We Don’t Need Another Gimmick, Just Simplify the Corporate Tax Code
June 5, 2013
In the wake of the Apple hearings, there has been a lot of discussion about who pays what tax 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 income. 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. depreciation treatment). This is a problem because the current code inaccurately defines the income tax base, 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.