December 4, 2020

Economic Scene: The Trouble With Taxing Corporations

It hardly qualifies as a defense. But that is perhaps the most accurate statement that Apple’s chief executive, Timothy D. Cook, could have made to lawmakers inquiring last week about how its creative financial techniques contributed to its low business tax payments.

You may have heard of Google’s “Double Irish With a Dutch Sandwich” — an increasingly popular route through Ireland and the Netherlands that cleanses corporate cash of most of its tax liability.

Amazon and Facebook like the sandwich, too.

Don’t forget the fabled tax wizards in General Electric’s accounting department. Or what about Starbucks, which paid a grand total of $13 million in British corporate taxes over 15 years on revenue of more than $5 billion?

Starbucks is not a complex technology firm with a subsidiary in a low-tax Caribbean island charging its headquarters through the nose to license some cutting-edge software patent. It’s a chain of coffee shops, part of the predigital economy.

Still, despite a 31 percent market share, the company’s British subsidiary managed to report losses in 14 of its first 15 years.

The case of Starbucks is particularly troubling for every government concerned about how it is going to finance itself in the future.

As Edward Kleinbard of the University of Southern California noted: if Starbucks could generate so much “stateless” income — beyond the reach of tax authorities both where it makes and sells the Frappuccinos and where it is incorporated as a company — “any multinational firm can.”

That means that as the government seeks new sources of revenue to pay for an expanding safety net and an aging population, it should probably look outside the corporate sector.

“We have a tax problem; we are not collecting enough tax revenue — period,” said Jim Hines of the University of Michigan. “But we are never going to finance what we need with corporate taxes.”

Instead, governments seeking revenue might do best focusing their efforts on taxing people, who cannot flee as easily, or taxing what people consume.

Some of this may come at the expense of progressivity in the tax code.

The United States is the only advanced nation that does not have a value-added tax, which is similar to a sales tax and can raise lots of revenue. Peter Diamond from the Massachusetts Institute of Technology has suggested increasing payroll taxes to pay for increased spending on Social Security.

There are more progressive taxes — say taxing the “carried interest” charged by fund managers at the same rate as regular income, or raising taxes on dividends. That could raise money, though probably less.

But with countries around the globe in constant competition to lure investment by lowering tax rates and offering assorted breaks, taxing corporations will be an uphill battle. Multinational companies just have too many options to minimize their tax bill by routing profits through low-tax jurisdictions and losses through high-tax ones.

In the industrial era of the early 1950s, corporate income tax contributed almost a third of the total tax revenue raised by the federal government, equivalent to about 6 percent of the nation’s income. By the 1970s it generated about 3 percent. And in the last decade it raised around 2 percent of national income — only about $1 in $10 of all federal tax dollars collected.

Corporate tax revenues stopped shrinking as a share of the economy after the last major tax reform in the 1980s, moving up and down with the economic cycle. But they have failed to keep up with corporate profits’ rising share of the economic pie.

Part of this decline was by design. Notably, starting in the 1980s many companies were allowed to shed their corporate status so that their profits flowed directly to their owners — generating no corporate tax.

But globalization — combined with financial legerdemain — has opened wide new doors for companies to reduce their tax bill.

For all the complaints about the high corporate rate, from 1987 through 2008 federal income taxes paid by American corporations amounted to only 25.6 percent of their domestic income, according to the Congressional Budget Office. On their foreign income they paid much less.


Twitter: @portereduardo

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High & Low Finance: One Response to Apple Tax Strategy May Be to Copy It

But it turns out that in many ways it is not that complicated. The Apple tax tactic that came in for denunciation at Tuesday’s Senate subcommittee hearing was not particularly difficult to carry out, and it seems to have been something known to some tax experts — but not to many of those whose job it is to write tax laws.

“What impresses me is the effortlessness of Apple’s international planning,” said Edward Kleinbard, a tax law professor at the University of Southern California and a former chief of staff of the Congressional Joint Tax Committee.

The planning involved setting up subsidiaries that would get the lion’s share of Apple’s profits on sales in Europe and Asia. Apple incorporated those subsidiaries in Ireland — making them exempt from immediate United States taxation — and told Ireland that the subsidiaries were run from Apple’s headquarters in Cupertino, Calif., and therefore were exempt from tax in Ireland.

“It hinges,” said Mr. Kleinbard, “on nothing more than an Irish shell company whose management in fact is in Cupertino, and a contract between two arms of Apple’s single global enterprise with no economic significance to anyone outside of Apple. It’s as if Apple checked a box to elect out of worldwide taxation on a vast swath of their international income.”

Was that shocking? It was to Senator Carl Levin, the chairman of the subcommittee that held the hearing. He said he had not seen anything comparable at General Electric or Microsoft, two companies whose tax returns Senate staff aides had previously combed through.

Mark Mazur, the assistant Treasury secretary for tax policy, testified he had never heard of such a thing. It is his job to recommend changes in tax laws.

But Samuel Maruca, the Internal Revenue Service director of transfer pricing operations, sounded surprised that people were surprised.

Tim Cook, Apple’s chief executive, saw nothing unusual. He vigorously denied Apple had used any “tax gimmicks.”

It may be that once a loophole is spotted, using it is anything but complicated. But it can be very difficult to spot such a loophole without help from someone who has already found it.

If that is the case, Tuesday’s hearing could have the exact opposite effect from the one that Senator Levin intended. It is not hard to imagine other chief executives reading news reports and asking their chief financial officers why they never thought of that. That could lead to even more companies finding ways to avoid American income taxes.

To use Apple’s strategy, companies will need to meet a few criteria.

First, they must be multinationals.

Second, a large part of their profits must come from what is called “intellectual property,” like patents or copyrights.

Third, it helps a lot if the company can do its tax planning before it is obvious to outsiders — or maybe even to insiders — just how profitable that intellectual property is going to be.

Finally, they must find one or more countries that will let them pull the trick. Ireland seems to have been very clever. It offers the benefit of “stateless subsidiaries” only to companies that have actual operations in Ireland. Apple has its European headquarters there, and employs a lot of people. In effect, Ireland pays companies to come to Ireland by offering to let them avoid taxes in their home countries.

In Apple’s case, as with many technology and pharmaceutical companies, the cost of production is but a fraction of the price paid by the customers. Most of the profits will accrue to the owner of the intellectual property.

Apple does nearly all of its research near its Cupertino headquarters. But in 1980 it signed over to an Irish subsidiary the right to profit from that research in most of the world. Buy an iPhone in Brazil, and Apple U.S. will benefit. Buy one in China, and the Irish operation books most of the profits.

That deal appears to have been very one-sided, given what happened to Apple. But Apple renewed it in 2008.

Such an inter-company deal should be on “arm’s-length” terms. But that is hard to know. It is, testified Mr. Maruca, the I.R.S. official, “our most significant enforcement challenge.”

Under American tax law, American companies owe tax on their worldwide profits — but with a major catch. “Foreign profits” are not taxed until they are brought home. Then they are taxed at the American rate of 35 percent, less whatever foreign tax was paid. But there is no requirement that they ever come home.

President John F. Kennedy called for ending that deferral. Congress refused to do so, but passed provisions that were supposed to make it harder for companies to abuse the deferral rules. Senator Levin says that those rules have themselves been abused.

What will happen? Apple thinks the solution is simple. Let it bring the money home at a rate Apple and other companies would deem reasonable.

And what is reasonable? “To incent a huge number of companies” to bring back money, Mr. Cook testified, the new rate “would have to be a single-digit number.”

Senator Levin hopes that the hearing will inspire his colleagues to change the law in a different way. “These tax-shifting capabilities that these major corporations have cannot continue,” he said.

But the result could be the opposite, with nothing happening on Capitol Hill as more companies use the Apple example to take a bite out of their tax bills.

Floyd Norris comments on finance and the economy at

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Tech Firms Push to Hire More Workers From Abroad

Mr. Sankhla got a master’s degree in electrical engineering nine years ago from the University of Southern California, followed by a job at Cisco, then at a start-up that attracted $4.5 million in financing from Silicon Valley investors. There was only one wrinkle: he was in the country on a temporary work visa, with no idea whether or when he would get permanent residence.

He remains in limbo, which preoccupies him almost as much as running his business. “It’s a constant distraction,” said Mr. Sankhla, who is 32. “You can’t really settle down because your visa status is uncertain.”

Silicon Valley is battling in Washington to make the immigration process easier for thousands of people like Mr. Sankhla, many of them Indian engineers, while also pushing to hire many more guest workers from abroad.

Rarely has the industry been so single-mindedly focused on a national policy issue, with executives like Mark Zuckerberg of Facebook and John T. Chambers of Cisco personally involved. Its efforts seem to be paying off, as a group of eight senators negotiate details of a comprehensive immigration deal to be announced early next week.

Several lobbyists and advocates who have spoken to Senate staff members say they are optimistic about at least two items high on their wish list: a fast-track green card line for math and science graduates like Mr. Sankhla, no matter which country they come from, and a near doubling of the visas for temporary workers.

“I think we are going to get a balanced outcome, which takes advantage of the value that immigrants bring to the economy and be protective of U.S. workers,” said Scott Corley, director of Compete America, an industry coalition that includes Google and Intel.

The contentious piece of this is the potential increase in temporary workers from abroad. Critics fear that is a ruse for lowering wages. Those critics are likely to get at least one boon from a revamped law: a requirement that companies try to find qualified American workers before hiring from abroad. The law may also make it more expensive to bring in guest workers.

The new immigration measure will almost certainly fix a situation that keeps people like Mr. Sankhla stuck in limbo for so long. The current law limits how many green cards can be issued to people from any single country, no matter how populous.

That effectively means that applicants from countries like India and China, with a large supply of young engineers often educated in American universities, wait far longer for permanent residence than those from almost every other country. The temporary employment visa, usually an H-1B, has become a kind of way station for them.

The Senate is considering eliminating the per-country quotas for those who graduate from United States universities with math, science and engineering degrees. The debate in Congress perfectly illustrates how immigration law, codified in 1965 and last revamped substantially in 1990, has lagged behind the demands of a rapidly changing economy. Unemployment in the technology industry hovers below 4 percent, far less than the national average.

In that climate, temporary visas are in such heavy demand that the total number available for the coming year — 65,000 for skilled workers and 20,000 for those with a master’s degree or higher — were snatched up in less than five days. The United States Citizenship and Immigration Services said Monday that it had received 124,000 applications in that time and had resorted to a lottery to make the final cut.

The measure being considered by lawmakers could nearly double the H-1B visas allotted yearly and possibly admit more temporary workers during periods of high demand, said several advocates who have discussed the matter with Congressional staff members and who declined to be named because the final language has not yet been released.

“If you were the human resources vice president of the United States, you would want to have a rule that says if things get busy and you need skilled people you can bring in people,” said Dan Siciliano, a law professor at Stanford. “At the same time you would want a way to bring highly skilled people in and perhaps at your choosing convert them to status that lets them stay much longer.”

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Economix Blog: Health Insurance Exchanges May Be Too Small to Succeed

Dana P. Goldman is the director of the Leonard D. Schaeffer Center for Health Policy and Economics at the University of Southern California. Michael Chernew and Anupam Jena are professors of health care policy at Harvard University.

Today’s Economist

Perspectives from expert contributors.

With the re-election of President Obama, the Affordable Care Act is back on track for being carried out in 2014. Central to its success will be the creation of health-insurance exchanges in each state. Beneficiaries will be able to go a Web site and shop for health insurance, with the government subsidizing the premiums of those whose qualify. By encouraging competition among insurers in an open marketplace, the health care law aims to wring some savings out of the insurance industry to keep premiums affordable.

Certainly, it is hard to be against competition. Economic theory is clear about its indispensable benefits. But not all health care markets are composed of rational, well-informed buyers and sellers engaged in commerce. Some have a limited number of service providers; in others, patients are not well informed about the services they are buying; and in still others, the quality of the service offerings vary from provider to provider. So the question is: What effect does insurer competition have in a marketplace with so many imperfections?

The evidence is mixed, but some of it points to a counterintuitive result: more competition among insurers may lead to higher reimbursements and health care spending, particularly when the provider market – physicians, hospitals, pharmaceuticals and medical device suppliers – is not very competitive.

In imperfect health care markets, competition can be counterproductive. The larger an insurer’s share of the market, the more aggressively it can negotiate prices with providers, hospitals and drug manufacturers. Smaller hospitals and provider groups, known as “price takers” by economists, either accept the big insurer’s reimbursement rates or forgo the opportunity to offer competing services. The monopsony power of a single or a few large insurers can thus lead to lower prices. For example, Glenn Melnick and Vivian Wu have shown that hospital prices in markets with the most powerful insurers are 12 percent lower than in more competitive insurance markets.

So health insurance exchanges are probably welcome news for hospitals, physicians, and pharmaceutical and medical device companies throughout the United States. If health insurance exchanges divide up the market among many insurers, thereby diluting their power, reimbursement rates may actually increase, which could lead to higher premiums for consumers.

Ultimately, economic theory predicts that the effect of insurance exchanges on insurance premiums will depend on two offsetting factors. On one hand, smaller, less-consolidated insurance companies may have less bargaining power with large hospitals, physician groups and pharmaceutical companies, which traditionally command substantial market power. Reimbursements to these parties, as well as costs to insurers, may rise in a fractionated market, and if so, these costs would be passed on to consumers as higher premiums. On the other hand, exchanges may inject competition into the marketplace, reducing premiums as even the smallest insurer can market its plans, forcing larger insurers to lower their premiums to remain competitive. Which theoretical effect will dominate in reality is an open empirical question with important policy implications.

There is some evidence on how insurer market power affects premiums. Leemore Dafny, Mark Duggan, and Subramaniam Ramanarayanan have found that greater concentration resulting from an insurance merger is associated with a modest increase in premiums — suggesting that concentration may not help consumers so much — although they did report a reduction in physician earnings on average. Over all, however, the evidence is limited and mixed.

A simple analysis of the nationwide growth in premiums over the last decade is illustrative. Using 2001-10 data from the National Association of Insurance Commissioners, we examined the relationship between insurer market power (defined as the market share of the two largest companies) and changes in premiums. We found that concentration of insurer power — hence less competition – was not significantly associated with higher premiums, as can be seen in the chart below.

Hawaii is a good example. Kaiser Permanente and Blue Cross Blue Shield together controlled more than 90 percent of the insurance market in 2001. In this highly concentrated market, the average premium rose only 72 percent over the decade, compared to an overall increase of 135 percent nationwide. By contrast, Virginia had one of the most competitive markets in 2001, with its two largest insurers controlling only 25 percent of the market, yet premiums in the state increased nearly 140 percent over the period.

Greater competition in the insurance industry — either through health insurance exchanges or other measures — may not lower insurance premiums. Weakening insurers’ bargaining power could instead translate into higher costs for all of us in the form of higher premiums.

In financial markets, we ask if banks are too big to fail. When it comes to health care, perhaps we should ask if insurers are too small to succeed.

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Supreme Court Hears Copyright Case on Imported Textbooks

WASHINGTON — The Supreme Court heard arguments on Monday in a copyright case about the sale of imported textbooks on eBay that has wide-ranging implications for many products made abroad and sold in the United States.

The case arose from the entrepreneurial impulses of Supap Kirtsaeng, a Thai student who attended Cornell University and the University of Southern California. He helped pay for his education by selling textbooks that his friends and relatives had bought abroad and shipped to him.

Publishers of textbooks, like other manufacturers, often charge different prices in different markets. One publisher, John Wiley Sons, successfully sued Mr. Kirtsaeng for copyright infringement.

The general rule for products made in the United States is that the owners of particular copies can do what they like with them. If you buy a book or record made in the United States, for instance, you are free to lend it or sell it as you wish. The question for the justices was whether that rule, called the first-sale doctrine, also applies when the works in question were made abroad.

The answer turns on a phrase in the Copyright Act, which appears to limit the first-sale doctrine to works “lawfully made under this title.” The lower courts said that textbooks manufactured outside the United States cannot have been made under American law and so remained subject to the control of the owner of the copyright.

Much of the argument concerned what lawyers call the “parade of horribles” — the hypothetical problems that might follow a ruling in favor of one side or the other.

E. Joshua Rosencranz, a lawyer for Mr. Kirtsaeng, said the happenstance of where a record was made should not alter the rights of the person who buys it. Otherwise, he said, “the result is that a teacher can go and buy a Beethoven record and play it to her class if it was made in the United States,” he said. “But if she flips one past it to the next Beethoven record that happens to have been made in Asia, she can’t play that for her class.”

Worse, he said, the ability to retain control of copyrighted works made abroad provides manufacturers with a powerful incentive to ship jobs overseas.

Justice Stephen G. Breyer asked a series of hypothetical questions, starting with whether he was permitted to buy a book abroad and give it to his wife.

“Imagine Toyota,” he went on. “Millions sold in the United States. They have copyrighted sound systems. They have copyrighted GPS systems. When people buy them in America, they think they’re going to be able to resell them.”

He gave other examples: “libraries with three hundred million books bought from foreign publishers that they might sell, resell or use” and “museums that buy Picassos.”

Theodore B. Olson, a lawyer for the publisher, said that none of those things were before the court. “When we talk about all the horribles that might apply in cases other than this — museums, used Toyotas, books and luggage, and that sort of thing — we’re not talking about this case.”

Justice Anthony M. Kennedy responded that “you have to look at those hypotheticals in order to decide this case” so that the justices understand the consequences of their ruling.

Mr. Olson said there might be provisions of the copyright laws that allowed some gifts and resales. He gave the example of the fair use defense, which protects some reproductions of copyrighted works for criticism, research and similar purposes.

Chief Justice John G. Roberts Jr. said that defense would not carry much weight in many of the hypothetical cases.

“It seems unlikely to me that, if your position is right,” the chief justice told Mr. Olson, “that a court would say, it’s a fair use to resell the Toyota, it’s a fair use to display the Picasso.”

In 2010, the court considered essentially the same question in Costco Wholesale Corp. v. Omega S.A. But Justice Elena Kagan did not participate in that case — presumably because she worked on it when she was solicitor general — and the rest of the justices split 4-to-4, which upheld the decision. All nine justices heard the case argued Monday, Kirtsaeng v. John Wiley Sons, No. 11-697.

Justice Kagan was an active questioner but did not indicate which way she was planning to cast her presumably decisive vote.

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Corner Office | Ruth J. Simmons: Ruth Simmons of Brown University, on Amiable Leadership


Q. Do you remember the first time you were somebody’s boss?

A. Probably the first time I was a boss was when I was associate dean of the graduate school at the University of Southern California. I was in my early 30s.

Q. Was that an easy transition?

A. It was. If I had to ask myself why, I would say it’s because I’d probably been building to the point where I was capable of doing those things without actually knowing that I could. And if you ask me how far back that went — this assemblage of skills and experience — I’d probably say that it went back to my childhood.

Q. How so?

A. I realized that I was an inveterate organizer from the earliest age. I’m the youngest of 12 children. And although I was the youngest, I tried to organize things in my family. When there were disputes, I tried to mediate. And I intervened in school as well to tell teachers what they were doing wrong, or at least to tell them what I didn’t like about what they were doing. I intervened sometimes in classes to take a leadership role. By the time I got to college, I was impossible.

Q. Why impossible?

A. I was impossible. I thought that it was very important to take a principled stance about various things, and some of them had meaning, and some of them probably didn’t mean very much.

I think somehow this sense of myself came from my mother, who instilled in us very strong values about who we were. And this was quite essential at the time I grew up, because in that environment, in the Jim Crow South, everybody told you that you were worth nothing. Everybody told you that you would never be anything. Everybody told you that you couldn’t go here, you couldn’t go there. She would just constantly talk to us: Never think of yourself as being better than anybody else. Always think for yourself. Don’t follow the crowd. So we grew up with a sense of being independent in our thinking.

Q. And what about your siblings? What did they think of their confident youngest sister?

A. They didn’t like it very much. They thought I was not normal, because I was very different from everybody else in my family. My oldest sister went to my mother one day and said that she thought there was something wrong with me, and that something needed to be done.

Q. But at some point, particularly when you became a manager, you realized you couldn’t be so impossible.

A. It was living, frankly. And the experience of understanding that the ways in which I was trying to solve problems and to interact with people were getting in the way of achieving what I want. And that’s what did it for me. Ultimately, I came to understand that I could achieve far more if I worked amiably with people, if I supported others’ goals, if I didn’t try to embarrass people by pointing out their deficiencies in a very public way. So I think it was really experience that did it more than anything else.

Q. When the college promoted you into a management role, was it something you wanted?

A. I was stunned, and a little skeptical. In my early career, I learned to be very leery of people asking me to perform in these higher-level positions.

Q. Because?

A. Because this is coming out of the civil rights movement. The idea of taking somebody off their path to do something that is useful to you, as opposed to thinking long term about what they might contribute to the profession, was something I thought was a bit odd. When I was a Ph.D. student at Harvard, I was asked to drop out of my Ph.D. program and become a full-time staff member at Radcliffe. I was, first of all, the only black student in my Ph.D. program, and they wanted me to drop the program in order to become an administrator. So I just thought that was very odd, and I always remember that. I was skeptical of letting others create that path for me.

In the end, however, because there were so few African-American faculty at the time, I realized that I would see very few minorities in my classes. And that the only way I could influence what was happening with regard to minorities was to take a central position. And that’s why I ultimately did it. It never occurred to me that this would be a path that I would stay on or that I would accomplish anything at a significant level.

Q. What do you consider some of your most important leadership lessons?

A. I had some bad experiences, and I don’t think we can say enough in leadership about what bad experiences contribute to our learning.

Q. Can you elaborate?

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The Bay Citizen: Amazon Spends Millions to Fight Internet Sales Tax

More than nine months before a proposed June 2012 referendum asking that California’s new Internet sales tax law be overturned, Amazon, the Seattle-based online retailer, has already spent $5.25 million, state records show, more than any company has spent in California this far from a vote in at least a decade.

“The initiative and referendum process have been hijacked,” said Loni Hancock, a state senator from Berkeley, who wrote the law Amazon is trying to overturn and who is now pushing legislation that could block Amazon’s referendum effort.

Even by California’s expensive campaign standards, the company’s early contributions are causing observers to take note.

For example, the company’s $5.25 million investment dwarfs the $1.5 million that Pacific Gas and Electric spent nine months ahead of the vote on Proposition 16, a June 2010 initiative that would have made it more difficult for local governments to get into the electricity business.

P.G. E. ultimately spent $46 million on that campaign. Political observers say that by spending more, earlier, Amazon is showing potential opponents that its ultimate campaign spending could soar even higher.

“These types of sums can send a very strong discouraging signal to potential opponents,” said Dan Schnur, a veteran Republican political strategist who is now director of the Jesse M. Unruh Institute of Politics at the University of Southern California.

While Wal-Mart and other deep-pocketed retailers have lined up in favor of the tax law, they may decide to forgo financing the opposition to Amazon’s referendum if they feel it faces long odds, Mr. Schnur said.

Early polling has suggested that a vote would be close. A Los Angeles Times-University of Southern California poll released last month found 46 percent of voters favoring an online sales tax, with 49 percent opposed.

Ned Wigglesworth, a political consultant coordinating the Amazon-financed More Jobs Not Taxes campaign, said he did not see “any significance” in the company’s historic giving and dismissed the notion that Wal-Mart could be scared away by $5 million in campaign contributions.

Neither Amazon nor Wal-Mart representatives responded to calls and e-mails seeking comment.

Meanwhile, in Sacramento, Ms. Hancock has begun a quixotic quest to keep California voters from weighing in on whether online retailers should be required to collect sales tax. On Thursday, she pushed a new bill through a legislative committee that election law experts said could prevent Amazon from putting a referendum on tax collection before the voters.

According to the state Department of Finance, the state will lose $200 million it has already counted toward balancing the state budget if the online sales tax is not collected.

“That means a lot of teachers that aren’t in classrooms and police that aren’t on the streets,” Ms. Hancock said.

She says that her new bill is an “urgency statute,” which, under the state constitution, is not subject to voter referendum.

According to the California Constitution, such laws must be passed by two-thirds majorities of both houses of the State Legislature, and must be “necessary for immediate preservation of the public peace, health or safety.”

Mr. Wigglesworth refused to comment on efforts in Sacramento to render his campaign moot.

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But Nobody Pays That: U.S. Business Has High Tax Rates but Pays Less

Topping out at 35 percent, America’s official corporate income tax rate trails that of only Japan, at 39.5 percent, which has said it plans to lower its rate. It is nearly triple Ireland’s and 10 percentage points higher than in Denmark, Austria or China. To help companies here stay competitive, many executives say, Congress should lower it.

But by taking advantage of myriad breaks and loopholes that other countries generally do not offer, United States corporations pay only slightly more on average than their counterparts in other industrial countries. And some American corporations use aggressive strategies to pay less — often far less — than their competitors abroad and at home. A Government Accountability Office study released in 2008 found that 55 percent of United States companies paid no federal income taxes during at least one year in a seven-year period it studied.

The paradox of the United States tax code — high rates with a bounty of subsidies, shelters and special breaks — has made American multinationals “world leaders in tax avoidance,” according to Edward D. Kleinbard, a professor at the University of Southern California who was head of the Congressional joint committee on taxes. This has profound implications for businesses, the economy and the federal budget.

As Congress wrestles with how to get the deficit under control, one big point of contention is whether spending cuts will need to be accompanied by an increase in taxes on some individuals or businesses. Facing a full-court press from business leaders who say the tax system is outdated and onerous, President Obama, Congress and business leaders have been warily negotiating various proposals, though mostly about whether to cut the top corporate rate and to tighten tax laws and not about whether to increase revenue.

The United States is virtually alone in trying to tax its multinational corporations on their foreign earnings, but it allows companies to avoid those taxes indefinitely by keeping profits overseas. That encourages companies to use accounting maneuvers to shift profits to low-tax countries and to invest profits offshore, says David S. Miller, a partner at Cadwalader, Wickersham Taft in New York.

Honeywell International, the New Jersey company that makes things as diverse as aerospace components and First Alert smoke detectors, reported in regulatory filings that in the last five years, it paid cash income taxes in the United States and abroad equal to 15 percent of its profits. On Friday, a Honeywell spokeswoman pointed out that the company had since made a large pension contribution, which effectively cut its profits and made its tax rate closer to 22 percent.

A major domestic competitor, United Technologies, reported an average of 24 percent over that time. A German rival, Siemens, reported 29 percent of its total profit.

In addition to being complex and uneven, the United States corporate tax code is inefficient and has become a diminishing source of revenue. Corporate taxes accounted for about 9 percent of all federal revenue in 2010. At $191 billion, they were equal to 1.3 percent of the nation’s gross domestic product. Most industrial countries collect more from companies, about 2.5 percent of output. Only a portion of that disparity can be explained by the many types of businesses in the United States that elect to be taxed at an individual rate.

“Whether the test is fairness or efficiency, the U.S. system gets really low marks,” said Michelle Hanlon, an M.I.T. professor who says the country needs to completely revamp the way it taxes corporations.

Not all American companies are willing or able to reduce their taxes drastically. Taxes vary more by industry here than abroad, according to a study released in February by Kevin S. Markle of Dartmouth and Douglas A. Shackelford of the University of North Carolina. At the high end, American retailers paid 31 percent in total income taxes, construction 30 percent and manufacturers 26 percent. Financial services companies paid an average of 20 percent, real estate 19 percent and mining 6 percent.

(Measuring taxes paid by companies is imprecise because tax filings remain private. In many cases, the estimates reported in a company’s financial filings with regulators overstate taxes paid in a year because they include deferred taxes. Nonetheless, academics, economists and elected officials use the estimates for comparative purposes.)

Because some companies are so effective at minimizing taxes, the average works out to far less than the official rate. United States companies pay about a quarter of their profits in federal income taxes, a few percentage points higher than the rate paid by companies in most other major industrial countries, according to a number of studies and tax experts.

Assorted proposals being discussed in Washington call for the rate to be lowered officially to about 25 percent and some tax breaks to be eliminated so that revenue remains unchanged.

But some prominent business leaders, including the chief executive of Procter Gamble, are pushing for the rate to be reduced without reining in tax shelters. That would make the United States virtually the only country to change corporate taxes in recent years in a way that ended up adding to its deficit.

“One fact we know is that in all of the countries that have lowered their corporate rates in recent years, they still collected the same amount in revenues or more,” said Reuven S. Avi-Yonah, an international tax lawyer who teaches at the University of Michigan. “This means that they were broadening the base of the profits that corporations were actually taxed on.”

Procter Gamble, whose products include Tide detergent and Crest toothpaste, paid an average of 24 percent of its profits in worldwide income taxes over the last three years, according to regulatory filings. That is nearly the same rate reported by two big European rivals, Unilever and Henkel.

Yet Robert A. McDonald, P. G.’s top executive, testified before a Congressional committee this year about the need to cut the United States tax rate without ending tax breaks and shelters. “We need a tax system that addresses today’s hypercompetitive global marketplace,” Mr. McDonald said, arguing that the playing field was tilted away from American businesses.

Many liberal groups counter that ending the breaks, subsidies and shelters in the corporate tax code could provide enough money to lower the rate several percentage points and still increase revenue.

Furthermore, some business owners complain that the American system unfairly rewards disingenuous bookkeeping rather than innovation. It forces companies to compete “based not on product quality and services, but on accounting gymnastics,” said Paul Egerman, former chairman and chief executive of eScription, a medical transcription service in Boston.

No one is certain how much creative accounting costs the federal government in lost revenue, but most estimates say it easily exceeds $50 billion a year. Targeted tax preferences, which Congress created to intentionally benefit specific companies or industries, cost an estimated $100 billion more a year.

Many tax analysts are skeptical that Congress, business leaders and the Obama administration will be able to reach a deal before the 2012 election.

“It’s human nature that people are going to fight harder to preserve a benefit they already have than to get some new benefit,” said Clint Stretch, a principal at Deloitte Tax and a former counsel to the Congressional Joint Committee on Taxation. “The only way tax reform makes everyone happy is if everyone wins. And with the federal budget where it is today, that’s not possible.”

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