Apple, the hippest company in the world is taking flack over revelations that the tech giant only paid a corporate tax rate of 9.8% last year. Apple utilized overseas subsidiaries in country’s with lower tax rates, in particular Ireland and the Netherlands, both of whom boast corporate tax rates around 20-25% while the U.S. sets an official federal corporate tax rate of 35%.
Conservatives have taken this opportunity to decry the high American corporate tax rate of 35% (even though, as the taxes paid by companies like Apple reveal, the number of loopholes and incentives in the corporate tax code mean that very few major corporations actually pay 35%). Conservative Grover Norquist, explained that the high corporate tax rate encourages companies to either move offshore or engage in the kind of legal maneuvering Apple used here to short-change America. Norquist calls this “stupid” and demands sharp cuts to the corporate tax rate.
Norquist is not wrong that a high corporate tax rate riddled with loopholes could encourage companies to either move assets offshore, but he overlooks the fact that few companies have this luxury. While Apple, with its digital technology products, can move assets and income overseas, but a retail company can’t. Wal-Mart can’t place its stores in Malaysia and hope to make money from consumers in Des Moines. At the same time, small businesses, long touted as the engine of jobs in America, lack access to the legal loopholes that major corporations can claim. Corporate tax loopholes are, in many ways, regressive, holding smaller operations to higher rates than their larger counterparts. In both ways, corporate taxes have a selectively impact, with some companies holding possible tax-avoidance advantages that other companies lack. This should be purpose of tax loopholes, to ameliorate the adverse impact on certain industries.
High corporate taxes also highlights the need to increase taxes on wealthy individuals and lower corporate taxes as a matter of fairness. The high corporate tax rate was set in the 1986 Tax Reform Act, a Reagan policy that slashed income tax rates on all individuals and raised corporate taxes to offset the losses. Instead, it created the pressure upon some companies to move assets offshore even though executives and board members remained in the United States. The tax system allows those running these companies to move jobs and assets to countries like Mexico, while they continue to take advantage of living in the United States, reaping their massive salaries and stock portfolios at lower income tax rates. They want to live here for cheap…they want your job to live in a third-world country for even cheaper.
Quick quiz, where is Apple headquartered. You said “California” because that’s the site of their physical headquarters and provides the business environment most conducive to a mega tech corporation. But when it comes to paying for that environment, Apple says it works in Nevada. According to this report, Apple funnels assets through Nevada, a state with no corporate taxes, to avoid paying California’s 8.84% corporate tax rate.
An underreported impact of the GOP assault on federal taxation, is the pressure it places on states to increase regressive taxation. Federal taxes can capture revenue notwithstanding this state-by-state maneuvering. As federal taxes are cut, states receive less funding from the federal government and must make up the difference through state taxes. But this is where state maneuvering rears its head, both to corporate taxation, where businesses like Apple can sidestep taxes in California through corporate structures, and to individual income taxes, where wealthier individuals have the luxury of parting with large portions of their income and placing it in low tax states like Nevada and Texas.
Where can states raise revenue when corporations can play legal games and wealthy individuals can shield income? Through property taxes and sales taxes and lotteries and legalized gambling, all regressive taxes that disproportionately take income from the poor and working class while wealthier entities escape the pinch.