Home > Uncategorized > The simple way to crack down on Apple’s tax games

The simple way to crack down on Apple’s tax games

from Dean Baker

While Elizabeth Warren is praising the European Union’s crackdown on Apple’s Ireland tax scheme, Jack Lew and the Obama Treasury Department are going to bat for corporate tax cheating. Warren is far too optimistic about the prospect of a successful crackdown. These folks are prepared to spend a lot of money to hide their profits from tax authorities and they are likely to find accomplices in many Irelands around the world.

It would be good to look in a different direction. I remain a big fan of my proposal for companies to turn over non-voting shares of stock to the government. In that case, what goes to the shareholders also goes to the government. Unless you cheat your shareholders, you can’t cheat the government.

I know this is probably too simple to be taken seriously in policy circles, but those who care about an efficient and effective way to collect corporate taxes should be thinking about it.

  1. September 9, 2016 at 4:33 pm

    I read the full article proposal and could find no faults in this excellent idea.

  2. Guilherme da Fonseca-Statter
    September 9, 2016 at 7:22 pm

    A very interesting idea and I would love to see it implemented in the European «Union» countries… The only problem I can see (at least in the European context, but perhaps even more so in the USA…) is the counter argument, coming (most probably) from certain quarters: «That proposal smacks of Socialism»…
    One possible alternative I have been entertaining for some time is the adoption of «standard models in corporate accounting» as «points of reference» to enable governments to collect taxes on presumed profits… And at the same eliminate «corporate tax»… If corporations operate at an efficient level above those «standard reference points», they simply keep the extra profits… If not, too bad… They just pay the presumed taxes and try to improve…
    This is just an overall idea and it may sound terribly «messy», but it is not so difficult to program it into computer expert systems. As a matter of fact most of that software is already in place, being used by most corporations, but not being exploited for that type of purpose…

  3. September 9, 2016 at 7:55 pm

    Yup, I like that idea and discussed it before, I think. I would make it a condition for listing and brand it “Communism 2.0”. Then again, maybe not :)

    Reminds me of Louis Kelso (https://en.wikipedia.org/wiki/Louis_O._Kelso) and his attempts to broaden capital ownership in the US in the1950s, for good moral reasons as far as I can tell. The common premise, I think is Capitalism is a mechanism. It’s a pretty good mechanism in some respects: Corporate governance, alignment of motives that would otherwise manifest as corruption, etc. If we can use the better mechanics of Capitalism for noble social ends, there’s a lot of mileage in that.

  4. September 10, 2016 at 12:13 pm

    For Dean’s proposal or any of the others to work we’re going to have to agree on a single definition for profit and loss (e.g., the contents of balance sheets are the same on every balance sheet). I’ve worked with auditors for years. So far we’ve found no two sets of balance sheets that use the same or at least similar data for each category on the sheets. Germany’s SAS data, analytics, and accounting products come close to breaking down the balance sheets so they can be reassembled to be consistent. But only close. It’s not just that an elephant can be hidden in the balance sheets but a whole herd of elephants can be hidden. Enron was in debt way over its head. But you wouldn’t know that from its balance sheets. Similarly, just how much profit does Apple earn in a typical year? Do its balance sheets reflect that level? If not, why not? How can we fix it? External, independent auditors were the old answer to these questions. We how well that worked with Enron. The external auditor actually helped Enron “cook its books.”

    • September 11, 2016 at 1:50 pm

      You are quite right on that «we have to agree on a single definition for profit and loss»… A few years ago the French magazine «Alternatives Économiques» ran an article explaining how the (then) «Big-5» accounting firms managed to make obsolete the until then «State-defined» «National Plans of Accounting», then in use in all continental countries of Europe.
      These «Plans» defined in very precise terms what could and what could not be done in terms of «depreciation», «cost accounting, «general expenses» and what-have you…
      A «cultural» heritage from the time of Napoleonic «codes of laws», infused with Germanic «Kammeralism», Weber’s idea of «bureaucracy» and Fayol’s ideas about «corporate organization»… But then, the Anglo-Saxon peoples have always been more «down-to-earth» pragmatists…

    • September 11, 2016 at 8:26 pm

      Is that necessarily a big problem? The firm distributes profits to shareholders somehow. Absent a corporate income tax, firms can decide to invest 100% of their profits in themselves, in which case their valuation goes up, or to return 100% cash to shareholders, or some other combination. Or firms can reduce the amount of profits by giving excessive compensation to workers (unlikely) or to managers. Really the choice between manager compensation and shareholder value is the only one that needs resolving.

      Of course, the state’s revenue under such a scheme would go up and down as profits and stock markets go up and down. In that, the state would be in the same boat as wealthy capitalists, so in the long run it’s good. But the state, or its fund manager, would have to build its own mechanisms to turn a fluctuating wealth asset into a steady income stream.

      • September 12, 2016 at 5:53 am

        The important phrase here is “Of course, the state’s revenue under such a scheme would go up and down as profits and stock markets go up and down. In that, the state would be in the same boat as wealthy capitalists …” After lots of digging it was determined that during most of its existence ENRON had no profits. What it had booked as profits were actually borrowed money. Profits (retained earnings) is just a word on a balance sheet or an entry in the accounting sheets. It can be understood only if the source of the money listed there is identified. A profit is not always a profit. A loss is not always a loss. Takes some digging, sometimes a lot of digging to figure this out. And sometimes even the best auditors don’t figure it out. I knew oil well owners in Texas who never produced a barrel of oil but lived very well by rolling over bank loans. For many of them stealing from banks was more than a way to live well. They considered it an obligation. Some even thought of it as recreational.

    • Jeff
      September 13, 2016 at 10:25 pm

      The article proposes a very simple definition of “profit”. If it goes to the owners of the company the government gets a share.

      • September 14, 2016 at 6:15 am

        In utility regulation we used a device called a rate cap. It’s a way of ensuring customers pay no more than an identified level for service, based on a benchmark. One of the benchmarks is the utility’s actual rate of return. A joke among the staff concerns a sharing based on the RoR. Went like this … if sharing with customers begins at ___% rate of return, the utility’s filed rate of return will never exceed this rate. Magic! I suspect if you tell Apple it’s tax rate will rise based on the level of its profits, its profits will never rise. This will be a joke among financial analysts since they know the profits are rising. Try to prove that in court! I’ve testified in dozens of cases trying to do just that. Amazing how difficult that “simple” task is. And economists mostly just added more fog to the situation.

  5. September 12, 2016 at 1:58 pm

    The problem is these are the industries Government regulates too, presenting a conflict of interest. Will gov’t crackdown on coal companies for pollution if it drives their stock prices down, for example? Yanis Varoufakis proposed taking a 10% equity stake from all EU companies to pay for a Basic Guaranteed Income, but the same problem remains.

    • September 13, 2016 at 11:25 am

      Remember Frankenstein’s monster. The good doctor intended only the best for mankind when he created the man from spare parts. But the results were a nightmare. When shareholder welfare, profits was elevated to the level of the most important factor in economic decision making the results were as with Frankenstein’s monster a nightmare. From growing economic inequality to environmental destruction to loss of moral guidelines for the economy the monster is killing society and the non-economic bonds that make a civilized life possible. There is lip service only to regulation and public welfare but no way to make these work in practice. It’s time to end shareholder capitalism, before it ends the human race.

  6. Jeff
    September 13, 2016 at 10:29 pm

    This seems like an interesting idea. Of course government will want more control over the timing of its payments, but there are probably ways to deal with that.

    Another possibility is the 20/20 tax. Start with tariffs high enough to prevent capital flight and then impose a flat 20% revenue tax on every company with a ratio of highest paid to lowest paid (including subsidiaries and captive suppliers) of 20 or more. This can finance tax cuts on the rest of the business community as well as increased infrastructure spending.

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