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We Don’t Need Another Gimmick, Just Simplify the Corporate Tax Code

By: Andrew Lundeen

In the wake of the Apple hearings, there has been a lot of discussion about who pays what taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. and to whom. To clear up any confusion, a commentary from the New York Times Dealbook section makes a suggestion: require every large American company to disclose publicly what the author would inaccurately call the “true U.S. tax rate,” so voters and politicians can easily understand the function of the system.

The author is right, we do need a “true U.S. tax rate,” but we need to get that rate by simplifying and clarifying the corporate code, not finding new ways to measure the effectiveness of the current broken code.

The tax measure the author proposes would take the amount of U.S. taxes paid and divide it by the total worldwide pretax book incomeBook income is the amount of income corporations publicly report on their financial statements to shareholders. This measure is useful for assessing the financial health of a business but often does not reflect economic reality and can result in a firm appearing profitable while paying little or no income tax. . The example the author uses is Apple:

According to the Senate report, Apple paid $5.3 billion to the Treasury Department in the fiscal years 2009 to 2011. Its worldwide pretax book income over that period was about $65 billion. Thus, Apple’s “true U.S. tax rate,” according to my own calculation, was 8.2 percent.

On a theoretical basis, the suggested measurement of taxation is entirely void of the benefits principle. The benefits principle of taxation submits that because governments collect taxes in order to pay for government services, the people (or companies) who benefit from those services should be required to pay the tax.

By counting total worldwide income earned, the measure falsely suggests that the U.S. government provided services on all income earned. The proposed measure creates the perception that the U.S. government played a part in the entirety of Apple’s income and is being compensated for those services at a rate of 8.2 percent, which is significantly lower than the statutory rate of 35 percent.

On a practical basis, this measurement tool significantly understates the tax burden paid by corporations. Over 95 percent of the world’s population lives outside the U.S. borders. This means that U.S. corporations earn much of their income outside of the United States. Secondly, the income for the equation is “book” income, which is income before any tax treatment at all (i.e. depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. treatment). This is a problem because the current code inaccurately defines the income tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. , counting business expenditures as income.

Furthermore, this measure fails to account for the taxes paid by corporations to foreign governments. A recent Tax Foundation study shows that U.S. corporations pay over $100 billion in taxes to foreign countries a year.

So, instead of being an accurate indicator of the health of the tax code on the burdens paid by U.S. companies, the proposed measurement plays into the false narrative that corporations are undertaxed.

In reality, U.S. corporations pay a high effective tax rate by international standards. Previous Tax Foundation analysis found that the U.S. effective corporate tax rate is one of the highest in the world at about 27 percent, and a recent PwC study found the rate to be even higher, at over 28 percent.