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November 10, 2016


I am indebted for the undergirding research for this essay to an article in the Fall Edition of The American Prospect – my favorite political magazine – by Michael Stumo, called “The Progressive Tax Reform You’ve Never Heard Of”). I have heard of it and written of it before, but perhaps those to whom this is addressed have not, hence this offering.

The word “reform” has a certain positive aura about it. It presupposes that there are problems in need of reformation and all of us are in favor of solving problems, but when you are talking about the internal revenue code all too frequently you are using that positive term to cover further thefts within the peoples’ treasury to the benefit of the few. Thus when hearing that we are going to reform the tax code, put on our circumspect glasses and drink a big glass of beware. Make (as we do in the law) a motion to make more specific (or in this case, very specific).

So, for instance, if you voted for Trump or if you didn’t and are not rich, I have some bad news for you. Your tax rates are at best going to stay where they are and those of the rich and corporate class are going down. You will continue to pay the bulk of what it takes to fund the military, the patent office and all the other appurtenances of government in an increasingly higher proportion than those of the rich and corporate class. Don’t believe it? Read Trump’s tax plan. He said otherwise while campaigning, but that was stump chatter. Now the reality.

The only possible exception to another giveaway to the rich and corporate class may be the ending of so-called “carried interest” (which Trump has said he doesn’t like), a deliberately defined legislative ruse to identify what is clearly ordinary income as “carried interest” and taxed at far lower rates than ordinary income. Carried interest explains why corporate vultures such as the one Romney still receives pay from (his old company) along with hedge fund managers and equity money management firms use to report their compensation to the IRS. It saves them hundreds of billions; money you and I have to make up to either meet our nation’s current budget requirements or add to the deficit – and then such people who are greatly benefitting from such taxpayer largesse as I have just indicated have the chutzpah to complain about the deficit! Romney, for instance, paid at a 13.7 percent rate on 21.7 million in income for the tax year 2010, a rate lower than those who trimmed the vines on his estates paid.

That said, this essay is not about a focus on tax loopholes, tax breaks and statutory rates while preserving the taxation of U.S. corporations’ worldwide income. It is about greatly needed reform in  how we tax worldwide income of U.S. multinational corporations. Thus most developed countries tax income generated in their country known as a “territorial” income tax system, which makes sense, but what of the income generated in a foreign country by a U.S. multinational corporation wherever “based?”

Stay with me; this is not as complicated as it may seem. Here in plain language is what happens. U.S. corporations may have production facilities both here and elsewhere, but how do they price their products through so-called “profit shifting” via internal transactions that are in truth purely internal accounting fictions? Apple, for instance, has set up subsidiaries here and there (Ireland, Switzerland and other low tax jurisdictions) who play costs and sales games as between and among themselves that bear no relation to reality but a heavy relation to find the lowest tax rate possible. As a former Treasury economist, Martin Sullivan, told Bloomberg News: “Apple has shifted enormous amounts of profits for the United States to an untaxed entity overseas.”

How did this happen? How can somebody do the bulk of their business, including sales, in the U.S. and report the profits therefrom to a subsidiary in Ireland? Here’s how. The world believes that Apple is headquartered in Cupertino, California. It is, but a graphic of their business would show several Irish companies, since Ireland is a good place to report profits with their very low corporate tax rates. Apple has even negotiated a lower tax rate with the Irish government than Irish corporate tax law allows, a miserly 2 percent. So though assembly and sales occur elsewhere, the profits are booked to Ireland. That is not the right way of doing things. It is not a territorial method; these are not arms-length transactions; they are plainly accounting techniques to further tax avoidance pure and simple.

So how was this accountant’s fantasy come to fruition? Here’s how. Apple created its prime holding company, Apple Operations International, Inc. (AOI) as an Irish corporation but has not yet declared a tax residence in any jurisdiction per the finding of a congressional committee report, which also noted that AOI paid no corporate income taxes to any national government for a four-year period from 2009 to 2012 on an income of 30 billion dollars!

Apple has also created another Irish subsidiary, Apple Sales International, Inc. (ASI), which like its sister AOI enjoys substantial profits but may pay no taxes to anyone. ASI is the repository for Apple’s offshore intellectual property rights and the recipient of income related to Apple’s worldwide sales. ASI also claims no tax residency.

I say that when any American multinational corporation does not establish a “tax residency” that we should do it for them and tax them on their income at American rates. In all events, the collusion between Apple and Irish taxing authorities is breath-taking. Thus in addition to allowing Apple to pay only two percent on income booked in Ireland (while other such subsidiaries pay at ordinary rates), a later arrangement is that Ireland is not now requiring Apple to recognize ANY income in Ireland, leaving billions of dollars untaxed by any jurisdiction! It’s hardly any wonder that Apple’s stock is performing so well with such advantages over their competitors, if any, who do not have such a cushy tax life there, all of which greatly facilitates monopoly pricing for their products.

I will write in Part II about a few more problems with tax policy involving income from American multinational corporations and then propose a simple solution which will not inhibit corporate freedom to roam within the global economy but solve the resulting conundrum about what to do tax-wise with such streams of income from various sources. The current system (if it is one) is costing us hundreds of billions of dollar every year, money you and I have to make up for as taxpayers to fund our government. So is it a big deal? Huge! Stay tuned.      GERALD      E







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