on profits, so employee wages have already been deducted from corporate revenues by the time the tax liability is determined.

Nobody is "hurt" collecting taxes. Taxes are simply a nonspecific bill from the government for a massive variety of services rendered directly or indirectly on behalf of the taxpayer.

Dividends and capital gains are taxed at lower rates than corporate tax rates. Thus, it is preferrable (from a revenue-generating viewpoint) to collect taxes from the corporation rather than from the dividend payments or the sale of stock. Even if the dividend preference expires, dividends will still be taxed at the individual's marginal rate, which is lower than the corporate income tax rate.

Taxes do not reduce the value of investing in companies. Under the time-value of money theory, if a tax can be deferred for 7-8 years, it is as if the tax was never owed. Thus, high taxes increase the value of investing in companies because the deferral opportunities of the corporate investment form offer greater "savings".

Finally, your last argument is logical nonsense. Paying less than the statutorilly declared tax rate is what people find unethical. Unethical does not mean "less ethical", it means "not ethical".

JumpCrisscross3• 14 years ago

>Corporate taxes...do not decreas [sic] wages for employees

Given two companies, one that pays no taxes and another that pays 10% of profits in taxes, the former will have something between (a) cheaper access to capital (assuming equal expenditures), or, (b) more cash for R&D, employees, etc. (assuming equal returns). Saying that corporate tax rates have no effect on how much money a company has available to spend is absurd.

>Under the time-value of money theory, if a tax can be deferred for 7-8 years, it is as if the tax was never owed

Assuming AAPL is a AA credit (pessimistic) it would pay an 80 basis point spread for a 10-year borrowing [1]; with the 10-year Treasury at 190 [2] Apple's discount rate by these assumptions for 10 years is 2.7%. The present value of a $6B tax liability 10 years from now would thus be $4.6B, not zero.

[1] http://www.bondsonline.com/Todays_Market/Corporate_Bond_Spre...

[2] http://www.bondsonline.com/Todays_Market/Composite_Bond_Yiel...

newbie12• 14 years ago

There is no such thing as taxing a "corporation." Corporations are owned by shareholders, and those shareholders pay taxes on the money they invest and in-turn on the gains from that investment. Taxing corporation profits is double-taxation. The proper corporate tax rate should be zero.

It is crazy that the government runs myriad business and job subsidy programs while also tax penalizing the most successful, forward-looking companies.

gte910h3• 14 years ago

>The proper corporate tax rate should be zero

I actually suggest you do something that ends double taxation and the capital gain tax tier:

http://en.wikipedia.org/wiki/Dividend_imputation

This is why:

>Elimination of Tax Incentives >It is also interesting to note that it was soon realised that the system eliminated to a considerable extent the effectiveness of tax incentives for corporations. If a corporation was given a tax break then its incomes thus released from taxation would not generate franking credits precisely because no tax was paid. In turn, this meant that the shareholders received fewer credits along with their dividends, meaning in turn that they had to pay more tax. The net result is that each tax break a corporation itself got was countered by a matching increase in the tax burden of shareholders, leaving shareholders in exactly the same position had no tax break been received by the corporation. Thus, to the extent that corporate directors acted so as to increase shareholder wealth, tax incentives would not influence corporate behaviour.

cletus• 14 years ago

I disagree with the premise that legally avoiding tax is somehow unethical or wrong (or otherwise something to be shameful for). There's a strong counterargument that not voluntarily handing over money you don't need to is resisting the tyranny of government.

The real problem here is twofold:

1. The tax system is too complicated and continues to get more complicated with special interest riders and so forth; and

2. Large companies are free to shop around for friendly tax jurisdictions. The natural endgame here is that you need to treat money going to friendly jurisdictions as avoiding income and tax it at source.

(2) is no doubt controversial but I see it as inevitable.

An example of (1) is the tax regulation surrounding the expatriation of technology, something legal and blessed by the IRS. It goes to Ireland and money gets funnelled there and then through the Netherlands. It's time to cut that shit out.

For individuals I really do think it's time for the flat tax. Call it 25% of what you earn above $20,000 with no deductions and be done with it.

rprasad7• 14 years ago

(1) The tax system is very simple if you're not trying to game the system to (EDIT: changed from "or") minimize your tax burden. Almost all of the complexity arises from the allowance for deductions and the related regulations necessary to prevent abuse of those deductions.

(2). Worldwide, that is the standard tax practice. It is called "territorial taxation." Source-based taxation is the U.S. practice regarding foreign persons who are citizens of nations with which we have income tax treaties (for purposes of determining which country gets to tax them). The U.S. is an outlier in taxing worldwide income regardless of source. However, getting rid of the Irish structure would require (a) a change in other countries' tax policies or (b) a tax code even more complicated than the one we have right now.

Note that I mean "game the system" in the sense of gamifying the outcome. I do not mean game in the sense of "cheating."

clarky075• 14 years ago

>(1) The tax system is very simple if you're not trying to game the system or minimize your tax burden. Almost all of the complexity arises from the allowance for deductions and the related regulations necessary to prevent abuse of those deductions.

How is taking deductions "gaming the system?" Why on earth would I not try to minimize my tax burden. The US government is not a charity, and it functions far worse than most charities do. If I'm just going to give money away, the government is not going to be my first choice for recipient.

beagle39• 14 years ago

> Almost all of the complexity arises from the allowance for deductions and the related regulations necessary to prevent abuse of those deductions.

Unfortunately, that complexity also applies to taxpayers who are not trying to game the system. And while they might only be, say, 5% of the population, they vastly outnumber the outlaws for which these regulations were made.

e.g., if you have control of any asset outside the US, you can spend weeks trying to satisfy the documentation and tax requirements, and still fail because they are ambiguously worded. And you are automatically assumed to be in the wrong and avoiding taxation, even if you overpaid. How is that for simple? That is regardless of any deduction you may or may not be able to take.

> However, getting rid of the Irish structure would require (a) a change in other countries' tax policies or (b) a tax code even more complicated than the one we have right now.

Neither is true. The tax code for persons already enforces that - no matter how many entities you have in the middle, if you are ultimately in control of a company or a bank account, you have to report it and pay taxes on the profits.

It just takes the addition of one clause "Company X pays US taxes on every cent it makes in itself or a company under its control (in proportion to said control, ultimately determined by agency). Violation of this is considered lying under oath w.r.t sarbanes oaxley reporting"

(or 10 in legalese, with this underlying meaning), and all of a sudden it becomes the company's issue to prove it is not in control if it doesn't want to pay taxes. Just like it is for your "real person" taxpayer.

Symmetry4• 14 years ago

Much as I'd love to see our tax code simplified and to have less deductions in it, there's not need to tackle (1) to solve (2). Just scrap the idea of taxing corporations themselves, and tax their profits when they're paid out to executives or shareholders. Corporations can move and subdivide and such. People can't.

It's time to give up on shaming big tech companies for their low tax rates

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