I'm always skeptical when someone precedes "close the loophole" with the word "just", especially when the entity searching for loopholes has hundreds of billions of dollars in cash. Closing loopholes is good, but they'll almost certainly find another one.
The thing, though, is that their main "loophole" currently consists of "play chicken with the government until someone passes a tax holiday". If you make it clear there will never be a tax holiday, but that you will instead keep adjusting the rules to go after earnings withheld abroad, at some point the rational choice for them will be to bite the bullet and repatriate the income.
As it is, the most rational choice for them is to keep waiting for that amnesty/tax holiday unless they badly need the cash.
> If you make it clear there will never be a tax holiday, but that you will instead keep adjusting the rules to go after earnings withheld abroad, at some point the rational choice for them will be to bite the bullet and repatriate the income.
Another rational choice is to relocate the company, a la Burger King's move to Canada [1,2].
Then the government can counter with tariffs [3,4]. It's a balancing act, though.
At the end of the day, there is no way you as a corporation can entirely subvert a nation state. I find it odd even that rational individuals think its possible against an adversary (typically with effectively unlimited resources) that can tariff you, dissolve your organization, and even jail you.
It's not corporation against nation state, it's nation state against nation state.
I'm pretty sure China would be quite happy if the US punishes Apple. That means that their protectionist policy towards Huawei will be even more effective. It is difficult for me to imagine other nations either not rolling out the red carpet to bring Apple over, or giving virtually tax free giveaways to their own companies to gain smartphone supremacy.
>I'm pretty sure China would be quite happy if the US punishes Apple. That means that their protectionist policy towards Huawei will be even more effective.
If the US put onerous taxes on the purchase of Apple phones that might be true.
If the US instead just collects a larger share of Apple's profits then Apple is going to go on exactly as before and just not deliver quite as much cash to its shareholders.
Taxing the phone or the company’s margins should have the same effect, right? They’re both costs on apple’s revenue. Barring maybe some enforcement issue or something it makes no difference how you collect it, Apple will pass some of it off to their customers and eat another percentage based on whatever the new cost/demand curve looks like to them.
My argument is that since apple can move the price, if you tax the company they increase the cost of the phone as much as makes sense and eat the rest. If you tax the phone, they leave as much as the increase on the cost to the end user as makes sense and lower the price beyond that, eating it. In neither case are profits or demand going to zero.
And a tax on the phone does this, so they either lower the cost and eat it, or suffer the same fall in demand as when the price of the phone increases to protect their margins.
Are you arguing that a 100% tax on Apple profits wouldn’t impact their competitiveness? How would they build new factories, develop new products or hire more workers without reinvesting profits into their company? Why wouldn’t a company that can raise more money from capital markets and that has the support of its government quickly overtake Apple’s position?
>Are you arguing that a 100% tax on Apple profits wouldn’t impact their competitiveness?
Pretty much. It would render their stock worthless, but there's nothing about a 100% tax on realized profits from preventing a business from operating exactly as before.
>How would they build new factories, develop new products or hire more workers
With relative ease. Corporation tax is paid only on realized profits. Reinvesting earnings has often been a way of avoiding paying it at all, which is actually supposed to be a feature.
Yeah, but why would they? Why would any employee or manager have an incentive to do extra work to do so? Where do they get the money from, and more importantly, why would they reinvest the money if there is absolutely no gain to doing so, instead of paying it out to executives and shareholders and just cashing out?
> Corporation tax is paid only on realized profits.
I’m not sure you know what this means. A new factory is an asset, taxes are definitely paid on it if Apple buys a new factory with retained earnings. Are you claiming that a corporation can gain new long term assets without paying any tax unless investors put more money into the business or banks loan them money?
I'm sorry if I sound shocked, but I actually file corporation taxes for a small business. Corporate profits are taxable whether they get paid out to shareholders or reinvested into the company.
>Yeah, but why would they? Why would any employee or manager have an incentive to do extra work to do so?
Coz they get paid.
>why would they reinvest the money if there is absolutely no gain to doing so, instead of paying it out to executives
It's true that with a higher profit tax you'd may see execs paying themselves higher and higher salaries and shareholders would be less inclined to prevent it.
>I’m not sure you know what this means. A new factory is an asset, taxes are definitely paid on it if Apple buys a new factory with retained earnings. Are you claiming that a corporation can gain new long term assets without paying any tax unless investors put more money into the business or banks loan them money?
>I'm sorry if I sound shocked, but I actually file corporation taxes for a small business.
So do I. Actually, the year before last I personally paid more in corporation tax than Facebook did (they paid £4,000).
I'm pretty sure they were taking neither investment nor loans.
It's a balancing act, not (just) an arms race. As a government, raise corporate taxes too high, and corporations leave and/or overseas corporations outcompete them and/or new corporations form overseas instead of domestically. Raise tariffs too high, and domestic consumer choice and quality decrease, and consumer purchasing power decreases. These aren't consequences that dissolving your domestic corporations or jailing their managers address.
>As a government, raise corporate taxes too high, and corporations leave
Only when there's almost no cost to leaving, which in itself is a tax loophole. If you declare that residency is about where you do the most business and has nothing to do with which letterbox has the word "headquarters" on it then their reaction would be limited to tantrums in Wall Street Journal op eds.
>or overseas corporations outcompete them
That's not how corporation tax works. It's paid on profits and does not affect the competitiveness of the firm.
>>As a government, raise corporate taxes too high, and corporations leave
>Only when there's almost no cost to leaving, which in itself is a tax loophole. If you declare that residency is about where you do the most business and has nothing to do with which letterbox has the word "headquarters" on it then their reaction would be limited to tantrums in Wall Street Journal op eds
Or to the other two arms of the disjunction in the text that you elided.
>>or overseas corporations outcompete them
>That's not how corporation tax works. It's paid on profits and does not affect the competitiveness of the firm.
It has to come from somewhere. It can come from owners, workers, or consumers. If it came from consumers (higher price or lower quality for products and services) this would affect the competitiveness in a straightforward way. [1] and [2] claim that it instead comes from owners and workers, with considerable uncertainty about the ratio between those. If it comes from owners, it increases the corporation's cost of capital – but only to the extent that investment is global. If it comes from workers, it decreases the ability for the corporation to compete for labor – but only to the extent that labor is global. So you're correct that it does not affect competitiveness in a sufficiently non-global economy.
It is collected from owners. Tax collection and tax incidence are separate issues. In economics parlance, where tax "comes from" or "falls on" refers to tax incidence, not tax collection.
Tax collection and tax incidence are indeed separate issues.
The tax incidence falls on owners - probably at least until profit taxes reach ~80% or capital became magically very scarce for some reason that clearly doesn't apply to the present day.
>That's not how corporation tax works. It's paid on profits and does not affect the competitiveness of the firm.
Corporations often need to raise money from investors, who will rationally only fund corporations that are expected to generate enough profit to produce a good enough return for the risk and so on. If profit is lower in some countries, that reduces the amount of money going to investment in that country as the potential reward has gone down. Therefore such companies are less competitive in fundraising.
>At the end of the day, there is no way you as a corporation can entirely subvert a nation state.
There are countless examples of this happening, from the East India Company (who essentially ruled India for a century) to the United Fruit Company to present-day Shell Oil.
The first sentence there ends with "this clearly established Parliament's sovereignty and ultimate control over the company". So not a very convincing example of company independence over its host nation.
[Influence and control over another, relatively weak country is clearly a separate issue, but that's not always clearly separable from the host country's influence]
Can you provide an example present day of a company successfully subverting the US government? To my knowledge, they're even pursuing companies successfully outside of their jurisdiction (Kim Dotcom/MEGA).
Large corporations simply have the ability to shop around to figure out which tax/legal jurisdiction they want to incorporate under, and which instruments they choose to represent their incomes, expenses, and holdings. If things like tariffs are implemented, then the cost/benefit situation changes and shopping around resumes. A smaller company or individual often doesn't practically have that scale of flexibility & research to pull off the same changes, though technically they do.
But even in your personal purchasing, because you might shop around and even negotiate prices with sellers to get a good deal, does that make you an adversary of the economy? No, it makes you part of the economic structure, like the various corporate implements are part of various jurisdictions' tax structures, and the governments benefit from their presence in various ways, not just directly through taxes. That's what all the negotiations are based on.
Of course, I'm speaking of options that are legal, and it gets arguable (and sometimes flagrant) how some corporate actions get interpreted in that sense.
In this case it's not a loophole in American laws. It's a problem with European and Carribean laws. This money was earned abroad. Blame the Irish, and now whatever this Jersey Island place is.
The EU made a move to close the loophole, apple found another.
I suppose there are loopholes with them selling IP assets to subsidiaries. But that's a different loophole than the one with them floating money around different countries. That money wasn't earned in America, so why are you trying to "repatriate" it? The better term would be "appropriate" it as it was never here in the first place.
Until it costs more for apple to pay interest on a loan (and/or penalties and fines) than they would pay in taxes, that money will never come here.
It's a British crown dependency, and afaik not the only tax haven under British rule. And it seems like there's no much the EU will be able to do about those.
Yes, French and German authorities have made it known that they cannot wait for brexit to happen because it will relieve them of any need to play nice with the UK about shenanigans like these. At the same time, the Irish border problem puts the Republic of Ireland in a similar position of weakness, and they are enemy n.2 for honest tax authorities worldwide. Enemy 3 and 4 (Luxembourg and NL) have also been weakened by the disappearance of the “free trade alliance” that ran from Poland to Ireland, and when left isolated, they have been successfully bullied in the past anyway.
This is one of the very few areas where brexit might actually end up a net positive for the world at large.
The US government doesn't, as a general rule, care if the money has ever been here. If you as a private US citizen choose to live and work abroad, you are required to file US income taxes and declare all foreign income. And depending on the precise details of the foreign government's treaty situation and tax rates, you may be required to pay the normal US tax rate on some or all of that income.
I don't know that it counts as a "loophole" exactly that the system for corporations works the way it does. "Loophole" sort of implies an unintended consequence, when the reality is that the laws are written with the express purpose of making this type of tax avoidance possible.
> If you as a private US citizen choose to live and work abroad, you are required to file US income taxes and declare all foreign income.
Do you support this practice though? Does any other country try to tax people for income earned entirely abroad? This puts US citizens at a disadvantage compared to citizens of say, the EU.
In practice, the US has tax treaties with most other nations that permit foreign taxes paid (on income that would be taxable federally, so not on wealth taxes) to be taken as a dollar-for-dollar credit. That means that any country with a lower tax rate than the US will generally not increase your overall income tax bill. If you owed $X to a foreign country and $Y to the US for work done in the foreign country, you pay $X to the foreign country (regardless) and if Y is greater than X, you pay $(Y-X) to the US.
It's a pretty weird practice, and I can't come up with a good reason why I think it should be done, but it is. Just not for corporations. That's my point -- not that it's desirable, just that corporations get special treatment here.
At some point you tax people too much and they leave your country for one with better taxes. Never forget that the top 20% of citizens are responsible for like 87% of all the tax revenue the US and state governments rely on.
If the new cut cut cut tax plan passes and Californian's can no longer write off state income tax on their federal returns, you will see even more people leave California.
Never forget that the top 20% of citizens are responsible for like 87% of all the tax revenue the US and state governments rely on.
Never forget that you implicitly assumed this is because taxes on that segment are too high, rather than because various aspects of our economy were rigged to give those people a disproportionately high share of the total taxable income.
In other words: there are two ways to reduce your tax bill, and only one of them requires Congress to pass a law that puts you in a lower bracket.
This is an entirely handwavy and unsupported assertion, whereas stating the percentage of tax paid by the top 20% is a statement of fact with no implicit assumptions.
The people of a country get the tax system written by the representatives they voted for, and are complicit in any "rigging" of the economy.
What we have is a tax code that is layer upon layer of exceptions that came about when Group A supported a tax on Group B to pay for a benefit for Group A. Sometimes group A is in the top 20% (e.g. taxes used to subsidize an industry) and sometimes group A is in the bottom 20% (e.g. taxes used for food stamps). The former arises from things such as regulatory capture and the latter arises from uninhibited populism.
No politically active bloc of voters is innocent. Everyone from the rich to the poor are special interests and all are equally as guilty of "rigging our economy". Only a flat tax that treats no group as special is fair.
In it, absent any tax code distortions, Wilt Chamberlain would end up with most of the taxable income through entirely voluntary transactions. If thousands of people voluntarily pay Wilt Chamberlain to be entertained and Wilt ends up with most of the income, is that a rigged system? Power law distributions in income are a naturally occurring phenomena. No rigging is required.
If the system is indeed rigged, it's rigged in favor of the 45% of Americans that don't pay any federal income tax. They get all of the benefits at none of the cost.
Apple is not waiting for anything. They store their money abroad, and they invest it abroad, in foreign manufacturing and foreign retail expansion and foreign R&D and foreign acquisitions. And when domestic investors complain, Apple takes on domestic debt (at very good terms) to fund stock buybacks and dividends.
The idea that U.S. international tax policy is somehow hampering Apple is just not true. There's a big world out there outside U.S. borders.
What it is hampering is U.S. domestic investment and job growth.
I think once a loophole has been identified, it becomes a "just." But you are right that the trickier problem is with the more fundamental process of constantly searching for loopholes. If only we could "just" close that one, too.
Yup. It's to some extent an adversarial process. But that's part of why we have a legislature all the time, rather than just relying on laws written decades ago.
A fine example is wire fraud. Existing fraud laws didn't really cover it, and innovative criminals made extensive use of the loopholes until wire fraud was criminalized. (For those interested, the Yellow Kid's autobiography is a fun read. [1])
Same thing with any sort of security hole, really. We'll always have on-line attackers, but that's not a reason to give up. It's a reason to keep plugging holes and improving state of the art.
This reads a bit fatalist, why don't we close this particular loophole and deal with the next when it comes along. This may be a game of whack-a-mole but we're never going to have a sane tax code if we don't start killing some moles.
If anyone is knowledgeable in accounting and wants to point out some future loopholes that may arise, sure we can get those as well but... don't let the perfect be the enemy of the good.
Clearly we need stochastic regulations, where the regulations are chosen randomly from time to time subject to the constraints that they accomplish their policy goals. Just have to change them faster than the accountants can figure out how to exploit them...
Several places have what's called a "General anti-avoidance rule". The way this works is, if you think you've got a brilliant wheeze that avoids taxes, you're required to tell the tax officials about it. If you choose not to tell them then they can prosecute for evasion, and if you tell the court actually it was a clever avoidance tactic not evasion the court says hang on, why didn't you obey the General anti-avoidance rule? So you're screwed either way.
On the other hand if you tell them, they get to look at your clever idea and decide to either allow it, change the rule for next year, or go to court saying you're wrong this avoidance method doesn't work so you owe taxes.
Tax minimization is still possible in such a system if it’s consistently adjudicated. If not, it is subject
to regulatory capture and possibly bribes. And the nation executing this scheme still has a target effective tax rate, so the base rates will be adjusted up or down depending on the extent of minimization. I am not sure if you’re presenting this as an solution or a warning. :)
That's a terrible idea. You need stable tax regulations in order to make a business plan, get a loan etc. If you kill or drive away the taxpayer you're going to be left without taxes to collect.
You can close all loopholes that rely on literal interpretation by changing the approach to interpretation of the law/tax code. You can reinforce it with minimum taxation based on revenue, which prevents you having to wade through treacle in the courts.
Taxing revenues means taxing products on every step in production, many many times on their path through production and the economy. You would essentially also destroy low margin businesses, like grocery and retail and Adobe they ate such low margin the entire tax bill would be paid by the end consumer.
We should just keep pursuing the tax loopholes as they are discovered, they should be closed. I also think we should be lowering tax rates in conjunction with this as our tax code becomes more effective.
It seems that you're suggesting that we tax corporations on overseas income, even when reinvested overseas. That would put American companies at an extreme disadvantage compared to those from other countries, by forcing them to pay double taxes, US and foreign corporate taxes, on all income.
The logical solution is to get rid of the corporate tax altogether. The only reason why it exists is to be a plank for politicians who want to tax the "greedy corporations." All corporate income is either paid as dividends, paid as salaries, or reinvested. When it is paid as dividends, it is taxed as capital gains. When it is paid as salaries, it is taxed as income. When it is reinvested, it is either lost, or eventually becomes income and capital gains. There is no need to have another layer of taxation that just makes a giant accounting mess and creates all sorts of ridiculous incentives to use tax shelters.
That's fine, but all other things remaining equal, there's not as much revenue coming in. So, you need to raise capital gains tax and income tax in some proportion to retain the balance. Does that still seem easier?
Alternatively, we could cut a bunch of spending, but that turns into its own dogfight.
The corporate tax is actually a small (but not negligible) portion of tax revenue. Part of the logic for capital gains tax being lower than income tax is to account for the double taxation of the corporate tax. So I would be in favor of raising the capital gains tax to make up for eliminating the corporate tax.
I also happen to think that taxes should be lower overall, but I think it’s best to divide the two issues: 1) how much we should be taxed, from 2) how we should be taxed.
Treat income of any foreign company wholly owned or with substantially similar ownership structure of a domestic company as taxable income for that domestic company.
I don't think this is a good idea; I'm just demonstrating that it's not impossible.
How do you define "domestic"? Is it a company that earns the majority of its revenues in your country? That won't work because Toyota is certainly not an American company but the US market represents the majority of their revenues. Is it a company that was founded in your country? That won't work because of companies like Airbus that are supranational in origin. Is it a company that is headquartered in your country? That won't work because a headquarters can be moved in a matter of months (look at how GE left CT for a more regional example).
Domestic has a technical meaning: a company registered in a US state. To do business in the US you have to spin up a US company. Toyota USA would be taxed for global Toyota income. You could try to mitigate that by saying these rules only apply to companies whose ownership or control structure is more than 25% american, directly or indirectly. But yeah, these side effects are part of why I say I don’t agree with such a proposal.
Those foreign corporations named "Apple whatever" are owned, and controlled by "Apple Inc. (forever)". Such conglomerates are usually treated as one for tax purposes, which is why Apple and others can't just create 2500 shell companies each year to take advantage of various "startup" incentives across the world.
That's the sort of knowledge journalists learn in journalism 101, before they advance to their seminar on "sensationalism and selling advertisement" and the group therapy session "some know-nothing on the internet thinks I have anything to do with the BBC's business side, completely ignoring that online advertisement is, like, 0.001% of the BBC's revenue and that, being one of x thousand people working for the BBC, and my articles' revenue going into one big pot with all the others', my personal future is almost completely devoid of anything resembling a link to my articles' readership numbers".
If congress is to simplify the tax code to $rate = $rate->{calculate_bracket($amount_of_revenue)} then the members of congress would lose 99% of their net worth because there would be nothing special that is worth any money that the members of congress could do so they could reap some money for doing it.
Exactly. And it avoids the problem of losing tax revenue by creating an expectation of additional future tax holidays at regular intervals, incentivizing people to keep untaxed money offshore.
So wait, wouldn’t that just mean an end to USA companies operating abroad as USA companies? Microsoft has to invest money in china for example, they just can repatriate profits from China willy nippy, and China would get pissed of about it. Also, might as well make SAP do it also, even if a German company, otherwise American companies can’t compete with them.
Also, as a meta point, since I seem to see these kinds of challenges often: any time a person is put on the spot to name a specific change to a specific provision of law to enact a policy goal, it's probably going to be difficult to immediately give a specific answer. To translate policy into legislation often requires the assistance of multiple layers of paid staff and legislative analysts.
So the difficulty of answering that type of question is a function of the complexity of legislating, and not necessarily a sign that someone's preferred policy is a bad idea.
Won't help against foreign state sanctioned competitors to Apple, e.g. Samsung (Korea) or Huawei (China).
I am sure foreign nations would be quite happy to gain any advantage for their own companies over US corporations like Apple. Personally I would prefer that the US maintain a technological advantage for as long as possible.
Apple has been using tax strategies since the '80s and pioneered many of the techniques [1]. Samsung or Huawei weren't competitors then (perhaps Sony is the bogeyman you're looking for?)
It also won't make Apple's bezels smaller or write their ad copy for them, because that's simply not among the objectives of any prospective law targeted at reigning in tax havens.
If we need to prop up the U.S. tech sector with special tax handouts because they can't compete, we can do that on a targeted basis when that day comes rather than continuing to perpetuate an open-ended tax giveaway enjoyed by major companies in every sector of the economy.
And in the meantime perhaps we can use the missing revenue to bring our infrastructure up to parity with the rest of the modern world.
That's insufficient. Most of the world has a lower corporate tax rate than the United States. The Cayman Islands might be the most attractive place to park their funds, but pretty much anywhere would still be more attractive than bringing it to the US.
Lowering the US corporate tax rate to say 10 or 15% is the only reasonably feasible solution. Incentivize companies to book profits in the US. Then increase the dividend tax rate to compensate (depending on if this ends up being tax neutral or not -- it might very well be tax neutral given the extra profits that would be booked in the US)
That's more or less what I would suggest. Though, I would probably put the rate at 25% and only tax domestic profits. That would bring US policy in line with the rest of the G7. Raising taxes on dividends and capital gains to make it revenue neutral is also a good idea.
At the moment, tax policy basically penalizes companies bringing money earned in other countries home into the United States. It's stupid. Tax holidays are also stupid. Fix the problem at its heart.
The US reserves these kinds of hostile sanctions for its established enemies such as North Korea and Iran. In general, trade between nations should be encouraged, not blocked by economic nationalism.
You cannot close the loophole, they will just create another one. In cases like this we (meaning the judicial system and society as a whole) should be able to use judgement and just say that its clear they are creating these complex scenarios to avoid paying taxes.
