Allow me to point and link you to two pieces in this AMs NYT. I don’t have time to give them the treatment they deserve—off to CA for the Milken Institute Global Conference where I’ll be debating tax reform and the role of budget deficits so more to come on those issues.
The first article is about all the machinations Apple goes through to cut its tax bill (their effective rate is under 10%, according to the piece). This is a well-known story—journalists Jesse Drucker and David Cay Johnston have also done yeomen’s work in this space as well. But the NYT piece added an important dimension by discussing some of the granular costs of the revenue losses to localities in Apple’s backyard.
A mile and a half from Apple’s Cupertino headquarters is De Anza College, a community college that Steve Wozniak, one of Apple’s founders, attended from 1969 to 1974. Because of California’s state budget crisis, De Anza has cut more than a thousand courses and 8 percent of its faculty since 2008.
Now, De Anza faces a budget gap so large that it is confronting a “death spiral,” the school’s president, Brian Murphy, wrote to the faculty in January. Apple, of course, is not responsible for the state’s financial shortfall, which has numerous causes. But the company’s tax policies are seen by officials like Mr. Murphy as symptomatic of why the crisis exists.
“I just don’t understand it,” he said in an interview. “I’ll bet every person at Apple has a connection to De Anza. Their kids swim in our pool. Their cousins take classes here. They drive past it every day, for Pete’s sake.
“But then they do everything they can to pay as few taxes as possible.”
Something very absurd—though not illegal—is going on here but we knew that already. The fact that US foreign profits held in Bermuda and the Cayman Islands amount to between 550 and 650 percent of those countries GDP is a pretty strong hint that something’s awry, as is the “double Irish with a Dutch sandwich” move decribed in the piece (it’s just a very effective way to shelter profits earned in higher tax countries by assigning them to low-tax havens).
So here’s my thinking on this. If Apple’s doing anything wrong here, it’s not their tax-sheltering tactics. That’s no more despicable then me buying my socks at Target instead of Nordstrom. They need to compete and to avoid providing their competitors with any advantages.
There are, instead, two other problems, the first of which is the most important.
First, our system of taxation—corporate or otherwise—raises far too little revenue to sustain America. We can’t sustain our infrastructure, invest in either public goods–most importantly education—or the innovation that was an essential ingredient in the fertile ground in which the Apple tree grew. We cannot till such soil on the revenue we’re collecting today, especially from such highly profitable firms as Apple. If we don’t turn this around, I’m quite certain that the number of Apples in our future will continue to dwindle.
The second problem is the resources companies like Apple and GE and all the other multinationals plough into these double Dutch sandwiches—the millions they spend on the billions they save (GE apparently has about 1,000 tax lawyers working on this stuff). Obviously, it’s money well spent from their perspective but that’s not the case from the broader perspective of society.
What’s the solution? I’d start by ending the ability to defer taxes on profits earned abroad, a minimum tax on overseas profits, and closing the loopholes that make it cheaper to build a factory in Guangdong than in Ohio. Basically, the goal should not be to make it more expensive to invest abroad—it should to level the playing field, i.e., end the loopholes that make it cheaper to invest elsewhere.
Until then, Apple should be a better corporate citizen and do more to voluntarily support the schools in its backyard (and I’d argue that America is its backyard).
The second piece provides some potentially good news about how health care spending is growing more slowly in recent years. Are we starting to bend the cost curve?
You can’t overestimate how important that is, given the fact that for all the nonsense about how spending on welfare and foreign aid is busting the budget—not even close—the true path to fiscal sustainability cannot be achieved without slowing the growth of spending on health care.
I was talking to a friend last week who mucks around deeply in this stuff—visiting health IT companies, e.g.—and he assured me that the Affordable Care Act is already playing a role incentivizing producers and providers to do more to contain costs. Let’s just hope Justice Kennedy is listening.
But I think the article may be down-weighting the impact of the recession. It’s in there, but the experts quoted argue that it’s not the main factor. I hope that’s right, but I’m worried that what we’re really seeing is less cost savings and more cost shifting. That is, our delivery system has clearly been shifting more costs onto health consumers. The recession hits, incomes fall sharply, and people simply can’t afford to get the health care they need and/or want.
I get that skin-in-the-game is a critically important component of market economics. I just can’t accept that health care is a normal good to which this standard ought to be fully applied.
Apple and others also use differences in state corporate income tax rates to avoid paying what they should. This race to the bottom between states hurts the country as a whole. If state corporate income taxes were deductible from federal corporate taxes (which need to be higher even before this) it would get rid of this problem.
Would trading corporate income tax for a VAT make it easier, more transparent, harder to avoid, and harder to demonize?