There’s been considerable attention to the news that the IRS has only managed to grab 2.4 percent of Google’s overseas income. As this Bloomberg article indicates, many statists act as if this is a scandal (including a morally bankrupt quote from a Baruch College professor who thinks a company’s lawful efforts to lower its tax liability is “evil” and akin to robbing citizens).
Google Inc. cut its taxes by $3.1 billion in the last three years using a technique that moves most of its foreign profits through Ireland and the Netherlands to Bermuda. Google’s income shifting — involving strategies known to lawyers as the “Double Irish” and the “Dutch Sandwich” — helped reduce its overseas tax rate to 2.4 percent, the lowest of the top five U.S. technology companies by market capitalization, according to regulatory filings in six countries. …Google, the owner of the world’s most popular search engine, uses a strategy that…takes advantage of Irish tax law to legally shuttle profits into and out of subsidiaries there, largely escaping the country’s 12.5 percent income tax. The earnings wind up in island havens that levy no corporate income taxes at all. Companies that use the Double Irish arrangement avoid taxes at home and abroad as the U.S. government struggles to close a projected $1.4 trillion budget gap and European Union countries face a collective projected deficit of 868 billion euros. …U.S. Representative Dave Camp of Michigan, the ranking Republican on the House Ways and Means Committee, and other politicians say the 35 percent U.S. statutory rate is too high relative to foreign countries. …Google is “flying a banner of doing no evil, and then they’re perpetrating evil under our noses,” said Abraham J. Briloff, a professor emeritus of accounting at Baruch College in New York who has examined Google’s tax disclosures. “Who is it that paid for the underlying concept on which they built these billions of dollars of revenues?” Briloff said. “It was paid for by the United States citizenry.”
Congressman Dave Camp, the ranking Republican (and presumably soon-to-be Chairman) of the House tax-writing committee sort of understands the problem. The article mentions that he wants to investigate whether America’s corportate tax rate is too high. The answer is yes, of course, as explained in this video, but the bigger issue is that the IRS should not be taxing economic activity that occurs outside U.S. borders. This is a matter of sovereignty and good tax policy. From a sovereignty persepective, if income is earned in Ireland, the Irish government should decide how and when that income is taxed. The same is true for income in Bermuda and the Netherlands.
From a tax policy perspective, the right approach is “territorial” taxation, which is the common-sense notion of only taxing activity inside national borders. It’s no coincidence that all pro-growth tax reform plans, such as the flat tax and national sales tax, use this approach. Unfortunately, America is one of the world’s few nations to utilize the opposite approach of “worldwide” taxation, which means that U.S. companies face the competitive disadvantage of having two nations tax the same income. Fortunately, the damaging impact of worldwide taxation is mitigated by a policy known as deferral, which allows multinationals to postpone the second layer of tax.
Perversely, the Obama Administration wants to undermine deferral, thus putting American multinationals at an even greater disadvantage when competing in global markets. As this video explains, that would be a major step in the wrong direction. Instead, policy makers should junk America’s misguided worldwide system and replace it with territorial taxation.
[…] the current system in place. Yet, it’s based on worldwide taxation, but at least companies have deferral, which creates de facto territoriality for firms that manage their affairs […]
[…] also want to further undermine the ability of U.S. companies to compete on a level playing field in foreign […]
[…] Since the discussion is about income that Apple has earned in other nations (and therefore about income that already has been subject to all applicable taxes in other nations), the only “fair rate” from the United States is zero. […]
[…] Since the discussion is about income that Apple has earned in other nations (and therefore about income that already has been subject to all applicable taxes in other nations), the only “fair rate” from the United States is zero. […]
[…] “fair share” should be zero for income that is earned (and therefore already subject to tax) in other […]
[…] There’s a remarkable level of inaccuracy in that short excerpt. Pfizer wouldn’t be claiming to be an Irish company. It would be an Irish company. And it would still pay tax to the IRS on all U.S.-source income. All that changes with an inversion is that the company no longer would have to pay tax to the IRS on non-U.S. income. Which is money the American government shouldn’t be taxing in the first place! […]
[…] to understand about this issue. First, the income earned by American companies in other nations already is subject to tax, and, second, companies understandably don’t want it taxed again by the world’s […]
[…] to understand about this issue. First, the income earned by American companies in other nations already is subject to tax, and, second, companies understandably don’t want it taxed again by the world’s highest […]
[…] to understand about this issue. First, the income earned by American companies in other nations already is subject to tax, and, second, companies understandably don’t want it taxed again by the world’s highest […]
[…] But that’s income that the United States shouldn’t be taxing in the first place. […]
[…] But that’s income that the United States shouldn’t be taxing in the first place. […]
[…] ago, Google was criticized for paying “only” 2.4 percent tax on its foreign-source income, but I explained that was 2.4 percentage points too high. Likewise, when Apple earns money overseas, that should not trigger any tax liability to the IRS […]
[…] ago, Google was criticized for paying “only” 2.4 percent tax on its foreign-source income, but I explained that was 2.4 percentage points too high. Likewise, when Apple earns money overseas, that should not trigger any tax liability to the IRS […]
[…] was criticized for paying “only” 2.4 percent tax on its foreign-source income, but I explained that was 2.4 percentage points too high. Likewise, when Apple earns money overseas, that should not trigger any tax liability to the IRS […]
[…] added to those remarks later in the […]
[…] I’m a bit skeptical of the numbers (did it include the taxes paid to foreign governments, for instance, which can be substantial for multinational firms?), I confess I didn’t read the […]
[…] I’m a bit skeptical of the numbers (did it include the taxes paid to foreign governments, for instance, which can be substantial for multinational firms?), I confess I didn’t read the […]
[…] I’m a bit skeptical of the numbers (did it include the taxes paid to foreign governments, for instance, which can be substantial for multinational firms?), I confess I didn’t read […]
[…] In other words, worldwide taxation results in a version of double taxation. […]
[…] In other words, worldwide taxation results in a version of double taxation. […]
It is utter absurd to try to tax income earned outside US territory. If they tax income earned outside the USA, since the USA does not helps in creating that income, then many people will find a way to create a company outside the USA or to move their residence outside the USA. Mr Mitchell has given us thousands of examples where such a thing happened in western european tax hells and the USA.
But now if you invest in “emerging markets” (Latin America, East Asia, for instance), as a general rule, you will get a higher return on your investment. And here in these “emerging countries” (I live in one of them) it is getting pretty safe to bring your money. In the past people never dared to invest in Latin America or East Asia. Now millions of persons dare. And now it is easier than ever to invest and communicate via the zero-cost super mega communications that today are almost everywhere.
USA became the world ECONOMIC SUPER POWER in the 1800s with TOTAL government spending around 10% of Gross Domestic Product (GDP). Western Europe was too the world economic superpower before it severely curtailed its economic growth by instaurating tax hells.
GDP (keynesian) figures have deep flaws, I think the way those figures account for capital gains -they never account for them- and the way they substract imports create flawed numbers where the GDP of western european tax hells that have a net outflow of capital is shown as much bigger than it actually is. And, conversely, the GDP figures of tax havens -the USA is the biggest tax haven that ever existed- that have huge inflows of capital is computed much smaller than it actually is. I barely began the research on this and will post my findings once decent research is done, since I may be totally wrong.
Such GDP keynesian figures promote the false idea that Western European tax hells are the summum of prosperity but any person that has a decent computer can make a “virtual trip” with “google earth” and can see how much those european tax hells rely on capital acumulated in their pre-tax-hell past: While in my Latin America country I often cannot recognize the neighborhoods of my childhood because there are so many new buildings and houses, “google earth” shows you how many old buildings and houses there are in tax hells like Sweden or France. In France at least they have good architectural taste. But in Sweden many 1960s-1970s buildings are really ugly and there are tons of houses built with the cheapest materials. Anyone can see that those tax hells are not the summum of prosperity, as they allege.
With the USA and Western Europe becoming every day a less relevant part of the world, and with these emerging countries growing much faster and being today so attractive for investment, I wonder how the USA and Western Europe will retain its power to impose those imperialistic schemes of world taxation and world “tax harmonization”. I think their quest is hopeless. They have to change and reduce their tax hells or they will become an even more irrelevant part of the world.
What would happen to the USA if the HUGE inflow of foreign capital suddenly ceased? Well, that almost happened for a brief period during the past crisis and we know how bad things got. How high would be US economic growth without the HUMONGOUS amounts of capital it gets thanks to being the biggest tax haven thanks to tax exemptions for foreigners?. That is a good question to answer. Not even the Obama administration is crazy enough to eliminate the capital gains tax exemptions and interest tax exemptions for foreigners that bring their capital to the USA.
They satanize those that seek tax exemptions while giving to foreigners that bring capital to the USA gigantic tax exemptions. How incoherent those tax hell promoters are.
[…] Dan Mitchell points us the case of Google and its US corporate tax liability. Google has organised its affairs so as to minimise its tax liability. Some people carry on like this is ‘a bad thing’. Google is “flying a banner of doing no evil, and then they’re perpetrating evil under our noses,” said Abraham J. Briloff, a professor emeritus of accounting at Baruch College in New York who has examined Google’s tax disclosures. […]
With over one million software enginners in India, chomping at the bit to be employed at salaries that are a fraction of what their American counterparts command, greedy Americans (especially Californians) risk loosing the Google that lays the golden egg.