In Singapore, Coca-Cola recently opened a plant with the capacity to produce the underlying ingredient for 18 billion cans of soda a year. In Cork, Ireland, PepsiCo has located its “worldwide concentrate headquarters,” which until 2007 had been in New York. More than half of all PepsiCo soda sold around the world starts, as concentrate, in Ireland.
What Ireland and Singapore share is a low corporate tax rate. And because soda is such a simple product, with so much of its financial value stemming from the concentrate, Coke and Pepsi can reduce their overall tax rates by manufacturing it in low-tax countries.
Partly as a result, the industry paid a combined corporate income tax rate — spanning federal, state, local and foreign taxes — of only 19.2 percent over the past six years, according to an analysis for The New York Times by the financial research group SP Capital IQ. The average rate for the companies in the Standard Poor 500 was 29.1 percent.
The soda industry’s success at legally avoiding taxes shows why so many economists and tax experts believe the United States corporate-tax code is terribly flawed. It includes a notoriously high statutory rate that causes companies to devote resources to avoiding taxes. But it has so many loopholes that the effective corporate tax rate in the United States is slightly lower than the average for rich countries.
The decline in corporate-tax collection in recent decades has contributed to budget deficits. It has also aggravated income inequality: a company’s shareholders ultimately pay its taxes, and with a smaller tax bill, shareholders, who tend to be much more affluent than the average American, see their wealth increase.
“It’s clearly a broken system,” said Michelle Hanlon, an accounting professor at M.I.T.
Corporate taxes burst into the spotlight last week, with the release of a Senate committee report on Apple’s tactics to reduce its tax payments. More quietly, but perhaps more significantly, the House Ways and Means Committee has begun work on a potential overhaul of the tax code. Edward D. Kleinbard, a tax expert and former Democratic Congressional aide, said he had been impressed so far by the seriousness of the committee’s work.
The effort has a long way to go, but if it succeeds, both liberal and conservative tax experts hope it will reduce the statutory rate while also eliminating tax breaks. The net effect could be to close the gap between companies that pay relatively little in taxes and those that pay much more. The market, rather than the tax code, would then play a bigger role in determining companies’ success and failure.
Many voters, meanwhile, want to see companies paying higher taxes. In a Gallup poll last month, 66 percent of respondents said that corporations paid “too little” in taxes, compared with 61 percent who said the same about upper-income people, and 19 percent who said the same about lower-income people.
Low-tax companies are often large, global companies with the ability to use accounting maneuvers to shift earnings around the world. Having intangible assets (like a computer algorithm) or portable ones (like soda concentrate and pharmaceutical ingredients) can also help.
Carnival, the cruise-ship company, paid a minuscule 0.6 percent of its earnings in taxes over the past five years, according to Capital IQ. Starwood Hotels and Resorts, which owns the St. Regis, Sheraton, and W chains, paid 8 percent.
Amazon.com paid 6 percent; Boeing, 7 percent; Apple, 14 percent; General Electric, 16 percent; Google, 17 percent; eBay, Eli Lilly and Raytheon, 19 percent; and FedEx, 23 percent.
Individual executives also matter. The most creative can “play a significant role” in reducing taxes, according to a published study by the accounting professors Scott D. Dyreng, Edward L. Maydew and Ms. Hanlon. They built a database of 908 top executives who switched companies and identified some who were successful at holding down taxes wherever they went.
The professors did not name names. But a few executives — like John Samuels, head of the General Electric tax department — are famously shrewd.
Some companies with low tax rates, including Coca-Cola, have recently started a lobbying group called the LIFT America Coalition. Their main goal is to protect their advantages, if not bring down their taxes further. Other companies, like General Electric, are also major donors to Representative Dave Camp, Republican of Michigan and chairman of the Ways and Means Committee, and to Senator Max Baucus, the Montana Democrat who is chairman of the Senate Finance Committee.
ON the other end of the corporate-tax spectrum are smaller companies and those whose businesses tend to be tied down, less easily moved than Coca-Cola syrup or technological know-how. The retailers Best Buy, CVS, the Gap and Whole Foods each paid a combined rate of between 35 percent and 40 percent over the past five years. Wal-Mart paid 31 percent. Oil companies also pay relatively high rates, with Exxon Mobil at 37 percent.
To many economists, a fairer system would not lavish billions of dollars of tax breaks on only some industries for reasons that are almost accidental. “No one likes the current system,” Donald Marron, a former official in the George W. Bush administration who is now at the Tax Policy Center in Washington, said, speaking for his fellow economists if not for corporate executives.
Why, for example, should the government tax a retailer that sells soda at a much higher rate than a company that makes soda? Public-health experts note that the soft-drink industry is an especially odd candidate for taxpayer generosity, given its central role in increasing obesity and health costs.
Mr. Kleinbard, a law professor at the University of Southern California, says the only kind of overhaul that can get through Congress is one that reduces the headline corporate tax rate, from its current 35 percent to between 25 and 28 percent. In exchange, Congress would also most likely force companies to pay more taxes on their overseas profits.
Business lobbyists like the LIFT coalition are pushing for the opposite: lower overseas taxes. They say that Washington puts American companies at a disadvantage by trying (if often failing) to tax their overseas operations on top of the taxes that foreign governments collect. Instead, many companies want a so-called territorial system, in which only the local government imposes a tax.
The weakness in such a system, of course, is that some countries allow companies to operate almost tax-free. And in a globalized economy, many companies have figured out how to put much of their operations in those countries. Thus Ireland has become the world’s cola maker.
One compromise being discussed in Congress is a version of the territorial system — but with a minimum tax for any overseas operations. If companies were not paying at least that minimum to a foreign government, they would have to pay the difference to Washington.
So many companies are paying such low tax rates that even a modest minimum tax may result in a tax increase. Doubtless, though, the companies and their lobbyists will do the work to figure out how any proposed overhaul will affect them. If Congress is really going to reverse the long slide in corporate tax collection, it will have to make enemies along the way.
David Leonhardt is the Washington bureau chief of The New York Times. Kitty Bennett contributed reporting.
Article source: http://www.nytimes.com/2013/05/26/opinion/sunday/who-will-crack-the-code.html?partner=rss&emc=rss