The European Commission last month ordered Ireland to collect $14.5 billion in unpaid corporate taxes from the U.S. company Apple.
Europe’s competition commissioner, Margrethe Vestager, who has made tax avoidance a central focus, said that “Apple’s illegal deals with the Irish government allowed the technology giant to pay virtually nothing on its European business in some years.” It is alleged that Apple “paid only 50 euros in taxes for every million euros in profit during 2014.” The European Union is demanding that Ireland “recoup 10 years’ worth of back taxes, some 13 billion euros, or about $14.5 billion, plus interest.”
Naturally, both Apple and Ireland are unhappy with the order and have said that they plan to appeal the decision. Timothy Cook, Apple’s CEO, said that Europe’s ruling had “no basis in fact or in law,” and called it an effort to “rewrite Apple’s history in Europe, ignore Ireland’s tax laws, and upend the international tax system in the process.” The Finance Ministry of Ireland maintained that taxes were a “fundamental matter of sovereignty” and that “the commission’s decision would undermine a continuing global tax overhaul and create business uncertainty.”
Apple has found an unlikely ally in the U.S. government. The Treasury Department released a “White Paper” criticizing any moves by the European Union to recoup back taxes from American companies. Treasury Secretary Jacob Lew remarked that he saw Europe’s effort as “an attempt to reach into the U.S. tax base to tax income that ought to be taxed by the United States.” Sen. Charles Schumer (D-N.Y.) labeled the decision against Apple a “cheap money grab by the European Commission, targeting U.S. businesses and the U.S. tax base.” House Ways and Means Committee Chairman Kevin Brady (R-Tex.) termed the decision a “predatory and naked tax grab.”
But just a few years ago a U.S. Senate committee complained that Apple had “negotiated a special corporate tax rate of 2 percent or less in Ireland” and criticized the “gimmicks” and “schemes” that “allowed the company to sidestep taxes.” Apple and other large American corporations are routinely condemned for keeping large cash reserves overseas. According to Moody’s credit rating agency, nonfinancial American companies “hold a combined $1.7 trillion in cash overseas,” including Apple’s $215 billion. The U.S. Treasury has also tried to curtail “inversions”: the relocation of a corporation’s headquarters to a country with a lower corporate tax rate. Ireland especially has benefited from inversions.
All of these “tax avoidance” strategies are implemented because the U.S. corporate tax rate is 35 percent — one of the highest in the world, while Ireland’s corporate tax rate is 12.5 percent — one of the lowest in the world. Even when all the tax breaks and loopholes are factored in, the effective U.S. corporate tax rate is still at the top.
U.S. companies are taxed on their global profits, less a credit for tax payments to foreign governments, and don’t pay their American tax obligations until they bring their money back to the United States.
There are two solutions to what governments see as the problem of corporations trying to pay as little in taxes as they possibly can.
The first was articulated by Commissioner Vestager at a news conference in Brussels: “The ultimate goal should of course be that all companies, big or small, pay tax where they generate their profits. We need a change in corporate philosophies and the right legislation to address loopholes and ensure transparency.”
The second has been proposed by libertarians, and some conservatives, for decades: no companies, big or small, should have to pay tax on their profits. The corporate income tax should be abolished.
In the United States, the first federal corporate income tax was instituted in 1909, when business income above $5,000 was subjected to a 1 percent tax rate. It has been changed approximately 35 times since then. The corporate income tax does not add significantly to government revenue. For fiscal year 2015, $1.54 trillion was collected in individual income taxes, $1.065 trillion was collected in payroll taxes, but “only” $343 billion was collected in corporate income taxes. And according to the Congressional Budget Office (CBO), although federal tax receipts for the first 11 months of fiscal year 2016 totaled $2.909 trillion (a record high), corporate income tax receipts were actually $35 billion lower than they were in the same period last year.
And then there is corporate income tax on the state level. According to the Tax Foundation, forty-four states levy a corporate income tax with rates ranging from 4 percent in North Carolina to 12 percent in Iowa. The states of Nevada, Ohio, Texas, and Washington impose gross receipts taxes instead of corporate income taxes. Only South Dakota and Wyoming levy neither a corporate income nor a gross receipts tax. State corporate income taxes “account for just 5.3 percent of state tax collections and 3.9 percent of state general revenue.”
Corporations don’t pay taxes; people do. The corporate tax burden is borne by shareholders through lower dividends and share prices, passed along to consumers through higher prices, and paid by workers in companies in the form of lower wages. Corporations are owned by shareholders: large pension funds, 401k plans, university and other endowments, and individual investors.
The corporate income tax is a hidden tax. It is not withheld from Americans’ paychecks. It is not a line on the 1040 tax form. It is not added on to the cost of each purchase Americans’ make. It is not a bill Americans receive in the mail. It is easy for liberals, progressives, and socialists to persuade the typical American worker to support an increase in the corporate tax, since it is a tax increase that he thinks he will never see.
The corporate income tax is a double tax. The same income is taxed once at the corporate level as profit and then again at the individual level as income when it is distributed as dividends to shareholders.
The corporate income tax is just another government mandate that raises the cost of doing business: just like the minimum wage, unemployment taxes, health-insurance mandates, family-leave requirements, and government regulations.
Sen. Elizabeth Warren (D-Mass.) recently claimed that the biggest multinational corporations have shirked their “obligations” for decades and should be made to step up and pay their “fair share.” But not only should the corporate tax be abolished because its elimination would result in higher dividends and share prices, more money available for research and development, an increase in global U.S. competitiveness, higher wages for workers, and lower prices for consumers — it should be abolished because the government is not entitled to the profits of corporations any more than it is entitled to the incomes of individuals.
All taxation is government theft. Taxes of every variety should be abolished, and especially “double” and “hidden” taxes like the corporate income tax.