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The Economic Recovery Would Be Stronger If Companies Like Apple Paid Their Fair Share in Taxes

It's time for corporate tax reform


Apple: $36.4 billion

Microsoft: $24.4 billion

Citigroup: $11.7 billion

That's how much each company would owe in corporate taxes if they repatriated the more than $230 billion of profits they hold offshore, according to a report released Thursday from the Citizens for Tax Justice and U.S. PIRG. The report finds that 72 percent of Fortune 500 companies have subsidiaries in tax haven jurisdictions. The majority of those companies—307 out of 362—do not disclose the average tax rate they pay on offshore profits. But for the 55 that do, they pay an average rate of just 6.7 percent and would owe nearly $150 billion in corporate taxes if they repatriated the profits.

That’s a massive amount of money and speaks to both the complexity of the U.S. corporate tax code and the extreme lengths companies will go to lower their tax bill. Apple, for instance, uses a subsidiary known as Apple Operations International (AOI) to hold most of its offshore profits, as a report from the Senate Permanent Subcommittee on Investigations explained last year. AOI is incorporated in Ireland, where the corporate tax rate is just 2 percent. Because of that, AOI avoids paying the U.S. corporate tax rate of 35 percent. But the Irish corporate tax code only applies to companies whose management and control reside in Ireland. It has nothing to do with where the entity is incorporated. Therefore, AOI’s management and control is not located in Ireland, so it avoids the Irish corporate tax as well.

The Citizens for Tax Justice report shows that Ireland is the seventh most popular tax haven for Fortune 500 companies. You’ll see some other familiar names on the list: the Netherlands, the Cayman Islands, Bermuda and Switzerland.

Tax Avoidance
Citizens for Tax Justice

The 362 companies have nearly $2 trillion combined sitting overseas. Including Fortune 500 firms without subsidiaries in tax haven jurisdictions and non-Fortune 500 companies brings that to over $2 trillion. That money cannot be used to pay wages or invest in the United States. Companies cannot buy back shares or issue dividends with it. Apple even issued $17 billion in debt last year for dividend and buyback programs to avoid repatriating their overseas profits and paying the 35 percent corporate rate. This money could have provided a huge boost to the U.S. economy if companies had returned it to the United States. Instead, it sits overseas, collecting dust.  

While it’s easy to denigrate the multinational firms for keeping the profits abroad, the corporate tax code also deserves blame. Democrats and Republicans both agree it needs to be reformed. The 35 percent rate is the highest in the developed world. The corporate tax code contains so many tax breaks that no rational company pays that rate. Instead, they hire teams of lawyers and use complicated tax strategies to lower their tax bill in any way they can. This complex system inherently favors those with the resources to hire teams of lawyers: big, rich companies. New, small firms are at a significant disadvantage.

The corporate tax code isn’t even doing a good job collecting revenue for the federal government. Corporate tax revenue as a percent of GDP fell from a peak of more than 6 percent after World War II to approximately 2 percent over the past three decades:

Corporate Receipts as Percent of GDP
Federal Reserve

In other words, the corporate tax code—along with big companies using complicated schemes to reduce their tax bill—is distorting the market, hurting the economy and not providing enough revenue to the federal government. Don’t get your hopes up for any Congressional action though. While Democrats and Republicans are both interested in corporate tax reform, they intend to make it part of comprehensive tax reform in the next Congress. But there are huge obstacles to making that happen. For instance, Paul Ryan, who is rumored to become the next chair of the House Ways and Means Committee, has already committed to tax principles that he will not be able to uphold in any tax reform deal. Democrats also want to increase corporate tax revenue, while Republicans, at best, want corporate tax reform to be deficit-neutral.

These impediments make it hard to see how tax reform happens during the remainder of the Obama presidency. Instead of delaying corporate tax reform until they can reach a comprehensive deal can be reached, policymakers should start with it. There are still difficult questions about how to structure our corporate tax system and how much revenue it should collect, but those are easier to answer when separated from arguments about individual tax reform.

In the end, Congress might fail. That might even be the likely outcome. But it’s at least worth a shot to incentivize companies to return this money to the United States and provide a boost to the slow recovery.

Image via shutterstock.