Apple And The Case For Tax Reform

By Steve Barlotta, CPA

This week we saw a Congressional Investigative Committee grill Apple CEO Tim Cook about the company’s creative tax-saving strategies. The committee estimates that from 2009 to 2012 Apple was able to shift at least $74 billion in taxable U.S. income to low-tax offshore havens. Through the use of this maneuvering, Apple has been able to accumulate more than $102 billion in cash overseas as of the end of March. These strategies employed by Apple and other large U.S. global companies are clearly in response to the U.S. corporate tax rates being among the highest in the industrialized world.

The testimony coming out of this hearing clearly illustrates the extent of loopholes in the American corporate tax code that are really only available to  large corporations through their abundance of financial resources. More importantly, it highlighted the fact that, as one Congressman articulately put it, the U.S. tax code is a “mess” and the issue of comprehensive tax reform needs to be seriously addressed.

Keep in mind that the last time our country enacted major tax reform was 1986. When this tax code was designed our lawmakers certainly didn’t envision that so many U.S. companies would be would be doing so much of their business in the global marketplace. Our current tax code, with its higher corporate rates, discourages companies from reinvesting their profits back to the Unites States. Because companies like Apple can employ these strategies of keeping their cash in low-tax havens, individual taxpayers and small businesses assume a significant portion of the tax burden. Our tax system, as it currently stands, does not create a level playing field between small and large companies.

Here are some changes I would like to see implemented:

• Significantly reduce the corporate tax rates to become more competitive with the other industrialized nations. President Obama has proposed lowering the top rate from 35% to 28%. I think the top rate needs to be lowered more than that, but existing loopholes and “special” tax breaks need to be eliminated.
• Allow global U.S. firms to repatriate their overseas profits back to our country and tax it at a one-time reduced rate. The rate should be around 5% and the companies should be given incentives to reinvest this money back in to their companies and create jobs instead of simply giving dividends to shareholders or bonuses to executives.
• Going forward, large corporations should no longer be allowed to park their earnings in tax-free or low-tax havens. Small and large corporations must operate under the same set of rules and U.S. global companies should not be allowed to exert their influence on our tax code through lobbying efforts or their deep pockets.

By the way, the likelihood that any serious tax reform will be enacted by this dysfunctional Congress and our President is slim to none. I still don’t think they grasp the seriousness of this issue.

Image Source: policymic.com