Members of Congress called Apple executives to testify on Capitol Hill yesterday. Why? Because the company makes money overseas, and some Senators want to get their hands on the cash.
A Senate subcommittee accused the company of “shifting” profits from the U.S. to other countries and avoiding paying taxes.
But Apple pays its U.S. taxes. Heritage tax expert Curtis Dubay said the earnings aren’t “shifted,” because “it’s not income that’s earned here in the U.S.”
“I can’t go down to the Apple store here in Washington, buy an iPad, and have Apple then ‘shift’ that income abroad,” Dubay said.
The Senators were up in arms about Apple keeping income in Ireland. The issue was the company’s foreign income earned from all those iPhones and iPods that people around the world are buying.
The reason the Senate feigned indignation over an issue that had nothing to do with the U.S. is that some Members want Apple to pay more U.S. tax on all that foreign cash. They want Apple to bring all of that profit back into the U.S. and pay the U.S. corporate tax rate—the world’s highest—on it. But as long as we keep the U.S. rate the highest in the world, Apple and other multinational businesses are going to keep their foreign income abroad.
Senator Rand Paul (R-KY) said it was offensive that Senator Carl Levin (D-MI) called in the leaders of a company that is trying to do right by its shareholders. He said:
Instead of Apple executives, we should have brought in here today a giant mirror, okay? So we could look at the reflection of Congress, because this problem is solely and completely created by the awful tax code. If you want to assign blame, the committee needs to look in this mirror and see who created the mess.
Apple—and any other company that does business outside the U.S.—isn’t doing anything illegal to minimize its tax liability. In fact, America’s high corporate tax rate drives companies to do more business overseas.
Not only that, but “we’re the only country that effectively taxes our businesses on income they earn around the world,” Heritage’s Dubay said. “They’re keeping that income abroad because we add that extra layer of tax.”
What to do? Other developed countries have been cutting their corporate tax rates for 20 years. That’s what Congress needs to be looking into, as well as moving away from our “worldwide system” of taxing foreign income—not putting on business-bashing hearings for show. Fortunately, House Ways and Means Committee Chairman Dave Camp (R-MI) has been doing that necessary and difficult work.
As Senator Paul wrote in an op-ed for Rare:
If you want more money to be earned in the United States—make profit welcome here. Until that time arrives, count me out of any government dog and pony shows that badger business.
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There aren’t many American-owned companies more iconic than Anheuser-Busch, the famous producer of Budweiser beer based in St. Louis, Missouri. That was true up until 2008, when the Brazilian-Belgian company InBev executed a hostile takeover of the historic brewer, leading to layoffs of more than 1,800 workers. Unfortunately, conditions in the United States are growing ripe for even more takeovers like these to occur, especially now that the nation’s corporate tax rate is officially the highest in the world.
As of yesterday, the U.S. corporate tax rate of 39.2 percent claimed the world’s top spot, edging out Japan which recently lowered its rate from 39.5 percent to 36.8 percent. (The U.S. rate includes the 35 percent federal rate plus the average rate the states add on.) That’s well above the 25 percent average of other developed nations. Heritage’s Curtis Dubay explains the impact on companies based in the United States:
This gaping disparity means every other country that we compete with for new investment is better situated to land that new investment and the jobs that come with it, because the after-tax return from that investment promises to be higher in those lower-taxed nations.
Our high rate also makes our businesses prime targets for takeovers by businesses headquartered in foreign countries, because their worldwide profits are no longer subject to the highest-in-the-world U.S. corporate tax rate. Until Congress cuts the rate, more and more iconic U.S. businesses such as Anheuser-Busch will be bought by their foreign competitors.
Unfortunately, in the face of this tax rate, the Obama Administration is proposing measures that will make matters even worse for U.S. companies. Last week, Vice President Joe Biden proposed a “global minimum tax” in a wrongheaded effort to encourage companies to invest in the United States instead of overseas. Just like the rest of President Obama’s corporate tax policy, it will just make matters worse — punishing firms that seek new opportunities in growing markets by taxing their earnings in those developing markets even more heavily than they’re already taxed. The net result will be to make it even more likely that the companies’ assets would go up for sale to overseas firms in order to escape the Obama tax penalty. Unfortunately, America’s workers pay the price for this destructive tax policy. Heritage’s J.D. Foster explains why:
Economists and policymakers increasingly understand that while the tax is paid almost exclusively out of profits that would otherwise go to the shareholders, the true economic burden falls primarily on workers.
The reason is simply that the higher the effective corporate tax burden, the higher the hurdle rate on corporate investment. (The hurdle rate is the minimum rate a business must earn on investment to make the investment.) The higher the hurdle rate, the less investment takes place. The less investment takes place, the slower labor productivity grows, and the slower labor productivity grows, the slower wages grow.
Congress should act now to help make America more competitive on the global stage, and it can do so by reducing the corporate tax rate to match or preferably fall below the international average. The U.S. economy is struggling to recover from the global recession, and by lifting the burden of record-high corporate tax rates, Congress can give American companies incentive to grow and expand here at home. If not, the American people can expect to see more companies like Anheuser-Busch bought up by international competitors — and the jobs will go right along with them.
“Proposals Will Largely Amount To Political Messaging”
After More Than Two Years Of Rhetoric, President Obama Hands Off His Corporate Tax Framework As A ‘Lower Priority‘
“While Obama has been promoting various aspects of his economic agenda in personal appearances and speeches, the decision to leave the corporate tax plan to the Treasury Department to unveil signaled its lower priority.” (“AP Source: Obama Seeks 28 Percent Corp. Tax Rate,” AP, 2/22/12)
· “…Mr. Geithner… is unlikely to see the project through since he plans to leave office after this year.” (“Obama Offers To Cut Corporate Tax Rate To 28%,” The New York Times, 2/22/12)
“Obama, however, is not scheduled to discuss his tax framework on Wednesday.” (“White House To Pitch Business Tax ‘Framework’ To Compete With Romney’s Reform Announcement,” The Daily Caller, 2/22/12)
“For now, [analysts] said, tax proposals will largely amount to political messaging.” (“Obama To Propose Corporate Tax Rate Of 28 Percent,” Reuters, 2/22/12)
More Than Two Years Of Empty Rhetoric
PRESIDENT OBAMA: “The — and what I’ve said is, if you can lower corporate tax rates by eliminating loopholes, so that it’s tax neutral, I’m happy to work with you.” (President Obama, CNBC Town Hall, 9/20/10)
PRESIDENT OBAMA: “I would like to see a lower corporate tax rate. But the way to do that is to eliminate all the loopholes, because right now on paper we’ve got a high corporate tax rate.” (President Obama, Remarks, Des Moines, IA, 9/29/10)
PRESIDENT OBAMA: “So tonight, I’m asking Democrats and Republicans to simplify the system. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years –- without adding to our deficit. It can be done.” (President Obama, State Of The Union, 1/25/11)
PRESIDENT OBAMA: “Now, another barrier government can remove — and I hear a lot about this from many of you — is a burdensome corporate tax code… We need something smarter, something simpler, something fairer.” (President Obama, Remarks, U.S. Chamber Of Commerce, 2/7/11)
PRESIDENT OBAMA: “Now, with respect to corporate tax reform, the whole concept of corporate tax reform is to simplify, eliminate loopholes… let’s get rid of those as well.” (President Obama, Press Conference, 2/15/11)
PRESIDENT OBAMA: “And as I called for in the State of the Union, we should reform our corporate tax code…” (President Obama, Remarks On Fiscal Policy, George Washington University, Washington, D.C., 4/13/11)
PRESIDENT OBAMA: “Our tax code is more than 10,000 pages long… That has to change… we can lower the corporate rate if we get rid of all these special deals.” (President Obama, Remarks, The White House, 9/19/11)
PRESIDENT OBAMA: “By eliminating pages of loopholes and deductions, we can lower one of the highest corporate tax rates in the world.” (President Obama, Remarks To A Joint Session Of Congress, 9/8/11)
Third Way, The Case for Corporate Tax Reform:
High rates, low revenues, cash kept overseas, and thousands of pages of complexities—nothing about our corporate tax system seems to be working. Our corporate tax code is a relic, last substantially reformed in 1986—before the Internet, before the Euro, and before capitalist China. Many of America’s competitor nations have revamped their codes, but not the United States. Reform of our corporate code has been restrained in part by concerns that lowering rates would benefit only multinational corporations while doing little to create decent jobs or raise revenues. However, it is increasingly clear that modernizing our corporate code is a competitive necessity. Done right, corporate tax reform can help businesses create jobs and wealth here, and generate revenues to address the deficit and fund national priorities. In this paper, we lay out the seven reasons why America should embrace corporate tax reform that lowers rates, changes our taxation of international profits, and reduces complexity in the tax code.
For the first time this legislative session, the Michigan Senate Finance Committee heard testimony Wednesday about the FairTax proposal to reform Michigan’s tax code. The day’s testimony was largely comprised of discussions about REPLACING the tax code with the proposed “Michigan FairTax”. The proposal would eliminate the Personal Income Tax, all state-imposed Business Entity Taxes and rely on an expanded Sales Tax.
Everyone Wants the State Tax Code Reformed
Ron Babin, Vice President for the Michigan FairTaxAssociation, advised Senators that while Governor Snyder’s plan for improving Michigan’s economy is a good one, it would be far superior and longer lasting by substituting the so-called Michigan FairTax plan in place of current proposals to keep the Personal Income Tax and a tax on Michigan corporation profits. Michigan FairTax proposal language.
Babin, a small business owner from Sterling Heights, urged the Senate to consider that, according to the Tax Foundation in Washington, DC, the Snyder proposed plan would move Michigan’s Business Tax climate from being the 48th worst in the nation to #22. By completely eliminating and replacing state business entity taxes completely, the FairTax would vault Michigan into the best position for attracting businesses to locate and expand here.
“Senator Warren mentioned wanting revenue certainty, the MI Chamber supports a transition of knowing what the replacement is first, the MML and my local Mayor don’t want to lose more revenue, and Chairman Brandenburg wants no replacement of the business tax!”, Babin said.
“Senators, the MI FairTax gives all of that and more. It puts a limit on state government growth controlled by a vote of the people. It constitutionsalesally forces down the sales tax rate in excessive growth years after the Budget Stabilization Fund is filled.”
Sales Tax is More Stable Than Income Tax
Stephen Vear, a practicing CPA and former state representative from Hillsdale, told the Finance Committee that under the MI FairTax ‘Taxpayers will provide our state government the revenue it needed to operate last fiscal year. But, rather than taxing ourselves at that point when we EARN our money, we will tax ourselves at that point when we SPEND our money.”
Vear also helped explain how changing from the current business and income tax system to one focused on the state sales tax will make Michigan-made products more price-competitive.
“Additionally, history shows that revenue collections of a SALES tax are much more stabile and predictable than are collections if Income Taxes.”
Babin also reminded senators that a sales tax is more stable and more predictable than an income tax is. He added, ”The Michigan FairTax is not in opposition to whatever the legislature is going to agree upon with the Governor. That’s a short term fix that will help.
“But we need a long term fix, a game changer if you will, that gives the business community constitutional certainty, (local) communities’ (revenue) stability, and the public a voice.”
The Michigan FairTax replaces the following state-imposed tax with an across-the-board sales tax on all New Goods and Services purchased by retail customers:
- MBT 22% Surcharge
No one in the packed hearing room offered any comments in opposition to the Michigan FairTax proposal.
The full text of Babin’s testimony, including graphs, is available for your use and review.
Additional details are available at www.mifairtax.org.