U.S. Corporate Taxes Too High?
As a follow-up to earlier posts, a couple of interesting items of interest yesterday. The first is the Microsoft disclosure that of the $50.2 billion cash on its’ balance sheet, $42 billion is held offshore. The disclosure came courtesy of the SEC who is sniffing around Microsoft’s taxation and specifically how it has managed to keep those liabilities relatively low. Microsoft acknowledged that by channeling sales through low-tax countries (like Ireland) they were able to save a lot on taxes. With so much of the cash “offshore” and subject to tax if it is repatriated back to the U.S., is it any wonder that Microsoft (along with other companies like Google) are taking advantage of the Fed’s low rate policy and the public’s ravenous appetite for anything with a higher (and safe) yield to issue debt? It is cheaper to do this and fund dividends, share buybacks etc. than repatriate.
This headline fits into a number of other commentators thoughts on corporate tax policy in the U.S. with the inevitable question of “Are U.S. corporate taxes too high?” The answer to that question is not a simple one. The “posted” corporate tax rate in the U.S. is 35% and is arguably one of the highest in the world. However, there are a myriad of tax shelters, credits and subsidies that can substantially reduce this burden. A good example of this is GE – the poster child for corporate America, especially given Mr. Imelt’s close ties to the Obama government. Earlier this year, GE reported a profit of $14.2 billion of which $5.1 billion was sourced from U.S. operations. But GE claimed a tax benefit of $3.2 billion. What gives? Well for one, GE has had large write-offs associated with GE Capital. But over the past 5 years, GE has earned $26 billion in the U.S. and received $4.1 billion from the IRS! To a shareholder of GE, that sounds just great (BTW we are short GE in some accounts) but as a citizen, that seems like corporates are not paying their fair share. The New York Times reports that one Treasury official called GE the “world’s best tax law firm” given that its tax team includes former officials from the Treasury, the IRS and “virtually all the tax-writing committees in Congress” (http://www.nytimes.com/2011/03/25/business/economy/25tax.html?_r=1). The real benefit to GE, though, is that it pays far less in taxes abroad (thanks to schemes in Ireland, etc.) and it does not have to actually pay taxes in America on those profits until they are repatriated )– this, the U.S. multinationals argue, is necessary to compete with the low-tax jurisdictions and emerging economies. Ironically, former President Reagan would be rolling over in his grave right about now – his 1986 Tax Reform Act was aimed at closing the very loopholes and shelters that GE was exploiting way back then.
In my opinion, the loopholes and special interest lobbying for tax breaks and subsidies has to go – it is clearly advantageous for those that can afford it and a real disadvantage to those who cannot. It generates a ton of money for lobbyists, lawyers and accountants but generates little in the way of benefit to taxpayers. In conjunction with simplifying the tax code, a move to lower corporate tax rates to a reasonable level (35% is far too high, especially given all the double taxation that goes on) so that U.S. companies can compete globally, benefit from what should be the best legal domicile in the world and ideally repatriate capital and reinvest productively in America. Barry Ritholtz notes in his terrific blog (http://www.ritholtz.com/blog/2011/04/corporate-tax-rates-then-and-now/) the huge swing in the government tax burden from corporates to individuals – individual income and payroll taxes accounted for 81% of the U.S. Federal revenue generated in 2010. Why is this important? Simply put, America has to claw its way out of its debt and deficit problems – this will require a plan that in part raises taxes fairly and productively at both the individual and corporate level. Based on the direction of the last 50 years, I don’t like the chances of the individual coming out on top.
Next time, I will look at taxation at the personal level and the coming war on that front in the US and elsewhere.