How Apple Avoids Paying Taxes
The US Senate wants to know why Apple and other big technology companies are paying so little into the US Treasury.
The US Senate wants to know why Apple and other big technology companies are paying so little into the US Treasury.
CSM‘s Jason Walsh (“Google, Apple draw transatlantic ire over ‘double Irish’ tax haven“):
It doesn’t have the sunshine, but it does have golf courses, banks, and most important of all, low corporate taxes. Is Ireland now a tax haven for US tech giants?
Schemes with colorful names such as “Dutch sandwich” and “double Irish” have returned to the headlines this week as Ireland’s corporate-friendly tax regime has become the crux of debates on both sides of the Atlantic. Apple is under fire in a US Senate subcommittee over the company’s purported effective corporate tax rate of a mere 2 percent in Ireland. And reports in the UK say that Google’s UK-based sales are finalized in the Republic of Ireland in order to avoid British taxes.
The revelations have taken on an international dimension, reigniting debate about lower tax regimes in Europe, such as Ireland and the Netherlands, being used to to avoid paying tax where the business is actually being done – including in the US.
Ireland has a reputation as business-friendly jurisdiction and makes much of its educated and English-speaking workforce, but the since the 2007 crisis has gained an unwelcome reputation as an offshore tax haven without the warm climate.
Ireland’s corporation tax rate of 12.5 percent is the second-lowest headline in Europe, with only Bulgaria and Cyprus’s 10 percent rate lower. Taken on an average basis, Ireland remains at the lower-end of so-called “implicit” tax rates, a measurement of the actual taxes paid.
The government denies Ireland is engaged in facilitating tax avoidance. Speaking in Brussels this morning, Ireland’s deputy prime minister, Eamon Gilmore, said Ireland’s had a “very strong, very transparent tax regime,” and that the problems arose elsewhere.
Nonetheless, the Irish tax regime has proven very attractive to big multinational corporations – so much so that it has given a nickname to one of the more common schemes.
A “double Irish” involves setting-up two Ireland-based companies – for example, Google Ireland and Google Ireland Holdings – one of which is, under Irish law, held to be headquartered elsewhere (usually a very low tax jurisdiction). This company will hold the intellectual property rights, which are then licensed to the second company. The second company can then offset royalty payments to the first as tax-deductible expenses.
Critics charge that Irish government policy encourages companies like Google to set up in Ireland primarily for purposes of tax avoidance.
It’s actually quite brilliant. Business Insider‘s Walter Hickey explains how “Apple Avoids Paying $17 Million In Taxes Every Day Through A Ballsy But Genius Tax Avoidance Scheme.”
The report published by the Permanent Subcommittee on Investigations detailing Apple’s strategies is a great read on its own.
The report gives an inside look on Apple’s absolutely genius tax avoidance strategies.
Apple uses a variety of offshore structures and arrangements to shift billions of dollars from the United States to Ireland.
The U.S. corporate tax rate is 35%, while Apple said it has negotiated a special corporate tax rate in Ireland of less than 2%*.
Apple has found the secret to not paying taxes. You just avoid taxes by not declaring a tax residency for the company that oversees the entirety of your international income.
First, let’s look at Apple’s main offshore holding company:
Apple Operations International (AOI) is the company’s primary offshore holding company. It was registered in Cork, Ireland in 1980, and its purpose is to serve as a cash consolidator for most of Apple’s offshore affiliates. It receives dividends from those affiliates and makes contributions as needed.
- Apple owns 100% of AOI either directly or through controlled foreign corporations.
- AOI owns several subsidiaries, including Apple Operations Europe, Apple Distribution International, and Apple Singapore.
- AOI has no physical presence and has not had any employees for 33 years. It has 2 directors and 1 officer, all Apple Inc. brass. One is Irish, two live in California.
- 32 of 33 AOI board meetings were held in Cupertino rather than Cork.
- Shockingly, AOI doesn’t pay taxes. Anywhere. The holding company had a net income of $30 billion from 2009 to 2012, but has not declared tax residency in any jurisdiction.
- AOI’s income made up 30% of Apple’s total world profits from 2009- 2011.
A key quote from the report explains why AOI exists:
Apple explained that, although AOI has been incorporated in Ireland since 1980, it has not declared a tax residency in Ireland or any other country and so has not paid any corporate income tax to any national government in the past 5 years. Apple has exploited a difference between Irish and U.S. tax residency rules. Ireland uses a management and control test to determine tax residency, while the United States determines tax residency based upon the entity’s place of formation. Apple explained that, although AOI is incorporated in Ireland, it is not tax resident in Ireland, because AOI is neither managed nor controlled in Ireland. Apple also maintained that, because AOI was not incorporated in the United States, AOI is not a U.S. tax resident under U.S. tax law either.
That’s a rather clever loophole exploit. But Apple has been doing this for 33 years. Why haven’t we closed the loophole?
Oh, it gets better:
Apple Sales International (ASI) is a second Irish affiliate. It is the repository for all of Apple’s offshore intellectual property rights.
- ASI buys Apple’s finished products from contracted manufacturers in China — think Foxconn — and resells them at a major markup to other Apple affiliates in Europe, the Middle East, Africa, India and the Pacific.
- Although ASI is an Irish incorporated entity and the purchaser of the goods, only a small percentage of Apple’s manufactured products ever entered Ireland.
- Upon arrival, the products were resold by ASI to the Apple distribution affiliate that took ownership of the goods.
- Before 2012, ASI had no employees despite $38 billion in income over three years.
- Apple’s cost sharing arrangement facilitated the shift of $74 billion in worldwide profits away from the United States from 2009 to 2012.
- ASI’s parent company is Apple Operations Europe Inc. Together they own the intellectual property rights to Apple goods sold offshore.
- Like AOI, ASI claims to be a tax resident of nowhere. It’s not obligated to pay taxes to any nation.
Again, I’m not mad at Apple for figuring this out. Multinational corporations have been gaming tax systems for as long as there have been multinational corporations. (Indeed, in a separate piece, Hickey identifies “17 Great American Companies That Keep Mountains Of Cash Overseas Just Like Apple Does.)” What’s needed is reform of our tax laws—both at the domestic and international levels—to fix this.
Apple CEO Tim Cook offers some simple advice to the US Senate: Slash America’s corporate tax rate.Apple has called for US corporate tax rates to be slashed after it admitted sheltering at least $30bn (£20bn) of international profits in Irish subsidiaries that pay no tax at all.
In a dramatic display of how threats from multinational corporations are driving down taxes across the world, chief executive Tim Cook warned Congress that he would refuse to repatriate a total of $100bn stashed offshore unless it acted to slash the 35% US rate.
Cook said the tax rate for repatriated money should be set “in single digits” to persuade companies to bring it back. Standard tax for US profits should be, he said, in the “mid 20s”.
Cook said he had no plan to bring back the $102bn built up by Apple at current tax rates, and recently opted to return money to shareholders by borrowing money instead. “I have no current plan to do so at the current tax rates.
“Unlike some technology companies, I am not proposing a zero rate,” he said. “My proposal is that we have a reasonable tax for bringing back money from overseas.
“A permanent change is materially better than a short term tax holiday.”
Cook said he “personally doesn’t understand the difference between a tax presence and a tax residence”.
While it makes sense to me to have a lower–and preferably internationally standardized–corporate tax rate, I’m not sure how it solves the problem. Why would Apple enthusiastically pay even a 5% tax rate if it can avoid paying taxes almost entirely through their offshore holding companies?
Frankly, it appears that the main issue is that business is just decades ahead of government in figuring out the new economy:
Edward Kleinbard, professor of law at USC Gould School of Law, said: “Apple is not an outlier in its efforts to produce ‘stateless income’ – income that is taxed neither in the United States nor in the countries where its foreign customers are located – but it is an outlier in the baldness of its strategies. Apple shifted tens of billions of dollars of income without even breaking into a sweat.
“The hearing will forcefully remind policymakers that international tax reform will require the implementation of really thoughtful anti-abuse rules, ideally developed in conjunction with other OECD member states. Every country is the worse off when they facilitate multinationals aggressively pursuing stateless income strategies, just as every country is worse off when they all engage in trade wars.”
Corporate tax expert Jennifer Blouin at University of Pennsylvania’s Wharton business school said the Apple revelations were “extraordinary but not surprising”. “We have seen versions of this with Microsoft and with Google,” she said. “I hope it gooses the notion that we need to fix the worldwide system.”
She said Apple was working within the law but that the law was written before huge profits could be made by companies that trade not in goods and manufacturing but in ideas. “I have worked in this area for years and it’s been largely an obscurity. But it’s at the forefront now, and it needs to get fixed.”
There’s no doubt about that. My decidedly non-expert sense is that the easiest way to fix this is to eliminate taxation on income entirely, shifting instead to taxation on consumption. It’s next to impossible to figure out where a technology company is making its money; figuring out where it’s spending it is pretty easy.
I suppose because once there was a concept of corporate stakeholders that went beyond stock shareholders. The communities that educated and supported the thousands of workers Apple now benefits from in Cupertino were at least partially raised and nurtured on a system paid for by U.S. taxpayers. Corporate America may owe nothing technically, but they do owe morally – and by starving the educational system and other US infrastructure they are destroying their future.
As opposed to a multi-national corporation not paying any taxes at all, which also happens to be a major player in getting Barack Obama elected twice? Naw that can’t be true.
Best proximate solution would be to eliminate the corporate tax entirely and raise the capital gains tax rate to 38%. A better structural solution would be to also eliminate the capital gains tax and re-classify those earnings as taxable under the standard progressive income tax. We’d do a better job of slowing income gains by the high-income sector that way and could then push up low-income wages and salaries at a more rapid rate.
Right. I find it surprising that in all the screaming and hollering about taxes in the last several years, there seldom seems to be serious discussion of a significant restructuring. I think Obama should confront the GOPs with a plan to cut personal and corporate income tax rates in half; and replace the lost revenue with a Value Added Tax. Seems to work in Europe. It is regressive, but they find ways to compensate.
And after logging back onto the company network this morning I had to refill the name and email blanks. Hardly arduous, but FYI. Firefox. And Firefox allows follow up editing. The blanks are still filled.
Because the company is following the rules written by these same senators?
Notice, too, how much of the news these days revolves around corporate income taxes. It’s not just Apple’s tax minimization scheme. The IRS contretemps is about corporate taxes. The outrage about the Citizens United Supreme Court decision is, ultimately, about corporate taxes.
The solution is to abolish the corporate income tax and increase the personal income tax to make up the lost revenue (as Ben Wolf suggests) or with a consumption tax.
I’d also completely re-write the laws on lobbying (e.g. prohibit professional lobbying, require that lobbying be done by actual constituents, etc.) but that’s another subject.
They are not alone. Many corporations avoid paying taxes as they can afford to pay for good accountants who will make sure they don’t pay their ‘fair share’! It’s corporate greed at its best and that is shameful. The ‘little’ people out there have to pay theirs but the greedy top one percent can never make enough money. It’s about time all tax loopholes were closed and they pay what they are supposed to pay. We hear about being patriotic, well they should do their patriotic duty and stop fleecing the government of much needed revenue while their coffers are bursting at the seams!! Corporations are people my friend! Wonder who said that? Oh yes, Mr Patriot himself Romney, the man who stashes his money in offshore accounts as to avoid paying taxes to the country he loved to sing about in the campaign! He is a fraud like a lot of corporate people are. Patriots my eye!!
This is why businesses hire corporate attorneys.
Tax policy in application is often very different from what lawmakers intend.
Thinking collecting 35% of profits will increase receipts but in reality pushes the business elsewhere and effectively lowers receipts.
If “corporations are people” then why aren’t they paying the individual tax rates?
This is your real IRS scandal.
But it’s important to recognize Apple is not actually doing anything wrong (moral discussions aside).
The system is f’ed.
Hate the game, not the player.
Unfortunately, it will never get fixed.
If Republicanists can’t even close a few measly loopholes…eg Corporate Jets…they are never going to want to fix this.
Protect the income of the wealthiest among us…the raison d’etre of the GOP.
James & gVOR08:
“taxation on consumption”. “value-added tax” … these are fine euphemisms. Let’s just call it what it really is. You are both propsing to eliminate (or greatly reduce) income taxes (a progressive tax) down to unheard of levels, and replace it with a huge sales tax (the most regressive type of tax there is). Every one of my european acquaintances has told me time and again how much VAT absolutely crushes consumers, especially the poor and middle classes.
This is what a lot of people assume is the Solomonic “splitting the baby” solution, but it would actually be far worse for far more people than the system we have now. Purely consumption-based taxes are pretty terribly regressive… People and companies in the realm of Apple and the Koch Bros simply don’t make money by _spending_ money any more. Yes, that traditional kind of work may have _gotten_ them into the area of millions/billions, but those get turned into billions & trillions not by _selling_ things, but by convincing other people that what you already have is worth more.
Lookit: Someone who has 3x my wealth and/or income will certainly spend more than I do, but probably not fully 3x. Someone who has 100x my wealth certainly doesn’t spend 100x what I do, and someone in the upper-upper reaches pretty much _can’t_ spend 10000x what I do – there’s just not that much stuff to buy or even invest in. A consumptive tax, pretty much by definition, costs a poor person more than it does a rich person. It’s not a good solution.
I liked this:
The Unspeakably Wonky Idea That Can Solve the Corporate Tax Debate
Note that this is an overseas earning problem.
There is actually no need to change domestic tax rules to solve it.
Yes. This a thousand times yes. Because it is not enough that the poor and working class make the rich all their money, but we must pay their taxes too.
Really James, you are class warrior extraordinaire.
Look, this is what it is. It is a fundraiser. Elections are coming up and Senators, and Congressmen, need cash in their coffers. How do they do that? They promote new programs and plans? No, they threaten a cash cow. Suddenly, not just Apple but all the big corporations are ‘generous’.
They certainly don’t want that money repatriated or the ‘loophole’ fixed. No, they want lots of cash overseas that they can shout about on occasion until “accommodations” are made.
After years of Republicanists complaining about massive debilitating tax rates…when in fact this is a low tax nation…I’d love for someone to figure out what Apples effective tax rate is.
Maybe then we could have a real discussion about tax reform…and not the pure bullshit that comes from the GOP and the Right Wing Entertainment Complex.
Which is exactly why Rand Paul spent yesterday french-kissing Apple’s arse.
Sure Tim, I can go along with that. As soon as we triple your personal taxes and make it illegal to remove more than $10,000 dollars from the US, and if you try and get caught than we just seize all your money, not just that which you tried to sneak out.
Really, I am sick to death of these over compensated leeches with the emotional intelligence of a 2 year old rigging the game in their favor. And that is what is happening here. They rigged the game, but they’re not done yet, they won’t be done until none of them ever pays a dime of taxes.
@john personna: That is indeed truly wonky, particularly the name: formulary apportionment.
A little while after I read it I started wondering if it was really wonky, or just a capitulation. We know that corporations can shield offshore activities with murky intermediaries. We know they don’t pay taxes on international exchanges for this reason.
And so the wonky proposal is just to let it go, and to concentrate on taxing money made in the US. The technique, formulary apportionment, is meant to catch all activity truly in the country, but I suppose another rule could be used.
The main advantage is that if you do capitulate on Apple’s “Irish” earnings, you free them to bring it all back to California, and US shareholders. I probably would not have accepted that trade a few years ago, but I accept the framing in that Time article. It’s worth it.
(I think that arguments about US corporate tax rates, or the practicality of a US consumption tax are wholly unconnected from the Apple story, and the story of overseas intermediaries. Note also that when a US company lifts oil overseas, a shady intermediary makes money as the oil reaches the world price. This is exactly analogous to the iPhone story. Well, I think the oil folk invented it.)
It’s what’s known as “the cost of money”. If I need 20 billion dollars for my company, which is cheaper: a loan at 12% (it’s usually a lot less for a company such as apple) or “rehabilitating” at 35%? The loan. At 5%, however, rehabilitating becomes cost competitive.
In the case of Apple (and Exxon) they are cash rich both places, and have no real cost of money. The can leave money in Ireland, because they don’t need it. Indeed, even sitting there it improves their books and the attractiveness of their stock.
You all do know, don’t you, that by engaging in perfectly legal tax engineering, multi-national corporations and international wealthy people are driving us toward international tax laws, as well as, enforcement structures that will look like a one world government.
If you downvoted this, you probably do not understand the story. Felix Salmon does a very good summary:
As I say, nothing in US corporate tax rate or US consumption tax is going to capture earnings “made” by that Irish title swap.
Not only that. In Latin America and in many countries of Europe there is a huge informal and unofficial sector of the economy, just to avoid paying Consumption taxes and avoid dealing with the bureaucracy that´s related to it.
That´s not so easy, because countries like Ireland, Cayman Isles and Singapore are directly benefited by the status quo. Take out the tax advantage, the Celtic Tiger is a lousy cat that threants no one.
Are you suggesting that if we could get Ireland to raise their corporate tax, all would be fine?
Sure, but I think the stronger argument is that “there will always be an Ireland” offering to “flag” corporate earnings. Formulary appointment attempts to capture as much income under domestic tax as possible, even so.
(I’m sure that such “Irish” intermediaries capture much of the profit made on products mid-Pacific, as they travel from China to California as well. A product leaves the factory for $2, arrives in California with a wholesale price of $20, but the $18 profit has been eaten, made “offshore.”)
Oh, and James? No matter how much water you carry for the rich by advocating tax cuts for them. they will never let you in the club. To them, you will always be just “the help.”
@Tony W: Most multinational corporations are truly multinational. They simply don’t owe, as institutions, loyalty to any country and only some loyalty to the communities in which they operate. I presume Apple, Amazon, and Google executives donate quite a bit to charity as individuals.
@Ben Wolf: I do think it makes sense to tax individuals rather than businesses as much as possible. There has to be some way to capture hidden income, though.
@legion: I’m not sure why we’d want to tax wealth; it’s lifestyle that we want to tax. I’m in favor of progressivity, for a whole variety of reasons. But there are ways to achieve that even in a consumption-based system–exempting some classes of expenditure (food, medicine), luxury taxes, etc. But the guy buying the Ferrari would still pay a lot more taxes than the guy buying a used pickup truck.
@Scott: This would be inevitable even if corporations didn’t go out of their way to avoid taxes. Multinational corporations are often legitimately truly multinational. It makes sense to internationalize business rules for dealing with that fact. We’ve done if for decades in a whole variety of areas without any meaningful loss of national sovereignty.
I do agree both that the Corporate Tax and the Capital Gains deductions should be scrapped. But I find the idea of corporations creating ghost companies to avoid paying taxes appalling. Here in Brazil, that´s relatively common, and I always thought that this showed a country where people had no regard for laws or for the common good of society.
I was wrong.
@john personna: Wouldn’t a consumption tax make the paper location of profits irrelevant? That is, you’d tax the money when it’s spent, nor when it’s earned–whenever that might be.
@OzarkHillbilly: I’m not arguing that the rich shouldn’t pay taxes, or even more taxes than the poor. I’ve frequently argued the opposite. I’m arguing instead that it’s very hard to come up with a method of taxing corporate earnings in a multi-national environment and that we’d probably be better off taxing the consumption of their executives and owners instead.
No, I´m suggesting that countires like Ireland have no incentives in creating a healthier and saner international tax regime.
We agree that tax will be paid, currently split between personal and corporate.
One advantage of apportioning some to corporate is that it smooths tax revenues and makes them predictable over time. A personal capital gains tax will be lumpy and unpredictable, driven by market fluctuations.
I think you face a dividing down. First you divide the income to US shareholders, and then you divide again to “spenders.”
My biggest problem with a consumption tax though is how high it would actually have to be, and how great a restraint that would be on consumption. Forbes:
The national sales tax would fall between 23% and 30%
Even if that were net-net dollar equal, it would wreck the economy, as everyone panicked and reined in their spending.
Did you read the article?
@Andre Kenji: “Take out the tax advantage, the Celtic Tiger is a lousy cat that threants no one. ”
The Celtic Tiger? Have you failed to pick up a newspaper for the last five years? It turns out the “Tiger” was nothing more than an illusion inflated by the same kind of financial fraud that tanked our economy — and has tanked theirs even worse.
And frankly, the scheme by which Apple gets to pretend to park its money in Ireland — according to today’s NY Times, most of it is in American banks — is most likely part of that fraud. I’m sure a bunch of banksters and several politicians made out quite nicely from the deal, as the Irish people got screwed again.
@James Joyner: “Most multinational corporations are truly multinational. They simply don’t owe, as institutions, loyalty to any country and only some loyalty to the communities in which they operate. I presume Apple, Amazon, and Google executives donate quite a bit to charity as individuals.”
I bet they like kittens, too! So we should continue to allow them to rig tax policy to greatly benefit themselves at the expense of the country. Because really, why should they have any loyalty? And they’re nice!!!
Note also that no one who proposes a consumption tax is brave enough to model what it would have to be in the second iteration, after everyone started spending less.
Negative, Ghost Rider. I agree that wealth and lifestyle should be taxed _differently_, but sit back and think about exactly what it would mean if we didn’t tax wealth at all:
The more money you have, the less incentive you have to _do anything_ with it.
If we didn’t tax “wealth”, then that effectively encourages – all but but forces, in fact – the very wealthy to simply sit on their money and never spend it back into the economy. It removes that money from the economic system altogether. And in doing so, it removes the possibility that anyone will ever be _paid_ that money for doing things – it eliminates the ability of anyone to ever change their social status by more than a few inches, either up or down. It basically re-creates the nobility – the wealthy and powerful are such because of what they inherit. Some commoners may be able to rise to the ranks of the middle class, or even become millionaires, but only by gaining the attention & patronage of the highest ranks, not by anything an American Capitalist would recognize as entrepreneurialism.
Look at it another way – “consumption” to you or I is not the same as it is to a billionaire. When you spend $50, you spend it on a nice dinner out or new clothes, or some such. You don’t expect to _get_ $75 or $100 _back_. But when a guy like Bill Gates or a company like Apple spends $100 mil, they _only_ do it because they expect to get $200 mil or $400 mil in return. That’s a whole different world, and it ought to be treated differently.
@James Joyner: I agree that the US hasn’t lost much of its national sovereignty primarily because it is a big dog. However, I get the impression that individual European countries do feel a loss of national sovereighty by participating in the economic integration of the Eurozone. Seems like they are always railing against the bureaucratsin Brussels. I think this is the natural evolution of political structures in any increasingly integrated world. The analogy is the lessening of state sovereignty here in the US as we deal and responde to national issues of the economy, environment, defense, etc.
The Irish government took a 2% skim, to launder profits made in the South China Sea.
That’s not bad work if you can get it, and it certainly benefits the Irish worker … to the disadvantage of workers elsewhere.
Yes, but without this tax advantage there would never be a Celtic Tiger, and the Irish economy would be even more fragile.
It seems to me corporate taxes are a hidden form of a consumption tax to begin with since they are paid by the profit of those consuming their product. A direct consumption tax would be far more transparent and harder to manipulate. Taxing prorated international profits and/or intellectual property seems to be a game we can never win.
Perhaps a more accurate headline would have been “How Apple Avoids Paying More Taxes Than It Is Legally Required To.” Did you ever notice how accuracy sometimes takes the edge off creative writing ???
Or maybe all money should go directly to the government and let it “redistriibute” it.
Pragmatically, a distributed tax system produces fewer big distortions and a more efficient economy. Conversel,y a highly concentrated tax system focuses attention and therefore avoidance.
Probably many consumption tax boosters have a “secret plan” to spend less and avoid tax, completely unaware that everyone else would adopt the same strategy.
Most people are criticizing the tax system, rather than Apple.
It would also destroy the lower classes (who spend very close to 100% of their income on consumption, and rarely accumulate any sort of savings or wealth), and barely touch the upper classes (who spend an extremely small percentage of their wealth on consumption)
I can’t fathom a way you could structure it that would 1.) bring in enough money to replace the lost income taxes, while 2.) making it still progressive enough to not wreck the lower classes. As I just said, the lower classes basically consume 100% of their income, all the time. And as legion said, the wealthy would just stop consuming altogether, and just hoard their cash, which would basically wreck our economy, as a large portion of the liquidity would be sitting around doing nothing.
Yes, Democrats are communists. I guess there is no sense trying to deny it any longer. You are just too clever for us.
@john personna: Would a consumption tax be more or less distributed than a corporate tax?
I think a consumption tax would certainly be more visible and thus more likely to impact buying habits, but I am not convinced that would be a bad thing. Also, I would assume it would vary somewhat by product or service.
@john personna: “That’s not bad work if you can get it, and it certainly benefits the Irish worker … to the disadvantage of workers elsewhere. ”
It might have benefitted the Irish worker — except that the Irish government decided that the only proper use of state funds was to pay off the big banks that conspired to wreck the economy.
Ask an Irish citizen what kinds of benefits he or she gets from tax dollars. Right now it’s pretty close to nil — because the banks have to be fed first.
You might also ask the same question of someone in Iceland, where the government decided that the lives of its citizens should take precedence over shovelling money at rich bankers…
@Andre Kenji: “Yes, but without this tax advantage there would never be a Celtic Tiger, and the Irish economy would be even more fragile. ”
In the same way that an investor with Bernie Madoff never would have felt rich if there hadn’t been a Ponzi scheme running.
1. Aren’t they already paying in the form of the purchases they make?
2. Couldn’t allowances be made for the necessities of life?
3. I am not convinced that in the totally of our tax system this would have to be more regressive than our current system.
Bank guarantees and the housing bubble where the Ponzi scheme in Ireland, not the tax haven status.
Right now corporate tax is just a slice, with tax also paid on dividends, bond interest, and capital gains. James proposed a consumption tax which would replace all those and more, concentrating the bite.
It’s funny that philosophical objections to the consumption tax get more upvotes than pragmatic ones. That is really odd to me because pragmatism is the first hurdle to clear. If a plan fails that, there is no need to go to the (harder) moral argument.
A concentrated consumption tax would crash the economy, end of story.
@Ben: I honestly don’t understand the notion that, if we had higher consumption taxes, the rich wouldn’t buy things. Money is pretty useless unless you convert it to goods and services. Sure, you can save it for a rainy day. But you still either spend it or pass it on when you die. In which case, someone else will spend it.
Granted, I’ve never been rich. But even billionaires with a reputation for frugality, like Warren Buffet, spend a crapload more than I do.
(Having just completed Ariely’s Irrational Behavior, and having spent a couple weeks on consumer behavior, I am really confident that “the pain of paying” a 25%+ tax would be an absolute hammer. Consider car purchases and the sudden disincentive on luxury models.)
@john personna: I haven’t read the books and maybe there’s something to that psychologically. But people would also have an instant infusion of cash, in the form of taxes not withheld from their paychecks.
The added “pain of paying” affects everyone.
Look at it this way, you’ve given me an easy way to reduce my tax bill.
When I don’t splurge on a purchase, I save twice.
@john personna: I haven’t studied the issue in any depth. Obviously, at some point, a consumption tax encourages black markets and other avoidance schemes. But states and localities rely on them for most of their revenue. Is there evidence of substantially lowered compliance or sales with higher rates?
“But even billionaires with a reputation for frugality, like Warren Buffet, spend a crapload more than I do.”
Likely. But do they spend more, as a percentage of their income? If not, then the tax is not progressive, which you say above that you are in favor of.
@James Joyner:Do you believe the personal income tax should be replaced by a consumption tax?
Apple really can’t be blamed by Congress for using loopholes that Congress put there
The biggest flaw with a consumption tax-based system is that it is sharply regressive. Its advocates have never been able to resolve that flaw, and I don’t think there’s any good solution to it. Also, too, transition costs:
@Moosebreath: I’m not sure why a targeted consumption tax can’t be progressive. For that matter, I’m not sure why taxing consumption, rather than income, can’t be progressive.
@Scot: I don’t know how feasible it is in practice to do that. But, yes, my inclination is to tax consumption rather than earnings. It would nearly abolish the incredibly wasteful accounting industry and the accompanying gimmickry and gaming of the system. it would be far more transparent.
I’d introduce progressivity in two ways. First, I’d exempt certain classes of items–basic foodstuffs, medicine, and the like. There could even be a credit up to a certain level for transportation and housing. Second, rather than using the tax code to redistribute income by stealth, I’d simply give money or vouchers to the working poor.
Let me be clear. In my previous posts I was referring to corporate income taxes, not personal income taxes.
@James Joyner: @James Joyner:
Not proportionally to their wealth (or income, for that matter). Most rich people don’t buy fleets of ferraris (Jay Leno and the Sultan of Brunei excluded). I’d argue they spend much more on real estate.
The percentage being withheld from most poor and middle class paychecks for income tax is lower than most of the estimates I’ve seen for what the rate will have to be on a sales tax for it to be revenue neutral (in the high 20s).
That’s because nobody’s saying that. The problem with a consumption tax is that the rich spend a markedly lower proportion on anything that could be considered (or would be taxed as) “consumption”. This shifts the tax burden further and further onto the lower classes, who already don’t make enough to have any generative savings or investments.
This is a common, but mistaken assumption. Even Say himself refuted “Say’s Law” later in life. Money is useful for acquiring goods & services, yes. And that’s mainly what you and I use it for. You probably (I assume here) make enough to put some modest amount away for retirement, your children’s future, etc. And those kinds of investments _do_ create things within the economy. But once you move farther and farther beyond the realm of “living off most of your income and investing a small amount” and more into the “living on a small amount of your wealth and investing the vast majority of it” department, the dynamic changes dramatically. Much of that kind of investment money isn’t spent generating new things, it’s spent buying things that already exist and then selling them later on for more. There’s very little economic impact there aside from all the generative things that money _isn’t_ doing. And it would _never_ be taxed as “consumption”.
@James Joyner: In that case I now see why everyone is in such a tiz. Ideally it might work but I have to agree it would be a major shock to the system and would be a bear to implement. Are there any other countries who rely totally on consumption for revenue? Personally I’d like to replace the corporate income tax and fix and simplify the personal income tax.
The poor and lower-middle classes currently don’t pay very much in federal income taxes at all. So eliminating it will not really give them much in the way of savings. So any consumption tax you introduce will be a net lose for them
“I’m not sure why a targeted consumption tax can’t be progressive. For that matter, I’m not sure why taxing consumption, rather than income, can’t be progressive.”
Because if the poor spend nearly all of their income for consumption, and the rich spend far less on consumption (and spend far more on investments), then taxing conumption and not investment hits the poor far harder, as a percentage of their income, than the rich. It is possible to exempt enough necessities to make it progressive, but then you get a very high rate of taxes (over 30%) on non-exempt items.
I am not arguing black markets, I am arguing the constraint on spending itself.
I’ll admit that there would be a way to minimize this effect, given consumer behavior. That would be to do a VAT but to explicitly HIDE it at the consumer level. That is, a burger would cost $8, but it would be vague what fraction was burger and what fraction was tax. A Porsche might cost $100,000 but it would be unclear what fraction would be car and what fraction would be tax. In all likelihood though, this would encourage producers, especially in the short term, to downsize offerings to make the final price more palatable.
Remember, all of us shoppers have an incorporated price history, and a resistance to go above $X for a fast food burger. Even if we have more in our paycheck that will affect us at a visceral level.
This is all Kahneman’s “system A” stuff.
My mistake – Ben was saying that. And he’s only partially incorrect. The wealthy have an ability to “vote with their feet” that most Americans don’t… If they don’t want to pay a consumption tax, they won’t consume in the US – just the same way they move their savings & investments to overseas tax havens to avoid paying the taxes the rest of us already do.
The point remains the same: none of these proposals will do anything other than make the tax system more regressive. The poor simply don’t have much more money to take – you’re going to _have_ to find a way to shift the tax burden _back_ onto the rich. Period.
@James Joyner: It’s not that the rich wouldn’t buy things – but unless we are talking about a national sales tax-equivalent on people’s homes, mutual fund shares and individual stocks it will not affect the rich in the same way it affects the poor.
This is a feature, not a bug.
Personally, if a burger costs $8 and the gov’t is getting $2 (or a Porsche costs…), I’d like to know.
The country where I live, Brazil, concentrates a big chunk of the taxes on consumption. So, I can say that:
1-) You can tax goods with different rates to make a consumption tax less regressive(Yes, even so the poor will pay a higher proportion of their income on taxes – Brazil is pretty regressive on that). You can tax luxury goods at a high rate, tax food and things like at a lower rate and so on. Sure, there is the problem that people that buy luxury goods in Miami or overseas. It´s also creates a hassle for people that make taxes for businesses.
Taxes at business level are probably one of the worst things of the famous red tape structure of Brazil(Ironically enough, paying INCOME taxes is pretty easy, specially when compared to the United States).
2-) The big problem is that high consumption taxes creates incentives for people to sell and buy things in the informal economy. Several countries in Latin America and Southern Europe have a huge part of their GDP in the so called “invisible economy”.
Here in Brazil there are all kinds of campaign to make people request their tax invoices when buying goods(the tax invoices is used to make the merchant pay the consumption tax of any good that is sold).
3-) Brazil also has a high level of consumption and a low level of personal savings. So, people are not going to stop buying things to stop paying taxes, that´s is not true. In fact, if you are a Keynesian consumption taxes are an attractive thing because you can enact tax holidays to enact INSTANT economic stimulus – that was done recently in Brazil, with varying levels of success.
@john personna: You must have missed this (emphasis mine):
If you borrow money to pay dividends, that means that it’s too expensive to “repatriate” the money.
@Ben Wolf: Yeah–I’d be happy to fully end corp inc tax in exchange for the classification of dividend and cap gains as ordinary income. I’d even yank rates down a fair bit.
Apple tells you that they “must” borrow $17 billion to pay dividends, but they have twice that in US cash. It only makes sense in a fuzzy, hand-wavey, way. They are saying “imagine that $121 billion as income we’ll never pay tax on, and now here take this borrowed $17 billion in its place.”
Also it looks like Apple might have picked a bottom in corporate bond rates, around 2.45%, which they might want to lock in, even having a lot of cash:
If you disbelieve that people will buy less of a thing when it costs more … you have abandoned the foundation of economics, supply and demand curves.
The fly in the ointment here James is proportional to their income, they don’t consume all that much.
As to corporate earnings… You got earnings? We tax them. Don’t want to pay those taxes? Sell yer sh!t somewhere else.
We got the money. They want some of it. Guess what? We want some of it back. Don’t like that? Try selling it in Zimbabwe.
How naive you are. (been waiting a long time to say that)
@OzarkHillbilly: You don’t think Warren Buffett spends more than I do?
What you all seem to miss is that tax evasion is illegal. Tax avoidance is smart management. Apple broke no laws and the senate tried to shame them for not paying more taxes voluntarily. Seems everyone thinks that it’s the government’s money and, damn you Apple, how dare you not let them have what is theirs. Complying with tax law does not mean Apple is doing something wrong. This is just a bigger version of Phil Mickelson wanting to leave Kalifornia to reduce his tax burden–perfectly legal.
I´m not saying that people won´t buy less of thing if it costs more. I´m pointing out that the idea that concentrating taxes on consumption is going to significantly reduce consumption is simplistic and not necessarily true. People may pay more when they consume, but the smaller levels of income taxes means that people have more disposable income. Simple as it is.
When I see people complaining about sales taxes I simply point out to property and income taxes in other countries.
I think it’s a given that Buffett spends more than you do. I think it’s also a given that he spends a smaller percentage of his income than you do. Therefore, a pure consumption tax would be regressive, in that the richer you are, the lower a percentage of your income you pay.
Warren Bufftett spends less of a percentage of his income than you do. A consumption based tax, therefore, will put less of a bite on him than it does on you. It’s a recipe to make the rich pay less of their income and the poor pay more of their income.
You don’t need “significant” reduction to wreck an economy.
You only need broad and across the board.
@James Joyner: “You don’t think Warren Buffett spends more than I do? ”
Wow. That’s an argument with all the intellectual sophistication of “I know global warming is a hoax because it’s snowing outside.”
Truly beneath you.
Given the general distaste I’ve read in these comments for consumption-based taxes, I’m interested to read everyone’s thinking on the widespread use of the Value-Added Tax in the social democracies of Europe and Scandinavia. There, it is used along with income and payroll taxes.
As a component of a tax system, it seems fine. In the purest form it taxes where “value is added” in the chain of production. A farmer pays tax on his strawberries, the jam maker pays on the difference between wholesale strawberries and wholesale preserves, the grocer pays the difference between wholesale and retail.
As a replacement for income tax, no. But then, in a “real” VAT system we’d be taxed on the “value added” of our labor as well.
Considering the country where I live I have my doubts if consumption taxes can curb consumption at any rate at all.
I think that´s the best balance. But substituting income taxes with a VAT would create a large informal market in the US economy.
Seconded. A VAT, even if it is graduated or excludes significant necessities to avoid being regressive by itself, is something I can live with only if it were a component in an overall progressive tax system.
Is that a counter-factual? Countries that had “a higher percentage of consumption tax” are not a very exact model for “countries with income tax switching in total to consumption tax, in one fell swoop.”
@James Joyner: You have a short memory. Don’t you remember the luxury tax imposed in 1990? It almost single-handedly destroyed the luxury yacht business in the US, costing that industry an estimated 7600 jobs and resulted in LESS revenue to the gov’t.