May 3, 2013

Corporate Tax Loopholes

Conservatives and progressive agree that there is a need for a corporate tax overhaul. But they are divided when discussing the details of an overhaul. Progressives want to close the myriad of corporate tax loopholes in the tax code and use that revenue to reduce the deficit or to support important programs. Conservatives generally want to use the money gained to lower the corporate tax rate, an irresponsible and shortsighted use of the money.

Though the ideological split may be obvious, there is also a split between the corporations that a rewrite would affect. The New York Times details the difficulties:

Despite the widespread support, the campaign for an overhaul is exposing deep fault lines within the business world that suggest it may fall apart. The problem is how to pay for everything lawmakers and businesses want without adding to the deficit.

The main goal of the advocates on both sides of the aisle is to lower the official corporate top rate from 35 percent, the highest among industrialized nations. Republican leaders and a large number of giant companies also want to end what they regard as the noxious practice of taxing the profits that multinational corporations earn abroad. The United States is one of the few countries to do so.

The only way to tackle such goals without losing revenue, however, is to close specific corporate tax preferences intended to promote various activities considered worthwhile by their supporters. There is plenty of money to be found: a Government Accountability Office study in March estimated the 80 or so business tax exemptions added up to about $181 billion in 2011, roughly the same size as total corporate tax revenue.

Corporate tax loopholes cost the federal government billions of revenue every year. Just this week, Apple showed how loopholes can help massive corporations escape paying their fair share:

Apple Inc. (AAPL) avoided as much as $9.2 billion in taxes by financing part of a $55 billion stock buyback with debt rather than offshore cash that would have been billed by the U.S. government, Moody’s Investment Services estimates.

Based on current rates, Apple will pay interest of about $308 million a year on the $17 billion bond offering, said Gerald Granovsky, a senior vice president at Moody’s.

“From a pure corporate-finance theory perspective, this was a no-brainer,” Granovsky said.

If the funds had come from Apple’s offshore cash pile of about $100 billion, the Cupertino, California-based iPhone maker would have had to pay a 35 percent tax to repatriate the money, Granovsky said. That means Apple avoided about $9.2 billion in taxes. And since interest payments are tax-deductible, that’s another $100 million a year, Granovsky said.

Loopholes like these that allow corporations to blatantly avoid their taxes should not be legal. We need a corporate tax reform that forces corporations to contribute their fair share, and we need to use that revenue to support the programs we care about.

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